In re Hanson
| Decision Date | 17 September 1998 |
| Docket Number | Adversary No. 97-88371.,Bankruptcy No. SG 97-04715 |
| Parties | In re John R. HANSON, Debtor. CLARK & GREGORY, INC., Plaintiff, v. John R. HANSON, Defendant. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan |
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There is no calamity greater than lavish desires. There is no greater guilt than discontentment. And there is no greater disaster than greed. Lao-tzu
The principal issue before this court is whether certain activities of the debtor, John Hanson (Hanson) and the debts arising therefrom should be deemed nondischargeable pursuant to 11 U.S.C § 523(a)(2)(A), § 523(a)(4) and § 523(a)(6) of the Bankruptcy Code. For the following reasons this court concludes that most of the debts arising from these activities are not dischargeable.
The nondischargeability claims presented in this adversary proceeding arise in a case referred to this court by the Standing Order of Reference entered by the United States District Court for the Western District of Michigan on July 24, 1984. This court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Accordingly, the bankruptcy court is authorized to enter a final judgment subject to the appeal rights afforded by 28 U.S.C. § 158 and Fed.R.Bank.P. 8001 et. seq.
The following constitutes the court's findings of fact and conclusions of law in accordance with Fed.R.Bankr.P. 7052. In reaching its determinations, this court has considered the demeanor and credibility of all witnesses who testified, the exhibits properly admitted into evidence, and the parties' trial briefs and closing arguments.
In 1991 Edward Clark, Marv Vander Ark and "Duke" Gregory were asked by John Hanson to invest in a corporation for the purpose of selling high end golf apparel. As a result, Clark & Gregory (C & G) was incorporated in 1992 as a wholesaler of wool and cotton golf sweaters and cotton knit golf shirts. All of the partners hold other positions and work in fields completely unrelated to the golf sweater market.
Hanson was hired as general manager at the company's inception. He had a great deal of expertise and knowledge in the golf sweater business due to his association with the J. McInerney Sweater Company (the McInerney Company). The McInerney Company ceased operations when the United States Customs Service discovered it was under reporting the purchase price of inventory being sent from Scotland on its customs declarations.1 Hanson, who was involved in this scheme, pled guilty to charges of customs violations and spent six months in a halfway house. Aware of his checkered past, partners of C & G were still willing to give Hanson a second chance as he could provide the golf sweater expertise they lacked.
Hanson's job entailed managing much of the day to day operations of the company including supervising the sales representatives, making sales calls, managing sales contracts and supervising the ordering and delivery of the inventory. He was also responsible for negotiating and obtaining contracts with vendors for the production of sweaters both here and abroad. Some of the vendors Hanson contracted with on behalf of C & G were Blair Knitwear and Peter Scott & Co. (Peter Scott) in Scotland and Steveco Fabric Company, Merry Maid, Embroidery Resource and Perrigo Printing in the United States. All were considered major vendors. In addition to these duties he would travel throughout the United States to work with other C & G sales representatives making individual calls on PGA tournaments and larger golf courses in hopes of obtaining business for various golf invitationals.
Everything appeared to be going well between Hanson and C & G until April of 1994.2 At that time Hanson met with Les Blair (Blair), the owner of Blair Knitwear and demanded that he be paid 30 pence per sweater for every sweater ordered by C & G3. Blair protested until Hanson threatened to move all of C & G's business to Peter Scott, Blair's direct competitor. Removal of the business would apparently have crippled Blair Knitwear to the point of ruin. When Blair argued that the added cost would cut into his profits, Hanson stated that he would simply approve an increase in the price of the sweaters from Blair Knitwear thereby passing on the extra cost to C & G. Hanson of course never informed C & G that he was receiving 30 pence per sweater from Blair; instead he represented that the increase in the cost of the sweaters was a result of burgeoning operating costs at the mill.
As time went by, Hanson became greedier. He demanded that his kickback be increased from 30 pence to 50 pence per sweater and that he be paid a flat fee of 250 pounds4 per week. He again passed the added cost on to C & G in the form of higher prices.5
With his schemes solidly in place, Hanson then began to augment his kickback revenue by increasing the amount of inventory ordered by C & G. In less than one year, Hanson had ordered approximately two years worth of inventory from Peter Scott and Blair Knitwear. In order to pay for the excess inventory, C & G used its credit line and to this day continues to pay interest on the outstanding principal.
In addition to the kickbacks, Hanson happened upon another way to increase his personal wealth. In late 1995, the Las Vegas Invitational golf tournament placed an order with C & G for approximately $142,500 worth of merchandise. By early 1996, Hanson had conspired with Blair to divert the order to Blair and himself, cutting C & G out of the deal completely.
By March of 1996, Hanson's schemes began to unravel. Upon learning that Hanson tried to counterfeit prototype sweaters which Blair Knitwear produced and have them manufactured by another mill, Blair grew tired of dealing with Hanson. Blair contacted the principals of C & G. An investigation ensued and Hanson's employment was terminated on June 3, 1996.
During his discussions with C & G, Blair issued an affidavit setting forth all the information he had divulged in the meetings. He also offered to split the Las Vegas Invitational golf sweater order with C & G but they refused, claiming the order was rightfully theirs, adding that they had been financially harmed to a much greater extent than Blair Knitwear. Shortly thereafter Blair gave Hanson an affidavit recanting his previous admissions and disappeared with the Las Vegas Invitational profits on an extended boat trip.6
C & G filed a complaint against Hanson in Kent County Circuit Court alleging fraud, breach of fiduciary duty and conversion. C & G filed a Motion for Summary Judgment solely on the fraud count. The state court granted the motion with respect to the kickback payments Hanson received from Peter Scott in the amount of $58,050.00.7 The state court then scheduled a hearing to determine the extent of C & G's damages as a result of the excess ordering of inventory.
On the day of the hearing, Hanson stated that he would refute C & G's claim even though he had earlier asserted his Fifth Amendment right. Not wishing to deprive him of his right to be heard, the court adjourned the hearing so the parties could take Hanson's deposition.8 On the eve of the deposition, Hanson filed bankruptcy under Chapter 7. C & G promptly filed a nondischargeability complaint under 11 U.S.C. § 523(a)(2), (4) and (6) and an objection to discharge under 11 U.S.C. § 727(a)(2) and (4).
Trial was set to begin in the Bankruptcy Court on April 13, 1998. On March 10, 1998, Hanson filed a Motion to Adjourn the Trial. It was denied on March 13, 1998. C & G attempted to schedule the deposition of Hanson's accountant, Thomas Dahlstedt. These attempts were resisted based on the grounds of accountant/client privilege. On April 1, 1998, C & G filed a Motion to Compel the Testimony of Mr. Dahlstedt with an ex parte order. The court granted that motion on April 3, 1998. The same day, a Motion to Reconsider was filed by Hanson. On April 7, 1998, the court issued an order denying the Motion to Reconsider noting that the Supreme Court expressly disapproved of the so-called "accountant-client" privilege stating that "no confidential accountant-client privilege exists under federal law, and no state created privilege has been recognized in federal cases." Couch v. United States, 409 U.S. 322, 334, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973).
On April 8, 1998, a hearing was set for each party's objection to the other's exhibit list but prior to the hearing the objections were withdrawn. C & G was allowed to amend its witness and exhibit lists in an order bench filed and signed on April 13, 1998.
On the morning of trial, this court addressed an issue which had been raised as a result of Hanson's invocation of his Fifth Amendment privilege in the bankruptcy. Concerned that this might require the dismissal of his Chapter 7, the Court asked counsel to brief the issue. Having examined the course the Chapter 7 had taken to date, including the Schedules and Statement of Affairs filed as well as the transcript of the 2004 examination, the court concluded that since Hanson first invoked his Fifth Amendment privilege at the 2004 examination, he could remain as a debtor in light of Butcher v. Bailey, 753 F.2d 465 (6th Cir.1985).
Hanson then made a request that he be permitted to file an Amended Answer in which he would admit as nondischargeable the $58,050.00 debt resulting from the Peter Scott judgment ordered by the state court and the $83,663.03 which he received in kickbacks from Blair Knitwear. C & G objected stating that the $83,663.03 did not reflect the excess inventory that was ordered in furtherance of Hanson's fraud, the conversion of goods found in Hanson's house or the conversion of the Las Vegas Invitational order. Pointing out that the excess inventory issue was never pled in the complaint, the court allowed C & G to amend its complaint under ...
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