Krystal v. Haynie (In re Haynie)

• Decision Date: 23 June 2020
• Docket Number: Adv. No. 17-07010-TLM,Case No. 17-20587-TLM
• Citation: 621 B.R. 456
• Parties: IN RE: Lance B. HAYNIE, Debtor. Jack Krystal, Plaintiff, v. Lance B. Haynie, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

621 B.R. 456

IN RE: Lance B. HAYNIE, Debtor.

Jack Krystal, Plaintiff,

v.Lance B. Haynie, Defendant.

Case No. 17-20587-TLM

Adv. No. 17-07010-TLM

United States Bankruptcy Court, D. Idaho.

Signed June 23, 2020

Michael G. Schmidt, Lukins & Annis P.S., Coeur d'Alene, ID, for Plaintiff.

Cameron Lee Phillips, Safa Michael Riadh, Cameron Phillips, PA, Valiant Law, Coeur d'Alene, ID, for Defendant.

MEMORANDUM OF DECISION

TERRY L. MYERS, U.S. BANKRUPTCY JUDGE

In this adversary proceeding, plaintiff Jack Krystal ("Krystal") contends a state court judgment against chapter 7 debtor and defendant Lance B. Haynie ("Haynie") should be excepted from discharge under § 523(a)(2)(A), (4), and (6).¹ That judgment awarded Krystal damages for Haynie's usurpation of a business opportunity created jointly by Krystal and Haynie.

A trial was held on March 2–5, 2020, and the evidentiary record was closed on April 8, 2020. Doc. No. 59 at 1. The parties presented closing arguments on April 13, 2020. After considering the evidence, the parties' arguments, and applicable authorities, this Court enters the following findings of fact and conclusions of law.

JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. § 1334, and all issues before it are core matters on which it may enter final decisions under 28 U.S.C. § 157. Pursuant to Bankruptcy Rules 7008 and 7012, the parties expressly consented to this Court entering final judgment.

FACTS

Krystal and Haynie met at a business convention in Florida around 2002. The two began a working relationship where each would provide services towards various projects. For example, Krystal utilized Haynie's skillset in telecommunications and network solutions in Krystal's real estate development projects. Krystal lived and operated his businesses in California, and Haynie lived and worked in Spokane, Washington.

Haynie was employed by an internet company, Tsunami Communications, Inc. ("Tsunami"), which was owned by Cory Colvin and Michael Funk. Tsunami owned Sanswire of Spokane, Inc. ("Sanswire"), which provided internet services in the greater Spokane, Washington area. Haynie became aware that Sanswire was struggling, and he informed Krystal of the opportunity to buy the company. In early 2003, Haynie and Krystal discussed forming a company that would purchase Sanswire and provide internet services. Krystal and Haynie memorialized their discussions in a handwritten document that the parties referred to as the "Deal Points." Ex. 100.

The Deal Points outlined the parties' ideas regarding the formation, ownership, management, funding, profit distribution, employees, and initial objectives of a to-be-formed LLC. Ex. 100. The Deal Points stated that Krystal would have a 30 percent interest in the LLC and Haynie would have a 70 percent interest of which 40 percent could be sold to future investors. Krystal was to lend the LLC up to $100,000 in $25,000 increments. Krystal was to be the "CEO" and Haynie the "President." Haynie's company, LBH Communications, would form the LLC. The Deal Points provided a structure for distributing profits under which Haynie would receive a percentage of the profits exceeding certain specified amounts, and Krystal would receive one-third of the amount to which Haynie was entitled. These Deal Points were written in early 2003, but were initially unsigned.

On June 4, 2003, Haynie formed Stat Network Solutions, LLC ("Stat"). Ex. 102 at 1; Ex. 208. Stat's limited liability company agreement ("LLC Agreement"), Ex. 102, named Haynie as the sole member. Id. at 3. The LLC Agreement provided: "The Company shall engage in the business of the sales, installation and service of computer and communication systems and networks." Id. Krystal explained he was unaware of the formation of Stat for two to three months after it occurred.

On June 15, 2003, Haynie executed a promissory note on behalf of LBH Communications and himself individually by which he agreed to repay with interest a $20,000 loan from Krystal's real estate company, Diversified Realty Services ("Diversified"). Ex. 117. Haynie explained that these funds were used to purchase equipment to provide internet services to Eastern Washington University.

On August 19, 2003, Stat purchased Sanswire for $100,000. Ex. 104. In further consideration for this purchase, Cory Colvin and Michael Funk were made members of Stat, each holding a 5 percent membership interest therein. Ex. 104 at 2, ¶ C.

On August 26, 2003, Haynie executed a promissory note on behalf of LBH Communications, and himself individually, by which he agreed to repay with interest another loan of $100,000 from Diversified. Ex. 118. Haynie explained these funds were used to purchase Sanswire and its equipment.

Around October 25, 2003, Haynie emailed Krystal and requested another loan of $25,000 in order to purchase equipment for Stat. See generally Ex. 105. Krystal agreed by email. Id. Krystal's email alluded to ongoing discussions he, Haynie, and Haynie's attorney, Cynthia Schwartz, had regarding the preparation of "documents that describe[ed] the terms of [their] agreement." Id. Krystal also requested

"a print out and pertinent schedules reflecting the consolidated categorized revenue and expenditures of the Business since its inception to a current date and the list of accounts receivables, payables and amount and type of work lined up for the future. You may have also prepared an estimated itemized budget of monthly revenues and expenses, which would be useful in planning and making future financial decisions."

Id. Krystal explained that he requested this information as an "owner" of the business. Haynie agreed to talk with Cynthia Schwartz, send a signed promissory note, and provide the financial information requested. Id. A few days later, on October 27, 2003, Haynie executed a promissory note on behalf of LBH Communications, and himself individually, by which he agreed to repay $25,000 loaned by Diversified. Ex. 119. Krystal never received the requested, and promised, financial information.

On November 17, 2003, Cynthia Schwartz emailed Haynie drafts minutes for a meeting, by which the members of Stat would agree to admit Krystal as a member with 30 percent ownership. Ex. 107.² Cynthia Schwartz suggested these minutes be backdated to a date after the Sanswire purchase because Krystal was not named on the purchase agreement. Id. at 1. Based on this suggestion and the lack of signatures on these minutes, it does not appear that such a meeting admitting Krystal actually occurred, and the minutes regarding this alleged meeting were not officially adopted. Id. Krystal objected to these proposed minutes and Schwartz's backdating suggestion, writing:

Cynthia must make the appropriate changes to the [ ] documents and our agreement to reflect the correct date that you and I agreed to the terms, our share of ownership, salaries, income, future investors or shareholders, the amount of loans, and our share of LBH and the new companies, Stat and Sanswire of Spokane. This goes back to the beginning of the year, when we drafted and agreed to the terms of our agreement and you took it to Cynthia for her to prepare the contract. The loans have been funded and we have proceeded ahead on those terms since. We have told everyone of our envolvement [sic ] and they have known that as our dela [sic ] with them evolved and was finally signed. You signed it in [sic ] behalf of our company and not as an individual or a single shareholder. If Cynthia drafted the Agreement to state that she made a mistake and that must be correcte [sic ] through an addendum or clarification statement to be signed by everyone that participated in the transaction. She knew that we had made a deal and should have taken that into account to properly disclose my envolvement [sic ] in the contract.

Id.

On December 16, 2003, Krystal and Haynie signed the Deal Points. Ex. 100. On the same day, Krystal and Haynie also signed a typed document that had nearly identical terms as the handwritten Deal Points, but also had material differences. Ex. 101 ("Typed Deal Points").³ Of note, the Typed Deal Points provided a more complete picture of what business objectives would be, or had already been, achieved; adjusted the amounts to be lent by Krystal from increments of $25,000 to a range of $20,000–$25,000; and listed the titles for Krystal and Haynie as "Chairman" and "CEO/President" respectively. Id.

On July 29, 2004, Haynie executed an agreement to sell 50 percent of Stat to Tom Davis for $650,000. Ex. 103 ("Davis Agreement"). The Davis Agreement also provided that Haynie was to use a portion of the $650,000 to repay Krystal $130,000 which Diversified loaned. Id. Haynie repaid the loans made by Diversified.

In 2007, Krystal sued Haynie, Stat, and Tom Davis in the Superior Court of the State of Washington in Spokane. On April 20, 2007, Krystal filed his "Amended Complaint for Accounting, Damages, Breach of Contract and Declaratory Relief." Ex. 123 ("State Complaint"). In the State Complaint, Krystal sought a declaratory judgment that he was a 30 percent member of Stat, damages for breach of fiduciary duties, damages for conversion, an accounting of the financial affairs of Stat, and damages for Haynie's conduct in managing LBH Communications. Id.

In October 2009, the state court held a trial on the issue of the "existence (or nonexistence) and percentage, if any, of plaintiff Jack Krystal's ownership interest in defendant Stat Network Solutions, LLC." See Ex. 127 at 1–2 ("First State Judgment"). According to the First State Judgment, entered on November 18, 2009, the parties had agreed to limit the issues considered. The First State Judgment also noted that Haynie had affirmatively waived his right to participate as a party, but gave testimony as a witness. Id. The state court concluded that "Krystal is not now, nor has he ever been the owner of any membership interest in Stat." Id. at 6. On June 9, 2011, the First State Judgment was affirmed in...