complaint – claims for breach of contract, etc. related to stock purchase

COMPLAINT – CLAIMS FOR BREACH OFCONTRACT, ETC. RELATED TO STOCK PURCHASE

IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF ALABAMA

SOUTHERN DIVISION

INC., ) COMPANY, )

INC., and ) REVOCABLE TRUST, ) ) Plaintiffs, ) v. ) )

, ) , INC., )

, INC., and , ) , , P.C., )

) CASE NO. Defendants. ) )

., ) ) Intervenor Plaintiff, ) ) v. ) )

, ) , , P.C., )

, INC., and REVOCABLE TRUST, )

) Intervenor Defendants. )

AMENDED COMPLAINT

Plaintiffs , Inc., , Inc. and

Revocable Trust state their amended complaint against defendants ,

, Inc., , Inc., and

, P.C. as follows:

1. (“ ”) is a resident of Alabama.

Case Document 91 Filed 08/23/10 Page 1 of 23

"Redacted"

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2. , Inc. (“ ”) is an Alabama corporation

with its principal place of business in Alabama.

3. , Inc. (“ ”) is an Alabama corporation with

its principal place of business in Alabama.

4. P.C. (“ ”) is an

Alabama professional corporation.

5. This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331

and 1367 as certain of plaintiffs’ claims arise under the laws of the United States,

specifically, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, and plaintiffs’

remaining claims form part of the same case or controversy.

6. Venue is proper in this Court in accordance with 28 U.S.C. § 1391(b)

because many of the defendants reside in this district and all of the defendants reside in

this state, and because a substantial part of the events or omissions giving rise to

plaintiffs’ claims occurred in this district.

PURCHASE OF STORAGE CONTAINERS

7. , Inc. (“ ”) entered into a contract with

for the purchase of mobile storage containers.

8. breached that contract by failing to deliver to

the number of storage containers contracted for and for which it paid.


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THE STOCK PURCHASE AGREEMENT

9. In April 2007, entered into a Stock Purchase Agreement

with, among others, and Intervenor Plaintiff Inc. (“ ”).

assigned his interest in that contract to the Revocable

Trust (“ ”), for which he acts as trustee. Pursuant to that agreement,

purchased 61% of the stock of Mobile Attic.

10. The Stock Purchase Agreement included a number of representations and

warranties, among them representations and warranties addressing the existence, location

and value of assets, including its inventories and equipment. Further, each

seller, including , represented and warranted not only that the agreement and its

exhibits did not contain any untrue facts but also that they did not omit any material facts.

11. Section 3 of the Stock Purchase Agreement sets out the representations

and warranties of each seller. Among them are the following:

3.3: The Corporation and MAFCO each has good

and marketable title to all of its property and assets, real and personal, that are material to its business…, and the Corporation’s and MAFCO’s federal income tax, state income tax, unemployment compensation, real and personal ad valorem taxes, and all licenses, fees, and other payments required to be made, withheld or otherwise collected and accounted for are current and complete to the date of this Agreement.... All real property and tangible personal property of the Corporation and MAFCO are in good operating condition and repair, ordinary wear and tear accepted.

3.4: To the best of each Seller’s knowledge, the respective books of accounting and the minute books of the Corporation and of MAFCO are complete and correct, and reflect all those transactions involving their business which properly should have been set forth in such books.


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3.7: To the best of each Seller’s knowledge, Exhibit “B” attached to this Agreement contains a true and correct copy of the financial statements of the Corporation and of MAFCO… Except as disclosed on Exhibit “B,” the Financial Statements present fairly and accurately the financial position, results of operation, and changes in financial position of the Corporation and MAFCO at the dates for the periods covered, in each case in conformity with general accepted and consistently applied accounting principles.

3.8: All inventories owned by the Corporation and/or MAFCO (“Inventories”) consist of items of a quality and quantity useable and saleable in the ordinary course of business by the Corporation or MAFCO and are of the stated value on December 31, 2006, as that value is set forth in the Financial Statements of the Corporation or MAFCO for December 31, 2006, provided by Sellers to Purchaser in Exhibit “B” attached to this Agreement.

3.9: The equipment, furniture, fixtures, and other personal property described in Schedule 3.9 attached to this Agreement constitute all the items of tangible personal property owned by, in the possession of, or used by the Corporation or MAFCO in connection with the Corporation’s or MAFCO’s business, except Inventories, as of 12/31/06. Except as stated in Schedule 3.9 no personal property used by the Corporation or MAFCO in connection with its business… is located any place other than in the possession of the Corporation or MAFCO.

3.19: Schedule 3.19 attached to this Agreement contains a true and correct list of all accounts receivable and notes receivable of the Corporation and/or MAFCO as of 12/31/06. All listed accounts and notes receivable of the Corporation ... are bona fide receivables, arose in the ordinary course of business by the Corporation, and require no further performance by the Corporation. ... No material objection, claim, or offset has been made regarding the receivables and the receivables are current and collectible in the normal course of business within thirty (30) days from the day hereof without resort to litigation or the retention of collection services.

3.27: No representation, warranty or covenant

made to Purchaser in this Agreement or any document, certificate, exhibit, or other information given or delivered


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to Purchaser prior to or pursuant to this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit a material fact necessary to make the statements contained in this Agreement or the matters disclosed in the related documents, certificates, information, or exhibits not misleading.

12. The Stock Purchase Agreement includes a broad indemnification

provision, as follows:

6.3: Sellers shall, jointly and severally, indemnify, defend and hold Purchaser and Purchaser’s permitted successors and assigns (each a “Purchaser Indemnified Party” or, collectively, “Purchaser Indemnified Parties”) harmless from and against all losses, damages, liabilities or expenses (including reasonable attorneys’ fees and expenses) (“Loss” or “Losses”) suffered by a Purchaser Indemnified Party that result or arise from:

6.3.1: any breach of a representation and warranty made by any of the Sellers in this Agreement.

6.3.2: any breach or default in the performance of any covenant or agreement made by any of the Sellers under (i) this Agreement….

6.3.3: any fraud, fraud in the inducement or misrepresentation by any of the Sellers as regards (i) this Agreement….

13. audited the financial statements of . The

audited financial statements of were attached to the Stock Purchase

Agreement. They state that as of year-end 2006, had Inventory with a value

of $446,630, Accounts Receivable with a value of $1,802,198 and Furniture and

Equipment with a value of $9,932,036 (before depreciation). They state further that the

vast majority of the Furniture and Equipment consisted of mobile storage containers

valued at $9,521,270 (before depreciation). The financial statements audited by

also state that “[t]he storage units have an estimated residual value of 70% of


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their purchase price.” The accompanying Notes state that after year end 2006,

negotiations were undertaken with a third party for the purchase of a majority interest in

the company.

14. The Independent Auditors’ Report of accompanied the

financial statements. In that report, represented that it had audited the

financial statements in accordance with auditing standards generally accepted in the

United States. Further, stated its opinion that the financial statements,

in all material respects, presented fairly the financial position of .

15. Schedule 3.9 to the Stock Purchase Agreement contained a list of mobile

storage containers that were purportedly owned by as of December 31,

2006, and stated a value of $9,521,270 (before depreciation) of those containers. The

number and value of mobile storage containers that were shown on

financial statements as audited by and as stated on Schedule 3.9 to the

Stock Purchase Agreement were greatly overstated. Specifically, more than 550 40’

mobile storage containers representing a value of more than $3,000,000 were not in

possession when the Stock Purchase Agreement was executed and had

never been in possession. Moreover, the “salvage value” of the containers

reflected on Schedule 3.9 greatly exceeded the true salvage value of the listed containers,

and the containers did not have a residual value of 70% as stated in the audited financial

statements.

16. Schedule 3.9 to the Stock Purchase Agreement also listed five delivery

trailers that were purportedly owned by Mobile Attic. Two of those delivery trailers were

actually owned by and have been repossessed by a bank.


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17. Schedule 3.19 to the Stock Purchase Agreement contained a list of

accounts and notes receivable of and included an entry entitled “N/R

” in the amount of $1,780,711.00. The value of

Accounts Receivable as stated in the financial statements audited by

and as stated on Schedule 3.19 to the Stock Purchase Agreement were greatly overstated.

Specifically, the $1,780,711 note receivable from was not a bona fide

receivable, was not generated in the ordinary course of business, and was

not collectible within 30 days of the date the Stock Purchase Agreement was executed.

18. When the Stock Purchase Agreement was executed,

unemployment taxes for the fourth quarter of 2006 and first quarter of 2007 had not been

paid. As a result, was later required to pay the outstanding taxes and is

subject to penalties from taxing authorities.

19. The value of the Inventory as stated in the financial statements attached to

the Stock Purchase Agreement was also greatly overstated.

MISREPRESENTATIONS RELATING TO ASSETS

20. Using the means and instrumentalities of interstate commerce and acting

with scienter, misrepresented to and the number of and

value of the mobile storage containers owned by . Further,

misrepresented to and the amount of raw materials that had

been purchased with funds for the manufacture of mobile storage

containers. knew that the facts misrepresented were false. Acting on behalf of

, had invoiced for the purchase of mobile storage


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containers which never built and never delivered. The facts

misrepresented were material. In justifiable and reasonable reliance on these

misrepresentations, purchased a majority of the stock in from

and others and loaned approximately $9.5 million with which to pay its

existing bank debt.

21. recently discovered the falsity of these misrepresentations. When

purchased stock in , the company did not own near the number of

mobile storage containers as had represented it did, and the value of its mobile

storage containers was substantially less than had represented. Further,

substantially less raw materials had been purchased with funds than

had represented.

SUPRESSION/OMMISSIONS RELATING TO ASSETS

22. Even apart from these misrepresentations, but especially in light of them,

owed and J a duty to disclose the entire truth about

business and its assets, including the number of and value of mobile storage

containers owned by , inventory, and its accounts and notes

receivable.

23. breached this duty by failing to disclose to and .

that did not own near the number of mobile storage containers as he

had represented it did, that its mobile storage containers did not have near the value he

had represented, that the note receivable from had not been incurred in the

ordinary course of business and was not collectible in the ordinary course of business,


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and that substantially less raw materials had been purchased with funds than

he had represented.

THE / E ASSET PURCHASE

24. In the Spring of 2007, J and agreed to create a new

company, , to purchase many of the assets of , a company

which, among other things, manufactured mobile storage containers for . For

administrative reasons, was initially set up with being the only

shareholder. On or about March 28, 2007, , as trustee for ,

and entered into a Stock Transfer Agreement in which agreed to

convey fifty-one per cent (51%) of the stock of to . The

conveyance occurred shortly thereafter.

25. Also on March 28, 2007, and entered into

the Purchase Agreement (the “

Agreement”) whereby purchased substantially all of the assets of

. loaned $15 million dollars to fund the purchase.

26. The Agreement included representations and warranties made

by the seller, , including the following:

4. Title to Assets. Seller represents and warrants to Buyer that Seller will have marketable fee simple title to the Property and will convey the same to Buyer free and clear of all liens and encumbrances except liens of record, ad valorem taxes not yet due and payable, recorded easements for utilities, drainage, and other similar purposes serving the Property ….


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27. When conveyed its real property to , it did

not do so free and clear of all liens. Rather, at the time of the conveyance, also

purported to grant a mortgage on the real property to Bank

(“ ”), thereby breaching this contractual provision.

MISREPRESENTATIONS RELATING TO THE ASSETS

28. Both before and after execution of the Stock Transfer Agreement and the

Agreement and the conveyance of the stock to ,

, individually and acting for Bridgeville, with scienter and using the means and

instrumentalities of interstate commerce, misrepresented to , and

that the purchased assets were worth approximately $15 million

dollars, with the real property and the manufacturing facility being worth approximately

$8.6 million and the equipment being worth approximately $6.2 million. provided

and with a beginning Balance Sheet for on

which he misrepresented the value of the equipment being purchased. The facts

misrepresented were material.

29. , in reasonable and justifiable reliance on these misrepresentations,

loaned $15 million dollars to fund the purchase of the

assets and in exchange for 51% of the stock.

reasonably relied on these misrepresentations by, among other things, using those funds

to purchase the assets of .

30. and have recently discovered that a substantial

portion of the equipment “purchased” from was not, in


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fact, owned by but rather was leased to or . Thus,

has paid for assets that it did not receive, and has loaned

the monies used to “purchase” those assets. The assets

purchased did not have near the value represented they did.

SUPPRESSION/OMMISSIONS RELATING TO THE ASSETS

31. Even apart from these misrepresentations regarding the assets,

but especially in light of them, and owed , and

a duty to disclose the entire truth about the value and ownership

status of the assets.

32. and breached this duty by failing to disclose that

did not own a substantial portion of the equipment it “sold” to

and by failing to disclose that the equipment being purchased was worth

substantially less than had been represented.

THE GUARANTY AGREEMENT

33. On or about March 28, 2007, executed a Promissory

Note in favor of promising to repay the $15 million loaned to it to purchase the

assets.

34. To secure the repayment of that Promissory Note, entered into a

Guaranty Agreement with whereby he agreed that if did not

pay the amounts due to under the Promissory Note, he would pay forty-nine per

cent (49%) of the same.


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35. The Promissory Note is in default. has made demand that pay

$7,858,681.25 (which is 49% of the principal and interest due under the Promissory Note

as of December 4, 2008). has failed and refused to pay that amount, in violation of

the Guaranty Agreement.

CHECK-KITING FRAUD

36. On information and belief, both before and after entering into the Stock

Purchase Agreement with and , was engaged in a multi-million dollar

check-kiting fraud using the bank accounts of, inter alia, , , and

Brothers. ongoing check-kiting fraud was not disclosed to or

before the Stock Purchase Agreement was executed. Information concerning

check-kiting fraud would have been material to decision to

enter into the Stock Purchase Agreement, to purchase stock in , to loan

money to , to enter into the Agreement and to enter into any

business relationship or dealings with and . Had check-kiting

fraud been disclosed to and J , would not have entered into

the Stock Purchase Agreement, purchased stock in , loaned money to

, entered into the Agreement, purchased stock in , or

entered into any business relationship or dealings with and .

UNAUTHORIZED, FRAUDULENT LOANS

37. On or about August 31, 2007, executed a Promissory Note

purportedly on behalf of in favor of The Citizens Bank (“Citizens”)

in the principal amount of $2,500,120.00.


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38. On or about August 31, 2007, executed a Commercial Security

Agreement purportedly on behalf of in favor of Citizens. By way of

that agreement, purported to grant Citizens a security interest in certain property of

.

39. did not have s authority to execute the

Promissory Note and the Commercial Security Agreement on its behalf.

40. Citizens has demanded that pay the amounts due

under the Promissory Note, and has brought suit against Citizens

requesting a declaration of its rights with respect to the Citizens loan. That suit has now

been resolved.

41. On or about July 24, 2007, executed a Promissory Note purportedly

on behalf of in favor of Southern Independent in the principal amount

of $1,500,000.00.

42. On or about July 24, 2007, executed a Real Estate Mortgage

purportedly on behalf of in favor of Southern Independent on real

property located in Elba, Alabama.

43. On or about June 20, 2008, executed another Promissory Note

purportedly on behalf of in favor of Southern Independent in the

principal amount of $1,500,000. On information and belief, the proceeds of the June 20,

2008 Promissory Note were used to satisfy the July 24, 2007 Promissory Note.

44. did not have authority to execute the

Promissory Notes or the Real Estate Mortgage.


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45. Southern Independent has demanded that pay the

amount due under the June 20, 2008 Promissory Note, and has

brought suit against Southern Independent requesting a declaration of its rights with

respect to these transactions.

46. is entitled to indemnity from for the expenses

incurred in connection with the Citizens and Southern Independent suits and for the

monies paid to resolve the Citizens suit. If is determined to be liable

to Southern Independent for all or any portion of the monies due on the loans, it is

entitled to indemnity from for any and all amounts paid.

PRESENTATION OF A FAKE INVOICE

47. On information and belief, on or about June 16, 2008, , individually

and acting for , presented Trinity Bank (“Trinity”) with a fake invoice

suggesting that was purchasing 600 mobile storage containers from

. Trinity has filed suit against claiming that actions

with respect to the fake invoice were within the scope of his supposed authority as a

representative of , and seeking damages from .

48. is entitled to indemnity from and for the

expenses incurred in connection with the Trinity suit, and if it is held liable to Trinity, it

is entitled to indemnity from and for any and all amounts paid to

Trinity.


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SHARES IN AND

49. The Articles of Incorporation for both and

create a lien in favor of the respective company for any debt or liability

owed to the company by one of its shareholders.

50. Both and are entitled to foreclose these

liens against stock so as to repay, in part, the debts owed to them by .

COUNT ONE: BREACH OF CONTRACT AGAINST

51. Plaintiffs incorporate by reference the foregoing paragraphs of this

complaint.

52. has performed all of its obligations under its contract with

.

53. breached its contract with by failing to deliver

mobile storage containers in the quantities promised.

54. is entitled to any and all compensatory damages flowing

from ’ breach of contract.

COUNT TWO: BREACH OF THE STOCK PURCHASE AGREEMENT


complaint.

56. has performed all of its obligations under the Stock Purchase

Agreement.

57. has breached the Stock Purchase Agreement.


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58. is entitled to any and all compensatory damages flowing from

breach of the Stock Purchase Agreement.

COUNT THREE: NEGLIGENCE


complaint.

60. In its Independent Auditors’ Report dated February 26, 2007, which

accompanied the financial statements, represented that it

had audited the financial statements in accordance with auditing standards generally

accepted in the United States. Further, gave the unqualified opinion

that the financial statements “present fairly, and in all material respects, the financial

position of , Inc. and subsidiary.”

61. In fact, the audited financial statements prepared by

placed a value on Inventory, Furniture and Equipment and Accounts

Receivable that was well in excess of their true value. Thus, contrary to ,

s representation, the financial statements did not present fairly the financial

position of in all material respects. Had exercised

reasonable care and diligence, the excessiveness of these figures would have been

discovered. Further, on information and belief, did not follow

generally accepted auditing standards in its assessment of the financial statements of

as it had represented. failed to exercise reasonable care

and competence as is required of members of the accounting profession.


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62. When issued its Independent Auditors’ Report and

accompanying financial statements, it knew that intended to furnish them to

those who were negotiating to purchase a majority interest in the company for their

benefit and guidance. Those persons included and J .

knew that the Independent Auditors’ Report and accompanying financial

statements would influence those negotiations and would be relied upon by the

prospective purchaser(s). Indeed, acknowledged this in the financial

statements, which note that “Subsequent to year end, the Company entered into

negotiations with a third party to sell a majority interest of its stock.”

63. In deciding whether to purchase stock in , and

reasonably and justifiably relied on the Independent Auditors’ Report and

accompanying financial statements prepared by , including the

representations as to the auditing standards followed and the value of the Inventory,

Furniture and Equipment and Accounts Receivable.

64. Because the value of Inventory, Furniture and Equipment

and Accounts Receivable was greatly overstated in its financial statements, the

stock purchased was not worth near the price it paid. Had the financial

statements of audited by presented fairly, and in all

material respects, the financial position of as represented by ,

would not have entered into the Stock Purchase Agreement or the

Agreement, would not have bought stock in or

and would not have loaned any money to or

. has suffered significant damages as a direct and proximate result


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of his reliance on the materially false and misleading financial statements prepared by

, including its statements that the financial statements presented fairly,

in all material respects, the financial position of and that it had conducted its

audits in accordance with generally accepted auditing standards. is entitled to

recover those damages herein.

COUNT FOUR: MISREPRESENTATIONS RELATING TO THE ASSETS


complaint.

66. misrepresented to and the number of and

value of the mobile storage units owned by , the amount of

inventory, and the amount of accounts and notes receivable as stated

herein.

67. and reasonably relied on these

misrepresentations to their detriment.

68. is entitled to any and all compensatory damages flowing from their

reliance on these misrepresentations. is also entitled to and hereby demands

punitive damages based on this fraudulent and egregious conduct.

COUNT FIVE: SECURITIES FRAUD AS TO THE STOCK


complaint.


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70. In violation of 15 U.S.C. § 78j(b) and Rule 10b-5, using the means and

instrumentalities of interstate commerce, made false statements of material fact to

in connection with its purchase of stock in . made these

statements with scienter. justifiably relied on these statements and suffered

damages as a proximate result.

71. is entitled to any and all losses proximately caused by

violation of this federal statute and the corresponding rule.

COUNT SIX: BREACH OF THE AGREEMENT


complaint.

73. has performed all of its obligations under the

Agreement.

74. has breached the Agreement.

75. is entitled to any and all compensatory damages

flowing from breach of the Agreement.

COUNT SEVEN: MISREPRESENTATIONS RELATING TO THE ASSETS


complaint.

77. , individually and acting for , misrepresented to

and the value of the assets being purchased by


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. and reasonably relied on these

misrepresentations to their detriment.

78. and are entitled to any and all compensatory

damages flowing from their reliance on these misrepresentations. and

are also entitled to and hereby demand punitive damages based on this

fraudulent and egregious conduct.

COUNT EIGHT: SECURITIES FRAUD AS TO THE STOCK


complaint.

80. In violation of 15 U.S.C. § 78j(b) and Rule 10b-5, using the means and

instrumentalities of interstate commerce, and made false statements of

material fact to in connection with the conveyance of stock in

. and made these statements with scienter.

justifiably relied on these statements and suffered damages as a proximate result.

81. is entitled to any and all losses proximately caused by and

violation of this federal statute and the corresponding rule.

COUNT NINE: BREACH OF THE GUARANTY AGREEMENT


complaint.

83. has performed all of its obligations under the Guaranty Agreement.

84. has breached the Guaranty Agreement.


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85. is entitled to any and all compensatory damages flowing from

breach of the Guaranty Agreement, including $7,858,681.25 (the principal and

interest due as of December 4, 2008), together with interest as it accrues and attorneys’

fees.

COUNT TEN: INDEMNITY FOR THE UNAUTHORIZED LOANS


complaint.

87. is entitled to indemnity from for the expenses

incurred in connection with the suits referenced in paragraphs 37 through 46 above,

including its reasonable attorneys’ fees, and the amount paid to resolve the Citizens suit.

Should be held liable to Southern Independent Bank, it will be

entitled to indemnity from for any and all monies paid to them.

88. seeks as damages the monies that have been and will

be spent in connection with the referenced suits, together with any monies paid by it as a

result of those suits. Further, requests a declaration that it is entitled to indemnity

from for any and all such losses that become due.

COUNT ELEVEN: INDEMNITY FOR PRESENTATION OF THE FAKE INVOICE


complaint.

90. is entitled to indemnity from and for the

expenses incurred in connection with the suit referenced in paragraphs 47 and 48 above,

including its reasonable attorneys’ fees. Should be held liable to Trinity, it


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will be entitled to indemnity from and for any and all monies paid to

Trinity.

91. seeks as damages the monies that have been and will be

spent in connection with the referenced suit, together with any monies paid by it as a

result of that suit. Further, requests a declaration that it is entitled to

indemnity from and for any and all such losses that become due.

COUNT TWELVE: DECLARATION OF LIEN AND FORECLOSURE ON SHARES


complaint.

93. and request a declaration that each of

them has a first priority lien on shares in the companies.

94. and request a judicial foreclosure of

those liens so as to satisfy, in part, debts to them. If needed to effect the requested

foreclosure, and request an injunction directing to

transfer his shares to the companies.

WHEREFORE, plaintiffs hereby demand compensatory damages, punitive

damages, attorneys’ fees, declaratory and injunctive relief as outlined herein, judicial

foreclosure of the liens of and on stock, and

such other and further relief as the Court deems just and proper. Plaintiffs demand a trial

by jury as to all issues so triable.


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Date: August 23, 2010 /s/ ____________________

One of the Attorneys for Plaintiffs ., M , Inc., and Revocable Trust

OF COUNSEL:

CERTIFICATE OF SERVICE

I hereby certify that on August 23rd, 2010, a copy of the foregoing was electronically filed with the Clerk of the Court using the CM/ECF document filing system, which will send an electronic notice of filing to the following counsel of record:

OF COUNSEL


Documents

complaint – claims for breach of contract, etc. related to stock purchase