manlove lawsuite

John L. Amsden

Anthony F. Jackson

BECK & AMSDEN, pllc

1946 Stadium Drive, Suite 1

Bozeman, MT 59715

(t) 406-586-8700

(f) 406-586-8960

[email protected]

[email protected]

Attorneys for Plaintiff Trustee

* * * * * * *

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MONTANA

MISSOULA DIVISION

* * * * * * *

RICHARD J. SAMSON, duly appointed

Chapter 7 Trustee of Vann’s Inc., on behalf

of the Estate of Vann’s Inc. and on behalf of

the Plan Participants of the Vann’s Inc.

Employee Stock Ownership Plan and Trust,

Plaintiff,

v.

GEORGE MANLOVE, an individual, and

PAUL NISBET, an individual, as Officers

and Directors of Vann’s Inc.; and JOHN

DOES 1-10,

Defendants.

IN RE:

VANN’S INC., a Montana Corporation,

Debtor.

CV 13-183-M-DWM

PLAINTIFF TRUSTEE’S PRELIMINARY

PRETRIAL STATEMENT

Bankr. Case No. 12-61281-7

Case 9:13-cv-00183-DWM Document 10 Filed 01/31/14 of 31

mailto:[email protected]

mailto:[email protected]

BECK & AMSDEN, pllc

PLAINTIFF TRUSTEE’S PRELIMINARY PRETRIAL STATEMENT

PAGE 1


Chapter 7 Trustee,

Plaintiff,

v.

GEORGE MANLOVE, PAUL NISBET,

ROB STANDLEY and MARK

HOPWOOD, individuals; GMRP, LLC, a

limited liability company; JPEG, LLC, a

limited liability company; GMP, LLC, a

limited liability company; and PAINTED

SKY, LLC, a limited liability company; and

JOHN DOES 1-10,

Defendants.


Chapter 7 Trustee,

Plaintiff,

v.

GEORGE MANLOVE, PAUL NISBET,

ROB STANDLEY and MARK

HOPWOOD, individuals; GMRP, LLC, a

limited liability company; JPEG, LLC, a

limited liability company; GMP, LLC, a

limited liability company; and PAINTED

SKY, LLC, a limited liability company; and

JOHN DOES 1-10,

Defendants,

v.

VANN’S INC., a Montana Corporation,

Debtor-in-Possess.

Bankr. Adversary No. 13-00031-JLP

(consolidated under CV 13-183-M-DWM)

CV 13-212-M-DWM

(consolidated under CV 13-183-M-DWM)


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PAGE 2

Pursuant to Local Rule 16.2(b)(1) and this Court’s January 7, 2014,

Scheduling Order, Plaintiff Trustee hereby submits the following preliminary

pretrial statement:

A. FACTUAL OUTLINE OF THE CASE.

Plaintiff Richard J. Samson is the Chapter 7 Trustee (the “Plaintiff Trustee”)

for the Estate of Vann’s Inc. Defendants are former executives at Vann’s, officers

and/or directors of Vann’s Inc. (“Vann’s”) and fiduciaries of the Vann’s ESOP.

The LLC Defendants are corporate vehicles Defendants used to own and

lease properties to Vann’s.

Plaintiff Trustee asserts that, in their various fiduciary and insider capacities,

Defendants initiated an executive compensation plan without fully-informed

oversight. In doing so, Defendants violated their Employee Retirement Income

Security Act (“ERISA”) fiduciary duties and Montana corporate law duties.

In addition, some or all of what Defendants received under the executive

compensation plan also constituted fraudulent transfers and/or preferential

transfers in violation of Montana and federal statutes.

B. JURISDICTION AND VENUE ISSUES.

The parties agree that jurisdiction and venue are appropriate. Answer at

(Doc. 6 at 5-8).


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PAGE 3

C. FACTUAL BASIS OF THE CLAIMS.

1. Parties.

Defendant George Manlove began working for Vann’s Inc., an electronic

appliance retail store, in 1986 doing operations and MIS. Four years later, he also

became the consumer electronics buyer. In approximately 1998, he became Vann’s

vice president. In 2002, he became president. In 2004 or 2005, the founder of the

company, Pete Vann, retired1. Manlove then became CEO. At approximately the

same time, he became a trustee of the Vann’s ESOP. Manlove was the CEO of

Vann’s, an ESOP trustee and/or fiduciary, and an officer or member of the Board

of Directors of Vann’s. Defendant Manlove is also a member of the limited

liability company (“LLC”) Defendants.

Defendant Paul Nisbet started working for the company as a controller in

2000. Four to five years later, he became the CFO. He also became a trustee of the

ESOP at around the same time that George Manlove did. Nisbet was the CFO of

Vann’s, an ESOP trustee and/or fiduciary and an officer or member of the Board of

Directors of Vann’s. Defendant Nisbet is also a member of the LLC Defendants.

Defendant Rob Standley was a manager, officer or director of Vann’s and is

a member of one or more of the LLC Defendants.

1 Manlove is Pete Vann’s son-in-law.


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PAGE 4

Defendant Mark Hopwood was a manager, officer or director of Vann’s and

is a member of one or more of the LLC Defendants.

Collectively, Defendants Manlove, Nisbet, Standley and Hopwood are

sometimes referred to herein as the “Individual Defendants.”

Under applicable state and federal law, Defendants Manlove, Nisbet,

Standley and Hopwood were “insiders” of Vann’s.

Defendant GMRP, LLC is a limited liability company with its principal

place of business in Missoula, Montana. Defendants Manlove, Nisbet, Standley

and Hopwood are the members of GMRP, LLC. Defendant Nisbet is its registered

agent.

Defendant JPEG, LLC is a limited liability company, with its principal place

of business in Missoula, Montana. Defendants Manlove and Nisbet are the

members of JPEG, LLC. Defendant Nisbet is its registered agent.

Defendant GMP, LLC is a limited liability company, with its principal place

of business in Missoula, Montana. Defendants Manlove, Nisbet and Hopwood are

the members of GMP, LLC. Defendant Nisbet is its registered agent.

Defendant PAINTED SKY, LLC is a limited liability company, with its

principal place of business in Park City, Utah. Defendant Manlove is its registered

agent.


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PAGE 5

2. Vann’s Financial Difficulties.

Upon becoming ESOP Trustees and Vann’s officers and/or directors,

Defendants Manlove and Nisbet caused Vann’s to enter into a series of

transactions intended to compensate themselves at the expense of Vann’s

employee owners. As a result of this executive compensation plan, Vann’s became

insolvent. The following is a chart of payments made pursuant to the plan:

As shown above, between 2007 and 2011, the executive compensation plan

took 118% of Vann’s available free cash flow, in other words, more cash than

Vann’s generated through operations. This was in addition to Defendants’ base

salaries and benefits.

As shown below, the executive compensation plan (above and beyond

salaries) used up Vann’s available cash:

Vann's Chart of Payments - Management Compensation Plan Fiscal Year End 2007 - Fiscal year End 2011

2007 2008 2009 2010 2011 Aug- Total Lease Payments 408,000 $ 588,900 $ 807,600 $ 807,600 $ 828,600 $ 564,400 $ 4,005,100 $ Leased Property Improvements 1,139,557 $ 1,489,402 $ 140,471 $ 799,112 $ 462,159 $ - $ 4,030,701 $ Debt Service of Manlove Share Sale 172,572 $ 172,572 $ 172,572 $ 172,572 $ 172,572 $ 100,667 $ 963,527 $ Manlove Education Expense - $ - $ 50,000 $ 100,000 $ 57,000 $ - $ 207,000 $ Excess Expenses and Bonuses 80,000 $ 144,089 $ 64,556 $ 114,595 $ 43,490 $ - $ 446,730 $ Total 1,800,129 $ 2,394,963 $ 1,235,199 $ 1,993,879 $ 1,563,821 $ 665,067 $ 9,653,058 $

Compensation as % of Free Cash Flow 55.5% 159.6% 63.1% 142.1% 172.9% 118.6%


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PAGE 6

Vann’s $8 million in cash as of 2007 would have enabled Vann’s to

withstand any economic downturn. Saddled with Defendants’ excessive

compensation, however, it did not survive. Had Defendants not instituted the

executive compensation plan, Vann’s would not have become been insolvent, and

it would have had sufficient cash reserves as well as significant real estate

holdings.

The management compensation plan rendered Vann’s equity, and thus the

employees’ stock value, worthless. Vann’s would have experienced an increase in

cash flows.


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PAGE 7

The specific transactions of the executive compensation plan included a

number of transactions relating to, inter alia, the following:

a. Vann’s Paid Excessive Rent for Property Owned by

Defendants as Part of Defendants’ Compensation.

Between 2006 and 2011, Defendants caused Vann’s to make rent payments

to the Defendant LLCs in which they and the other Individual Defendants were

members. These lease payments were made as follows:

a. To GMRP, LLC for lease of a property located at 3400 Laramie Drive

in Bozeman, MT. Monthly rent for this location ranged from $22,000

per month to $30,000 per month.


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PAGE 8

b. To JPEG, LLC for lease of a property located at 1817 South Avenue

West in Missoula, MT. Monthly rent for this location ranged from

$15,900 per month to $21,200 per month.

c. To GMP, LLC for lease of a property located at 6418 Mormon Creek

Road in Lolo, MT. Monthly rent for this location ranged from $12,000

per month to $17,000 per month.

d. To Painted Sky, LLC for lease of a property located at 2019 Cromwell

Dixon Lane in Helena, MT. Monthly rent for this location was

approximately $17,600.

These rents were in excess of the market rate and in excess of the mortgage

payments pursuant to the loans on the properties that the LLC Defendants obtained

using the Vann’s leases as collateral. These rents totaled $4,030,701 between 2007

and 2012.2

b. Vann’s Paid for Improvements to Defendants’ Properties.

In addition, Defendants caused Vann’s to pay over $4 million for leasehold

improvements, including for leasehold improvements for the above-described

leased properties. The payment of the cost of these leasehold improvements

2 Defendants Manlove and Nisbet admit that the lease payments were intended as management

compensation. Exhibit 1, R. 2004 Exam 56:11-18 (Aug. 23, 2013).


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PAGE 9

constituted further fraudulent transfer and recoverable preferences pursuant to

applicable state and federal law.

c. Vann’s Paid for Defendant Manlove’s Education Expenses.

Defendants caused Vann’s to pay Manlove’s tuition and other expenses

related to obtaining an executive business degree from Kellogg School of Business

at Northwestern University. This included payments in the amount of: $19,667 on

September 22, 2009; $1,500 on September 30, 2009; $1,489.88 on November 30,

2009; $25,242.59 on December 31, 2009; $24,666 on March 31, 2010; and

$24,667 on August 31, 2010.

d. Vann’s Paid for Manlove’s Shares of Company Stock.

In December 2004, George and Jill Manlove sold 8,196 shares of Vann’s

stock to the ESOP for $1,270,380. To acquire those shares, the Company borrowed

$1,270,380 (the entire amount of the purchase price) from a bank under a ten-year

variable rate loan. In addition to increasing the Company's liabilities by more than

$1.2 million, this loan resulted in an increased monthly cash obligation for the

company of $14,381 initially or about $172,572 of additional annual debt service.

e. Vann’s Paid for Excessive Personnel Expenses and Bonuses.

Between 2006 and 2011, Vann’s paid over $350,000 for Defendant

Manlove’s personal expenses. These expenses include but are not limited:


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PAGE 10

a. Interior decorating expenses such as $1,776 spent at Mattress

USA on August 31, 2010; $1,303.90 spent for down pillows on

May 31, 2010; $601.72 at Bed Bath & Beyond on May 31,

2010; $278 at Pier 1 on July 31, 2008; $759.92 at Art.com on

July 31, 2008; $1,553 from Crate & Barrel on August 31, 2008;

$1,607.92 at Barstools.com on August 31, 2008; and $1,188.82

spent at Target on May 31, 2011;

b. Multiple hundreds of dollars in iTunes purchases;

c. Multiple hundreds of dollars for an XM Satellite Radio

subscription;

d. Thousands of dollars in purchases from the Apple Store;

including $3,644.78 on August 31, 2009; $3,174.90 on August

31, 2009; $699.00 on March 31, 2010; $829 on April 30, 2010;

and $1,733 on November 30, 2010;

e. Johnston & Murphy shoes;

f. $675 at Bryant Photo on October 31, 2009;

g. $1,580 at a Las Vegas casino on January 31, 2009; and another

$1,231.05 at a Las Vegas Casino on January 31, 2010;


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PAGE 11

h. Payment of credit card charges in the amount of $24,567 on

December 16, 2009; and in the amount of $24,666 on March

10, 2010; and

i. Unexplained charges in the amount of $13,000 on May 31,

2010; $15,000 on May 31, 2010; $2,077.03 and $13,000 on

June 30, 2010; $12,930.90 and $1,450.02 on June 30, 2011.

Defendants also self-approved bonuses at whim, including a $25,000 bonus

for Defendant Manlove, which he self-approved via a one-sentence e-mail to

Defendant Nisbet. Exhibit 2, Email Exchange Manlove and Nisbet (Dec. 1, 2007).

D. LEGAL THEORY UNDERLYING EACH CLAIM.

Defendants’ executive compensation plan resulted in four independent

claims: breach of ERISA fiduciary duties; breach of corporate law duties;

fraudulent transfers; and, preferential payments recoverable under bankruptcy law.

1. Breach of ERISA Fiduciary Duties.

Defendants acted as ERISA fiduciaries. 29 U.S.C. § 1002(21)(A); see also §

1102(a)(1) (trustees are fiduciaries because they have “authority to control and

manage the operation and administration of the plan”). Defendants Manlove and

Nisbet admit they were plan fiduciaries. Answer at 12, ¶ 47.


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PAGE 12

As ERISA fiduciaries, Defendants Manlove and Nisbet were required to

discharge their duties with respect to the ESOP solely in the interest of the

participants and beneficiaries, for the exclusive purpose of providing benefits to

participants and their beneficiaries and with the care, skill, prudence and diligence

of a reasonable person acting in like capacity and familiar with the circumstances.

29 U.S.C. § 1104(a)(1). Excessive executive compensation violates ERISA.

Johnson v. Couturier, 572 F.3d 1067, 1077 (9th Cir. 2009).

The business judgment rule is not a defense to ERISA claims. Donovan v.

Mazzola, 716 F.2d 1226, 1231-32 (9th Cir. 1983); Sallis v. Couturier, 2009 WL

3055207, * 4 (N.D. Cal. Sept. 17, 2009) (business judgment rule not a defense to

alleged ERISA violation); Hilton Hotels v. Dunnet, 275 F. Supp. 2d 954, 966 n.1

(W.D. Tenn. 2002) (business judgment rule does not apply to ERISA fiduciary

decisions).

2. Breach of Corporate Duties.

Defendants Manlove and Nisbet owed fiduciary duties under non-ERISA

law to Vann’s and its shareholders, including its employee shareholders. Mont.

Code Ann. §§ 35-1-418; 35-1-443. Directors and officers must discharge their

duties: in good faith; with the care an ordinarily prudent person in a similar

situation would exercise under similar circumstances; and, in a manner that the

director reasonably believes to be in the best interests of the corporation. Ibid.


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PAGE 13

Excessive executive compensation implicates a director’s or officer’s duty of

loyalty to the corporation. ADR Trust Corp. v. Dean, 854 F. Supp. 626, 645 (D.

Ariz. 1994). Defendants have the obligation to establish that their compensation

was reasonable. 3A Fletcher, Cyclopedia of the Law of Corporations, § 1039.

Defendants Manlove and Nisbet breached their duties, as officers and

directors, to the corporation and the shareholders thereof, including as follows:

a. Usurping corporate opportunities in the form of the commercial

real estate purchases that their LLCs obtained using Vann’s

agreement to pay rent thereon;

b. Causing Vann’s to enter into rental agreements that their LLCs

used to buy commercial real estate that the LLCs would then

own free and clear when the loans were fully paid using

Vann’s’ rental payments;

c. Causing Vann’s to pay their personal expenses without any

oversight or control process;

d. Causing Vann’s to pay for Manlove to get an MBA from

Northwestern University that he intended to use to leave Vann’s

and pursue other opportunities; and

e. Failing to communicate with members of the Board of

Directors, hold official meetings, and obtaining Board approval


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PAGE 14

of Vann’s actions, all of which resulted in the resignation of

Vann’s outside board members.

3. Defendants’ Burden to Establish Substantive and Procedural

Fairness.

As noted above, as a matter of law the business judgment rule does not apply

to Defendants’ ERISA violations. Donovan v. Mazzola, 716 F.2d 1226, 1231-32

(9th Cir. 1983). It would be inapplicable under the facts of this case, in any event,

because no reasonable basis exists to indicate that Defendants acted in good faith

with respect to their conduct. Such actions would not have been taken by ordinarily

prudent people in the management of their own affairs of like magnitude and

importance.

In addition, the business judgment rule also does not apply to state law

directors’ conflict-of-interest transactions. Warren v. Campbell Farming Corp.,

2011 MT 324, ¶¶ 25-25, 363 Mont. 190, 271 P.3d 36.

While a conflict-of-interest transaction may be reviewed under the safe

harbor provisions of Mont. Code Ann. §§ 35-1-461 to 35-1-464, the Defendants

have the burden of establishing compliance with the procedures of Section 35-1-

463 (majority of directors approve after full disclosure) or Section 35-1-464

(majority of shareholders approve after full disclosure) or that the transaction was

fair. Warren, ¶ 11 (citing Mont. Code Ann. 35-1-462(2)).


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PAGE 15

Here, Defendants cannot meet that burden because Defendants’ actions were

not fully disclosed to or approved by the shareholders, were not fair to the

corporation and were not fully disclosed and approved by outside, disinterested

directors as reflected in the emails attached as Exhibits 3-5.

For example, Director Cameron Lawrence resigned in part because of:

. . . poor communication between the company and the board. In fact,

outside of our annual meetings, the board has not been provided with

any financials or updates on important strategic initiatives. In

addition, we were required to have our annual meeting in March

which obviously did not occur. Not only did we not have a board

meeting, there was no communication as to why this was the case or

recognition of the fact that we were not meeting our responsibilities.

The poor and unsystematic communication is a clear indication that

the existing governance structure and processes need to be examined.

I would encourage the board to work on this issue.

Exhibit 3, Lawrence to Manlove, undated.

In addition, director Chris Abess resigned on July 12, 2011, over the

following:

1. Lack of transparency – Vann’s has not provided core financial

statements, formal strategic plans for the business, and other

formal disclosures that would allow me to operate as an

effective board member.

2. Lack of communication – The Vann’s board does not meet on a

regular basis. In fact, the board has long passed the time for its

required annual meeting. No communication has been provided

to the board explaining meeting inconsistency.

3. Lack of governance rigor – 16 months ago, I provided Vann’s

with a recommended governance framework in a document

entitled Board of Directors – Responsibilities and Action Plan


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PAGE 16

Document. The company has taken no substantive action

toward adopting the recommended framework or making

progress toward improving governance.

Exhibit 4, Ltr. Abess to Manlove (July 12, 2011).

Also, on October 3, 2011, director Bill Honzel resigned on the basis that:

It has become apparent that the ESOP Plan Trustees and the

company CEO/Chairman have migrated to a format of

governance by company management. Therefore, it seems that

outside directors have a hollow role in providing any

substantive service to the company.

Exhibit 5, Email Honzel to Manlove & Nisbet (Oct. 3, 2011).

Defendants acted contrary to the highest consideration required to be given

to the interests of the corporation and its shareholders. Defendants acted to

maximize their own financial gain at the expense of the corporation and its

shareholders.

4. Fraudulent Transfers.

Defendants directed and received fraudulent transfers under the Uniform

Fraudulent Transfer Act and 11 U.S.C. §§ 548, 549 and 550 and Mont. Code Ann.

§ 31-2-326, et seq. These transfers may be avoided and recovered by Plaintiff

Trustee, pursuant to Mont. Code Ann. § 31-2-326, et seq., and 11 U.S.C. §§

544(b), 548(a), 549 and 551. Defendants’ fraudulent transfers or receipts of these

assets may be avoided and recovered under the Bankruptcy Code (§§ 544(b)(1),

548(a), 549 and 551) and Montana statute (Mont. Code Ann. § 31-2-327 et seq.).


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PAGE 17

11 U.S.C. 548 provides that:

(a)(1) The trustee may avoid any transfer (including any transfer to or

for the benefit of an insider under an employment contract) of

an interest of the debtor in property, or any obligation

(including any obligation to or for the benefit of an insider

under an employment contract) incurred by the debtor, that was

made or incurred on or within 2 years before the date of the

filing of the petition, if the debtor voluntarily or involuntarily –

(A) made such transfer or incurred such obligation with

actual intent to hinder, delay, or defraud any entity to

which the debtor was or became, on or after the date that

such transfer was made or such obligation was incurred,

indebted; or

(B)(i) received less than a reasonably equivalent value in

exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was

made or such obligation was incurred, or became

insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was

about to engage in business or a transaction, for

which any property remaining with the debtor was

an unreasonably small capital;

(III) intended to incur, or believed that the debtor would

incur, debts that would be beyond the debtor's

ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an

insider, or incurred such obligation to or for the

benefit of an insider, under an employment

contract and not in the ordinary course of business.

Mont. Code Ann. § 31-2-333 provides that:

(1) A transfer made or obligation incurred by a debtor is fraudulent

as to a creditor, whether the creditor's claim arose before or


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PAGE 18

after the transfer was made or the obligation was incurred, if the

debtor made the transfer or incurred the obligation:

(a) with actual intent to hinder, delay, or defraud any creditor

of the debtor; or

(b) without receiving a reasonably equivalent value in

exchange for the transfer or obligation and the debtor:

(i) was engaged or was about to engage in a business

or a transaction for which the remaining assets of

the debtor were unreasonably small in relation to

the business or transaction; or

(ii) intended to incur, or believed or reasonably should

have believed that the debtor would incur, debts

beyond the debtor's ability to pay as they became

due.


1) A transfer made or obligation incurred by a debtor is fraudulent

as to a creditor whose claim arose before the transfer was made

or the obligation was incurred if the debtor made the transfer or

incurred the obligation without receiving a reasonably

equivalent value in exchange for the transfer or obligation and

the debtor was insolvent at that time or the debtor became

insolvent as a result of the transfer or obligation.

(2) A transfer made by a debtor is fraudulent as to a creditor whose

claim arose before the transfer was made if the transfer was

made to an insider for an antecedent debt, the debtor was

insolvent at that time, and the insider had reasonable cause to

believe that the debtor was insolvent.


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PAGE 19


(1) In an action for relief against a transfer or obligation under this

part, a creditor, subject to the limitations in 31-2-340, may

obtain:

(a) avoidance of the transfer or obligation to the extent

necessary to satisfy the creditor's claim;

(b) an attachment or other provisional remedy against the

asset transferred or other property of the transferee in

accordance with the procedure prescribed by Title 27,

chapter 18; or

(c) subject to applicable principles of equity and in

accordance with applicable rules of civil procedure:

(i) an injunction against further disposition by the

debtor or a transferee, or both, of the asset

transferred or of other property;

(ii) appointment of a receiver to take charge of the

asset transferred or of other property of the

transferee; or

(iii) any other relief the circumstances may require.

(2) If a creditor has obtained a judgment on a claim against the

debtor, the creditor, if the court so orders, may levy execution

on the asset transferred or its proceeds.

The subject transfers were made at times when Vann’s was insolvent and/or

they had the effect of rendering Vann’s insolvent. These transfers were fraudulent

because they were made with the actual intent to hinder, delay and defraud Vann’s

from using the funds for ongoing operational expenses and/or to satisfy its

obligations to creditors. The transfers were also fraudulent because they were made


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PAGE 20

without receiving reasonably equivalent value in exchange for the transfers. The

transfers were also fraudulent because they were made to or for the benefit of an

insider.

5. Preferential Payments.

Defendants’ conduct constitutes preferential payments that may be avoided

and recovered by the Plaintiff Trustee pursuant to 11 U.S.C. §§ 547, 544(b) and

551 and Mont. Code Ann. § 31-2-327 et seq., including Mont. Code Ann. § 31-2-

334(2).

These transfers were preferential under 11 U.S.C. § 547 to or for the benefit

of a creditor, for or on account of an antecedent debt owed by Vann’s before such

transfer was made, made while Vann’s was insolvent, enabling Defendants to

receive more than they would otherwise receive in Vann’s bankruptcy proceeding.

That section provides, in pertinent part, that:

(b) Except as provided in subsections (c) and (i) of this section, the

trustee may avoid any transfer of an interest of the debtor in

property –

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the

debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made –


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PAGE 21

(A) on or within 90 days before the date of the filing of

the petition; or

(B) between ninety days and one year before the date

of the filing of the petition, if such creditor at the

time of such transfer was an insider; and

(5) that enables such creditor to receive more than such

creditor would receive if –

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the

extent provided by the provisions of this title.

These transfers were fraudulent preferences under Mont. Code Ann. § 31-2-

334(2), made by Vann’s to insiders for purported antecedent debts at a time when

Vann’s was insolvent, and the insider Defendants had reasonable cause to believe

that Vann’s was insolvent. That statute provides that:

A transfer made by a debtor is fraudulent as to a creditor whose claim

arose before the transfer was made if the transfer was made to an

insider for an antecedent debt, the debtor was insolvent at that time,

and the insider had reasonable cause to believe that the debtor was

insolvent.

Under applicable state and federal law, Plaintiff Trustee is entitled to set

aside and recover all such transfers occurring within the applicable set-aside

period.


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PAGE 22

E. COMPUTATION OF DAMAGES.

Defendants are liable for damages in an amount which will compensate for

all Vann’s damages for breach of ERISA fiduciary duties and corporate law duties.

As reflected in the valuation chart on page seven above, Plaintiff Trustee estimates

compensatory relief to exceed $11 million from the destruction of Vann’s equity

value and the value of the plan participant’s employee stock. Punitive damages are

to be determined.

In addition, Defendants are liable for damages in an amount which will

compensate for all fraudulent or preferential transfers. As reflected in the payments

chart on page five above, Plaintiff Trustee estimates such claims to exceed $9.6

million. Punitive damages are to be determined.

F. RELATED LITIGATION.

Vann’s is the chapter 7 debtor in In re Vann’s Inc., Cause No. 12-61281-7.

Plaintiff Trustee filed an Adversary Proceeding asserting his fraudulent and

preferential transfer claims. AP No. 13-00031. Plaintiff Trustee also filed a district

court action asserting ERISA claims and state law corporate duty claims. Case No.

9:13-cv-00212-DWM. Plaintiff Trustee’s two actions have been consolidated

under Case No. 9:13-cv-00183-DWM. The Department of Labor is also

investigating Defendants’ conduct.


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PAGE 23

G. STIPULATIONS OF FACT AND LAW.

1. Richard J. Samson is the duly appointed Chapter 7 Trustee for the

Estate of Vann’s Inc., a Montana corporation.

2. Vann’s was founded by Pete Vann and his family.

3. Vann’s business included the operation of retail stores in Montana that

sold home electronics and appliances.

4. George Manlove is an individual residing in Park City, Utah. Manlove

previously served as CEO of Vann’s, as a Trustee of the Vann’s ESOP, and a

member of the Board of Directors of Vann’s.

5. Paul Nisbet is an individual residing in Missoula, Montana. Nisbet

previously served as the CFO of Vann’s, a Trustee of the Vann’s ESOP, and a

member of the Board of Directors of Vann’s.

6. Manlove and Nisbet were, at certain times, ESOP fiduciaries as to the

Vann’s ESOP.

7. Manlove and Nisbet were officers and directors of Vann’s whose

duties were a matter of law.

8. Vann’s leased property from separate companies that were owned in

part by Manlove, Nisbet and others.

9. GMRP LLC is a Montana limited liability company that owned the

building that Vann’s leased for operation of its Bozeman store. The members of


BECK & AMSDEN, pllc


PAGE 24

GMRP LLC were George Manlove, Paul Nisbet, Mark Hopwood, and Rob

Standley.

10. JPEG LLC is a Montana limited liability company that owned the

building that Vann’s leased for operation of its Missoula store. The members of

JPEG LLC were George Manlove and Paul Nisbet.

11. GMP LLC is a Montana limited liability company that owned the

building that Vann’s leased for operation of a warehouse in Lolo, Montana. The

members of GMP LLC were George Manlove, Paul Nisbet and Mark Hopwood.

12. Painted Sky LLC is a Montana limited liability company that owned

the building that Vann’s leased for operation of a retail store in Helena, Montana.

The members of Painted sky LLC were George Manlove and Jill Manlove.

14. The lessors borrowed money to acquire the buildings that Vann’s

rented; received rent payments from Vann’s; and paid principal, interest and other

expenses to their lenders and others in conjunction with their ownership of these

properties.

15. Vann’s paid certain expenses incurred by Defendants, including

interior decorating expenses; iTunes; XM Satellite Radio; Apple Store; shoes;

Bryant Photo; travel to Las Vegas;

16. Certain employees of Vann’s had credit cards for the purpose of

charging business expenses and Vann’s paid the credit card bills.


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PAGE 25

17. Vann’s paid certain expenses for Manlove to attend the Executive

MBA program at the Northwestern School of Business at Northwestern University.

18. Defendants received bonuses for their work at Vann’s.

19. Substantially all of the assets of the Vann’s ESOP were invested in

Vann’s capital stock.

20. A subsidiary of Vann’s purchased real estate near Deer Lodge,

Montana, and constructed a home there.

21. Vann’s formed a subsidiary in 1998, known as Big Sky Country LLC

and later used that subsidiary to sell outdoor gear. This start-up company lost

money.

22. The business judgment rule does not apply. Donovan v. Mazzola, 716

F.2d 1226, 1231-32 (9th Cir. 1983); Warren v. Campbell Farming Corp., 2011

MT 324, ¶¶ 25-25, 363 Mont. 190, 271 P.3d 36.

H. JOINDER OF PARTIES OR AMENDMENT OF PLEADINGS.

See Joint Discovery Plan (Doc. 8) filed on January 30, 2014.

I. CONTROLLING ISSUES OF LAW FOR PRETRIAL DISPOSITION.

None.


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PAGE 26

J. PERSONS WITH KNOWLEDGE OR INFORMATION OF CLAIMS.

Subject to further investigation and discovery, Plaintiff Trustee identifies the

following individuals who may have knowledge that significantly bears on claims

made in the Complaint:

Identity Subject Matter

George Manlove Former Vann’s CEO. Has knowledge of

Vann’s operations, activities, financial

condition, and defendants’ impact and

influence on the company.

Paul Nisbet Former Vann’s CFO. Has knowledge of Vann’s

operations, activities, financial condition, and

defendants’ impact and influence on the

company.

Mark Hopwood Former Vann’s Board member and executive

management team member. Has knowledge of



influence on the company. Member of one or

more LLCs from which Vann’s leased

commercial space.

Rob Standley Former Vann’s Board member and executive

management team member. Has knowledge of



influence on the company. Member of one or

more LLCs from which Vann’s leased

commercial space.

Vann’s accountants,

auditors, business

consultants, and financial

advisors, including ESOP

advisors, 2005-present

These entities have knowledge of Vann’s

operations, activities, and financial condition.


BECK & AMSDEN, pllc


PAGE 27


Vann’s former board

members

Former board members have members have

knowledge of Vann’s operations, activities,

financial condition, and defendants’ impact and

influence on the company. Resigned because of

the lack of transparency, oversight,

communication, and failure to satisfy meeting

requirements.

Chris M. Abess Resigned board member with knowledge of




Bill Honzel Resigned board member with knowledge of




Chris Orvis Resigned board member with knowledge of




Connie Kulbeck Former Vann’s director of human resources and

executive committee member with knowledge

of Vann’s operations, activities, financial



Cameron Lawrence Resigned board member with knowledge of




Jerry Demple Former Vann’s director of retail sales and

executive committee member.

Ed Gay Former Vann’s employee with knowledge of

Vann’s accounting information.

Darren Jenkinson Former Vann’s employee with knowledge of

Vann’s accounting software and systems.

Darrell Messmer Former Vann’s employee with knowledge of

Vann’s accounting software and inventory

controls.


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PAGE 28


Gordon King Former Vann’s employee with knowledge of

Vann’s accounts payable and receivable.

Duane Bethel Former Vann’s employee with knowledge of

Vann’s accounting system.

Jay Allen Former Vann’s employee with knowledge of

Vann’s accounting system.

Amy Ashley Former Vann’s employee with knowledge of

Vann’s accounting data and system.

Dudley Chicioene Former Vann’s installer, director of installation,

and director of services.

David Kotz Former Vann’s employee with knowledge of

Vann’s computer system.

Courtney Manlove George Manlove’s daughter. Former employee

of Vann’s.

Jill Manlove George Manlove’s wife or former wife.

Contracted with Vann’s for interior design.

Jaiden Nisbet Paul Neisbet’s niece. Former

Bigskycountry.com employee.

Nisbet Construction Construction company owned by Paul

Neisbet’s father. Paid to do Vann’s

construction work.

Amy Greger Former Vann’s employee with knowledge of

Vann’s accounts. Balanced accounts and

worked on accounts payable.

Gail Forcee Former Vann’s employee with knowledge of

Vann’s accounts.

Pete Vann Vann’s Inc. founder and predecessor to George

Manlove. Father of Jill Manlove.

Jabari Involved in collateral business endeavors with

Manlove and/or Vann’s Inc.

Lenders or potential

lenders for Vann’s real

estate transactions.

Entities with knowledge of commercial

properties related to Vann’s Inc.

Dave Cotner Knows that Vann’s paid for Defendants’ legal

services.


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PAGE 29

K. TANGIBLE EVIDENCE.

1. Leases between Vann’s and the LLC Defendants.

2. Corporate records including minutes of board meetings.

3. Resignations letters from outside directors, including Cameron

Lawrence, Chris Abess, and Bill Honzel.

4. Accounting records detailing the executive compensation plan.

5. Vann’s financial statements and appraisals.

L. INSURANCE COVERING JUDGMENT.

Vann’s purchased a fiduciary liability policy with a liability limit of $15.5

million from Travelers’ Inc. Travelers is defending under a reservation of rights.

M. PROSPECTS FOR COMPROMISE/SETTLEMENT.

Plaintiff Trustee is amenable to an early neutral evaluation and/or mediation.

N. SUITABILITY OF SPECIAL PROCEDURES.

Plaintiff Trustee is not aware of any special procedures appropriate for this

case.

O. ELECTRONIC DISCOVERY.

The parties agree that documents stored in electronic format will be

produced in the same manner as other documents.


BECK & AMSDEN, pllc


PAGE 30

DATED, this 31st day of January 2014.

/s/ John L. Amsden

BECK & AMSDEN, pllc

Attorneys for Plaintiff Trustee


Case 9:13-cv-00183-DWM Document 10-1 Filed 01/31/14 Page 1 of 2

From: Paul Nisbet <[email protected]>Subject: RE: Payday

Date: December 1, 2007 8:26:58 PM MSTTo: George Manlove <[email protected]>

No thank you!!! I saw Eugene at the mall today and told him I intendedto complete the application very quickly. I think he was very happy tohear this, and thanked us for taking the time to take such a completetour of the RCCC.

________________________________

From: George Manlove [mailto:[email protected]]Sent: Saturday, December 01, 2007 8:09 PMTo: Paul NisbetSubject: Fwd: Payday

Paul - I would like to take a $25k bonus on the next payroll.

Thanks,

George


George;

I have decided to resign from the Vann's board. Given my currentresponsibilities and obligations, coupled with a concern that Ibriefly outline below, I believe it is best for me to resign. First,my wife and I have recently purchased our partners 50% interest in ourbusiness and will require more of my attention as we go forward. Weare thrilled to have this opportunity, but we also have a $2 millionobligation that I want to focus on over the next two years.

The concern mentioned above is related to what I believe to be poorcommunication between the company and the board. In fact, outside ofour annual meetings, the board has not been provided with anyfinancials or updates on important strategic initiatives. In addition,we were required to have our annual meeting in March which obviouslydid not occur. Not only did we not have a board meeting, there was nocommunication as to why this was the case or recognition of the factthat we were not meeting our responsibilities. The poor andunsystematic communication is a clear indication that the existinggovernance structure and processes need to be examined. I wouldencourage the board to work on this issue.

I believe the company has some very talented people with some greatopportunities and I look forward to watching its future success. I amalso happy to continue to help match talented students at UM withopportunities within the company.

It has been a privilege to be associated with all of you and Iconsider you friends.

Sincerely,Cameron-- Cameron Lawrence Ph.D.Poe Family Faculty FellowThe University of MontanaSchool of Business Administration32 Campus DriveMissoula, MT 59812406-243-6739


From: Bill Honzel <[email protected]>Subject: Vann's Board

Date: October 3, 2011 9:47:53 AM MDTTo: George Manlove ([email protected]) <[email protected]>Cc: Paul Nisbet ([email protected]) <[email protected]>

Please let this serve as official notification of my resignation from the Board of Directors of Vann’s, Inc. It has become apparent that the ESOP Plan Trustees and the company CEO/Chairman have migrated to a format of governance by company management. Therefore, it seems that outside directors have a hollow role in providing any substantive service to the company. I wish Vann’s every success in the future. Bill


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