In re Andress

• Decision Date: 28 June 2006
• Docket Number: Bankruptcy No. 05-11919-M.,Adversary No. 05-1088-M.
• Citation: 345 B.R. 358
• Parties: In re Theodore R. ANDRESS, Jr., aka Ted Andress, aka Kite Mechanical Service Inc., aka Kite Service Company, Debtor. Custom Heating & Air, Inc., an Oklahoma corporation, Plaintiff. v. Ted Andress, an individual, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Oklahoma

345 B.R. 358

In re Theodore R. ANDRESS, Jr., aka Ted Andress, aka Kite Mechanical Service Inc., aka Kite Service Company, Debtor.

Custom Heating & Air, Inc., an Oklahoma corporation, Plaintiff. v. Ted Andress, an individual, Defendant.

Bankruptcy No. 05-11919-M.

Adversary No. 05-1088-M.

United States Bankruptcy Court, N.D. Oklahoma.

June 28, 2006.

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Robert B. Sartin, Barrow & Grimm, PC, Tulsa, OK, for Plaintiff or Petitioner.

Richard K. Holmes, Hanson & Holmes, L.L.P, Tulsa, OK, for Defendant or Respondent.

JUDGMENT

TERRENCE L. MICHAEL, Chief Judge.

THIS MATTER came on for trial on the 26th day of April, 2006. The issues having been duly considered and a decision having been duly rendered, for reasons set forth in the Memorandum Opinion filed concurrently herewith,

IT IS HEREBY ORDERED that Custom Heating & Air, Inc. is entitled to recover the sum of Five Thousand Dollars from Theodore R. Andress, Jr., also known as Ted Andress, and that said right is not discharged in the bankruptcy case of Theodore R. Andress, Jr., Case No. 05-11919-M.

IT IS FURTHER ORDERED that the obligations of Theodore R. Andress, Jr., also known as Ted Andress, to Custom Heating & Air, Inc. shall be discharged in the bankruptcy case of Theodore R. Andress, Jr., Case No. 05-11919-M to the extent those obligations exceed Five Thousand Dollars.

IT IS FURTHER ORDERED that each party shall bear its own costs and attorney's fees in this adversary proceeding.

MEMORANDUM OPINION

This is the story of the sale of a business gone bad. As part of the sale, the seller agreed to work for and not compete with the buyer. The seller failed to live up to this agreement and began to take business from the buyer. Litigation ensued, and the buyer obtained injunctive relief and a significant judgment against the seller. It is the dischargeability of that judgment which is now at issue. The following findings of fact and conclusions of law are made pursuant to Bankruptcy Rule 7052.

Jurisdiction

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b),¹ and its reference to this Court is proper pursuant to 28 U.S.C. § 157(a). Issues of non-dischargeability of debt are core proceedings under the terms of 28 U.S.C. § 157(b)(2)(I). The Court thus has authority to issue its findings of fact, conclusions of law, and judgment.

Burden of Proof

When dischargeability of a debt is at issue, the creditor must prove the elements of its case by a preponderance of the evidence² Exceptions to discharge are to be narrowly construed in favor of the debtor.³

Findings of Fact

Custom Heating & Air, Inc. ("Custom") is an Oklahoma corporation engaged in the business of providing residential and commercial heating and air conditioning services. Its chief operating officer is Mr. Robert Townsend ("Townsend"). Townsend and his wife own eighty-five per cent of the stock in Custom. Kite Mechanical Service, Inc. ("Kite") was a corporation owned by Mr. Ted Andress ("Andress"), the Debtor and Defendant herein. Kite was, also engaged in the heating and air conditioning business and was, in the words of Andress, a "friendly competitor" of Custom. In late 2003, Kite was not profitable, and both Kite and Andress were in significant financial distress. At that time, Andress and Townsend began discussing a potential purchase of Kite by Custom. These discussions culminated in the execution of an Asset Purchase Agreement (the "APA") with an effective date of January 30, 2004.⁴

Under the APA, Custom purchased the following assets of Kite: the business name, the telephone numbers, customer list and records, service files, four motor vehicles, all equipment including office and computer equipment, marketing materials and all remaining parts and inventory of Kite. Under the APA, the purchase price for Kite was $100,000, which the parties allocated as follows:

                Intangibles:                  $55,000.00
                Equipment:                    $35,000.00
                Inventory:                    $ 5,000.00
                Covenant not to Compete:      $ 5,000.00
                

The covenant not to compete is found in § 14 of the APA. Pursuant to this covenant, Andress agreed for a period of three years: (1) not to own more than five per cent of any company engaged in the heating and air conditioning business; (2) not to "induce or attempt to induce any customer or prospective customer of [Custom] to cease doing business in whole or in part with [Custom] or solicit the business of any such customer which competes with any of the products or services offered or sold by [Custom]"; and (3) not to attempt to persuade any of Custom's employees to leave the employ of Custom. Section 15 of the APA provided that "[Andress] shall make good faith effort to refer to [Custom] all of [Andress]'s existing clients, as well as any potential customer that might contact [Andress] in the future." ⁵ On April 22, 2004, Custom and Andress executed an addendum to the APA.⁶ This addendum substituted an "insulation blowing hopper" for the computer identified in the original APA.

As part of the APA, Andress and Custom executed an employment agreement (the "Employment Agreement").⁷ Under its terms, Andress was to be paid a base salary of $105,000 the first year he worked for Custom and $110,000 in the second year of his employment. Of this base salary, $120,000 was paid immediately and placed into escrow at the request of Andress and/or his counsel⁸ These funds were ultimately used to satisfy tax liabilities owed by Andress. The Employment Agreement contained a covenant not to compete substantially identical to the covenant contained in the APA. On May 7, 2004, the parties executed an addendum to the Employment Agreement that allowed Andress to receive three items of heating equipment in lieu of a paid vacation.⁹ These three items of equipment were to be used to complete contracts which Andress had been paid for prior to execution of the APA. The items were to be used by Andress "strictly" for the completion of those jobs, and for no other purpose.

Townsend testified that maintaining Andress in the " employ of Custom was a key element in the purchase transaction. According to Townsend, when the key employee of a purchased company continues with Custom, he expects revenues generated as a result of the purchase to be between seventy-five and eighty per cent of the gross revenues earned by the company in the year prior to acquisition. If continued employment of the key employee (in this case Andress) is not part of the transaction, Townsend's revenue expectation drops to thirty per cent of prior revenues.

Shortly after commencing employment with Custom, Andress began to "moonlight" and solicit business on his own behalf instead of Custom. Andress freely admitted this at trial:

Q. You intentionally violated the terms of the asset purchase agreement and your employment contract, didn't you?

A. Yes.

Q. You intentionally attempted to take a customer that rightfully belonged to Custom Services and keep her for yourself, didn't you?

A. Yes.

Q. You intentionally took money that should have belonged to Custom Services and you tried to keep it for yourself, didn't you?

A. Yes.

Q. And when I asked you how many times you had done that, that we had not discovered, you asserted your Fifth Amendment right against self-incrimination, right?

A. Based on my counsel's advice, yes, sir.

Q. And now you are asking this Bankruptcy Court to excuse all of your actions, willful, wanton, and otherwise, and grant you a discharge, aren't you?

A. Correct.¹⁰

In addition to this general admission, evidence was adduced regarding specific examples of misconduct by Andress.

In the fall of 2003, Andress spoke to a Mr. Paul Jackson ("Jackson") about installing a heating and air conditioning system in a house which Jackson was constructing. Andress was a family friend of the Jacksons. Prior to execution of the APA and Employment Agreement, Jackson had done business with Andress, and Jackson's father had done business with Kite. Andress advised Jackson he would beat the price of any other contractor. In April or May of 2004, Jackson contacted Andress regarding the installation. Andress came to the construction site and advised Jackson as to his needs. Custom was not discussed. Jackson thought he was dealing with Kite. No written agreement was entered into between the parties; Jackson believed that he and Andress had an oral contract to do the work. Although Andress did provide a crew to install duct work at the residence, no heating and air conditioning equipment was delivered or installed. Jackson made several payments to Andress in May and June of 2004, totaling at least $15,000.00. Jackson inquired of Andress regarding the status of the matter and Andress advised Jackson he would "get the paperwork together" and get back to Jackson. This never occurred.

In June of 2004, Andress asked Jackson to sign a contract for the installation of the equipment. The proposed contract was dated November 21, 2003. Jackson refused to sign the contract. Andress was very anxious to get the contract signed stating that he was trying to get documentation that he entered into this contract prior to the sale of his company. The project was never completed by Andress, nor did Andress ever refund any monies to Jackson.

Mr. Chris Allen ("Allen") had done business with Kite and Andress prior to the execution of the APA, although he had no personal relationship with Andress. In early 2004, Allen determined that his residence needed a new heating and air conditioning system. He called the Kite phone number (which had been assigned to Custom) and received a return call from Andress. Andress came to Allen's residence and informed Allen he would be able to install a heating and air conditioning system for less money if he did so in the evenings and on weekends. Andress installed a heating and air...