IN RE RESSLER HARDWOODS AND FLOORING, INC.

• Decision Date: 19 March 2010
• Docket Number: Bankruptcy No. 1:08-bk-01878MDF.,Adversary No. 1:08-ap-00109.
• Citation: 427 B.R. 312
• Parties: In re RESSLER HARDWOODS AND FLOORING, INC., Debtor. James Little, Plaintiff v. Ressler Hardwoods and Flooring, Inc.; Keith Ressler; Kenneth L. Ressler; Karen R. Ressler, Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

427 B.R. 312

In re RESSLER HARDWOODS AND FLOORING, INC., Debtor.
James Little, Plaintiff
v.
Ressler Hardwoods and Flooring, Inc.; Keith Ressler; Kenneth L. Ressler; Karen R. Ressler, Defendants.

Bankruptcy No. 1:08-bk-01878MDF. Adversary No. 1:08-ap-00109.

United States Bankruptcy Court, M.D. Pennsylvania.

March 19, 2010.

427 B.R. 313

COPYRIGHT MATERIAL OMITTED

427 B.R. 314

Margaret M. Manning, Whiteford Taylor Preston LLP, Wilmington, DE, Ranak Kanti Jasani, Richard J. Magid, Whiteford Taylor and Preston LLP, Baltimore, MD, for Plaintiff.

Jacques H. Geisenberger, Jr., Jacques H. Geisenberger, Jr., P.C., Lancaster, PA,

427 B.R. 315

Kenneth J. Rollins, Michael W. Winfield, Timothy J. Nieman, Rhoads and Sinon LLP, Deborah A. Hughes, Robert L. Knupp, Knupp Law Offices, LLC, Harrisburg, PA, for Defendants

OPINION

MARY D. FRANCE, Chief Judge.

I. Background

During the time relevant to this case, Ressler Hardwoods and Flooring, Inc. ("Debtor") was a flooring manufacturer owned and operated by Defendants Kenneth and Karen Ressler and their son Keith Ressler (collectively "the Resslers;" individually "Keith," "Kenneth," and "Karen").¹ James Little ("Little") was an experienced investor employed by a commodity trading firm in Baltimore, Maryland. Little also held a controlling interest in Epic Floors, Inc. ("Epic"), one of Debtor's customers, which was managed by his daughter, Nicole Little ("Nicole").

Between 2004 and 2006, a series of unfortunate events occurred that had a profound negative impact on Debtor's profitability. During this period, Debtor relocated its business twice. After the second relocation, Debtor's production facility was severely damaged by fire. Each of these events disrupted Debtor's operations for several months. Even after production resumed, Debtor had difficulty fulfilling orders because of inadequate financing.

Little learned that the Resslers were looking for an investor, and the parties began negotiations for Little to acquire 51% of Debtor's stock for $1.2 million. The parties agreed that Debtor would retain the Resslers as the business' managers, therefore operating and employment agreements had to be negotiated before the sale of the stock could be finalized. During the negotiation process, Little advanced $400,000.00 to Debtor to address its immediate liquidity needs.

Unfortunately, in the late summer and early fall of 2007, the parties' efforts to negotiate employment and operating agreements stalled, and then ultimately failed, prompting Little to demand the return of the $400,000.00 he had advanced to the company. Debtor lacked the funds necessary to refund Little's money and, instead, decided to treat Little's cash advances as a partial payment on Little's purchase of Debtor's securities. Accordingly, Debtor issued to Little a stock certificate representing 26,021 shares (17%) of the company and pledged to issue the remaining shares (34%) when the balance of the purchase price was paid. Little refused to accept the shares issued and to pay the balance claimed by Debtor. Little did offer to return the shares issued to him in exchange for the $400,000.00 previously paid, plus interest, which was rejected by Debtor.

On January 15, 2008, Little filed a lawsuit against Debtor and the Resslers in the United States District Court for the District of Maryland (the "Maryland District Court") to recover the funds advanced. The three-count complaint alleged two counts of violations of the Maryland Securities Act ("MSA"), Md.Code Ann., Corps. & Assns. § 11-501 et seq., and one count in common law assumpsit. On May 27, 2008, Debtor filed the instant bankruptcy case. By order dated July 14, 2008, the Maryland District Court transferred Little's lawsuit to the Bankruptcy Court for the Middle District of Pennsylvania. This Opinion will address the merits of Little's case under the MSA.

427 B.R. 316

II. Jurisdiction

I have jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(L). This Opinion and Order constitutes findings of fact and conclusions of law made pursuant to Federal Rule of Bankruptcy Procedure ("FRBP") 7052, which is applicable to contested matters pursuant to FRBP 9014.

On March 31, 2009, I issued an Opinion on a motion for summary judgment filed by Debtor and the Resslers on two of the three counts in Little's complaint. By Order dated July 2, 2009, Count One of the complaint was dismissed as against all Defendants.² The trial on the remaining counts took place on July 1 and 2, 2009.³ On January 22, 2010, I issued an Order allowing the parties seven days to indicate whether or not they would consent to my entering a final order on the merits. Consents were filed by all parties.

The parties filed briefs on September 22 and October 7, 2009. Little's brief does not address the third count of the complaint, which was based on common law assumpsit. Therefore it is appropriate to treat that theory of recovery as having been abandoned. Accordingly, this Opinion need only address the second count, which alleges fraud or deceit in the sale of a security under the Maryland Securities Act ("MSA"), Md.Code Ann., Corps. & Ass'ns § 11-703.

III. Factual Findings⁴

Debtor's principal place of business is located at 29 Keystone Drive, Lebanon, Pennsylvania. (Little Ex. 21, Bates No. 757.) Defendants Keith, Kenneth and Karen Ressler were, respectively, Debtor's president, vice-president and secretary, and together they held 100% of Debtor's stock.

Prior to his retirement in January 2009, Little was employed as Vice President and Director of Business Development for Campbell & Company, a commodities trading advisor in Baltimore, Maryland. He is now retired and resides in Florida. In 2005 and 2006, Little's individual income exceeded $200,000.00 per year and his net worth exceeded $1 million.

Debtor was incorporated under the laws of Pennsylvania in February 1994 and began its operations from a location in Lititz, Pennsylvania. In 2004, Debtor moved its plant to Baltimore, which interrupted production for approximately five months. Unfortunately, the Baltimore operation was not successful and was closed in 2005. Debtor then returned to Pennsylvania, but this second move interrupted operations for another lengthy period—this time for six months.

427 B.R. 317

In preparation for its move back to Pennsylvania, Debtor obtained a new facility in Lebanon County that was much larger than its original plant. Before operations could be resumed, in March or April 2006, fire broke out, delaying the reopening of the business until August 2006. In November 2006, Debtor again had to shut down, this time because of a roof collapse attributed to fire damage. For various reasons not relevant here, Debtor did not receive immediate payment from its insurance carrier after the fire. By early 2007, Debtor finally was settled in a new and expanded facility with state-of-the-art equipment. However, Debtor's operations continued to experience significant problems because Debtor lacked the funds needed to purchase raw lumber to fill flooring orders. To meet this need, Debtor's principals began to look for an investor to provide an immediate capital infusion.

Having learned of Debtor's cash flow problems, Nicole introduced her father to the Resslers as a possible investor who could provide Debtor with the liquidity needed to fund its operations. Little, for his part, was looking for a business opportunity that would provide him with a stream of income for his retirement. On a weekend shortly after the parties' first meeting, Little, accompanied by his wife and his accountant, visited Debtor's physical plant to observe its operations. Thereafter, Keith met with Little in Maryland on two or three occasions to discuss Little's possible investment in the company. Kenneth was included in one of these meetings, but Keith was the point person for the negotiations with Little. Eventually, the discussions culminated in a verbal agreement that Little would purchase 51% of Debtor's stock for $1.2 million if the parties could reach mutually acceptable terms. Although the sale would require the Resslers to relinquish control of the corporation, Little agreed that the former owners would be retained to manage the business. Therefore, before the sale could be consummated, employment and operating agreements satisfactory to all parties had to be negotiated. The parties and their agents began negotiating these agreements in the spring of 2007 with discussions continuing into the fall of that year.

When negotiations commenced, Little generally understood that Debtor was experiencing financial difficulties and needed an outside investor. Little acknowledged at trial that he knew "that they were struggling somewhat financially because that's one of the reasons that people look for an investor, and that's typically when an investor can buy a company at a reasonable price." (7/1 N.T. 236.) Little was aware of many of the events that had plagued Debtor's business. He knew that Debtor had moved its physical plant from Lititz to Baltimore and back to Lebanon County, Pennsylvania between 2004 and 2006, resulting in lengthy interruptions to production. He also knew that Debtor had incurred unreimbursed losses and suffered disruption to its business from a fire at its new facility. He was aware that Debtor was in litigation with its insurance provider regarding the proceeds that Debtor would receive under its business interruption coverage. In July 2007, Little knew that Debtor did not have sufficient income to purchase raw materials to meet customer orders, that the company needed funds to purchase those materials, and that Debtor wanted Little to provide this funding in the form of cash. Keith and Kenneth had estimated that Debtor's overall cash needs to get it "over the hump" were approximately $1.2 million. They had also informed Little that Sovereign Bank ("Sovereign")...