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In re various controversies between Mercury

February 22, 2007


The opinion of the court was delivered by: Brieant, J.

Memorandum and Order

Pursuant to a mandate issued by the Court of Appeals on January 3, 2006, and filed in this Court on January 9, 2006, a hearing was held in this case on September 25, 2006, after numerous adjournments. By summary order and mandate, the Court of Appeals affirmed in part, vacated in part, and remanded in part this Court's earlier decision, which resulted in a $18,209.70 judgment in favor of South Liberty. The parties' post-hearing submissions were submitted for the Court's consideration on November 6, 2006. This litigation arises out of many undocumented oral agreements among shareholders of South Liberty Realty Corporation, a close corporation involved in condominium development and sales. This Court previously adjudicated several unresolved issues arising from the Mercury's bankruptcy proceedings, which decision the Mercury's appealed. Familiarity of the reader with the facts and prior proceedings in this case is presumed.

The original basis on which Gary Mercury alleged unequal shareholder treatment and sought an equitable offset against the corporation's claims against him, payment of which was guaranteed by Mary Mercury, was his assertion that only he was charged interest for shareholder loans granted to the shareholders in their capacity as purchasers, by South Liberty.*fn1 He now adds unequal treatment claims based on a $38,000 discount apparently applied to a condominium unit sold to Shareholder Al Vitiello's son, Steven; based on $25,000 fees allegedly paid (or used to offset debt) to South Liberty principal Al Vitiello for construction management services, which Mr. Mercury claims were never performed; and based on an alleged $10,000 overpayment by South Liberty to MCM, a paving and grading contractor. South Liberty obviously disputes his contentions of unequal treatment.

In its decision, the Court of Appeals stated: We affirm the remainder of the district court's decision for the reasons stated by Judge Brieant. The district court's determinations as to South Liberty's value, Gary Mercury's 22 percent interest, and the net value of South Liberty's claim against Gary Mercury are therefore affirmed subject to adjustment if Gary Mercury ultimately prevails in seeking an offset of the interest based on alleged unequal shareholder treatment.

Summary Order at 4. The Court remanded the cause "to the district court to consider anew the Mercurys' 'choate and inchoate' claims to equal treatment." Id. The Court discerns the following from the testimony at the hearing on remand and the grossly inadequate and incomplete financial records kept by South Liberty and its principals, as presented in this case. The Court here notes that any prior findings or statements by the Bankruptcy Court as to the issue of interest were vacated by virtue of this Court's grant of the Bankruptcy Court's recommendation for a "Limited Withdrawal of the Reference," which would extend to "all of the controversies and contested matters outstanding between South Liberty on the one hand and Gary Mercury and Mary Mercury on the other" and which included, inter alia, "the putative value of various claims which Gary Mercury asserts that South Liberty holds against other stockholders of South Liberty, including a claim that South Liberty has the right to recover interest from other shareholders." See Recommendation Doc. No. 2. The Bankruptcy Court's prior findings and Order dated March 5, 2004, had been vacated by this Court's Order dated August 13, 2004, filed under District Court Docket No. 04 Civ. 3306. Accordingly, the issue of interest is considered on remand de novo and not for clear error.

Unequal Shareholder Treatment

Mr. Mercury was among several shareholders to whom South Liberty loaned money in connection with condominium purchases. Tr. at 28. A loan was granted to Mr. Al Vitiello in the amount of $150,000 on August 28, 1989; to Mr. Gary Mercury in the amount of $150,000 on August 28, 1989; to Ms. Leona Monahan in the amount of $35,000 on August 28, 1989; and to Mr. Jim Trimble in the amount of $35,000 on October 25, 1989. See Mercury Exh. H. At some point, the shareholders voted as a corporation that the loan amounts would be due, if not already paid, when a shareholder sold their unit. Tr. at 48; see also South Liberty Exh. A. Mr. Mercury sold his unit in 1995, but to this day never paid the corporation the loan balance, having previously challenged in state court proceedings against him the due date for repayment. See Id. Of the primary shareholders, only Mr. Mercury's loan balance remained outstanding, which prompted South Liberty to sue him in state court for the unpaid loan balance. That suit resulted in a judgment in the corporation's favor in 1999. See South Liberty, Exh. A. Thereafter, Mr. Mercury filed for bankruptcy.

At the hearing on remand, the Mercury's presented Mr. James Murray, a certified public accountant and long-time personal friend of the Mercurys, who testified that in January 2001, he was asked by Mr. Mercury to review, and did review South Liberty's records, including its bank statements, cancelled checks, invoices, tax returns and general ledgers. Tr. at 8-9. On redirect examination, Mr. Murray testified:

COURT: As I understand it, they put it on the books and he never paid it; is that right?

A: No, sir, interest is not on the books.

COURT: If the interest is not on the books, what is your basis for claiming that he owes it?

A: It's my understanding that the -- that at some point in time the decision was made that interest would be paid on these loans. Outside accountants had prepared an analysis showing the interest that was due as of the end of 1994, which you have - -

COURT: But they never put it on the books; is that what you're telling us?

A: The interest is not reflected on the books.

COURT: As to ...

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