The opinion of the court was delivered by: Magistrate Judge Jeffrey Cole
MEMORANDUM OPINION AND ORDER
Vincent E. "Bo" Jackson achieved fame as a professional football and baseball player for the Los Angeles Raiders, Kansas City Royals, Chicago White Sox, and California Angels. Attempting to defy F. Scott Fitzgerald's dictum that "[t]here are no second acts in American life," Mr. Jackson formed a company called N'Genuity Enterprises, along with defendant, Valerie Littlechief. Things have not gone smoothly. He blames Ms. Littlechief, her husband, Alfred Bowen, and his son, Dustin, all of whom he accuses of looting the company of millions of dollars through payments to related corporations and through the less subtle device of direct payments to Ms. Littlechief that were disguised and concealed on N'Genuity's books. The defendants have denied any wrongdoing and have their own grievances against Mr. Jackson, whom they accuse of having abandoned the Company in favor of a national, fast-food chain.
The case began in the Circuit Court of Cook County and was removed to this court on September 25, 2009. [Dkt. #1]. The parties are of diverse citizenship, the matter in controversy exceeds the sum or value of $75,000, exclusive of interests or costs, and the court has subject matter jurisdiction under 28 U.S.C. § 1332. (First Amended Complaint, ¶21).
Mr. Jackson seeks a preliminary injunction to prevent any further diversions and to stop any action that dilutes or divests his ownership interest in N'Genuity through a contemplated merger with Impact Marketing Group LLC ("IMG")(a/k/a Global Financial Inv.), a company at least nominally owned by Ms. Littlechief's husband's sons, Dustin and Chad Bowen, and which purportedly is the exclusive marketing agent for N'Genuity. It is Mr. Jackson's contention that IMG has received $5 million from N'Genuity without having performed any services on its behalf. He also asks for the appointment of a temporary receiver to monitor N'Genuity's financial transactions. In light of events occurring on September 19, 2011, some further discussion is needed in order to explain the present posture of the case.
On March 3, 2011, Judge Lefkow entered a TRO, in which she found, inter alia, that there was credible evidence that the defendants had dissipated assets of N'Genuity in violation of their common law and statutory fiduciary duties, that there was no adequate remedy at law, and that without a TRO the plaintiff would suffer immediate and irreparable injury. [Dkt. #198]. On April 1, she entered an Agreed Order extending the TRO and instructing the parties to appear before me on April 1 at 9:30 to set a date and time for a hearing on the Motion for Preliminary Injunction. The Order recited that "[t]he parties agreed to extend the TRO to that date." [Dkt. ## 218, 219].
Pursuant to 28 U.S.C.§ 636 (c), the parties, on March 31, 2011, consented to jurisdiction here for resolution of Plaintiff's Motion for Preliminary Injunction and Motion for Appointment of a Temporary Receiver. [Dkt. # # 215, 220]. Thereafter, in various hearings counsel for all the parties expressly agreed to extend the TRO until ruling on the motion for preliminary injunction. Without the agreement the TRO would have ended, or, if extended by the court without agreement, would have automatically become a preliminary injunction and immediately appealable. Chicago United Industries, Ltd. v. City of Chicago, 445 F.3d 940, 942 (7th Cir. 2006); United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918, 923 (7th Cir. 2005).
In preparing the opinion on the motion for preliminary injunction, it became apparent that no order had been entered on the docket reflecting the parties' agreement. I informed counsel and asked that they prepare an appropriate agreed order. In a recent exchange of e-mails between the court and counsel, Mr. Miller, co-counsel for the defendants, did not dispute the existence of such an agreement; he merely thought Judge Lefkow's order of April 1, 2011 made unnecessary any further order. A copy of that email was sent to all counsel, including his co-counsel, Messrs. Glover and Krasnow, who had made the agreement in the first place. Mr. Miller said in his email to me:
Although the language if [sic] of the April 1 Order [of Judge Lefkow] is less than clear it is my understanding that the parties have behaved in a manner consistent with the language stating, "The parties agree to extend the TRO to that date" as meaning that the TRO is extended until the time of a hearing and ruling on the plaintiff's Motion for Preliminary Injunction. [Dkt. #332](Emphasis supplied).
I did not share his reading of Judge Lefkow's order and explained why in a responsive email, but noted that the matter is "academic" since, as the defendants' email confirms, "we had all operated on the premise that all parties had agreed that the TRO would be extended until the preliminary motion was decided. In fact, that was explicitly agreed on at least one, and perhaps two or three court hearings." I asked that counsel send me an appropriate agreed order reflecting the agreement "so that in the event the case goes to the court of appeals, that court will be under no misapprehension as to what happened." [Dkt. #332].
A dispute then arose between the parties, with the defendants taking the position that they were no longer bound by the TRO because a ruling on the motion was taking longer than they were comfortable with. All of this and the effect of the discovery disputes which necessitated updating of filings as information was obtained is explained in detail in the Memorandum Opinion and Order dated September 19, 2011, Jackson v. N'Genuity, 2011 WL 4375882 (N.D.Ill. 2011)[Dkt. ## 337, 338], which is attached as an Appendix to this opinion. See also Jackson v. N'Genuity, 2011 WL 4928912 (N.D.Ill. 2011).
Relevant briefing continued through mid-September. Among the issues was whether Ms. Littlechief and other of the defendants had violated the TRO by paying a large bill to a lawyer who did not represent N'Genuity. [# 331]. See infra at 26. In any event, as explained in the September 19th Memorandum Opinion and Order, all parties agreed to the extension of the TRO until ruling on the motion for preliminary injunction.
N'Genuity is an Arizona C-corporation, engaged in the distribution of wholesale food products throughout the United States. Mr. Jackson and Ms. Littlechief formed and incorporated N'Genuity in April of 2001, with Mr. Jackson owning 49% of the shares and Ms. Littlechief 51%. Alfred Bowen is married to Ms. Littlechief and has been integrally involved with her in the operation and administration of N'Genuity's business and finances. (Memorandum in Support of Motion for Preliminary Injunction, Ex. AA). And, as discussed infra, at 20, Alfred Bowen has held himself out as an officer of N'Genuity and has been held out as a corporate officer by Ms. Littlechief, herself, in filings with the United States Government. Nonetheless, the defendants deny that he is an officer of the company. Mr. Jackson's role in N'Genuity has been in marketing. While neither Mr. Jackson nor Ms. Littlechief drew a salary from their company in its first few years, starting in 2005, Mr. Jackson received $120,000 per year and Ms. Littlechief made $132,000 per year. [Dkt. # 244, ¶ 17].
The defendants, through an affidavit from Alfred Bowen complained that Mr. Jackson didn't make any financial contribution in return for his 49% of the company. [Dkt. #200-1]. But Mr. Bowen doesn't suggest that Mr. Jackson was supposed to have done so. It is apparent that the defendants were content to give Mr. Jackson his 49% in exchange for his celebrity. And they did so with the knowledge that the previous venture they undertook with Mr. Jackson -- selling energy bars through a company called Gamer -- in defendants' own words, "failed miserably despite Mr. Jackson's name and picture appearing on all the bars and packaging." (Defendants' Response, at 2).*fn2 If Gamer failed miserably -- defendants' words -- or "[f]elt like a Titanic" -- Mr. Jackson's words (Defendants' Response, Ex. C, Jackson Dep., at 159) -- N'Genuity wasn't much better in the beginning and still seems to be fairing poorly in terms of profit as opposed to revenue. The tax returns that the defendants have produced show profits of $142,000; $23,000; $101,000; $425,000; and $115,000 for the years 2002, 2004, 2005, 2007, and 2008, respectively. (Defendants' Response, Exs. CC, DD, EE, FF, GG).*fn3 These profits were derived from revenues of $1.4 million, $4.3 million, $14.8 million, $44.2 million, and $26.2 million for those same years. (Defendants' Response, Exs. CC, DD, EE, FF, GG).
Mr. Jackson's unrest about the situation grew when, according to him, the defendants repeatedly refused to let him see N'Genuity's financial records. The defendants, however, contend that every December, N'Genuity provided Mr. Jackson with the company's financial records. Upon the request of Mr. Jackson's accountant, N'Genuity forwarded some financial records in 2003 and 2006-2009 -- although Mr. Jackson says that he did not get "all of the documents to which he was entitled as a 49% shareholder and director prior to litigation." (Plaintiff's Reply, at 19).
As this was going on, Mr. Jackson contracted in April 2008 with the fast-food, chicken sandwich dynasty, Chick-Fil-A, to use his name and likeness in its marketing efforts. [Dkt. # 75].*fn4
The campaign included Chik-Fil-A's slogan, "Eat More Chicken." For the defendants, touting chicken sandwiches directly competed with, and denigrated, the sale by N'Genuity of its "Bo Burgers," and violated Mr. Jackson's fiduciary duty to N'Genuity. But Defendants fail to point to any agreement that N'Genuity would have the rights to Mr. Jackson's name and image exclusively, or that "Bo Burgers" even competed in the same market -- or league -- as Chick-Fil-A's well-known chicken sandwiches, which garner the chain annual sales of $3.6 billion.
http://www.bizjournals.com/atlanta /news/2011/02/21/chick-fil-a-sales -jump-to-36- billion.html.
N'Genuity is a wholesale food distributor, after all, and Chick-Fil-A operates in the retail world of fast food restaurants. It is highly doubtful, to say the least, that Chick-Fil-A ever tried to sell chicken sandwiches to one of N'Genuity's wholesale clients, and defendants certainly don't point to any instance where that happened and do not point to a single client conflict. (Defendants' Response, at 3-4). But these are matters that go to the merits of the litigation are not relevant to disposition of the motions.
From the commencement of the case, the defendants have intentionally sought to frustrate Mr. Jackson's legitimate attempts to obtain critical information through discovery. See Jackson v. N'Genuity, 2011 WL 4375882 (N.D.Ill. 2011)([Dkt. ## 337, 338]; Appendix, infra); Jackson v. N'Genuity Enterprises Co., 2010 WL 4928912 (N.D.Ill. 2010). Month after month, the defendants told the court and Mr. Jackson's counsel that the most basic financial documents needed not merely for this case, but to run a $30 million year company, simply did not exist. They went so far as to produce an affidavit from Dustin Bowen on September 3, 2010 in which he swore that electronic financial data prior to 2009 had been inadvertently destroyed and that the flash drives used for backup "were completely unavailable." [135 -- 3, Ex. J].
As the court-ordered examination of the defendants' computers in November 2010 revealed, the information that was alleged not to exist was often immediately accessible simply by opening the files on the defendants' computers. Even where the defendants had tried to delete important financial data, the information was often retrievable. And yet, much valuable information may never be recovered since the defendants have admitted that computers were likely destroyed. Dustin Bowen admitted at his deposition on November 19, 2010 that at least three N'Genuity computers were taken out of service and "thrown in the dumpster." Although Mr. Bowen claimed to be unable to pinpoint when this occurred, his overall testimony fairly allows the inference that the destruction of N'Genuity computers took place during the pendency of the current litigation. (Plaintiff's Renewed Motion For Appointment Of A Temporary Receiver. [Dkt. 210-5, at , p.17; see also 13, et seq].*fn5
Thus, the defendants' ultimate production of some 70,000 pages of documents does not render meaningless the history that led up to that production and is not an indicia of good faith or an occasion for self-adulation. (Defendants' Response, at 14-16).
It cannot be too strongly emphasized that the rulings on the instant motions are not intended as a sanction for the defendants' conduct in discovery. Rule 37 and a court's inherent powers are the usual methods for dealing with discovery non-compliance and deterring future misconduct. See Degen v. United States, 517 U.S. 820, 827 (1996); Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991); Rickels v. City of South Bend, Indiana, 33 F.3d 785, 786-87 (7th Cir. 1994). Those are the rules and principles that will govern the separate motions for attorneys' fees that the plaintiff is seeking pursuant to a briefing schedule set on September 30, 2011.*fn6
That does not mean, however, that the defendants' conduct does not have significant evidentiary and other implications for the decision of the motions for appointment of a temporary receiver and for a preliminary injunction. "It has always been understood--the inference, indeed, is one of the simplest in human experience" that, inter alia, a party's fabrication or suppression of evidence, 'is receivable against him as an indication of his consciousness that his case is a weak or unfounded one...." 2 J. Wigmore, Evidence §278 at 133; see also §278 at 139 (3d Ed. 1940).
As discovery progressed, Mr. Jackson was slowly able to uncover significant information. At her deposition, a former N'Genuity employee testified to facts that supported Mr. Jackson's contention that Ms. Littlechief and her family were in fact using N'Genuity funds as their own. Bank statements and other documents, ultimately produced, provided further and far more comprehensive confirmation. For example, there were a number of checks written to Ms. Littlechief's and Mr. Bowen's nanny in significant amounts and improperly shown as corporate expenses. Transfers of money to Ms. Littlechief were disguised as business expenditures and charged to cost of goods sold. Cost of bacon and chicken parts were favorite hiding places. Mr. Jackson detailed some of what had been learned in a Motion to Appoint a Temporary Receiver on July 26, 2010. [Dkt. # 80].
Opposing the motion, the defendants contended that Ms. Littlechief merely took "loans" from N'Genuity to pay for her and her family's and relatives' personal expenses, which she later "reconciled," or paid back. The defendants continually sought to explain that the recordations of the transactions as something other than what they really were were merely innocent "mistakes" and bookkeeping errors. The defendants also falsely claimed that they had produced all financial information that existed, "including all financial documents in N'Genuity's possession." [Dkt. #117, at 6]. An affidavit from Dustin Bowen dated September 3, 2010 swore that N'Genuity's electronic financial data prior to 2009 had been inadvertently destroyed and that the flash drives used for backup "were completely unavailable," and N'Genuity "has been unable to locate any of the flash drives used to back-up accounting records prior to 2007." [Dkt. #135 -- 3, Ex. J, ¶¶6-7].
Several months would pass before the court-ordered examination of the defendants' computers would reveal the falsity of the representations that financial documents spanning almost a decade did not exist. (See Plaintiff's Memorandum in Support of Motion for Preliminary Injunction, Ex. A, ¶ 15, Ex. EE at 59; and Appendix, infra; [Dkt. #155]). But lacking sufficient proof because of the discovery non-compliance, Judge Lefkow felt compelled to deny the motion for the appointment of a temporary receiver on September 9, 2010. [Dkt. # 121].
On February 24, 2011, the fraud examiner hired by the plaintiff to review the materials obtained from the court-ordered examination of the defendants' computers summarized his findings that the defendants have diverted large amounts of money from N'Genuity through various devices:
(1) N'Genuity paid millions of dollars to companies owned by the individual defendants, such as Impact Marketing Group LLC/Electronic Data Analysis ("IMG" and "EDA"), respectively owned by defendant, Dustin Bowen, and Littlechief Specialties (which is owned by Ms. Littlechief and Dustin Bowen).*fn7
The defendants contend that IMG is a legitimate company that does all the marketing for N'Genuity and is merely being paid for its legitimate efforts. Mr. Jackson contends that it is merely a vehicle for funneling millions of dollars out of N'Genuity and into the hands of Ms. Littlechief and the other defendants. Mr. Jackson also contends that Littlechief Specialties is simply a vehicle which, although recognized and allowed by United States tax laws, is in reality a device for transferring money for the sole benefit of Ms. Littlechief and Dustin Bowen, at his sole expense.
The examiner also concluded, and it is not denied, that N'Genuity paid many of Ms. Littlechief's and her family's personal expenses and that she caused N'Genuity to make unlimited, interest-free, and indeterminable loans to herself. (Memorandum in Support of Plaintiff's Motion for Preliminary Injunction, Ex. 8).
The income statement for 2008 from one of N'Genuity's computers indicates a net income of $121,332.04. The income statement produced by N'Genuity's Certified Public Accountant, Wayne Clouser, indicates a net income of $618,727, while the corresponding tax return shows a net income of $86,400. An Excel worksheet that had been deleted by N'Genuity but recovered by Forentech (and is referred to as a "carved" document) shows a net income of $1,372,116.84. (Plaintiff's Renewed Motion for Appointment of Receiver, Ex. 4). The 2009 balance sheet produced by Mr. Clouser reflects a net income of $1,024,442.19.
The QuickBooks data shows a net income of $1,044,219.27, based on the accrual method of accounting, or $1,080,327.69, based on the cash method. N'Genuity's tax returns, however, show a net income of only $522,578. (Ex. 4). Information for the year 2010 is limited. The defendants have balked at producing any income statements, balance sheets or tax returns for that year. (Defendants' Response, at 14-16 (listing records produced)).
According to N'Genuity's financial data, its net income has significantly decreased, despite substantial increases in sales revenues. N'Genuity reported revenues of $27,827,242 and a net income of $522,578 in its 2009 income tax return. But, according to N'Genuity's QuickBooks data for that same year, net income fell to $272,127 even though revenues rose to $29,745,824. (Ex. 4). The defendants, without citation to any evidence, claim that, in 2010, sales revenues were about $30 million. (Defendants' Response, at 16). Mr. Jackson's concern is with the rather small amount of profit being generated by these substantial revenues.
When Mr. Jackson and his accountant finally were able to examine the documents the defendants had labored for so long to conceal, it indeed appeared as though Ms. Littlechief was using N'Genuity as her "personal piggy bank," just as Mr. Jackson had contended. Entries for what could only be personal expenses and transfers of money in large amounts to Ms. Littlechief were all over the books, disguised as business expenses, deductible to the corporation.
The defendants do not deny the transactions or really account for the seeming inconsistencies in their own documents. Their excuse is that it was all due to bookkeeping "errors" and "mistakes" that have since been corrected. They also say that Ms. Littlechief was simply borrowing money and paying it back, admittedly without interest. This is a practice they claim, inaccurately, that is permitted under Arizona law. See infra at 17-18. Not surprisingly, Mr. Jackson would like a temporary receiver to keep an eye on N'Genuity's assets and a preliminary injunction to prevent further breaches of fiduciary duty.
But the outflow of enormous amounts of money from the corporation to Ms. Littlechief and her relatives and to entities controlled by them is only half of Mr. Jackson's concern. The other half has to do with where his ownership interest in the company went. He says that as a consequence of secret meetings among the defendants, his interest has been severely diluted. The defendants argue that the meetings were not secret, and that Mr. Jackson was his own worst enemy in the dilution of his interest because he had the opportunity to maintain the 49% ownership he started with. He simply chose not to. Mr. Jackson also wants an injunction to prevent any further dilution of his interest, which would take place if N'Genuity is allowed to go through with a merger with another -- and related -- company, IMG, which is formally owned by Ms. Littlechief's husband's children.
Preliminary Injunctions and Appointments of Receivers
We begin with the basics. "A preliminary injunction is an 'extraordinary and drastic remedy,' ...; it is never awarded as of right...." Munaf v. Geren, 553 U.S. 674, 690 (2008). It "'should not be granted unless the movant, by a clear showing, carries the burden of persuasion.'" Mazurek v. Armstrong, 520 U.S. 968, 972 (1997)(emphasis in original)(citation omitted). Accord Girl Scouts of Manitou Council, Inc. v. Girl Scouts of United States of America, Inc., 549 F.3d 1079, 1085--86 (7th Cir.2008)(a "'preliminary injunction is an exercise of a very far-reaching power, never to be indulged in except in a case clearly demanding it.'"). It is for the party seeking the injunction to make the requisite showing, not for the opponent to show the injunction should not issue.
In order for a preliminary injunction to issue, the plaintiff must show that it is likely to succeed on the merits, that it is likely to suffer irreparable harm without the injunction, that the harm it would suffer is greater than the harm that the preliminary injunction would inflict on the defendants, and that the injunction is in the public interest. "Issuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with [the Court's repeated] characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief." Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008); Judge v. Quinn, 612 F.3d 537, 546 (7th Cir. 2010). Nonetheless, a plaintiff need show only a "better than negligible" chance of success on the merits of at least one of his claims to meet the threshold requirement. Girl Scouts of Manitou Council, Inc., 549 F.3d at1096. The greater the likelihood of success on the merits, the less net harm the injunction must prevent in order for preliminary relief to be warranted. Judge, 612 F.3d at 546; Hoosier Energy Rural Elec. Coop., Inc. v. John Hancock Life Insurance. Co., 582 F.3d 721, 725 (7th Cir. 2009). "[T]he equitable personality of injunctive relief requires the result to be a 'just' or 'fair' result rather than a 'correct' result." Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429, 1435 (7th Cir. 1986).
Mr. Jackson bases his request for a preliminary injunction on his breach of fiduciary duty claim. (Plaintiff's Memorandum in Support of Motion for Preliminary Injunction, at 7). "In Arizona a director of a corporation owes a fiduciary duty to the corporation and its stockholders. This duty is in the nature of a trust relationship requiring a high degree of care on the part of the director." Dooley v. O'Brien, 244 P.3d 586, 590 (Ariz. App. 1st Div. 2010). The prohibition against self-dealing that is inherent in a director's fiduciary relationship with the corporation and its shareholders, underlies the corporate directors duty of loyalty. The Arizona Supreme Court in Master Records, Inc. v. Backman, 652 P.2d 1017, 1022 (Ariz.1982) put it this way: "The fiduciary relation of the corporate officers to the corporation . . . imposes upon them the obligation to serve the purpose of their trust with fidelity, and forbids the doing of any act by them, or by any one of them, by which the assets of the corporation are wrongfully diverted from corporate purposes."
While "'[m]any forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.'"Dooley, 244 P.3d at 590 n.4 (quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928)(Cardozo, C.J.)). Obviously, the misappropriation of corporate assets amounts to a breach of this duty.
The equitable remedy of appointment of a receiver, which Mr. Jackson also seeks, is designed to manage a defendant's assets during the pendency of litigation. Matter of McGaughey, 24 F.3d 904, 907 (7th Cir. 1994). It is an especially appropriate remedy in cases involving fraud and the possible dissipation of assets, since the primary consideration in determining whether to appoint a receiver is the need to protect, conserve and administer property pending final disposition of a suit. Id. The determination of whether to appoint a receiver in a diversity jurisdiction case -- and of course in cases arising under federal law -- is a matter of federal, not state law. Fed.R.Civ.P. 66 (and advisory committee notes); National Partnership Inv. Corp. v. National Housing Development Corp., 153 F.3d 1289, 1291 (11th Cir. 1998); Regions Bank v. R & D Development Corp., 2011 WL 2149086, *3 (S.D.Ill. 2011)(collecting cases).
The Defendants' Misuse Of N'Genuity Funds For Personal Expenses
And Their Claims Of Innocent "Mistake"
Overview Even on the present abbreviated record, the evidence reflects something far more than a mere isolated incident or two involving questionable transactions being incorrectly categorized on the company's books. Rather, it reveals a pattern of disguised transactions, always in favor of Ms. Littlechief and her family, which are now sought to be explained as merely good faith, bookkeeping "mistakes." If the defendants' explanation is to be credited, no one is at fault except the bookkeeper -- who, it ought be noted, has a college degree in accounting. As discussed below, the defendants' excuses are implausible. The implausibility of testimony, inconsistencies between testimony and objective evidence are more important than demeanor in judging credibility and may be so great that no reasonable fact-finder would credit the testimony. See Kadia v. Gonzales, 501 F.3d 817, 820 (7th Cir.2007); United States v. Bradford, 499 F.3d 910, 920-21 (8th Cir.2007); Pinpoint, Inc. v. Amazon.Com, Inc., 347 F.Supp.2d 579, 583 (N.D. Ill.2004) (Posner, J.)(sitting by designation). Cf. NLRB v. Dorothy Shamrock Coal Co., 833 F.2d 1263, 1268 (7th Cir. 1987).*fn9
In isolation, any one of the claimed "mistakes" might conceivably be dismissed as just that and nothing more. But there is a point when occurrences cannot be innocently viewed, and a pattern emerges that cannot be dismissed as innocuous. See Castle v. Bullard, 64 U.S. 172, 187 (1859)("Circumstances altogether inconclusive, if separately considered, may, by their number and joint operation, especially when corroborated by moral coincidences, be sufficient to constitute conclusive proof."). Accord United States v. Rodriguez, 975 F.2d 404 (7th Cir. 1992); Murdaugh Volkswagen, Inc. v. First Nat. Bank of South Carolina, 639 F.2d 1073 (4th Cir. 1981); In re Elm St. in City of New York, 246 N.Y. 72, 158 N.E. 24 (1927) (Cardozo, C.J.)("This group of conditions so unusual and particular is precisely fitted to the claimant's case, and only by a most singular coincidence could be fitted to any other. If we may not say of such a coincidence that it is literally impossible, at least we may say that one would be surprising, and several would be marvelous."). On the present record, that is the situation in the instant case.
Ms. Littlechief's Pattern Of "Borrowing" From N'Genuity And The Concealment Of The Transactions
With the belated and forced production of financial records, the defendants have finally abandoned their pretext that there were no books and records in paper or digital format for N'Genuity for the almost ten- year period up to 2009. And they have largely abandoned their claim that N'Genuity funds were not used to pay Ms. Littlechief's personal expenses. Instead, they now argue that: (1) it is a practice that is appropriate under Arizona law, and (2) in each instance, Ms. Littlechief either repaid the advances, reported them as salary or bonus, or they were recorded as a loan which she has repaid. (Defendants' Response, at 24). To the extent the transactions were recorded on the books as something they were not, the defendants say it was a series of unfortunate "mistakes."
They rely on a single Arizona case -- Tovrea Land & Cattle Co. v. Linsenmeyer, 100 Ariz. 107, 412 P.2d 47 (1966) -- to support their characterization of the loan transactions as nothing out of the ordinary. The defendants focus exclusively on this passage from Tovrea:
[S]uch loans are valid if free from fraud and fair to the company . . . It has been held that a corporation can loan its surplus funds at less than the legal interest rate to directors dominating the corporation where there is no fraud and no showing that the funds could have been invested at a more substantial interest yield. 100 Ariz. at 124, 412 P.2d at 56. But the court went on to stress -- in a passage not cited in defendants' brief -- that loans to officers are to be "closely scrutinized" and should be set aside if they are unfair to the company. Id. 100 Ariz. at 123, 412 P.2d at 58. Also ignored by the defendants are the facts of the case, which are not remotely comparable to those that exist here.*fn10
Significantly, the officers in Tovrea repaid their loans with interest, and the transactions were not disguised as something other than what they were. See 100 Ariz. at 121, 412 P.2d at 56. Ms. Littlechief's loans were interest-free, were disguised, and, as we shall see, the records rather strongly suggest she either owes a significant sum or that there have been more "bookkeeping mistakes." Why else the labored efforts to withhold and conceal the very existence of the financial records in the first place? Moreover, it's not enough for the defendants to simply claim, without proof or elaboration, that "any interest owing on the loans would have been minimal." (Defendants' Response, at 26).*fn11 Unsupported statements by lawyers in briefs don't count. See IFC Credit Corp. v. Aliano Brothers General Contractors, Inc., 437 F.3d 606, 610-611 (7th Cir.2006); United States ex rel. Feingold v. AdminaStar Federal, Inc., 324 F.3d 492, 494, 497 (7th Cir.2003). Here, defendants admit there was no interest paid by Ms. Littlechief, and thus, Tovrea provides no safe harbor for the loans to her.
Documents only recently produced pursuant to court order by Jere Glover, defendants' lead attorney in this case and N'Genuity's counsel"in all matters concerning the small Business Administration," (Memorandum in Support of Plaintiff's Motion for Preliminary Injunction, Ex. W), should be considered in connection with the defendants' claim that the loans were perfectly above board. These documents were provided to the SBA with its 8(a) Annual Update in May of 2006. (Memorandum in Support of Plaintiff's Motion for Preliminary Injunction, Ex. X). The Annual Update included an Individual Compensation Worksheet ("Worksheet") which did not reflect any loans or advances to N'Genuity shareholders. (Memorandum in Support of Motion for Preliminary Injunction, Ex. X, at 6).
It is the only SBA Worksheet the defendants produced in discovery. Yet, through a Freedom of Information Act Request to the SBA, Mr. Jackson learned that Ms. Littlechief submitted such Worksheets for every year since 2006 up to 2009. (Memorandum in ...