Opinion
Case No. 03-20952-BKC-RBR.
June 26, 2007
Thomas L. Abrams, Esquire, Attorneys for Debtors, Gamberg Abrams, Fort Lauderdale, Florida.
MEMORANDUM OPINION SUSTAINING CONSTANTIN BARTSOCAS AND VASILICI BARTSOCAS OBJECTION TO WHALE INLET CORP.'S PROOF OF CLAIM #16
This cause came before the Court upon Debtors, Constantin and Vasilici Bartsocas' Objection to Whale Inlet Corp.'s Proof of Claim #16. The Court held an evidentiary hearing on February 13, 2007, and a continued evidentiary hearing on May 22, 2007. The Court, having considered the testimony presented and exhibits, it is ORDERED and ADJUDGED as follows:
I. PROCEDURAL HISTORY
1. The Debtors, Constantin Bartsocas and Vasilici Bartsocas (collectively referred to herein as the "Bartsocas'" or "Debtors") filed for Chapter 11 relief on February 11, 2003.
2. The Debtors listed Whale Inlet, Inc. ("Whale Inlet") as a disputed creditor in Schedule F of their Schedules. [CP #8].
3. On February 28, 2003, Whale Inlet filed a Proof of Claim (Claim #16) in the amount of $400,000.
4. On July 14, 2006, the Debtors filed an Objection to Whale Inlet's Claim #16. [CP #100].
5. An Evidentiary Hearing on the Claim Objection was held on February 13, 2007, wherein the Debtors presented the testimony of Bonnie Blanford and sworn declarations of Kiki Bartsocas and Gus Bartsocas in support of their Objection. Debtor's Exhibit Nos. 1-8 contained within their Exhibit Register were admitted into evidence. Whale Inlet cross-examined Kiki Bartsocas. The Debtors rested their case on February 13, 2007, and Whale Inlet presented no direct testimony as no sworn declaration was presented pursuant to paragraph 3 of this Court's January 30, 2007 Order Scheduling Evidentiary Hearing. Whale Inlet stated its potential witness, Joan Wagner, could not be present due to travel complications.
6. On March 1, 2007, Whale Inlet filed a (I) Motion for Rehearing or Reconsideration, and (II) Direct Testimony of Joan Wagner in Support of Whale Inlet Corp.'s Proof of Claim. [CP #188].
7. On February 27, 2007, this Court entered an Order Granting Whale Inlet Corp.'s Motion for Rehearing and Reconsideration to allow Whale Inlet to present the Direct Testimony of Joan Wagner and cross-examination by the Debtors. [CP #183]. The Debtor filed a Motion to Reconsider this Court's February 22, 2007 Order [CP #188] which was denied by Order dated March 5, 2007 [CP #191]. On March 5, 2007, Whale Inlet filed the Affidavit of Joan Wagner and Direct Testimony in Support of Whale Inlet Corp.'s Proof of Claim.
8. On April 27, 2007, this Court entered an Order Continuing Evidentiary Hearing for May 22, 2007. [CP #199]. At the continued hearing the Direct Testimony of Joan Wagner was admitted into evidence pursuant to Joan Wagner's March 5, 2007 Affidavit together with its Exhibits A-N, and the Affidavit of Joan Wagner being marked as Exhibit "O" together with Exhibits O-A to O-I to the Affidavit. The Debtors' cross-examined Joan Wagner and presented two impeachment Exhibits marked as Exhibits 9 and 10 for impeachment purposes only. The hearing was concluded on May 22, 2007, as the Debtors and Whale Inlet rested their cases.
9. Whale Inlet's Claim #16 is a claim based on a Promissory Note in the principal amount of $400,000 dated August 14, 1998, executed by the Bartsocas' and Delta Property Holdings, Inc. ("Delta Property Holdings") as co-makers relating to a sale of real property owned by Whale Inlet located at 100 S. Federal Hwy., Hallandale Beach, Florida. ("Property"). Delta Property Holdings executed a Second Mortgage, Security Agreement and UCC-1 on the same date as the Note was executed. Whale Inlet asserts this is a straightforward claim on a Promissory Note ("Note") which the Debtors do not dispute they executed individually and Gus Bartsocas on behalf of Delta Property Holdings.
Whale Inlet's Exhibits are referred to herein by their letter designations, the Bartsocas' Exhibits are referred to by their respective number designations and references to the transcripts are referred to by T. I for the first transcript of the February 13, 2007 hearing and T. II for the second transcript from the continued hearing held on May 22, 2007 with the applicable line and page designations.
10. The Bartsocas', however, contend through their testimony and exhibits that there was a lack of consideration for the Note, Mortgage, Security Agreement and UCC-1 as they had an agreement with Boulis, on behalf of Whale Inlet, that the Note was never intended to be enforced. The Bartsocas' assert the Note and related loan documents were created as part of a plan with Gus Boulis ("Boulis") to inflate the purchase price to allow Delta Property Holdings to obtain a loan in relation to the purchase of the Property sufficient for Gus Boulis to receive a cash payment of over $600,000 from the closing. They also assert the Note is unenforceable as contrary to public policy.
II. FINDINGS OF FACT
The Bartsocas' and Gus Boulis had a long-term personal and business relationship spanning over 22 years, which included developing and operating various business interests through various entities. (Exhibit Nos. 7 and 8, ¶ 1). Gus Boulis and Gus Bartsocas were like brothers (T. II, p. 17, l. 3-5). The customary Bartsocas and Boulis business practice was to purchase a piece of restaurant suitable real estate, identify an existing concept or create a new concept to develop and operate on that location. (Exhibits 7 and 8, ¶ 4). The Bartsocas' helped fund the various entities and manage the day-to-day activities of the restaurants. (Exhibits 7 and 8, ¶ 4). The Bartsocas' and Boulis operated based on trust and did not profit off each other, but rather sought to create profit based on their joint efforts. (T. I, p. 57, l. 6-23).
The Bartsocas' obtained a jury verdict resulting in a Final Judgment of $1,753,590.47 against the Estate of Boulis for unjust enrichment relating to their contributions and work with Boulis on various restaurant and business projects for which the Estate of Boulis refused to recognize. (Exhibits 7 and 8, ¶ 5).
One of the concepts which was part of this business relationship was the Gusto's concept (Bartsocas Exhibits 7, 8, ¶ 4 and 6). The Gusto's name came from the combination of the names of Gus Bartsocas and Gus Boulis ("Gus + two"). (Exhibits 7, 8, ¶ 1). The agreement between Bartsocas and Boulis was for them to improve the property located at 100 South Federal Hwy., Hallandale Beach, Florida, which was purchased by Whale Inlet (an entity owned and controlled by Gus Boulis) on June 18, 1996 for $750,000, and commence operations of the new concept. (Exhibits 7 and 8, ¶ 6).
At the time of the purchase, the Property was unimproved for a Gusto's restaurant and the floors were actually wet. From June 1996 to August 1998, the Bartsocas contributed over $700,000 of their own funds to improve the Property, and the Gusto's Grill and Bar opened in January 1997 at that location. (Exhibits 5, 6, 7 and 8, ¶ 6, 7 and 8; T. I. p. 115, l. 8-10; p. 116, l. 10-23).
In the spring of 1998, Boulis approached the Bartsocas' and told them he needed cash to fund various casino businesses and other matters. Boulis suggested selling the 100 S. Federal Hwy. Property to the Bartsocas' (or an entity owned by the Bartsocas'), and obtain a loan to pay off Whale Inlet's existing mortgage with Family Bank of Hallandale and cash Boulis out for approximately $600,000. (Exhibits 7 and 8; T. I, p. 59, l. 16-25; p. 60, l. 1-4).
At a restaurant across from Miami Subs on 17th Street, it was agreed between Boulis and the Bartsocas' that a sale price of approximately $1.2 Million was needed in order to pay off the Family Bank Mortgage and net Whale Inlet/Boulis $600,000. That sale price was acceptable to the Bartsocas' and Boulis, however, a loan was needed to make the transaction work. (Exhibits 7 and 8, ¶ 4).
The Bartsocas' approached Colonial Bank, a bank with whom they had previously had a relationship, and were only able to obtain a loan for $1.2 Million if there were a purchase price of approximately $1.6 Million with a $400,000 cash payment by the Bartsocas' at closing. (Exhibits 7 and 8, ¶¶ 12 and 17, and HUD Settlement Statement, Exhibit 3).
In order to accomplish Boulis' cash-out from the sale of the Property, Boulis and the Bartsocas' agreed that they would show a sale price to the bank of $1,625,000 and a $400,000 cash deposit, but the actual sales price agreed to between the Bartsocas' and Boulis was $1,212,000. To accomplish this plan, the Bartsocas' wired $400,000 to Whale Inlet on August 6, 1998, and Whale Inlet wired the funds back to the Bartsocas' on August 7, 1998 (Exhibits 7 and 8, ¶ 12, Exhibit 2). Boulis and Gus Bartsocas also signed a HUD Settlement Statement on August 13, 1998 reflecting a cash payment of $400,000 by Delta Property Holdings, when in fact the payment was never made.
The closing on the loan and sale of the Property occurred on August 13, 1998. (See Exhibit 3). The HUD Settlement Statement executed by Gus Boulis on behalf of Whale Inlet and Gus Bartsocas on behalf of Delta Property Holdings reflects a sale price of $1,625,000, Excess Deposit to Seller of $400,000, payoff of first mortgage loan to Family Bank of $545,066.37, cash to seller of $636,544.14, and principal amount of new loan to the Delta Property Holdings of $1,250,000.
While many facts are in dispute in this case, there is no dispute that the HUD Settlement Statement is materially false as there was not a $400,000 excess deposit paid by Delta Property Holdings at the time of closing. Joan Wagner, the CFO of Boulis' entities, including Whale Inlet, at the time of the closing and in charge of Whale Inlet's finances (T. II, p. 15, l. 11-16; p. 28, l. 2-5; p. 80, l. 12-18), testified she had no knowledge of the $400,000 wire transfer from the Bartsocas' to Whale Inlet on August 6, 1998 or the return of the $400,000 to the Bartsocas' on August 7, 1998. (T. II, p. 38, l. 11-12; p. 39, l. 1-4). She also had no knowledge of the HUD Settlement Statement, although she testified she handled a hundred plus closings for Boulis. (T. II, p. 42, l. 1-25; p. 43, l. 1-7; p. 44, l. 12-22).
In response to an inquiry by this Court, Ms. Wagner stated she was aware of everything that was happening with Whale Inlet (T. II, p. 80, l. 12-18), however, she lacked or failed to disclose knowledge regarding material aspects of the transaction at issue.
In order to explain within Whale Inlet's records the receipt and return of the $400,000 as well as the HUD Settlement Statement reflecting receipt of a $400,000 deposit, Boulis told the Bartsocas' he needed to paper the $400,000 as a loan by having Delta Property Holdings and the Bartsocas' sign as co-makers on a Note and for a Mortgage and UCC-1 to be executed, although Boulis assured the Bartsocas' it was never intended to be an enforceable obligation. (Exhibits 7 and 8, ¶ 14). He told the Bartsocas' the $400,000 needed to be "papered" for Whale Inlet's records as he and Whale Inlet had ongoing legal and financial issues. (Exhibits 7 and 8, ¶ 14).
The Bartsocas' signed the Note and Mortgage on August 14, 1998, with the understanding and agreement with Boulis that the actual sales price was $1.2 Million not $1,625,000. Boulis told the Bartsocas' not to worry as there would never be any enforcement. (Exhibits 7 and 8, ¶ 14).
The details ofthe arrangement between Boulis/Whale Inlet and the Bartsocas'/Delta Property Holdings is set forth in a post-closing document worked up by Kiki Bartsocas (Exhibits 7 and 8, ¶ 4, and Exhibit 1). The Bartsocas' and Boulis reviewed Exhibit 1 together after the closing and agreed to the contents. Boulis said "entaxi" which in Greek means "everything is in order." (Exhibits 7 and 8, ¶ 11). Mrs. Bartsocas testified that the $1,212,000.00 purchase price was to cover the actual purchase of the Property, construction work on the Property paid by Boulis, funds advanced by Boulis in 1997, rent owed, and $79,000 for the purchase of a home on a lot next to the Property which was used for parking at Gusto's. (T. I, p. 51, l. 16-25; p. 52, l. 1-25).
Gus Boulis and his entities, including Whale Inlet, were encountering various legal problems in 1997 and 1998, prior, during and subsequent to the August 13, 1998 closing on the Property. (T. II, p. 116, l. 15-25; p. 127, l. 17-25; p. 128, l. 1-13; p. 130, l. 5-14; p. 131, l. 14-24). Whale Inlet had a judgment entered against it in the Circuit Court of the 17th Judicial Circuit in September 1998, requiring it to post a substantial supersedeas bond and had various legal issues with the Federal Government relating to his casino interests which resulted in a raid on his businesses in August 1998. He was also going through a divorce which still had not been resolved at the time he was murdered on February 6, 2001. (T. II, p. 98, l. 1-4; p. 116, l. 15-25). At or around the time of the August 13th closing, Boulis moved over $3,000,000 in funds off-shore to the Bahamas to ostensibly ensure he had sufficient funds to protect his interests. (T. II, p. 131, l. 20-24). Boulis was in need of cash as a result of his legal issues, business interests and divorce. (T. II, p. 116, l. 15-25; p. 127, l. 17-24; p. 131, l. 14-25; T. I, p. 59, l. 16-22).
Neither the Bartsocas' or Delta Property Holdings ever made a payment on the Note and there is no documentary evidence of any formal or informal collection efforts on the Note until the purported June 18, 1999 letter, after Whale Inlet filed for Chapter 11 Bankruptcy on January 4, 1999. There was never any legal action instituted until after Boulis unexpected death on February 6, 2001 from a gangland-style murder. The Mortgage, Note and UCC-1 were not recorded until after February 18, 1999. While Whale Inlets Bankruptcy Schedule B reflected a Note Receivable from "Delta Property Management" in the amount of $400,000, there is no mention of Delta Property Holdings, Inc. or the Bartsocas as co-makers of a Note. The Schedules and Statement of Financial Affairs also fail to disclose an interest in a mortgage collateralizing the $400,000 Note.
As discussed further below, the Court finds the June 18, 1999 letter (Exhibit O-E) to be suspect as it is unsigned and no evidence was presented it was mailed. Additionally, it was not listed on Whale Inlet's Exhibit List submitted on February 13, 2007. It was added later as an Exhibit to Joan Wagner's March 5, 2007 Affidavit.
While the listing of Delta Property Management as opposed to Delta Property Holdings, Inc. could be considered an error, it is difficult to explain the complete absence of any reference whatsoever to the Bartsocas' or the Mortgage interest. While the Mortgage and UCC-1 were recorded subsequent to the bankruptcy filing on February 18, 1999, the Schedules and Statement of Financial Affairs were never amended to reference the mortgage interest, the Bartsocas' as co-makers or to correct the name of Delta Property Management to Delta Property Holdings.
Whale Inlet's General Ledger Detail Report detailing postings for periods 1-12 ending 12/31/98 reflects a debt from the sale of Gusto's for $400,000, and a "loss on worthless mortgage" and "write off Note Receivable" on 12/31/98. (Exhibit 4). Page 2 of Exhibit 4 reflects write offs of other receivables of Gus Bartsocas and Gusto's sale. Bonnie Blanford, a former employee of Whale Inlet from 1994-2002, testified that the entries on the General Ledger Report were entered contemporaneously with the entry date of 12/31/98. (T. I, p. 20, l. 7-25; p. 21, l. 1). Ms. Wagner testified that Mr. Boulis was the one person who could decide to write the Note off. (T. II, p. 85, l. 21-24). Ms. Blanford testified, as did Ms. Wagner, that there was no doubt Boulis was in charge of all decisions. (T. I, p. 36, l. 24-25; p. 37, l. 20-25; p. 38, l. 1-6; T. II, p. 29, l. 9-25).
Based upon the above facts obtained from testimony and exhibits presented as well as public records considered by this Court, this Court finds that the Note and related loan documents dated August 14, 1998 were not supported by valid consideration and were never intended to be enforced. The Note and other loan documents were part of a plan between Boulis/Whale Inlet and the Bartsocas'/Delta Property Holdings to create an artificial sale price for the 100 S. Federal Hwy. Property in order for Delta Property Holdings to obtain a loan sufficient to satisfy Boulis' desire to obtain a cash amount of over $600,000. The Note and other loan documents were created for the purpose of papering the transaction in order to explain Whale Inlet's receipt of $400,000 from the Bartsocas' and return of those funds as well as the failure to receive the $400,000 cash deposit reflected on the August 13, 1998 HUD Settlement Statement.
In rendering the above findings of fact, this Court accepts the testimony of Kiki and Gus Bartsocas as credible and rejects the testimony of Joan Wagner as lacking credibility.
Ms. Wagner was the CFO for Boulis' various entities from the time she was hired by Boulis in 1992 until he died on February 6, 2001. (T. II, p. 15, l. 3-16). She continued in a similar capacity after his death earning an annual salary until the end of 2001, and became a curator and then personal representative of his estate wherein she has earned over $700,000 for those services. (T. II, p. 14, l. 10-24). She testified she was the Vice President, Secretary and Treasurer of Whale Inlet as well as the CFO during all material times. (T. II, p. 28, l. 2-5; Exhibit O, ¶ 2).
Ms. Wagner testified that as CFO she was aware of everything that was happening in the business. (T. II, p. 80, l. 12-18). She also testified that she was responsible for all of the closings for Whale Inlet and that Boulis always had Purchase and Sale Agreements in regard to his transactions. (T. II, p. 33, l. 10-15). Ms. Wagner, however, contended she had no knowledge of various material facts relating to this transaction, both prior and subsequent to closing. She testified that even to this date she had no knowledge of the Bartsocas' $400,000 wire transfer to Whale Inlet on August 6, 1998, and Whale Inlet's wiring the funds back of the $400,000 to the Bartsocas' on August 7, 1998. (T. II, p. 39, l. 1-24). Uponbeing questioned regarding the wire transfers, she could not recall initially whether Whale Inlet even had a bank account at Bank Atlantic, the bank which the Bartsocas' bank records reflect the wire was transferred to on August 6, 1998, and wired from on August 7, 1998. (T. II, p. 38, l. 11-25; p. 39, l. 1-25; p. 40, l. 12-23) (Bartsocas Exhibit 2). Whale Inlet's Bankruptcy Schedule B also reflects Bank Atlantic as a Whale Inlet bank account.
Despite her stated responsibility and involvement in closings and knowledge of Whale Inlet's business, she had no knowledge as to why the HUD Settlement Statement (Exhibit 3) reflected a $400,000 Excess Deposit based on a deposit of earnest money from Delta Property Holdings. She testified that such a deposit was unusual. (T. II, p. 45, l. 13-21). Ms. Wagner does not recall whether she even reviewed the closing statement. (T. II, p. 42, l. 12-24).
Ms. Wagner had no personal knowledge as to why the Mortgage and UCC-1 were not recorded until February 18, 1999, after the filing of the Bankruptcy, despite the fact her name and address were on the Mortgage. (T. II, p. 93, l. 12-25). Ms. Wagner's speculative explanation that she believes it was an oversight is not based on personal knowledge and is unlikely for a sophisticated business operation such as the Boulis' entities. (T. II, p, 94, l, 1-23).
Ms. Wagner, despite varying and contradictory testimony on cross-examination, ultimately stood by her Direct Testimony Affidavit that she had no knowledge why the December 31, 1998 General Ledger of Whale Inlet reflected a "Loss on Worthless Mortgage," and writeoff of "Note Receivable" relating to the Note and Mortgage at issue in this case. In her Direct Testimony Affidavit, Ms. Wagner testified that she had "no knowledge as to why a writeoff of the Note appeared as a December 1998 journal entry." She further testified on paragraph 12 of her Affidavit that, "It would have been proper for tax purposes for Whale Inlet to writeoff the Note and Mortgage as a worthless mortgage on December 31, 1998, as the Debtor or Delta had failed to make any payments thereunder." She testified on cross-examination, however, that she is not really aware of when a loan writeoff can be taken or whether the collateral must be evaluated. (T. II, p. 83, l. 24-25; p. 84, l. 1-16).
Although Ms. Wagner had no knowledge or recollection of various material matters, she had a vivid recollection of a purported June 18, 1999 letter from Sanford J. Fox to Gus Bartsocas and Delta Property Holdings regarding collection on the Note. The unsigned letter was attached as Exhibit "O-E" to Ms. Wagner's Affidavit, but was not included within Whale Inlet's initial Exhibit List. Whale Inlet's initial Exhibit List was filed on February 13, 2007 [CP #178]. Neither Gus or Kiki Bartsocas were cross-examined in regard to the letter or impeached as to their testimony that there were no collection efforts in regard to the Note until after Gus Boulis was murdered. (Exhibits 7 and 8, ¶ 17).
Ms. Wagner was materially impeached in regard to her credibility in general and as to execution of documents. Ms. Wagner admitted to various felonies under oath when she testified she notarized a document dated April 23, 1991, signed by Gus Boulis and Gus Bartsocas when she did not even know Gus Boulis or Gus Bartsocas until 1992. (Exhibit 10, T. II, p. 16, l. 21-22; p. 110, l. 19-24). It is a felony under Florida law to notarize a document outside the presence of the signatories and certainly to notarize a backdated document if a document was not signed on the date it was represented as notarized. Fla. Stat. § 117.105 and 117.107. The same document, an agreement between Gus Bartsocas and Gus Boulis, showed that Gus Bartsocas was 100% owner of Dream USA, Inc., wherein he agreed to sell the stock to Boulis at any time for the sum of $10.00 after Boulis' receipt of U.S. Citizenship impeached Ms. Wagner's testimony as to the nature and type of relationship between the Bartsocas' and Boulis. Clearly, it was much more than landlord and tenant as Ms. Wagner testified. (T. II, p. 128, l. 10-13; p. 129, l. 3-18).
Dream USA, Inc., and Dream Boats, Inc. were the owner of Casino Boats which Boulis could not own under applicable laws unless he was a U.S. citizen. (T. II, p. 127, l. 17-25; p. 128, l. 10-13; p. 129, l. 16-18). Accordingly, Gus Bartsocas, someone Boulis trusted like a brother, was made the owner ostensibly until Boulis became a U.S. citizen.
Ms. Wagner was also impeached as to a lawsuit filed against her by Boulis' wife, Efronsi "Frances" Boulis, for notarizing a signature of Efronsi Boulis on a mortgage document which was allegedly not her signature and at a time Efronsi Boulis was allegedly out of the country. (Exhibit 9). Ms. Wagner was evasive in regard to whether she notarized the document in front of Efronsi Boulis while Efronsi Boulis signed. Ms. Wagner admitted Efronsi Boulis' signature on the initial mortgage attached to the Complaint appeared different from the signature on the mortgage she notarized. (T. II, p. 105, l. 4-11). She also admitted that Efronsi Boulis' name "Frances" was spelled incorrectly. (T. II, p. 105, l. 12-18). Ms. Wagner was evasive as to whether Efronsi Boulis was in the United States when the document was notarized. (T. II, p. 99, l. 16-25; p. 100, l. 1-25).
Ms. Wagner's testimony calls into serious question her credibility, the veracity of her affidavit and many of the documents she sought to authenticate, including Exhibits O-A, O-C, O-D, O-E and O-I, and the dates in which they may have been created.
Whale Inlet's case relies heavily on the fact that it continued to carry the Note receivable on its books. While the evidence in this regard was contradictory, the fact that the receivable may have remained on the books would not be inconsistent with the Bartsocas' position that Boulis needed to paper the transaction for Whale Inlet's records, and from the outset never intended to be an enforceable obligation.
As to Exhibit O-A, Ms. Wagner testified she executed the document, but when seeking to explain her lack of knowledge regarding the HUD Settlement statement and failure to record the mortgage she testified that she may have been out-of-town at the time of the closing. (T. II, p. 41, 13-14). If that is the case, she could not have executed Exhibit O-A on the date it was executed. Furthermore, like Exhibit O-E, Exhibit O-A was not included on the initial Exhibit List submitted by Whale Inlet on February 13, 2007. It was only on March 5, 2007, upon the submission of Joan Wagner's Affidavit, that such document was added. Moreover, Exhibit O-B is not the same document referenced as Exhibit O-B to Ms. Wagner's Affidavit. There was no letter within Whale Inlet's exhibits from Petra Ringeisen to Stephen Newman, copied to Ms. Wagner as alleged in paragraph 9 of her Direct Testimony Affidavit.
Exhibit O-C is at best an incomplete document and not reliable. (T. II, p. 95, l. 1-18; p. 96, l. 5-23). As CFO of Whale Inlet, Ms. Wagner stated in her Affidavit that this was a document she was familiar with and stood by. This purported balance sheet is suspect. Among other apparent omissions, it does not reference a line item of Whale Inlet's obligation to Family Bank as of 12/31/97 in the amount of over $545,000, or for a -0- balance as of 12/31/98 after the Property was sold to Delta Property Holdings.
Ms. Wagner's testimony regarding Exhibit O-I was particularly confusing and contradictory. In her direct testimony she testified that Exhibit O-I was a spreadsheet as of March 7, 2001, outlining certain of the indebtedness owing by the Debtors to entities owned and controlled by Whale Inlet. She testified in paragraph 18 of her Direct Testimony Affidavit that:
"The handwritten comments on this summary are in my handwriting and I have personal knowledge of their meaning. This summary is not a reflection of all of the indebtedness between the Debtors and entities owed and controlled by Gus Boulis prior to his death, but only those personal loans, notes and mortgages directly related to Whale Inlet, one of many of Gus Boulis' companies that had business relationships with the Debtors."
On cross-examination, Ms. Wagner could not explain why if such funds were owed by Gus Bartsocas to Whale Inlet as documented on Exhibit O-I and stated in her Affidavit, the Estate of Boulis/Whale Inlet or other Boulis' entities did not file a Proof of Claim in this case for such amounts. Ms. Wagner testified that a lawsuit was filed in the Estate of Boulis probate proceeding, however, that suit only seeks recourse in Count III of the Agreement against Gus and Kiki Bartsocas for the $400,000 Note and Count V against Gus Bartsocas for $10,000. (See Exhibit M). Kiki Bartsocas testified that the "loans" listed on Exhibit O-I were advances to Gusto's and rolled into the $1,212,000 purchase price. The amounts and dates of the 1997 "personal loans" to Gus Bartsocas on Exhibit O-I match the 1997 loans listed on Exhibit No. 1. Neither Whale Inlet or the Estate of Boulis include any of these 1997 loans in this state court lawsuit or in a Proof of Claim in this case. The Estate of Boulis (not Whale Inlet) sued Gusto's for the $489,193.66 in regard to the build-out of Florida City, however, neither Gus or Kiki Bartsocas were sued for that claim nor was a Proof of Claim filed in this case for such claim. Ms. Wagner seemed to concede on cross-examination that even though Gus Bartsocas was listed as a borrower in Exhibit O-I under the $489,193.66 Florida City build out claim, that no Note was signed and, therefore, the Estate did not pursue Gus Bartsocas on the claim. (T. II, p. 147, l. 1-25). Kiki Bartsocas testified the $489,193.66 was not a debt, it was part of Boulis' contributions to the Gusto's Florida City joint project. (T. I, p. 67, l. 9-25; p. 69, l. 1-17). Ms. Wagner's contradictory testimony in this regard cast significant doubt as to her credibility and knowledge of this matter.
Kiki Bartsocas testified that the $10,000 was a wedding gift from Boulis to their niece, but the check was written to Gus Bartsocas. The Estate of Boulis included the $10,000 claim in the state court action but did not file a Proof of Claim in the Bankruptcy case. (T. I, p. 65, l. 18-25).
Finally, this Court found Ms. Wagner's testimony as to Whale Inlet's collection efforts to lack credibility. Her direct testimony made no mention of any collection efforts aside from Exhibit O-E. On cross-examination, Ms. Wagner testified it was Whale Inlet's policy and procedure to mail out collection letters monthly. In response to initial questioning whether monthly collection letters were mailed to the Bartsocas' for the nine months prior to the June 18, 1999 letter, Ms. Wagner testified:
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THE COURT: Did you send it out in nine months preceding this month?
THE WITNESS: I believe we did. We just — there has obviously been a lot of upheaval in the last eight years, and those records were very voluminous, and they would be run every month and we would keep a copy.
THE COURT: So it's your testimony that Sanford Fox, the corporate controller, would send a dunning letter to Delta and to the Bartsocases every month on this loan?
MR. ABRAMS: That wasn't what she said, Judge.
THE COURT: No, I'm asking her if that would be her testimony, because 14 addresses one letter. I asked was the letter sent all the other months, she said, yes. If they were sent every month, how would you know that, and where are the copies? That's my question to you.
THE WITNESS: All right. The question is — or the answer is, our standard practice relating to all tenants, all people that owed us money, was to send out standard collecting letters by the 5th of the month.
On the 8th of the month, if we still hadn't received the rent or payment that was due, we would call the tenant or whoever owed us the money.
(T. II, p. 56, l. 23-25; p. 57, l. 1-24).
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When asked whether she had personal knowledge that a [collection] letter was sent each month to the Bartsocas' or Delta Property Holdings, Ms. Wagner initially testified:
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Q: Do you have personal knowledge that a letter was sent each month to the Bartsocases or Delta Property Holdings?
A: I don't think I said that. I think I said that I have personal knowledge of the procedures that were in place and that we would have been sending those letters to all of our tenants, all of our people who owed us money.
(T. II, p. 60, l. 20-25; p. 61, l. 1-2).
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A few minutes later, when asked whether any other letters were sent to the Bartsocas', Ms. Wagner then testified she had specific recollection of letters being sent and they were produced. (T. II, p. 65, l. 20-25; p. 66, l. 1-14; p. 83, l. 17-23). However, Whale Inlet never produced or sought to enter into evidence any collection letter except the unsigned Exhibit O-E. In addition, Exhibit O-E is incomplete as it did not attach a copy of the closing statement which it references. It strains credibility to believe she specifically recalled the June 18, 1999 letter as well as other alleged standard collection letters to the Bartsocas', but had little or no knowledge regarding material aspects of the closing, the HUD Settlement Statement, $400,000 wire, the general ledger write offs, among other matters.
Conversely, the Court considered the testimony of Kiki Bartsocas and Gus Bartsocas to be credible and candid. Kiki Bartsocas was candid when asked whether she ever requested Gus Boulis to release the mortgage lien. She stated she had asked him to do so and he said it was complicated and couldn't at that time. She also testified that Exhibit 1, the Bartsocas' version of what the agreed closing figures were on the sale of the Property was drafted and reviewed by the Bartsocas' and Boulis post-closing. If she sought to be deceitful, she could have easily testified it was created and reviewed prior to or the same day of the closing.
Clearly, Boulis could not cause Whale Inlet to release a lien when it was in bankruptcy.
The Court finds that upon consideration of all of the evidence, documentary and oral testimony and the credibility of the witnesses, the Note obligation was not intended between the parties to be enforced and there was no consideration for such Note and related loan documents. The Note and loan documents were created solely for Whale Inlet's records in order to cover the $400,000 payment by the Bartsocas' and return by Whale Inlet creating a $400,000 imbalance for Whale Inlet in light of the Closing Statement reflecting a $1,625,000 sale price.
Whale inlet purchased the Property in 1996 for the purpose of Boulis and Bartsocas' to create Gusto's concept. The Bartsocas' put in over $700,000 in improvements and in the spring of 1998 (a little over a year after Gusto's opened its doors in 1997), Boulis approached the Bartsocas' to cash out as he said he needed the money. (T. I, p. 61, l. 20-25; p. 62, l. 1-6). Based upon their relationship and business dealings, the Court does not believe Boulis would have sought a $400,000 profit on the sale. The testimony of the Bartsocas' and the manner in which the slates were cleared, as described on Exhibit 1, is in this Court's view consistent with the relationship between the parties.
The above findings of fact are not based solely on the Bartsocas' testimony. There is substantial corroborating evidence which supports the Bartsocas' testimony. The August 6, 1998 $400,000 wire to Whale Inlet and return of the $400,000 to the Bartsocas' on August 7, 1998 (Exhibit 2); the HUD Settlement Statement (Exhibit 3) signed by Gus Boulis on behalf of Whale Inlet is false as it reflects a $400,000 deposit to Whale Inlet which it never owed; Whale Inlet's failure to record the mortgage and UCC-1 until over six months after the August 13, 1998 closing; the general ledger notations writing off the mortgage as "worthless" and writing off the Note receivable only months after the loan was made and prior to any collection efforts; the lack of credible evidence showing any meaningful collection efforts by Whale Inlet while Gus Boulis was alive despite the fact that the Bartsocas' never made a single payment on the Note; the testimony regarding the nature of the relationship between Gus Boulis and the Bartsocas' and the lack of veracity of Joan Wagner's testimony.
The Mortgage was not deemed worthless as Ms. Wagner testified that the value of the Property was $1,625,000 in August 1998. Moreover, the Schedules of Whale Inlet, referenced the Note receivable at closing as a $200,000 value, but did not reference the Mortgage interest.
III. LAW
I. Parol Evidence Rule Inapplicable .
Whale Inlet objected to testimony of the Bartsocas' which related to conversations between them and Boulis based on the parol evidence rule. The parol evidence rule precludes testimony to change the terms of a promissory note. However, in cases such as this one where it is alleged that there was insufficient consideration for the Note and that the transaction at issue was not intended to create a legally enforceable obligation and/or is a sham, extrinsic or parol evidence is permissible. Herzog Contracting Corporation v. McGowen Corporation, 976 F.2d 1062 (7th Cir. 1992); Guetzloe v. Rowell, 734 So.2d 467 (Fla. 5th DCA 1999); Wagner v. Bonucelli, 239 So.2d 619 (Fla. 4th DCA 1970). In Herzog, the Court held that all evidence is admissible to show that the note is some sort of sham and was not intended to create a legally enforceable obligation. The Herzog Court held:
At all events, to allow parol evidence to expose a sham case such as this is alleged to be would make no greater inroads in the parol evidence rule than the cases on condition precedent do. McGowen is not trying to change the terms of the promissory notes, but to show that the notes were not in fact intended to create a legally enforceable obligation. They were, not to put too fine a point on it, intended to fool the Internal Revenue Service. Herzog, perhaps fearing that it will be found to be a party to this deception, does not argue that McGowen's unclean hands should forfeit its right to make a sham-transaction defense, if there is such a defense, and we think there should be because we can think of no principled distinction between it and the condition-precedent defense that Herzog concedes is valid. (Emphasis Added)
Id. at 1070.
Likewise, in Guetzloe, 734 So.2d at 468, the party was allowed to present parol evidence to show that the note was never intended to be a binding obligation in that it was only created as a sham for tax purposes. See also, Simpson v. Milne, 677 P.2d 365, 368 (Colo.App. 1983) (Court allowed party to present evidence alleging a sham transaction in that the notes "were executed as a fiction to satisfy plaintiff's wife, who was near death, and who strongly felt that [the defendant and his wife] still owed [the plaintiff and his wife] money from prior business transactions.")
In Wagner, 239 So.2d 619, the Fourth District Court of Appeals held that as between a maker and payee of a promissory note extrinsic evidence is admissible outside four corners of the complaint to support defenses of lack of consideration, waiver, release and estoppel. The Court considered extrinsic evidence of the defendant that the note was only to be paid if a certain business venture between the parties succeeded. As further evidence of intent that the Note was unenforceable, the defendant asserted that no demand for payment had been made until after plaintiff's divorce from the defendant's mother.
In the instant case, the Bartsocas' are not seeking to alter the terms of the Note or refute it was executed, they assert the Note was from the outset not intended to be enforceable, was not supported by valid consideration and was a sham. Accordingly, consistent with applicable law, this Court deems the evidence as to conversations between the Bartsocas' and Boulis to be admissible. Even if the parol evidence rule were applicable, the Court finds the evidence aside from the conversations between Boulis and the Bartsocas' to be sufficient to sustain the Bartsocas' objection to Whale Inlet's Proof of Claim #16.
There is no applicable rule of evidence or statute to bar the testimony. Whale Inlet's only objection to the admissibility of the evidence was based solely on the parol evidence rule.
ii. Lack of Consideration .
It is well-established that lack of consideration is a valid defense to a note claim. Kenwall v. Salic, 743 So.2d 1210 (Fla. 4th DCA 1999). Likewise, where the parties to a note never considered it to be a legally enforceable obligation and/or was a sham, the Note and related loan documents must fail for lack of consideration. Guetzloe v. Rowell, 734 So.2d 467 (Fla. 5th DCA 1999); Herzog Contracting Corporation v. McGowen Corporation, 976 F.2d 162 (7th Cir. 1992).
In Kenwall, 743 So.2d at 1211 the Fourth District Court of Appeals held that the affirmative defense of lack of consideration precluded enforcement of the executed note. The note was executed at about the same time as the note holders' sale of an apartment complex to the note payor. There was disputed testimony as to why the note was executed in relation to the sale. The trial court, after considering the disputed extrinsic evidence held there was a lack of consideration for the note and it was unenforceable. The Fourth DCA affirmed.
This case bears similarity to Kenwall. The note in this case was executed in relation to a sale and the evidence supports a finding of lack of consideration.
This Court concludes based upon its findings of fact above that the Bartsocas' satisfied their burden of proof by a preponderance of the evidence as to their defense that the August 14, 1998 Note lacked consideration and was never intended to be enforceable.
iii. Note is Unenforceable as Contrary to Public Policy .
This Court further concludes that the Note and related loan documents are unenforceable as they were created as part of a plan to show an inflated purchase price for the Property in order for Delta Property Holdings to obtain a loan for $1,250,000 to allow Boulis to receive a cash payment from closing in excess of $600,000. Whale Inlet's papering of the Note and other loan documents, which were never intended to be enforceable and execution of a materially false HUD Settlement Statement in conjunction with the closing is clearly contrary to public policy rendering the Note and related loan documents unenforceable as a matter of law. The preponderance of the evidence supports that the Note, Mortgage and UCC-1 were part of a sham transaction and in turn, precludes their enforcement. Guetzloe v. Rowell, 734 So.2d 467 (Fla. 5th DCA 1999); Harris v. Gonzalez, M.D., 789 So.2d 405 (Fla. 4th DCA 2001) (A contract between two parties is void and unenforceable if the contract is repugnant to the public policy of this state).
CONCLUSION
The Debtors have satisfied their burden of proof by or preponderance of the evidence that the Note and related loan documents are unenforceable as the parties never intended them to be enforceable and there was a lack of consideration. The evidence also supported, and this Court finds, that the Note and loan documents are unenforceable as they were created as part of a sham transaction and are contrary to public policy.
The Debtors' objection to Whale Inlet's Proof of Claim #16 is sustained and Proof of Claim #16 is stricken.