Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 1 of 6
Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 2 of 6
Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 3 of 6
Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 4 of 6
Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 5 of 6
Case 2:06-cv-00746-WHA Document 2 Filed 08/18/2006 Page 6 of 6
IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

NORTHERN DIVISION

 

In the matter of: )

 )

TERRY MANUFACTURING COMPANY, )

INC., ) 

Debtor ) Case No. 03-32063 

J. LESTER ALEXANDER, III )

Trustee for Terry Manufacturing )

Co., Inc. and Terry Uniform )

Co., LLC )

 )

vs. ) Adv. No. 05-03042

 )

N. D. HORTON, JR., ET AL. )

 Montgomery, AL

 March 28, 2006, 9:19 a.m.

 

TRANSCRIPT OF PROCEEDINGS

BEFORE THE HONORABLE WILLIAM R. SAWYER

UNITED STATES BANKRUPTCY JUDGE

Vol. I - Pages 1 to 202

APPEARANCES: Brent B. Barriere

 Catherine E. Lasky

 Phelps Dunbar, LP

 365 Canal St., Suite 2000

 One Canal Place

 New Orleans, LA 70130

 C. Ellis Brazeal, III

 Walston, Wells 

 & Birchall LLP

 1819 Fifth Ave. N, #1100

 Birmingham, AL 35203

 

Electronic Recorder 

Operator: Linda Bodden

Transcriber: Patricia Basham

 6411 Quail Ridge Drive

 Bartlett, TN 38135

 9O1-372-O613

Proceedings recorded by electronic sound recording;

Transcript produced by transcription service.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 1 of 202
2

INDEX

WITNESSES DIRECT CROSS REDIRECT RECROSS

J. Lester

Alexander III 34 108 -- --

N. D. Horton, Jr. 156 185 196 --

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 2 of 202
3

1 (CALL TO ORDER)

2 THE COURT: Please be seated.

3 MR. BARRIERE: Good morning, Your Honor.

4 THE COURT: Good morning.

5 COURTROOM DEPUTY: Adversary case number 05-3042,

6 Alexander versus Horton, Jr., et al.

7 THE COURT: All right. Let’s start with appearances.

8 I guess we will start over here.

9 MR. BRAZEAL: Thank you, Your Honor. Ellis Brazeal for

10 N. D. Horton and James Reynolds.

11 THE COURT: All right, Mr. Brazeal.

12 MR. BARRIERE: Good morning, Your Honor. I am Brent

13 Barriere. I represent the trustee. I am joined this morning

14 by Katie Lasky and by the trustee, J. Lester Alexander, the

15 plaintiff in this case.

16 THE COURT: All right. Let me pull up my docket here.

17 My recollection is there was some dispute having to do with

18 witnesses and, Mr. Barriere, you objected. Have you resolved

19 that or do we have a difference of opinion as to –

20 MR. BARRIERE: I think not, Your Honor, and I was going

21 to suggest before we had openings that we address the issue of

22 our objection with respect to the experts, Messrs. Averett and

23 Slaton.

24 THE COURT: All right. Let’s do that, then. I guess

25 you are the objecting party. I will hear from you first and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 3 of 202
4

1 then I will hear from Mr. Brazeal.

2 MR. BARRIERE: Your Honor, the trustee requests that

3 Randy Averett be stricken as an expert witness because he has

4 failed to comply with any, and I stress “any,” disclosure

5 obligations imposed by Federal Rule 26, Bankruptcy Rule 7026.

6 Mr. Averett has testified he did not perform any

7 independent analysis; he did not draft, sign or even edit the

8 expert report tendered by the defendants. Indeed, he has

9 acknowledged under oath that he first read that report after it

10 was tendered to the trustee. The expert report that was

11 generated by the defendant was supplemented by correspondence

12 authored by Mr. Slaton, Jesse Slaton and dated February 27 of

13 2006. Mr. Averett has acknowledged he first read that letter

14 during the course of his deposition conducted on March 17.

15 In contrast to Mr. Averett, Mr. Slaton has complied

16 with some, although not all, of the disclosure obligations

17 required by Rule 26. He has authored and signed the report.

18 He has not made some of the other disclosures required by the

19 rules. He hasn’t provided, for example, a list of

20 qualifications timely; he didn’t provide an indication of his

21 compensation; matters in which he has acted as an expert. 

22 We are not seeking to bar him on that basis. Rather,

23 we are requesting that Mr. Slaton be excluded because he does

24 not meet the threshold requirement under Federal Rule of

25 Evidence 702.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 4 of 202
5

1 Apparently Mr. Slaton is going to provide testimony

2 with respect to the tracing of three loans made by entities

3 which are not defendants in this adversary proceeding.

4 THE COURT: Let me stop you there for just a second

5 because I did see something about that. Why is that important

6 in this case?

7 MR. BARRIERE: I think it is not, Your Honor.

8 THE COURT: Okay. I will let you address that later

9 then. Okay.

10 MR. BARRIERE: I’m sure Mr. Brazeal has a different

11 view of that, but let me turn to that. Let me first talk just

12 about Mr. Averett and why I believe he is properly excluded.

13 Rule 26(a)(2)(B) of the Federal Rules of Civil

14 Procedure and Bankruptcy Rule 7026 require the proper expert

15 specifically identify and tender, and I am quoting now, Your

16 Honor, a written report prepared and signed by the witness.

17 The expert report that was tendered by the defendants

18 on February 27 and the supplemental correspondence tendered by

19 the defendants were prepared by Mr. Slaton. It was Mr. Slaton

20 who reported the analysis. Mr. Averett has been candid in

21 acknowledging that he didn’t draft it; he didn’t edit it; he

22 didn’t sign it; he didn’t see it until it was turned over to

23 counsel for the trustee.

24 Likewise, the other disclosures required by Rule 26,

25 the current curriculum vitae; the list of compensation; other

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 5 of 202
6

1 matters in which Mr. Averett may have acted as expert, none of

2 those materials were provided.

3 So my basic concern with Mr. Averett, he simply hasn’t

4 complied with anything under Rule 26. Now that problem here is

5 compounded with respect to the solvency testimony. The court,

6 I assume, has reviewed the memo and knows what I am referring

7 to.

8 By way of background, there was extensive discussion

9 between the parties over a period of probably six weeks with

10 respect to whether the defendants would engage an expert at all

11 and, if so, what that expert would do and when he would do it

12 by.

13 We were told repeatedly, both Mr. Alexander and

14 myself, that Mr. Averett or whatever expert ultimately was

15 engaged would not be addressing solvency issues, and I am

16 referring to the issue of whether this company had a negative

17 balance sheet, whether unreasonably small capital, whether it

18 could pay its debts as they became due. We were specifically

19 told that would not be addressed and, consistent with that,

20 the report that was finally tendered on February 27 makes no

21 issue of any of the solvency issues whatsoever.

22 Now the item we have been told Mr. Averett would

23 address, or Mr. Slaton would address, would be the tracing of

24 these various loans. And there is a letter dated February 24

25 sent by counsel for the defendants to me. I don’t have a

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 6 of 202
7

1 record that it was received, but I assume it was, that says

2 that Mr. Averett or Mr. Slaton may testify to the opinions set

3 forth in the, quote, bank reports, unquote. What that refers

4 to, of course, are the approximately seventy pages of expert

5 reports Mr. Slaton’s firm generated in connection with the bank

6 litigation, the litigation against Wedowee, Tuskegee and

7 Peoples Bank, matters that were resolved earlier in the first

8 quarter of this year.

9 Of that some seventy pages, virtually all is devoted

10 to a tracing analysis. The court may recall there the

11 principal issue was were these loans made to the Terrys

12 individually ultimately delivered to Terry Manufacturing and

13 used in its business.

14 So when I saw the words that in this case Mr. Slaton

15 or Mr. Averett may be addressing the opinions in the bank case,

16 it seemed to be consistent with what we had been told, that

17 here there would be an attempt to trace certain other loans,

18 not the loans at issue but certain other loans and how those

19 funds were used. Again, no mention of solvency whatsoever.

20 At the start of the deposition conducted on March 17,

21 we were told by counsel for the defendants that in contrast to

22 the repeated representations that these experts would not be

23 addressing solvency, that in fact they would be doing so.

24 Now, Your Honor, this raises two fundamental issues in

25 our view. First, plainly Rule 26 requires that the report

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 7 of 202
8

1 address all opinions the expert intends to proffer, together

2 with the reasons therefor. And, as noted, the report here by

3 Mr. Slaton does not address solvency in any fashion whatsoever.

4 Words do not appear.

5 Secondly, we have the very real practical problem of

6 an inability to access witnesses who we would have called live

7 had we been given timely notice.

8 In May of 2005, Mr. Averett did address solvency in

9 the bank cases, and he basically came to an opinion as to what

10 he believes is the appropriate model for the Terry

11 Manufacturing balance sheet at December 31, 2000, and then

12 makes additional commentary concerning the years thereafter.

13 The key to that analysis, in our view, at least, are

14 certain assumptions Mr. Averett’s firm made with respect to the

15 fair market value of furniture, fixtures and equipment; fair

16 market value of real estate and certain debt of Terry

17 Manufacturing. Had we been given adequate notice that solvency

18 would be an issue here, we would have brought the witnesses in

19 on those topics. We have some depositions, but they are not

20 going to be an effective substitute, I think, for live

21 testimony.

22 THE COURT: When did you first learn that the

23 defendants might go there, might contest solvency?

24 MR. BARRIERE: About five minutes before the start of

25 Mr. Averett’s deposition on March 17 or ten days ago.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 8 of 202
9

1 THE COURT: Okay. Thank you.

2 MR. BARRIERE: So, Your Honor, to close out these two

3 topics, with respect to Mr. Averett, we ask that he be stricken

4 because of complete failure to comply with Rule 26. We have no

5 objection to Mr. Slaton on that basis. He was the author of

6 the report.

7 Secondly, we object to either addressing solvency for

8 lack of notice and the tardy reversal of the repeated

9 representation that solvency would not be part of their

10 analysis.

11 Your Honor, let me finally then turn to the substance

12 of Mr. Slaton’s report and why we submit it should not be

13 admitted in this proceeding.

14 Federal Rule of Evidence 702 permits the testimony of

15 an expert witness, and I quote, “if scientific, technical or

16 other specialized knowledge will assist the trier of fact to

17 understand the evidence or to determine a fact or issue.”

18 Now this case concerns three basic transactions – a

19 promissory note given by Cotina Terry for stock sold by N. D.

20 Horton and James Reynolds; a promissory note given by Allie

21 Robinson, Rudolph’s wife, for the same purpose; and then a

22 promissory note given by Roy and Rudolph purportedly for stock

23 they acquired. And all of those payments – and this is

24 stipulated – all of those payments were made by Terry

25 Manufacturing.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 9 of 202
10

1 Mr. Slaton has studied and traced three loans made by

2 American Real Estate – two loans by American Real Estate and

3 one by Peoples Bank, one to Roy and Rudolph Terry, the People’s

4 Bank loan to Perky Cap, and he is going to appear, as we

5 appreciate, and testify as to the flow of those funds.

6 Now we haven’t sought any relief with respect to any

7 of those loans. We haven’t named – certainly Peoples Bank has

8 been named here. We haven’t filed suit against American Real

9 Estate.

10 Quite simply, I think Mr. Slaton got it wrong. He

11 opens his report that he has provided an analysis with respect

12 to the loans at issue in this case. That is not the case. We

13 have made no objection, no issue with respect to those loans

14 whatsoever.

15 Now, I appreciate the defendants are going to attempt

16 to prove up the theory that loans by entities otherwise

17 affiliated with Mr. Horton to Roy Terry and Rudolph Terry, the

18 proceeds of which may have ultimately ended up in the coffers

19 of Terry Manufacturing, somehow provide value for these three

20 transactions, but the fact of the matter is the tracing of

21 those funds and those specific loans are simply not at issue.

22 And, as a result, I fail to see how Mr. Slaton’s testimony can

23 remotely reach the threshold of Rule 702.

24 Unless the court has any further questions, Your

25 Honor, I will pass the stand to Mr. Brazeal.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 10 of 202
11

1 THE COURT: Thank you.

2 MR. BRAZEAL: Good morning, Your Honor.

3 I guess a bit of a brief history is in order just to

4 lead into the motion. During January, Mr. Barriere and I were

5 discussing whether we could resolve the matter, and obviously

6 I’m not going to disclose any of our settlement discussions,

7 but that was a topic that came up. And Mr. Barriere said – I

8 said, “Well, look, Mr. Barriere, the payments on the Allie

9 Robinson note and the Cotina Terry note were both made pursuant

10 to a guaranty; they were made on an antecedent debt; therefore

11 we win. That is reasonably equivalent value.” And he said,

12 “Well, no, I think the guaranties themselves are flawed, that

13 they constitute fraudulent transfers.”

14 And, Judge, at that point I said, well, if that is the

15 case, then I may need an expert because I think that changes

16 the complexion of the case, Your Honor, and then we have to

17 look for other issues of reasonably equivalent value.

18 And as Your Honor may recall, by consent or

19 stipulation the complaint was amended on January 30 of this

20 year to add in the guaranty issue.

21 Mr. Barriere and I agreed that I would then be able to

22 designate an expert, which we did on or about – well, I guess

23 he knew before February 24 that we were going to use Mr. Slaton

24 and/or Mr. Averett.

25 And then on February 24, I talked to Mr. Barriere and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 11 of 202
12

1 I sent him correspondence and I sent him a report that Mr.

2 Slaton had drafted with input from Mr. Averett. Your Honor, it

3 is not that Mr. Slaton did it – well, with input from Mr.

4 Averett. And given the time schedule we had in trying to get

5 everything done – in other words, when the complaint was

6 amended at the end of January, rather than trying to push back

7 the trial date, we just agreed and Mr. Barriere agreed to

8 extend some of the deadlines on the expert witnesses, which we

9 did.

10 On February 24, I forwarded to him the report drafted

11 by Mr. Slaton which contains the tracing analysis and also

12 indicated, as he said, that Mr. Slaton and/or Mr. Averett would

13 express some opinions from the bank cases.

14 And, Judge, my point on the solvency issue, and I am

15 actually going to bring that up last, but my point on the

16 solvency issue is that is really the only opinion from the bank

17 cases that might have any relevancy in ours.

18 But, be that as it may, on the issue of whether the

19 three loans that Mr. Slaton traced have any relevance and are

20 therefore admissible and the proper subject of expert

21 testimony, Your Honor, the first two stock notes and the

22 guaranty of those notes from Terry Manufacturing all took place

23 on November 10 of 2000.

24 On that very same day, American Real Estate, which is

25 controlled by Mr. Horton – and I am sorry, Your Honor, I didn’t

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 12 of 202
13

1 introduce Mr. Horton earlier, Mr. N. D. Horton.

2 THE COURT: Good morning.

3 MR. HORTON: Thank you.

4 MR. BRAZEAL: Entered into a five point five million

5 dollar line of credit note with Roy and Rudolph Terry. So on

6 the very same day that the stock notes were executed by the

7 Terry women – I’m just going to call them the Terry women. I

8 never can remember, Judge – there is Allie Robinson and Cotina

9 Terry. I can’t remember which is the daughter and which is the

10 wife, but the two Terry women, on the very same day that that

11 occurred, Your Honor, the Terry individuals borrowed five point

12 five million from American Real Estate. And over the next

13 three months, five point five million dollars was advanced to

14 the Terrys and then placed in the debtor.

15 So, Your Honor, as set forth in the Rubin versus Manny

16 Hanny case, 661 F2d 979, it is clear that consideration that

17 flows to the nontransferor – the debtor is the transferor of

18 the alleged fraudulent conveyances – but the consideration that

19 goes to a non-transferor, and this was five point five million

20 that went to the Terrys individually and then they put it in

21 the debtor, can be looked at to determine whether there is

22 reasonably equivalent value. And that is the basis –

23 THE COURT: Okay. So you say there is a connection

24 between the five point five million and then like the two

25 hundred thousand or whatever the stock notes were?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 13 of 202
14

1 MR. BRAZEAL: Yes, sir. And the same thing on the

2 other two loans, Your Honor. All of the loans were cross3 defaulted and you will see, Your Honor, that the two hundred

4 thousand dollar loans were cross-defaulted with the five point

5 five million; that if the debtor had ever stopped paying on the

6 two, two hundred thousand dollar notes, Mr. Horton would have

7 been able to call the five point five million due and payable.

8 So I would submit, Your Honor, that it is relevant and

9 that is why we had Mr. Slaton conduct that analysis.

10 THE COURT: Let’s talk for a minute about the solvency

11 issue.

12 MR. BRAZEAL: Yes, Your Honor. On the solvency issue,

13 when I went back and read the letter, I can understand why Mr.

14 Barriere would say, well, you just said in general opinions

15 from the other case. And, Your Honor, the thrust of Mr.

16 Averett’s May 31, 2005, report in the bank case, about which he

17 has been deposed ad nauseam, really deals with issues in Mr.

18 Alexander’s report, which in large part stem from the shoddy

19 shape of the debtor’s records. I mean, I remember when this

20 case was first filed, Your Honor, and we were down here and he

21 was telling horror stories about the debtor’s location. 

22 And so I’m not offering Mr. Averett to say here is the

23 value of the company at any particular point. That is what Mr.

24 Barriere was taking issue with because he would like to bring

25 in the appraiser and say there is four million dollars on land

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 14 of 202
15

1 that Mr. Averett used.

2 My point in Mr. Averett’s testimony, Your Honor, is

3 just to point out issues in the report of the trustee or the

4 trustee’s expert based largely upon the deficiencies in the

5 debtor’s records.

6 What I was going to suggest, Your Honor, I can largely

7 deal with those through cross-examination and I would just

8 request on that issue that at the end of cross-examination – I

9 mean, it may be that Mr. Averett’s testimony on that issue is

10 not even necessary.

11 THE COURT: Okay. Now on the issue, the earliest note,

12 the two notes to the family members, the wife and the daughter,

13 those were executed on November 10, 2000; is that correct? 

14 MR. BRAZEAL: Yes, Your Honor.

15 THE COURT: And guarantees were executed by Terry

16 Manufacturing at the same time?

17 MR. BRAZEAL: Yes, Your Honor.

18 THE COURT: And the other note involving Roy and

19 Rudolph Terry, that was somewhat later in time?

20 MR. BRAZEAL: No, it was executed the very same day.

21 THE COURT: Everything was on November 10?

22 MR. BRAZEAL: Yes, Your Honor.

23 THE COURT: Okay. Do you contend that Terry

24 Manufacturing was solvent on November 10, 2000? I mean is that

25 an issue?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 15 of 202
16

1 MR. BRAZEAL: Your Honor, I don’t think anybody can

2 say. My only point, and that is what I’m going to try to bring

3 out in Mr. Alexander’s cross-examination, is I don’t believe

4 that anybody can tell whether the company was solvent at that

5 point because of the deficiencies in the records.

6 THE COURT: Okay. So not to put too fine a point on

7 this, you’re just saying you don’t think the trustee can meet

8 his burden to prove solvency as of that date?

9 MR. BRAZEAL: On the solvency, that is right, Your

10 Honor.

11 THE COURT: All right. Well, here is what we will do,

12 then. The trustee has the burden of proof. He will go first.

13 We will let that rock along and then we are going to get to the

14 point where if you want to introduce something that Mr.

15 Barriere has got a problem with, I will make the call then. I

16 will be in a much better position. Frankly the case is a

17 little bit difficult to get my hands around. If I rule – I

18 will do one of three things. Either I will rule for Mr.

19 Barriere but then I will let you make an offer of proof so that

20 you have got a record of what it is you wanted in even if it

21 doesn’t come into evidence, so you have got it. You will want

22 that in the event of an appeal. I may rule in your favor. In

23 which case, it comes in over his objection and then he has got

24 the issue for appeal or, you know, the third option, I guess,

25 is we will figure something else out of that point and try to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 16 of 202
17

1 resolve the issue, you know, without a big battle.

2 But, anyway, I am not going to make the decision right

3 now. I will make the decision at the time you offer and he

4 makes an objection, and we will take that up.

5 So we will start, then, with Mr. Barriere.

6 MR. BARRIERE: Thank you, Your Honor.

7 Your Honor, I will beg the court’s indulgence. As I

8 think you probably heard, the computer system went down, so

9 we’re struggling a bit here.

10 Your Honor, before I start my opening, let me

11 approach, if I may, stipulations which I think may be a helpful

12 guidepost for the court were executed by the parties and filed

13 electronically on Friday of last week. I have a hard copy here

14 for the court.

15 Good morning, Your Honor. Brent Barriere. I

16 represent the trustee, along with Katie Lasky. The trustee is

17 here this morning.

18 Your Honor, the court indicated when we got started

19 this morning that it had some trouble getting its hands around

20 this case. I will suggest to you this is actually an unusual

21 matter in that I believe, with respect to the core transactions

22 at issue, most of the facts are stipulated.

23 By this action the trustee is seeking to recover just

24 in excess of five hundred and ninety-six thousand dollars paid

25 by Terry Manufacturing to N. D. Horton and James Reynolds.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 17 of 202
18

1 Those payments were with respect to three promissory notes,

2 which I will address now in some detail.

3 By way of background, Your Honor, Terry Manufacturing

4 is, as the court knows, in the uniform manufacturing business.

5 Starting in about 1990 it acquired caps from Perky Cap Company.

6 It was indeed Perky Cap’s largest customer. In 1994, Roy Terry

7 and Rudolph Terry acquired something in the range of thirty-two

8 percent of the stock of Perky Cap from Mr. Reynolds and Mr.

9 Horton. They put down cash. They gave a note. That note was

10 paid by Terry Manufacturing. It is not the subject of today’s

11 case. The statute of limitations has run on that.

12 In November an agreement is reached by which Cotina

13 Terry, who is Roy’s daughter, and Allie Robinson, who is

14 Rudolph’s wife, would each acquire ten percent of the common

15 stock of Perky Cap from Messrs. Horton and Reynolds. In order

16 to do so, they signed a two hundred thousand dollar promissory

17 note payable to those individuals individually.

18 Notably the stock was not registered in the name of

19 Terry Manufacturing. It did not receive any of the benefits of

20 a shareholder of Perky Cap. For example, Perky Cap is a sub S.

21 Corporation. It consistently lost money. And indeed one of

22 the questions that the court may be left with today is how a

23 company that lost literally hundreds of thousands of dollars

24 each year was valued at, for example, two hundred thousand

25 dollars or ten percent of its stock, but the one benefit a

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 18 of 202
19

1 shareholder did receive, because it was a sub S. Corporation,

2 there was a flow-through of those losses and that flow-through

3 went exclusively to Cotina Terry individually or Allie Robinson

4 individually.

5 The trustee has exhaustively reviewed the records,

6 including the tax returns actually filed by Terry Manufacturing

7 and it is abundantly plain that it received no benefits payable

8 to a shareholder, including taking recognition of those losses.

9 Notwithstanding the fact that Terry Manufacturing had

10 no interest in the stock, it made all payments on the

11 promissory notes. Those notes were paid timely. They were

12 never in default. Each Reynolds and Horton received two

13 hundred and thirty-four thousand, three hundred and seventy14 five dollars, and those facts, Your Honor, are not in dispute.

15 They have been stipulated to in the stipulation I handed the

16 court a moment ago.

17 Now the mere fact that Terry Manufacturing was making

18 those payments, and there they are, unfortunately they can’t be

19 read very clearly. I will assure the court, when you get to

20 the bottom of that list, and I have a hard copy for you, those

21 are the monthly installments that total two hundred and thirty22 four thousand.

23 Terry Manufacturing, and I will return to it in a

24 moment, was insolvent throughout that period. It remained

25 insolvent in May of 2000 when Roy and Rudolph Terry agreed to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 19 of 202
20

1 buy an additional block of stock from Horton and Reynolds for

2 six hundred and twenty-four thousand dollars.

3 As with the Cotina Terry and Allie Robinson notes, no

4 cash was exchanged. A promissory note was tendered in

5 satisfaction of the price. Now, quite friendly, Your Honor,

6 one serious question is this promissory note was supposedly

7 given in consideration of thirty-one percent, and I say

8 supposedly given in consideration because it is not apparent

9 that in fact that sale ever occurred; and indeed the trustee

10 will introduce evidence today to suggest that there was no

11 transfer of the stock.

12 In that regard, the court will see the federal tax

13 returns prepared by Mr. Horton’s personal account, David

14 Giddens, which shows the stock in 2002 and 2003, both after the

15 purported transfer, that stock remaining in the names of Mr.

16 Horton and Reynolds.

17 Also, in contrast to the sale to Cotina Terry and

18 Allie Robinson, where we have obtained production of actual

19 stock certificates, there are no stock certificates to Roy and

20 Rudolph Terry in connection with this 2002 purported transfer.

21 This is not particularly lucid, Your Honor, but what

22 I have put before the court is the 2001 K-1 for Perky Cap for

23 Mr. Horton. This K-1 would have been generated approximately

24 eleven months after the alleged sale to Roy and Rudolph Terry

25 and continues to show that stock in the name of N. D. Horton.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 20 of 202
21

1 Likewise, in the following year we have that stock

2 remaining in N. D. Horton’s name. Again, this is the K-1

3 prepared for Perky Cap by David Giddens, Mr. Horton’s personal

4 account. Likewise, the 2001 and 2002 K-1's for James Reynolds,

5 prepared by Mr. Giddens, show the stock remaining in his name

6 at all times.

7 Now, what raises serious doubt with respect to whether

8 this stock transfer ever occurred is that we will demonstrate

9 that commencing in the summer of 2002, at about the same time

10 as the stock sale, an entity known as Wholesale Distributors,

11 which is an entity controlled by Mr. Horton, and Terry

12 Manufacturing engaged in a series of swaps of bogus invoices.

13 Routinely Terry Manufacturing was issuing to Wholesale

14 Distributors millions of dollars of invoices reflecting sales

15 of product when, in fact, no product was being sold. At the

16 same time, Wholesale Distributors, which is, as an aside, a

17 distributor of components for mobile homes. It doesn’t produce

18 anything that would be used by Terry Manufacturing. Wholesale

19 Distributors was issuing back to Terry Manufacturing invoices

20 purporting to represent product that was being transferred when

21 none was actually being sold.

22 This is a memo from Rudolph Terry to Mr. Horton which

23 summarizes this swap of bogus invoices and related payments.

24 Terry Manufacturing is enclosing checks for one million, nine

25 hundred and fifteen thousand dollars. It is simultaneously

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 21 of 202
22

1 issuing invoices, one for a million five, another for five

2 hundred and ninety thousand dollars.

3 At the same time, Terry is to pick up a check for one

4 million, five hundred thousand dollars, and then will pick up

5 an additional check for five hundred and ninety thousand

6 dollars. So these are the payments on these bogus invoices.

7 Then Wholesale Distributors is to issue a new invoice for two

8 million, one hundred and forty thousand dollars to be paid by

9 Terry Manufacturing.

10 So what we have, Your Honor, for reasons that have

11 never been explained, documentation of transfers of product

12 going back and forth which plainly are not occurring; swapping

13 of invoices going back and forth; and related cash payments.

14 This, of course, is in late December of 2002. By that time, as

15 we will hear in a moment, Terry Manufacturing is in a desperate

16 condition. As the court will recall, it ultimately files for

17 Chapter 11 relief in July of 2003.

18 Why is this relevant, Your Honor? I submit it is

19 relevant because the purported stock sale, the stock sale that

20 was never reflected on the tax returns of Perky Cap, never

21 reflected on Mr. Horton’s K-1, is occurring at the same time

22 and we believe is part of the same general scheme of transfer

23 of instruments for reasons to demonstrate creditors’ activity

24 that is in fact not occurring.

25 THE COURT: Okay. So what you are saying is, even

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 22 of 202
23

1 aside from the question of a transfer for less than full

2 consideration, is this evidence of actual intent to defraud?

3 MR. BARRIERE: Exactly, Your Honor, but there was no

4 transfer at all.

5 Now what is certain, Your Honor, is that Terry

6 Manufacturing didn’t receive ownership of any stock; didn’t

7 receive any benefit of any stock; and on the Roy and Rudolph

8 note, paid a hundred and twenty-seven thousand, nine hundred

9 and eighty-six dollars. Indeed ironically as late as May, when

10 Terry Manufacturing isn’t paying any of its creditors, it is

11 continuing to make payments to Mr. Horton. 

12 It is not particularly legible, Your Honor, but that

13 is the list of monthly payments and, as the court can see, I

14 hope, the last of those occurs on June 2, 2003, or

15 approximately one month prior to the Chapter 11 filing, total

16 payments on that loan of a hundred and twenty-seven, nine

17 hundred and eighty-six thousand dollars – excuse me – a hundred

18 and twenty-seven thousand, nine hundred and eighty-six dollars.

19 Now, there is, as I said, Your Honor, no dispute that

20 the payments were made by Terry Manufacturing. There is no

21 dispute that all of the stock went to the insiders.

22 Nonetheless, we have been presented and the court will hear of

23 a sort of smorgasbord of value, purported value, which the

24 defendants would claim represents reasonably equivalent value.

25 I would ask, as the court considers that evidence, to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 23 of 202
24

1 recall that it is reasonably equivalent exchange for the

2 transfer. There must be an exchange. And the mere fact that

3 there are other unrelated transactions between the parties is

4 really of no moment.

5 With that in mind, let me address briefly the evidence

6 concerning the purported reasonably equivalent value. First,

7 we have been told that Terry Manufacturing needed to have some

8 interest indirectly in Perky Cap relating to the stock sale to

9 acquire head wear. The evidence will demonstrate that starting

10 long before even the initial transaction involving the Terrys,

11 Terry Manufacturing was Perky Cap’s largest customer; the

12 largest volume of caps were acquired well before these

13 transactions; and indeed during the years in question, Terry

14 Manufacturing either made loans to Perky Cap or cash payments

15 substantially in excess of the amount of caps it purchased.

16 Terry Manufacturing was a net lender to Perky Cap.

17 Secondly, there has been the suggestion that loans

18 made by American Real Estate to the Terrys individually somehow

19 provide reasonably equivalent value for these transactions; but

20 Mr. Horton, himself, has testified these were entirely

21 unrelated transactions.

22 We are now talking about the six hundred and twenty23 four thousand dollar note. The question was – and, of course,

24 since he is a party, his testimony is admissible at any time

25 for any purpose – “At the time Exhibit 14, the six hundred and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 24 of 202
25

1 twenty-four thousand dollar note, was signed by Roy and Rudolph

2 Terry, did you personally commit to them you would make

3 additional loans to either them personally or to Terry

4 Manufacturing?” “Not in connection with this. We were working

5 on that Terry Promotional Products, but it was two totally

6 different deals.” “Totally separate?” Answer, “Yes.”

7 And, Your Honor, we will have more of this testimony

8 during the course of the trial but the consistent theme is that

9 these other loans by other Horton entities were not in any way

10 tied to or, in the words of the statute, in exchange for these

11 stock sales and related payments.

12 Your Honor, as the court knows, a debtor can spend his

13 money as it wishes. He can throw it off of the side of the

14 bridge, give it to his mother, as long as he is solvent. So

15 the penultimate issue, of course, will be not only is there

16 value, was it reasonably equivalent value, but was Terry

17 Manufacturing solvent at the time of these transfers.

18 We will introduce evidence by the trustee that

19 commencing no later than December 31, 1999, Terry Manufacturing

20 was insolvent from a balance sheet standpoint. We will

21 likewise demonstrate that it had unreasonably small capital.

22 That, in point of fact, one of the reasons the Terrys were

23 engaged in the series of schemes that have been detailed both

24 in this proceeding and Roy Terry’s criminal conviction and

25 other cases that have been heard by this court, is that it did

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 25 of 202
26

1 not have adequate capital to pay its bills timely, in large

2 measure because the company was being looted.

3 Finally, we will demonstrate that Terry Manufacturing

4 was incurring debts beyond its ability to pay timely. Of its

5 four largest vendors, the range of terms was from thirty to

6 sixty days. In each instance, we will show that Terry was

7 consistently paying those bills hundreds of days late.

8 Your Honor, let me close on one other note. There has

9 been a suggestion, and this is primarily for legal argument, so

10 I will leave it to closing, that the Alabama statute permits

11 value to be interpreted not from the debtor’s standpoint but

12 from third parties, that if the debtor makes a transfer and the

13 transferor – or transferee, pardon me – gives some value to a

14 third-party, that is reasonably equivalent for purposes of the

15 Alabama statute.

16 The court’s question may be has there ever been a case

17 finding, and the answer to that is no. I would simply point

18 out that this theory, if adopted, really opens the doors to

19 massive looting by insiders. We could have the very

20 transaction we are looking at here, the debtor making

21 significant transfers to a party; that party giving some value

22 to the insiders; and that, according to the defendants, is an

23 acceptable arrangement. We do not believe that is the law. We

24 believe the case here will demonstrate that this case,

25 consistent with that triangular transaction, is a classic

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 26 of 202
27

1 instance of the debtor being looted to pay the insiders’

2 obligations. And we will ask at the close of the trial that

3 the court avoid that entire transaction and direct a return to

4 the estate of a little more than five hundred and ninety-six

5 thousand dollars.

6 THE COURT: Thank you.

7 MR. BARRIERE: Thank you, Your Honor.

8 MR. BRAZEAL: Good morning, Your Honor. Thank you for

9 the opportunity to give you a bit of an overview of the matters

10 which we say are germane, Your Honor. 

11 As Your Honor is aware, the trustee filed a motion for

12 summary judgment and the trustee does contend that it is a

13 fairly simple case. I wish it were, Your Honor. If all Mr.

14 Horton was going to be out was five hundred and ninety-six

15 thousand dollars, it would be a fairly simple case, Your Honor.

16 But, instead, and the testimony I would suggest, Your

17 Honor, will demonstrate that Mr. Horton and/or American Real

18 Estate, the company that he controls, loaned over eight and a

19 half million dollars to the debtor. Wholesale Distributors and

20 American Testing Laboratories that Mr. Barriere referred to

21 also advanced monies to the debtor. And as evidenced by the

22 proofs of claim filed in this action by the various entities

23 owned or controlled by Mr. Horton, there is over eight million

24 dollars still outstanding to Mr. Horton.

25 Judge, as Mr. Barriere indicated, the first

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 27 of 202
28

1 involvement between Mr. Horton and the Terrys began back in the

2 mid 1990s and, at that point in time, as Mr. Barriere

3 indicated, the Terry brothers purchased thirty thousand shares

4 of Perky Cap stock. Mr. Horton is going to testify about his

5 relationship with the Terrys.

6 Well, between 1994 and November 10 of 2000, there were

7 numerous other loans from Mr. Horton and/or American Real

8 Estate to Terry Manufacturing, all of which were paid timely,

9 all of which were paid in full, Your Honor. And the timeliness

10 of the payments were such that, if Mr. Terry was going to be a

11 day late, he would contact Mr. Horton and say I’m going to be

12 a day late with the payment. It came as a great shock to Mr.

13 Horton when all of this tanked and went into bankruptcy.

14 But, as Your Honor can see – maybe not great, Judge –

15 this is a five point five million dollar note, dated November

16 10 of 2000, and this reflected five point five million dollars

17 that was ultimately advanced to the Terry brothers and then the

18 evidence is going to show, Your Honor, ultimately made its way

19 into the debtor.

20 Judge, there were several million dollars that was

21 advanced and ultimately made its way into the debtor’s coffers.

22 Judge, our argument about reasonably equivalent value is that

23 on November 10 of 2000, at the point in time when the two stock

24 notes were executed by the Terry wife and the Terry daughter,

25 that five point five million dollars went into the debtor’s

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 28 of 202
29

1 coffers and that that – 

2 THE COURT: Okay. So do you believe the evidence is

3 going to show some sort of connection or relationship between

4 the five point five million and the stock notes?

5 MR. BRAZEAL: Yes, sir. And that connection is that

6 they were all cross-defaulted and –

7 THE COURT: Tell me what you mean by cross-defaulted.

8 Do you mean if any one goes into default, they all can be

9 declared in default?

10 MR. BRAZEAL: Yes, Your Honor, then they could all be

11 declared in default. And the other point about it, during Mr.

12 Horton’s examination where Mr. Barriere was asking him were

13 they totally separate, they were two separate deals in the

14 sense that one dealt with the five point five million was to be

15 used for an Internet business and the other was to be dealt

16 with Perky Cap, but they were not separate in the terms of

17 reasonably equivalent value, Your Honor.

18 Subsequent thereto, in August of 2001, another one

19 point five million dollars was loaned to the debtor by American

20 Real Estate. Similar to the prior five and a half million

21 dollars, this one and a half million dollars was also cross22 defaulted. If at any point in time any of the payments that

23 are being sued for by the trustee had not been made, all of the

24 loans at issue could have been called and that would’ve been

25 over seven million dollars.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 29 of 202
30

1 Later, Your Honor, in May of 2002 – (Pause). I don’t

2 know why it is not opening. Well, in May of 2002, when the

3 second stock or actually the third set of stock purchase took

4 place, the Terrys communicated with Mr. Horton that they wanted

5 to completely take over Perky Cap, which they essentially did

6 except for the stock that remained owing to or owned by Mr.

7 Jack Perkinson. 

8 Contrary to Mr. Barriere’s assertion that the stock

9 purchase never took place, if I could open the exhibit, Your

10 Honor, I have Exhibit 46 which has the bill of sale of the

11 common stock that occurred on May 30 of 2002, which is where

12 the Terrys acknowledged receipt of this additional stock. I

13 also have the two exhibits which reflect the resignation of Mr.

14 Horton and Mr. Reynolds as officers of Perky Cap and from the

15 board of Perky Cap.

16 So regardless of what his tax returns show, regardless

17 of whether his accountant got the information right, there was

18 a stock sale that occurred and the Terrys took over control of

19 Perky Cap.

20 Well, Your Honor, when the Terrys took over control of

21 Perky Cap in May of 2002, they utilized the assets of Perky Cap

22 to go to Peoples Bank of Eatonton. And Your Honor has already

23 heard some about that in a related matter. The Terrys utilized

24 assets of Perky Cap, along with the assistance of Mr. Horton,

25 to obtain a one point five million dollar loan from Peoples

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 30 of 202
31

1 Bank which then went into the debtor.

2 So in May of 2002 when this additional or this third

3 stock sale took place, one point five million dollars was

4 borrowed and placed into the debtor and, but for the purchase

5 of that additional stock, Mr. Horton and Mr. Reynolds would not

6 have stepped down from the board and Perky Cap would not have

7 been able to borrow the money and place it into the debtor.

8 And, Judge, I apologize. Before my witness gets on

9 the stand, I will figure the computer out.

10 My final comment, Your Honor, is this, and it is

11 directed to Mr. Barriere’s comments about the Alabama

12 Fraudulent Transfer Act. Judge, the Alabama Fraudulent

13 Transfer Act contains language that is different from the

14 Uniform Act and from virtually any other state. The Alabama

15 act says that – and it is under Alabama code section 8-9A-8(d)

16 – it provides that if in a triangular transaction the

17 transferee – in this case, Mr. Horton – provides value to

18 someone other than the debtor, then he gets the benefit of

19 that. Okay.

20 The point about it is – and there are cases

21 essentially to that effect. The Rubin versus Manny Hanny case

22 that we talked about earlier, Your Honor, and others, which

23 say, look, if the transferee gives some benefit either in the

24 value of the Perky Cap stock or in the reduction of the debt of

25 the Terrys individually, then the transferee is entitled to an

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 31 of 202
32

1 offset in that amount. And that is the provision in the code

2 that Mr. Barriere and I are at issue about. And I would submit

3 to you, Your Honor, that when you look at the case law dealing

4 with triangular transactions, that the Alabama case will allow

5 us to have an offset of the value that was provided to the

6 Terrys. And as Your Honor is well aware, there are numerous

7 cases that say that value is – or that reduction of an

8 antecedent debt is tantamount to value.

9 So we believe, Your Honor, that every time there was

10 a dollar for dollar reduction in the debt owing from the Terry

11 individuals to Mr. Horton and Mr. Reynolds, that that conveyed

12 value to those parties and that that value gets attributed or

13 they get credit for that in the claims brought by the debtor.

14 THE COURT: Wait a minute. Well, we will get into that

15 later.

16 MR. BRAZEAL: Thank you, Judge.

17 THE COURT: Why don’t we do this: Why don’t we break

18 for about ten minutes? Bill, maybe you could get Carlene up

19 here. He is having trouble opening one of those PDF’s. I

20 mean, you should just be able to right-click and open it. It

21 should just pop right up. That should do it right there and it

22 is not opening. It is not doing it. Oh, there she is.

23 Carlene, why don’t you come on in? We are going to break for

24 about ten minutes and why don’t you have a look at the

25 computer. Thank you.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 32 of 202
33

1 (Recess from 10:09 a.m. until 10:27 a.m.)

2 THE COURT: Please have a seat. Mr. Barriere, I think

3 you are up.

4 MR. BARRIERE: Your Honor, I would like to at this time

5 mark and introduce into evidence Plaintiff’s Exhibits 1 through

6 48, previously provided to Mr. Ellis and I don’t think he has

7 any objection.

8 MR. BRAZEAL: No objection, Your Honor.

9 THE COURT: All right. Plaintiff’s 1 through 48 are

10 admitted without objection.

11 MR. BARRIERE: Your Honor, I also made – we are going

12 to have some PowerPoints with Mr. Alexander and we made hard

13 copies just in case you find that on the wall to be illegible.

14 THE COURT: Okay. 

15 MR. BARRIERE: Your Honor, the trustee would call the

16 trustee.

17 THE COURT: Okay. Let’s just make sure. I didn’t know

18 if there was a separation of witnesses or who these folks are.

19 MR. BRAZEAL: No, not unless they want to call Ms.

20 Horton.

21 THE COURT: I am sorry?

22 MR. BRAZEAL: Judge, this is Ms. Horton and a gentleman

23 that works for Mr. Horton. We are not –

24 THE COURT: Okay. I just wanted to make sure we hadn’t

25 created a problem.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 33 of 202
34

1 MR. BARRIERE: I am not intending to call them.

2 THE COURT: Okay. Then you folks are welcome to come

3 and go as you please. Thank you.

4 MR. BARRIERE: Mr. Alexander, would you take the stand,

5 sir.

6 (J. LESTER ALEXANDER, III, WITNESS, SWORN)

7 DIRECT EXAMINATION

8 BY MR. BARRIERE: 

9 Q. Good morning, Mr. Alexander. Would you state your

10 full name and address for the record, sir?

11 A. My name is Julian Lester Alexander, III. My address

12 is Suite 1400, 2 Twentieth Street North, Birmingham, Alabama.

13 Q. By whom are you employed, sir?

14 A. AEA Group.

15 Q. And what is your position with the AEA Group?

16 A. I am the managing principal and president.

17 Q. What is your profession, sir?

18 A. I am a CPA.

19 Q. All right. You act as trustee in the Terry

20 Manufacturing and Terry Uniform cases; is that correct?

21 A. I do.

22 Q. All right. Could you give the court a brief summary

23 of your educational background, beginning with your graduation

24 from college, sir?

25 A. I attended the University of Alabama and graduated

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 34 of 202
35

1 with a business degree and a concentration in accounting. I

2 have sat for and passed the CPA exam and I am licensed in

3 approximately three states.

4 Q. When were you first licensed in the state of Alabama?

5 A. 1981.

6 Q. Has your license as a CPA remained in full force since

7 1981?

8 A. Yes, it has.

9 Q. Has it ever been subject to suspension or revocation

10 proceedings?

11 A. No.

12 Q. What other states are you a certified public – in what

13 other states are you recognized, pardon me, as a certified

14 public accountant?

15 A. Florida and Tennessee.

16 Q. All right. Are you a certified fraud examiner?

17 A. Yes, I am.

18 Q. Would you explain to the court what is a certified

19 fraud examiner?

20 A. A certified fraud examiner is a professional

21 designation given by an organization to individuals who have a

22 special concentration in investigating fraud.

23 Q. In the trial binder we placed on the witness stand,

24 Exhibit, I believe, 48 is the expert report that you rendered

25 in this case; is that correct? I am sorry, 44. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 35 of 202
36

1 A. Exhibit 44 is my expert report, yes.

2 Q. And attached thereto, is that a true and correct copy

3 of your current curriculum vitae?

4 A. It is the version at that time. It has been updated

5 for little things like now I have crossed the twenty-seven-year

6 mark of professional practice.

7 Q. I congratulate you, sir. 

8 A. Thank you.

9 Q. Sir, were you asked to do an analysis of the payments

10 made by Terry Manufacturing to Mr. Reynolds and Mr. Horton in

11 connection with notes given by Cotina Terry, Allie Robinson and

12 Roy and Rudolph Terry?

13 A. I was, yes.

14 Q. Have you done so?

15 A. I have.

16 Q. Were you asked to perform an analysis of whether Terry

17 Manufacturing’s liabilities exceeded the fair value of its

18 assets during the period of November 2000 through July of 2003?

19 A. Yes, I was.

20 Q. Were you asked to perform an analysis of whether Terry

21 Manufacturing had adequate capital during that same time

22 period?

23 A. Yes.

24 Q. Did you in fact perform an analysis of whether Terry

25 Manufacturing’s assets – strike that – whether Terry

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 36 of 202
37

1 Manufacturing’s liabilities exceeded the value of its assets

2 during that time frame?

3 A. Yes, I have.

4 Q. All right. And you’re prepared to testify to that

5 here today?

6 A. I am.

7 Q. Did you reach conclusions with respect to the

8 adequacy, the reasonableness of Terry Manufacturing’s capital

9 during that same time frame?

10 A. I have, yes.

11 Q. And you’re prepared to testify with respect to that

12 topic today?

13 A. I am.

14 Q. Finally, sir, were you asked to perform an analysis of

15 whether Terry Manufacturing incurred debts beyond its ability

16 to pay timely during the period of November of 2000 through

17 July of 2003?

18 A. I have.

19 Q. You have performed such an analysis?

20 A. Yes, I have.

21 Q. And you’re prepared to address that topic today?

22 A. I am prepared, yes.

23 MR. BARRIERE: Your Honor, the court has obviously

24 accepted Mr. Alexander as an expert in the past. 

25 Q. Mr. Alexander, have you been accepted as an expert in

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 37 of 202
38

1 other courts besides this bankruptcy court?

2 A. Yes.

3 Q. All right. Have you been accepted as an expert in the

4 United States District Court for the Middle District of

5 Alabama?

6 A. Yes, I have.

7 Q. Have you been accepted as an expert on business

8 valuation?

9 A. Yes.

10 Q. Have you been accepted as an expert as an accountant

11 involved in the reconstruction of financial records?

12 A. Yes.

13 Q. Have you been accepted as an expert in the area of

14 fraud examination and have testified with respect to certain

15 transactions evidencing fraud?

16 A. Yes.

17 Q. And you have been accepted in both federal and state

18 courts here in Alabama?

19 A. Yes.

20 MR. BARRIERE: Your Honor, I can obviously prolong this

21 but I would tender Mr. Alexander at this time as an expert to

22 testify with respect to the topics I just outlined.

23 MR. BRAZEAL: I have no objection in that regard.

24 THE COURT: All right. 

25 Q. Mr. Alexander, when were you appointed trustee of

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 38 of 202
39

1 Terry Manufacturing and Terry Uniforms?

2 A. July of 2003.

3 Q. All right. The companies were in Chapter 11 at that

4 time?

5 A. Yes, they had already filed.

6 Q. Were you reappointed as trustee when the cases were

7 converted to Chapter 7s in May of 2004?

8 A. Yes, I was.

9 Q. All right. Can you describe for the court generally

10 what you found the condition of the financial records of Terry

11 Manufacturing at the time you assumed your duties as trustee?

12 A. Well, generally speaking, the records were in a

13 complete disarray. Filing cabinets had been opened up and

14 dumped on desks. It was a real mess.

15 Q. Did you take control of the records at that time?

16 A. Yes, I did.

17 Q. Can you describe for the court generally – we will go

18 into this in more detail – can you describe for the court

19 generally what you have attempted to do to reconstruct the

20 financial records as you found them in July of 2003?

21 A. Generally speaking, we started with third-party

22 information. We collected it on-site but we worked with bank

23 statements and then supplemented the information that way, and

24 then we went to public records looking for title searches and

25 liens and that type of information. And the last step was to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 39 of 202
40

1 review the documents at Terry Manufacturing.

2 Q. Did you collect, to the extent you could, all checking

3 account statements for Terry Manufacturing?

4 A. Yes.

5 Q. How many bank accounts did Terry Manufacturing have?

6 A. I am not ready for that one. More than twenty.

7 Q. And these were several banks?

8 A. Yes, several different institutions, yes.

9 Q. At the time you assumed your duties as trustee, were

10 there certain records that you would have anticipated a company

11 of the size and revenues that Terry Manufacturing would have

12 that you could not locate?

13 A. Yes.

14 Q. What sort of records are you referring to?

15 A. Well, they didn’t have a general ledger accounting

16 system. They didn’t have fixed asset accounting. Other than

17 the McDonald’s operation, they had no inventory or accounts

18 receivable accounting, and generally their purchasing system

19 represented a listing of manual checks.

20 Q. What about a computer system; were their financial

21 records maintained on any sort of computer system?

22 A. Well, they did have a computer system on site. It had

23 virtually no information on it. And also we were told when we

24 arrived there were approximately ten personal computers that

25 had been taken off-site and we have been unable to recover

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 40 of 202
41

1 those and I don’t know what is on those computers.

2 Q. Very well. I want to focus, if we can, rather than on

3 the broad issue of records, on the specific records you looked

4 at with respect to the three notes at issue here. You are

5 aware, sir, that Cotina Terry provided a promissory note to N.

6 D. Horton and James Reynolds?

7 A. Yes.

8 Q. All right. Did you attempt to reconstruct the amount

9 of payments made on that note by Terry Manufacturing?

10 A. Yes.

11 Q. Could you describe the methodology employed?

12 A. Well, we used payments clearing with the bank accounts

13 to reconstruct it.

14 Q. Did you look at the actual canceled checks?

15 A. Yes. They are photocopy images they came from the

16 banks but, yes.

17 Q. All right. Did you calculate the total amounts paid

18 by Terry Manufacturing on the Cotina Terry note?

19 A. Yes.

20 Q. And what is that amount?

21 A. It is two hundred and thirty-four thousand, three

22 hundred and seventy-six dollars.

23 Q. Now you are aware that Allie Robinson gave a note in

24 the same amount at the same time, November 10, 2000?

25 A. I am.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 41 of 202
42

1 Q. All right. Did you likewise attempt to calculate the

2 amount paid on that note by Terry Manufacturing?

3 A. We followed the same procedure, yes.

4 Q. And what was the amount paid on Ms. Robinson’s note?

5 A. The same amount, two hundred and thirty-four thousand,

6 three hundred and seventy-six dollars.

7 Q. And all of these payments were from the coffers of

8 Terry Manufacturing?

9 A. Yes.

10 Q. All right. Did you find any evidence whatsoever that

11 either Cotina Terry or Allie Robinson reimbursed the company

12 for those payments?

13 A. No, there is no evidence, no.

14 Q. Do you have an opinion as to whether in fact they

15 reimbursed the company for those payments?

16 A. I do have an opinion.

17 Q. And what is that?

18 A. That they did not reimburse the company.

19 Q. All right. Have you reviewed the Terry Manufacturing

20 tax return, federal tax returns I am referring to?

21 A. Yes.

22 Q. All right. Did you ascertain that there were multiple

23 sets of tax returns for the same year?

24 A. I did, yes.

25 Q. Would you explain to the court what you mean by that?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 42 of 202
43

1 A. Upon arrival we found two sets of tax returns, one set

2 for years dating back to approximately 1999, maybe longer, that

3 showed profits that could be reconciled to the supposed audited

4 financial statements; and then we found penciled copies of

5 another version, as well as an analysis weighing the pros and

6 cons of filing profit returns versus filing loss returns, and

7 the penciled copies reflected losses for all of those years.

8 Q. All right. What steps, if any, did you take to

9 ascertain which returns were actually filed with the federal

10 government?

11 A. Well, immediately we contacted the IRS and, in my

12 position, they were able to confirm to me via fax key amounts

13 on the tax returns as filed, which confirmed that the returns

14 showing losses were filed and then, subsequent to that, we

15 received the actual filed returns from the IRS.

16 Q. All right. So as I understand your testimony, there

17 was a set filed with the federal authorities showing losses,

18 there was another set floating around which showed profits; is

19 that correct?

20 A. That is correct.

21 Q. And how, as you understood it, were the returns

22 showing profits employed by Terry Manufacturing or by the

23 Terrys?

24 A. It is my understanding they were used in connection

25 with soliciting debt and investments.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 43 of 202
44

1 Q. On what do you base that understanding?

2 A. Well, I was told that my bankers and I believe there

3 has been testimony to that effect.

4 Q. All right. You have now obtained the actual tax

5 returns filed with the Internal Revenue Service?

6 A. Yes.

7 Q. And those are the returns that show the losses

8 incurred by Terry Manufacturing?

9 A. That is correct.

10 Q. Do those tax returns in any way evidence that Terry

11 Manufacturing was able to take advantage of losses by Perky

12 Cap?

13 A. No, they do not.

14 Q. Are you aware that Perky Cap is a sub S. Corporation?

15 A. I am.

16 Q. Are stockholders of a sub S. Corporation in a position

17 to take their proportionate share of losses of the corporation?

18 A. Generally speaking, yes.

19 Q. All right. Did you review the actual filed tax

20 returns to determine whether Terry Manufacturing took advantage

21 of any losses flowing from Perky Cap?

22 A. Yes, I did review them.

23 Q. And what did you find in that regard?

24 A. There is no Perky Cap losses reported on the tax

25 returns.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 44 of 202
45

1 Q. In your review of the Terry Manufacturing records, did

2 you find any evidence that any stock of Perky Cap was

3 registered in the name of Terry Manufacturing?

4 A. I found no such evidence, no.

5 Q. All right. Sir, you’re also aware, are you not, of

6 the promissory note given by Roy and Rudolph Terry to Mr.

7 Horton and Mr. Reynolds on or about May 20, 2002?

8 A. I am, yes.

9 Q. You have reviewed a copy of that promissory note?

10 A. It is May 30 but, yes.

11 Q. May 30, pardon me. And have you attempted to

12 calculate the amounts paid on that promissory note?

13 A. I have.

14 Q. Did you employ the same methodologies you described

15 for the calculation of the amounts paid on those other two

16 notes?

17 A. Yes.

18 Q. All right. What did you determine to be the amount

19 paid by Terry Manufacturing?

20 A. One hundred and twenty-seven thousand, nine hundred

21 and eighty-six dollars.

22 Q. All right. Now, I have put up on the screen a slide

23 that totals those amounts of five hundred and ninety-six

24 thousand, seven thirty-eight. Is that your calculation of the

25 total amount paid by Terry Manufacturing in connection with

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 45 of 202
46

1 these three notes?

2 A. Yes, it is.

3 Q. And just so the record is clear, did you find any

4 evidence whatsoever that Roy and Rudolph Terry may have

5 reimbursed the company for payments it made on their behalf?

6 A. No.

7 Q. Do you have an opinion as to whether they did so?

8 A. It is my opinion they did not.

9 Q. Sir, now, I would like to turn, if I may, next to your

10 efforts to reconstruct the financial statement of Terry

11 Manufacturing to determine whether it was solvent or insolvent

12 at various points in time.

13 MR. BARRIERE: Your Honor, there should be a hard copy

14 of that both in the PowerPoints I handed up to you, as well as

15 the expert report.

16 THE COURT: Okay. I have got it. 

17 Q. Is this your work product, Mr. Alexander?

18 A. Yes, it is.

19 Q. All right. I would like to focus, if I may, initially

20 on the period ending December 31, 1999. First, let me ask you,

21 sir, did you find financial statements of Terry Manufacturing

22 dating to December 31, 1999?

23 A. I did.

24 Q. And what did those reflect with respect to whether the

25 company was solvent or insolvent?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 46 of 202
47

1 A. They showed a profitable, solvent company.

2 Q. All right. I take it that you have concluded those

3 were erroneous?

4 A. Yes, I have.

5 Q. All right. Could you give the court an overview of

6 how you have concluded that those financial statements were not

7 accurate?

8 A. Well, generally speaking, the assets are overstated,

9 mainly inventory and accounts receivable, fixed assets and

10 investments, and the liabilities are understated. The sales

11 are overstated and the costs are understated.

12 And the way we determined that was initially I was

13 brought in with the statement by Southtrust Bank that Roy Terry

14 had essentially recalled his 2003 financial statements because

15 of a thirty-two million dollar inventory and accounts

16 receivable discrepancy. So when I came in, it was already

17 known that in 2003 there was thirty-two million dollars

18 missing.

19 Q. All right. So just so the record is clear, Mr. Terry

20 had acknowledged that the accounts receivable and inventory

21 were overstated by thirty-two million dollars?

22 A. That is correct.

23 MR. BRAZEAL: We would object, Your Honor, and move to

24 strike. I mean, if Mr. Terry told that to Mr. Alexander, that

25 is fine, but if he learned that from a bank officer, I’m not

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 47 of 202
48

1 sure that is appropriate, Your Honor. It would be hearsay.

2 MR. BARRIERE: Well, he is acting here as an expert,

3 Your Honor, so I think the rules are significantly low with

4 respect to what he can attest to.

5 THE COURT: Well, I will overrule the objection and

6 allow it to the extent it impacts upon his opinion but, if

7 there is a difference, I will not allow it as to the underlying

8 substance of what he said.

9 MR. BRAZEAL: Thank you, Judge. And, for the record,

10 I mean, we don’t dispute that the financial statements were

11 fraudulent. I’m not sure about the thirty-two million. Thank

12 you, Your Honor.

13 BY MR. BARRIERE: 

14 Q. Mr. Alexander, I would like, if I could, to walk

15 through with you your reconstructed financial statements and

16 ask you the specific sourcing for conclusions you reached in

17 this statement. 

18 Let’s focus, if we may, initially on December 31,

19 1999. You are showing cash at that time of two hundred and

20 twenty-four thousand dollars. Am I reading that correctly?

21 A. That is correct.

22 Q. And where did you obtain that figure from?

23 A. From Schedule “L” of the tax returns that were filed

24 with the federal government.

25 Q. All right. Have you done anything to attempt to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 48 of 202
49

1 confirm the accuracy of the figure that appeared on schedule

2 “L?” 

3 A. We have, not in 1999 but in other years we have.

4 Q. And what have you done in that regard?

5 A. We have rebuilt the cash account amount based on bank

6 statements, deposits in transit and checks in transit.

7 Q. Have you determined, based on that analysis, that

8 Schedule “L” is generally consistent with what you have found

9 to be the cash reserves at year-end?

10 A. With respect to – there are differences that go either

11 way but, with respect to an opinion on solvency, it made

12 absolutely no difference.

13 Q. So I take it by that, there may be a little more or a

14 little less cash in the accounts than set forth in Schedule “L”

15 but it is immaterial to your ultimate conclusion?

16 A. That is correct.

17 Q. Okay. Now your next figure is accounts receivable

18 that you show to be two million, three hundred and fifty-six

19 thousand dollars. What was the source of that information?

20 A. The same 1120 filed with the federal government.

21 Q. Were you able to reach an opinion as to whether the

22 filed tax returns, not those that were being used for finance

23 purposes, those that actually went to the federal government,

24 whether those appeared to accurately reflect Terry

25 Manufacturing’s operations during the course of a given year?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 49 of 202
50

1 A. To the extent it is a reasonable proxy, yes, because

2 two things that we located. One was there was an actual

3 analysis done. We recovered it from Sydney Johnson’s office,

4 who was the, for lack of a better description, the controller,

5 weighing the pros and cons of filing what I will call loss

6 returns versus filing profit returns which were fraudulent. So

7 that seemed evidenced to me of deciding to file real numbers

8 versus fraudulent, inflated numbers, and they ultimately

9 concluded to file the real numbers and still falsify the tax

10 returns and give those to the bank.

11 Second, we have got the penalties of perjury and all

12 of the other things that can happen to you if you commit tax

13 fraud, which is another motive or incentive from a fraud

14 investigator point of view that would lead me to conclude that

15 the tax returns are a reasonable proxy for the right numbers.

16 And then the last reason is the tax return assets are

17 significantly lower on the filed tax return than the financial

18 statements and the profits are lower. So it leads me to

19 conclude they are probably are accurate.

20 Q. Okay. You valued the inventories at 12-31-99 at six

21 million, three hundred and seventy-five thousand dollars. From

22 what did you obtain that information?

23 A. In the case of inventory, we took inventory amounts

24 and then marked them up as if they were finished based on our

25 study of the cash receipts and cash flows from approximately

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 50 of 202
51

1 2000 until the bankruptcy date. We were able to determine a

2 profit margin. So we marked up the inventory amounts to fair

3 market value.

4 Q. What was the base amount you used for inventory? You

5 said you marked it up, but where did you start with, what was

6 that figure?

7 A. Well, in the ‘98 and ‘99, 2000 and 2001 year, we used

8 the tax return to mark it up.

9 Q. All right. And then you would mark it up to show a

10 profit for a finished product?

11 A. That is correct.

12 Q. And how did you calculate that mark up?

13 A. We studied the cash flows coming from their three main

14 lines of business, the cash in versus the cash out, to come up

15 with a mark up.

16 Q. And that was an average markup for those three lines

17 of business?

18 A. It was average for all three for the approximately

19 three-year period.

20 Q. And just so the record is clear, what are those three

21 lines of business of Terry Manufacturing?

22 A. They have a McDonald’s line business, a licensed

23 apparel goods for McDonald’s. They had a Department of Defense

24 contract to manufacture battle dress uniforms; and then they

25 had a series of contracts with the Forestry Department to make

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 51 of 202
52

1 fire retardant protective material, uniforms.

2 Q. The next figure you have is land and buildings, three

3 hundred thousand dollars. Do you see what I am referring to?

4 A. Yes.

5 Q. All right. Could you describe to the court what land

6 and buildings were owned by Terry Manufacturing?

7 A. While Terry Manufacturing had three locations, they

8 only owned one of them. It was a location in Roanoke, Alabama.

9 It was a former schoolhouse that had some modifications and

10 renovations done to it.

11 Q. You chose the figure of three hundred thousand

12 dollars; is that correct?

13 A. That is correct.

14 Q. And on what did you base that?

15 A. We immediately, I guess within a couple of months of

16 my appointment, began marketing on a dual track the business as

17 a whole and the individual assets, and ultimately were able to

18 identify and find a buyer for the land. The buyer that ended

19 up buying it really bought the warehouse and the land for

20 expansion, and so I have used that transaction as a reasonable

21 proxy for fair market value.

22 Q. How many buyers did you solicit in connection with

23 that sales effort?

24 A. Well, there was over eighteen potential buyers that

25 were brought in, in one capacity or another, and every one of

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 52 of 202
53

1 them we attempted to market either the company as a whole or

2 individual assets, including the real estate. 

3 There were six principal buyers that I would call more

4 likely than not strategic buyers. Crest is one, which is a

5 competitor. In fact, I’m going to refer to my cheat sheet

6 here. There is Higgins Manufacturing; American Apparel; White

7 Star Sports Gear; The Brian Jordan Group; The Al Whitfield

8 Group; and Crest Uniform; and then there were others.

9 Q. Now are you aware, sir, that there were appraisals of

10 these properties made from time to time?

11 A. I am.

12 Q. Have you reviewed those in connection with your duties

13 as trustee?

14 A. I did. In reaching my decision of value, I gave

15 consideration to all of the appraisals that I was aware of and

16 still am aware of in this case.

17 Q. Let me show you a –

18 MR. BARRIERE: And this is not part of the record, Your

19 Honor. I will approach the witness if I may. This will be

20 Exhibit 49, Your Honor.

21 Q. Do you recognize this to be the appraisal performed on

22 the property by Real Estate Appraisers, LLC, in January of

23 2004?

24 A. Yes.

25 Q. What conclusion did that appraiser reach with respect

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 53 of 202
54

1 to the fair market value of this property?

2 A. John Hall reached the conclusion that the property was

3 worth seven hundred and seventy-seven thousand dollars.

4 Q. All right. You did not include that figure; is that

5 correct?

6 A. I did not use that number, no. I did consider using

7 it and decided not to.

8 Q. Over what period of time did you attempt to market

9 this property?

10 A. Oh, gosh, over a year. I can’t remember exactly.

11 Q. All right. So this was not a sheriff’s sale or a

12 liquidation sale that you engaged in?

13 A. No.

14 Q. Now let me just ask you, sir, had you chosen Mr.

15 Hall’s seven hundred and seventy-seven thousand approximate

16 figure, what effect, if any, would it have upon your opinion as

17 to the solvency of this company at any time during December of

18 1999 and 2003?

19 A. I’m sorry, Brent. I am still rethinking. I think it

20 was approximately a year on time of market. I am sorry. 

21 Q. That’s fine. My question simply was if you had used

22 Mr. Hall’s appraised figure, would it have had any effect on

23 your conclusion with respect to solvency?

24 A. No.

25 Q. Now obviously one of the challenges presented, sir, is

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 54 of 202
55

1 you were attempting to market this property in the 2003/2004

2 timeframe, and we are now talking about its value in 1999. In

3 connection with your duties as an expert, did you attempt to

4 ascertain what had been market trends for properties of this

5 type during that approximate four year period?

6 A. Yes, I did.

7 Q. And what were you told in that regard?

8 A. Well, I learned that within a fifty mile radius to a

9 hundred mile radius of the plant, there were numerous

10 properties that had been on the market for long, long time,

11 much longer than the time we had ours on the market.

12 Q. Okay. What advice or what expert opinions were

13 provided by Mr. Hall with respect to the trend in the market

14 for this property? It had gone up in that four year period,

15 stayed the same, gone down?

16 A. As it relates to ‘99 versus 2003? 

17 Q. Yes, sir. 

18 A. Mr. Hall, I recall him testifying that the market has

19 gotten better since 1999, market conditions have improved.

20 While it might be marginally, they have improved.

21 Q. So based upon that, your three hundred thousand dollar

22 figure from 2003 may actually be higher than the property would

23 have brought in 1999; is that correct?

24 A. That is correct.

25 Q. All right, sir. I would like to turn next to the

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 55 of 202
56

1 fixed assets. What sort of property does this include?

2 A. It is principally textile equipment, apparel

3 manufacturing equipment, sewing machines, embroidery machines,

4 that type of equipment.

5 Q. And on what did you base your figure of three hundred

6 and fifty-four thousand dollars?

7 A. The actual sales of that equipment.

8 Q. All right. Now, sir, when you became trustee, did you

9 become aware of a purported appraisal of this equipment showing

10 a value well in excess of three million dollars prepared by

11 Henderson Sewing Machine?

12 A. Yes.

13 Q. All right. Did you do any investigation concerning

14 that appraisal?

15 A. Yes.

16 Q. What did you do in that regard?

17 A. Well, I discovered a marked-up copy, a cut and paste

18 marked-up copy of that in, I believe, Sidney Johnson’s office

19 reflecting different amounts.

20 Q. Did it appear it was a document generated by someone

21 at Terry Manufacturing as opposed to Henderson Sewing?

22 A. Yes.

23 MR. BRAZEAL: I’m going to object to that, Your Honor.

24 I can take that up on cross. It is just hard for me to imagine

25 that the man can say I have read this report and I can tell who

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 56 of 202
57

1 doctored it, if in fact it was doctored.

2 THE COURT: Okay. Well, I am going to overrule. You

3 can do that on cross.

4 BY MR. BARRIERE: 

5 Q. Well, let me ask you, sir, on the – the doctored

6 version, we will call it, was found where?

7 A. In the offices of Terry Manufacturing.

8 Q. Was there any handwriting on that doctored version?

9 A. Yes.

10 Q. And whose handwriting did that appear to be?

11 A. It appeared to be Roy Terry’s handwriting.

12 Q. And what did you base that conclusion on?

13 A. Roy Terry maintained meticulous journals, handwritten

14 notes. I have got logs and logs of them and the handwriting

15 was consistent with the handwriting in Roy’s personal journals.

16 Q. All right. Are you aware that Mr. Henderson has been

17 called to testify in proceedings brought by you?

18 A. Yes.

19 Q. You reviewed his deposition?

20 A. I have.

21 Q. You are aware that he has testified that this was a

22 bogus appraisal; are you not?

23 A. Yes, I am.

24 Q. Now are you aware of Mr. Henderson’s opinion with

25 respect – strike that. Are you aware generally of the nature

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 57 of 202
58

1 of Mr. Henderson’s business?

2 A. Yes.

3 Q. What line of business is he in?

4 A. He buys and sells textile manufacturing equipment.

5 Q. To your knowledge and based upon his testimony under

6 oath, does Mr. Henderson in fact provide appraisals, not the

7 one you looked at but does he provide legitimate appraisals

8 from time to time?

9 A. Yes, he does.

10 Q. All right. Are you aware based upon his sworn

11 testimony as to what he believes to have been the value of the

12 fixed equipment?

13 A. I am.

14 Q. And what is that figure?

15 A. He believed that, after he reconditioned it, he could

16 sell it for somewhere around two hundred thousand dollars.

17 Q. All right. So the figure you reached for the sale was

18 actually greater than the appraised amount; is that correct?

19 A. Yes.

20 Q. All right. Let’s turn next to the 431 building. What

21 is that?

22 A. The 431 building was a warehouse located on Highway

23 431.

24 Q. Okay. It does not appear as an asset after December

25 31, 2000. Why is that the case?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 58 of 202
59

1 A. It was sold to the Marshalls.

2 Q. The marshals as in sheriffs or – 

3 A. Oh, no, the Marshalls. I have forgotten their first

4 names, but they are stockholders of the company.

5 Q. Okay. It was sold for a million dollars?

6 A. Yes.

7 Q. And that is why you used that figure?

8 A. That is correct.

9 Q. Okay. And, finally, there is land sold to Rudolph

10 Terry. On what did you base that value?

11 A. I based it on the information we have for the proceeds

12 of that sale.

13 Q. All right. Three hundred and forty-one thousand

14 dollars?

15 A. Yes.

16 Q. All right. And that is property located where?

17 A. Let me put my glasses on. At this time, I can’t

18 recall where the property was located.

19 Q. All right. So totaling all of those figures you came

20 up with a total value of the assets of ten million, nine

21 hundred and fifty thousand dollars; is that correct, sir?

22 A. That is correct.

23 Q. Let’s turn to the liability side of the ledger, if we

24 may. The first is the accounts payable of three million, nine

25 hundred and seven thousand dollars. The first question I have

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 59 of 202
60

1 for you is where did you derive that figure from?

2 A. I used the “as filed” tax returns or the “loss”

3 returns.

4 Q. Did you do anything to confirm the accuracy of what

5 appeared on Schedule “L,” the three million, nine hundred and

6 seven thousand dollars?

7 A. Yes, I did.

8 Q. And what did you do in that regard?

9 A. I was able to reconstruct accounts payable balances

10 for certain vendors, and I did that and then compared it to the

11 amounts that I used.

12 Q. Which vendors did you use?

13 A. Oh, gosh, there were several deposed. I used every

14 one that was deposed. I think there was nine of them. I have

15 summarized just a few of them right here. For just Darwood,

16 Millikin, Southern Mills, HLC, Bonifay and American Express,

17 which is four of approximately a hundred and sixty-five

18 vendors, but these are fairly significant vendors in 1999,

19 there balance alone was three point nine million.

20 Q. All right. Did that lead you to conclude that the

21 three million nine figure placed on the tax return was low?

22 A. Yes.

23 Q. Those four or five names you just gave us, do those

24 represent the principal vendors of Terry Manufacturing,

25 excluding bank debt now? I’m talking about actual trade

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 60 of 202
61

1 creditors.

2 A. They are the primary ones involved in the lines of

3 business that they are in, yes. They are the material

4 suppliers.

5 Q. All right. Are you of the opinion, sir, that had you

6 obtained the accounts payable actually due to all vendors as of

7 December 31, 1999, that figure would be greater than three

8 million, nine hundred thousand dollars?

9 A. I am pretty sure – I have rounded the three point nine

10 million, but I believe that number is already greater than the

11 amount I used on Appendix “A.” 

12 Q. And that was only employing, what, five of a hundred

13 and sixty odd vendors?

14 A. That is correct.

15 Q. All right. So were you to have totaled all amounts

16 owed to vendors, are you of the opinion it would cause your

17 balance sheet to show even a greater negative net worth?

18 A. There is no question it would go down.

19 Q. Okay. Let’s turn next to note payables, which you –

20 A. Or a net worth loss would be greater. I’m not sure

21 that is clear.

22 Q. It would be more in the red?

23 A. It would be more in the red, yes, that is correct.

24 Q. All right. Notes payable, fourteen million, eight

25 hundred and eighty-six thousand dollars. Where did you obtain

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 61 of 202
62

1 that figure from?

2 A. From the tax return.

3 Q. All right. Did you confirm that with any of the banks

4 or other secured lenders?

5 A. We agreed it to the information we had on the

6 amortization of the loan, yes.

7 Q. All right. Who were the principal lenders shown on

8 the financial statements as of 12-31-1999?

9 A. At this time, I can’t recall when, and it gets a

10 little confusing, NationsBank was a principal lender during

11 some period of this time and then Southtrust Bank came in and,

12 I believe, took NationsBank out; and I am not sure what year

13 that was.

14 Q. The next is subordinated notes payable, three million,

15 five hundred thousand dollars. Who was the holder of that

16 promissory note, if you recall, sir?

17 A. It is the state of Arkansas.

18 Q. Okay. And from what did you take that balance due?

19 A. From the statement provided by the lender.

20 Q. All right. Now, sir, I would ask you to turn to the

21 exhibits appearing behind tab forty-nine in the binder before

22 you. 

23 A. That would be forty-eight in my book? 

24 Q. I am looking at the subordinated note payable detail.

25 It should be the first page. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 62 of 202
63

1 A. The first page of mine says deposition exhibit two,

2 list of payments. 

3 Q. Look at forty-nine. 

4 A. There is nothing in forty-nine. 

5 MR. BARRIERE: I will approach the witness, Your Honor,

6 if I may. Do you have a forty-nine?

7 COURTROOM DEPUTY: Forty-nine is the appraisal.

8 THE COURT: Well, wait a minute. Tab forty-nine or

9 Exhibit 49? Subordinated note payable?

10 MR. BARRIERE: Yes.

11 THE COURT: Okay. That is what I am showing for – and

12 it has got an exhibit sticker, exhibit thirteen.

13 MR. BARRIERE: That is from the deposition, but I

14 wanted to make sure we have got the right number on the

15 exhibit. Is that appearing behind your tab forty-eight or

16 forty-nine, Your Honor?

17 THE COURT: This is tab forty-nine.

18 MR. BARRIERE: All right. Well, then, I would ask that

19 I admit that as Exhibit 49, and the appraisal be admitted as

20 Exhibit 50, if I may.

21 THE COURT: Okay. Now, I’m not seeing the appraisal.

22 Oh, this one here. Okay. I have got you. Okay.

23 BY MR. BARRIERE: 

24 Q. Mr. Alexander, are you familiar with that packet of

25 information from the Arkansas Highway Employees Retirement

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 63 of 202
64

1 System?

2 A. Yes.

3 Q. All right. You are aware that a representative of

4 that entity appeared for a deposition in this case?

5 A. I am, yes.

6 Q. All right. Sir, an issue was raised at one point as

7 to whether that represented debt or equity. Are you aware of

8 that dispute?

9 A. I am.

10 Q. All right. Tell me, sir, in your capacity as a

11 certified public accountant, are you called upon from time to

12 time to ascertain whether an instrument represents debt or

13 equity?

14 A. Yes.

15 Q. Typically in what engagements or work that you perform

16 is that service required?

17 A. Well, I have testified in court about it but typically

18 as an auditor you make those determinations in classifying

19 amounts shown on balance sheets.

20 Q. Have you reached an opinion in this case as to whether

21 the instrument provided by Terry Manufacturing to the Arkansas

22 Retirement Fund represents debt or equity?

23 A. I have.

24 Q. And what is your opinion in that regard?

25 A. It is debt.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 64 of 202
65

1 Q. And on what do you base that conclusion?

2 A. Well, it is evidenced by a note; it has a stated

3 principal amount; and it has an interest rate and repayment

4 terms.

5 Q. And the instrument itself is styled subordinated

6 promissory note, correct?

7 A. That is correct.

8 Q. All right, sir. Totaling the liabilities on December

9 31, 1999, did you conclude that those amounted to twenty-two

10 million, two hundred and ninety-three thousand dollars?

11 A. Because I can’t see that on the wall, I am having to

12 flip back to mine. Yes, I did.

13 Q. All right. What did that cause you, then, to conclude

14 with respect to whether Terry Manufacturing was solvent or

15 insolvent from a balance sheet standpoint as of December 31,

16 1999?

17 A. I concluded that they were at least eleven million,

18 three hundred thousand dollars insolvent at that time.

19 Q. You used the modifier “at least?”

20 A. That is correct.

21 Q. And why do you say that or why did you use that

22 modifier?

23 A. Mainly because our continued testing of these amounts

24 has shown that in sum total these numbers were conservative and

25 would default more on making them appear solvent when they are

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 65 of 202
66

1 not.

2 Q. All right. So if I understood your testimony, sir,

3 your continuing studies evidence greater debt or less value of

4 assets and, in turn, greater negative net worth or more in the

5 red?

6 A. Yes. Thank you. Yes, that is correct.

7 Q. All right. Sir, I don’t want to belabor this process.

8 For the years December 31, 2001, December 31, 2000, did you

9 employ fundamentally the same methodology to evaluate the

10 solvency of Terry Manufacturing as you did for the year-end

11 December 31, 1999?

12 A. For 2000 and 2001, we used consistent methodology. 

13 Q. All right. 

14 A. With ‘99, consistent with ‘99.

15 Q. And you used the same sources for information that you

16 have testified to with respect to 1999?

17 A. Yes.

18 Q. All right. What did you conclude with respect to the

19 solvency of Terry Manufacturing at December 31, 2000?

20 A. That liabilities exceeded assets by eight point nine

21 million dollars.

22 Q. Would that, again, be at least by eight million, nine

23 hundred thousand dollars?

24 A. Yes, it would be by at least eight point nine million.

25 Q. And what did you conclude with respect to the solvency

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 66 of 202
67

1 from a balance sheet standpoint of Terry Manufacturing as of

2 December 31, 2001?

3 A. That liabilities exceeded assets by at least fifteen

4 point six million dollars.

5 Q. All right. Now, let’s turn to the year-end December

6 31, 2002, if we can, sir. Can you describe – generally was

7 there a different methodology employed for that year as opposed

8 to prior years?

9 A. In 2002 and 2003, yes.

10 Q. And why is that?

11 A. There are two reasons. One, it was the availability

12 of information, the effort required to determine the amounts at

13 the level of precision used in 2003 and 2002, so it was a

14 matter of economy and reasonableness.

15 Q. All right. Was there a tax return filed for the year

16 ended December 31, 2002?

17 A. No.

18 Q. Let me start, then, by focusing your attention to the

19 cash line, one million, five hundred and ninety-six thousand

20 dollars. From what did you obtain or what was the basis for

21 that figure?

22 A. Our reconstructed – well, it is not even

23 reconstructed. It is the absolute value of cash according to

24 bank statements, and we have ignored outstanding items.

25 Q. Okay. So, if I understand it, you took all of the

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 67 of 202
68

1 checking account statements, figured out the balance in each

2 account as of December 31?

3 A. That is correct.

4 Q. And you ignored any checks that may have been issued

5 prior to December 31?

6 A. Yes.

7 Q. You totaled those up and you came to a million, five

8 ninety-six?

9 A. That is correct.

10 Q. All right. How about accounts receivable; where did

11 you come out with the figure, eight hundred and fifty-five

12 thousand dollars?

13 A. We used the receivable collections from July as a

14 proxy for what the receivables would have been as of December

15 31, ‘02.

16 Q. All right. Inventory is five hundred and fifty-six

17 thousand dollars. Where did you obtain that information from?

18 A. That is the sales value of the inventory on hand at

19 July which was used as a proxy for what would have been on hand

20 at 12-31-02.

21 Q. Okay. How did you attempt to reconstruct what

22 inventory might have existed as of 12-31-2002 but had been sold

23 as of July?

24 A. Well, you can look at their cash flow. We went back

25 and tested the number using the actual cash payments and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 68 of 202
69

1 turnover type analysis, days outstanding analysis, to test the

2 number and it didn’t materially change it, and that is how we

3 approached testing the number. Reconstructing the number was

4 done as of July 7, 2003. And the way we reconstructed the

5 inventory was we went and physically counted it.

6 Q. Next is land and buildings, three hundred thousand

7 dollars. That is the same figure used for prior years based

8 upon your efforts to sell the property?

9 A. Yes.

10 Q. And fixed assets, likewise you used the same figure

11 you had from 1999 based upon the actual sale of the furniture,

12 fixtures and equipment?

13 A. Yes.

14 Q. Let’s talk about accounts payable. You are showing

15 that as forty million, two hundred and fifteen thousand

16 dollars. How did you calculate that figure?

17 A. It was a function of the difference in the amounts

18 that were clearly determinable and the amounts shown on the

19 claims register. And, just for clarification, it is not

20 properly labeled. It is really all other liabilities, which

21 would include accounts payable.

22 Q. Okay. So you took off liabilities from the claims

23 register; is that correct?

24 A. Correct.

25 Q. Did you take out any of those figures?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 69 of 202
70

1 A. It seems like there were one or two types or

2 categories of claims that we may have taken out. I would have

3 to check my notes. It would be the Bank of Wedowee’s claim if

4 we took it out, and it might be some of the preferred

5 shareholders who may have filed claims. I just can’t recall at

6 this time whether we took it out or left it in.

7 Q. Now that figure as of July 7, 2003, is forty-one

8 million, nine hundred and forty-five thousand dollars. Why the

9 approximate one point seven million dollar difference between

10 December 31 and July 7?

11 A. It was based on a study of the cash flow during that

12 period. We rolled the number back.

13 Q. The next figure is notes payable, seventeen million,

14 eight hundred and ninety-nine thousand dollars. Where did you

15 obtain that figure from?

16 A. The capital lease?

17 Q. No, on the notes payable, seventeen million, eight

18 ninety-nine as of December – 

19 A. Oh, I am on the wrong year. Okay. That was, again,

20 from the bank’s filings in the bankruptcy, payment schedules.

21 Q. The subordinated notes payable, is that, again, the

22 same subordinated note you testified to a moment ago owed to

23 the Arkansas Employees Retirement System?

24 A. Yes.

25 Q. And from what source did you obtain the balance on

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 70 of 202
71

1 that note?

2 A. The same source that was used in the earlier years.

3 Q. And that was the statement actually generated by the

4 retirement system?

5 A. Yes.

6 Q. All right. And you are aware that a representative

7 testified to those figures in his deposition under Rule

8 30(b)(6)?

9 A. Yes.

10 Q. And you relied upon that testimony in preparing this

11 balance sheet?

12 A. I actually prepared the balance sheet before that

13 testimony and I used the testimony to test the accuracy of the

14 balance sheet.

15 Q. Fair enough. Finally, there is a figure here for

16 capital lease obligations. We haven’t discussed that

17 previously. It also appears December 31, 2001. What is that

18 figure?

19 A. When the 431 site was sold, it was immediately leased

20 back, and that is the fair value of the lease payments.

21 Q. What did you conclude, then, to be whether the company

22 was solvent or insolvent from a balance sheet standpoint on

23 December 31, 2002?

24 A. That the company was insolvent.

25 Q. And by what amount?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 71 of 202
72

1 A. By fifty-eight point eight million dollars.

2 Q. And what did you conclude with respect to whether the

3 company was solvent on July 7, 2003, the Chapter 11 filing

4 date?

5 A. That the company was insolvent.

6 Q. And by what amount, sir?

7 A. By sixty-three point eight million dollars.

8 Q. All right. Now, sir, you are aware that a question

9 has been raised as to whether the books and records of this

10 company were in such complete disarray, whether so many records

11 were lost or perhaps never prepared, that it is impossible to

12 reach a meaningful conclusion as to solvency in the years prior

13 to 2002 and 2003?

14 A. Yes, I am aware of that.

15 Q. All right. What is your opinion as to whether you’re

16 able to make a meaningful conclusion with respect to solvency

17 for this company, Terry Manufacturing, as of December 31, 1999?

18 A. I believe you clearly can make that determination.

19 Q. And you are basing that on what, sir?

20 A. Not only the work done at the time this balance sheet

21 was issued, which was February of 2005, but the information

22 gathered subsequent and the continuing work we have done to

23 test the amounts, which includes deposition testimony of

24 creditors, continued analysis of information provided in other

25 recovery actions from creditors and parties that dealt with

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 72 of 202
73

1 Terry Manufacturing. There is probably more information. I

2 just can’t think of it.

3 Q. All right. Are you of the opinion that there is

4 adequate information to reach a conclusion with respect to this

5 company’s solvency for 2000 and 2001?

6 A. Yes, for the same reasons.

7 Q. All right. Now, sir, I would like to turn next, if I

8 may, to what has been identified as appendix “C,” your sources

9 and uses of cash. 

10 A. Okay.

11 Q. Do you have a copy of that before you?

12 A. I do now.

13 Q. Can you tell the court why did you prepare appendix

14 “C?” 

15 A. Well, the biggest reason was to get a handle on the

16 historical operations, as well as investing and purchasing

17 activities of the company. We used it for several purposes.

18 One, to get a read on cash flow; two, to identify investment

19 and lending transactions; and, three, to identify fixed asset

20 purchases.

21 Q. From this were you able to conclude that Terry

22 Manufacturing had net cash flow at least for the period of –

23 well, you tell me. For what periods did you find the company

24 had a negative net cash flow?

25 A. Well, overall the cash flow for the entire period was

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 73 of 202
74

1 negative. The last six months was negative by one point three

2 million dollars, but that is misleading because during that

3 period of time the company was not paying substantial debts and

4 those debts were mounting, and that is how they were managing

5 to cash flow in those earlier years.

6 Q. All right. Was it your observation that the company

7 was using trade debt in effect to finance its operations?

8 A. Absolutely.

9 Q. All right. Let’s talk about that for a moment. I

10 will ask you to look next to the PowerPoint concerning a

11 payable aging. 

12 A. Okay.

13 Q. We have four vendors here – HLC Industries, Milliken

14 & Co., and Bonifay Manufacturing. Why were those selected for

15 your study?

16 A. Those are the three principal vendors for each line of

17 business. If you could not do business with those vendors, you

18 were out of that business.

19 Q. All right. I see HLC Industries. What do they sell

20 to Terry Manufacturing?

21 A. Camouflage material, which is used to manufacture the

22 BDU’s under their government contract.

23 Q. And their invoices call for payments within ninety

24 days?

25 A. That is correct.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 74 of 202
75

1 Q. Was Terry Manufacturing able to pay or did they pay

2 those bills within ninety days?

3 A. No.

4 Q. You have calculated various time frames here for ‘99,

5 2000 and 2001. What was that based upon?

6 A. The actual payment histories that we could recover

7 from Terry’s records and then we confirmed that information to

8 the deposition testimony and the exhibits taken from those

9 parties.

10 Q. So as I understand the exhibit, the HLC, ninety day

11 invoices, were paid on average of a hundred and sixty-two days

12 in 1999, a hundred and eighty-six days in 2000, and a hundred

13 and thirty-nine days in 2001?

14 A. Yeah. That is the average for that year, how late

15 they were. In other words, if the bill was due in ninety days,

16 on average they paid it in a hundred and sixty-two days in

17 1999.

18 Q. All right. Milliken & Co., were they also a provider

19 of fabric?

20 A. Yes.

21 Q. And they called for payments within sixty days?

22 A. Yes.

23 Q. And in 2000, the average payments were, in fact,

24 within a hundred and forty-three days?

25 A. That is correct.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 75 of 202
76

1 Q. And in 2001, those payments were in fact an average of

2 a hundred and seventy-four days?

3 A. That is correct.

4 Q. Bonifay Manufacturing called for payments in thirty

5 days. I take it Terry Manufacturing didn’t do so?

6 A. That is correct.

7 Q. All right. In 1999, average payment was a hundred and

8 forty-four days?

9 A. That is right.

10 Q. A hundred and fourteen days in 2000?

11 A. That is right.

12 Q. And 2001, a hundred and seven days?

13 A. That is correct.

14 Q. During your two-year tenure, I guess, as trustee,

15 approaching three-your tenure as trustee, pardon me, you have

16 had opportunity to visit with numerous vendors of Terry

17 Manufacturing?

18 A. I have, yes.

19 Q. Based upon your conversations with those vendors and

20 the proof of claims that they have filed in this case, is it

21 your appreciation that Terry Manufacturing consistently paid

22 debts will beyond the due date?

23 A. That is correct, yes.

24 Q. All right. These are not anomalies, HLC, Milliken and

25 Bonifay; they are typical of how most vendors were handled?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 76 of 202
77

1 A. No, they are not anomalies and also they represent

2 almost forty percent of the payments made during our study

3 period. So even though it is just three of them, it is a fairly

4 significant slice.

5 Q. Have you reached a conclusion as to whether Terry

6 Manufacturing was able to pay its debts timely?

7 A. I have.

8 Q. And what is your conclusion?

9 A. They were not able to pay their debts timely.

10 Q. And that would be true throughout the period of 1999

11 through 2003?

12 A. Yes.

13 Q. Now, sir, were you also asked to consider whether

14 Terry Manufacturing had adequate capital to sustain its

15 operation?

16 A. I was.

17 Q. And what conclusions have you reached in that regard?

18 A. They clearly did not have adequate capital.

19 Q. All right. What indicia do you rely upon or what

20 factors do you rely upon in reaching that conclusion?

21 A. Well, it is really when you step back and analyze the

22 situation, you see that they are not paying critical vendors

23 within terms. They are exhausting their known and disclosed

24 capital resources. They are soliciting investments. They are

25 soliciting off-balance-sheet and hidden financing arrangements,

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 77 of 202
78

1 paying upwards of forty percent in transaction cost to get the

2 access to that money, and they are still not paying

3 approximately sixty million dollars worth of claims by the time

4 you get to the end of 2003.

5 Q. How were the Terrys able to maintain this house of

6 cards over this four-year period given their lack of adequate

7 capital, their failure to pay their debts timely?

8 A. Well, there were several methods they used. One was

9 they were able – they used fictitious vendors. They used bogus

10 documentation but principally they used a series of numerous

11 cash transfers, combined with what I will call riding your

12 vendors to create float.

13 Q. When you say cash transfers, what are you referring

14 to? Can you give an illustration of that?

15 A. Well, yeah, I can. In fact, it may help if I step

16 over to the white board and write some numbers down if that

17 would be okay.

18 (Pause)

19 What the Terrys were –

20 THE COURT: Try to speak up a little bit because the

21 microphone is over here. It will probably pick you up but,

22 yeah, that will help. 

23 Q. You can move that forward, Les. I think it is on

24 wheels or is not very heavy. 

25 A. One of the things the Terrys did to obtain access to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 78 of 202
79

1 capital was they engaged in a series of constant churning of

2 their cash balances, and I brought one example for the court.

3 It is a period of May 30, 2002, for about fifty days, to July

4 19, 2002, and it is best shown by just simply looking at the

5 bank statements and looking at the deposits. It is about a

6 fifty day period. I counted the days, Your Honor. Over about

7 a fifty day period there was three hundred and sixty deposits

8 into their accounts, totaling a little over thirteen million

9 dollars. 

10 Okay. During that same period, however, only a

11 hundred and forty-seven of those deposits were from customers,

12 totaling, rounding up, six million. Leaving a balance of two

13 hundred and thirteen interbank transfers, totaling seven

14 million dollars.

15 So what they were accomplishing, and it is not dollar

16 for dollar, but what they were accomplishing is they were

17 appearing to the banks that they were maintaining an inflow of

18 thirteen million dollars by using these numerous bank accounts

19 to continuously move money around and creating a fiction, a

20 seven million dollar fiction.

21 It also accomplished another objective for them. It

22 made it very difficult to discover the inflated financial

23 statements. If you are a banker, you can discover inflated

24 financial statements by looking at the sales and saying fifty

25 million dollars, you look at the bank statements, well, I don’t

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 79 of 202
80

1 see fifty million dollars coming in here. Well, this method

2 achieved an objective for the Terrys that allowed them to show

3 fifty million coming through when the real number was more like

4 twenty to thirty million.

5 The second thing that it did for them is it made, once

6 they are caught, it is the same type of technique that

7 criminals use to hide their tracks, and it is a pretty good

8 method if you wish to hide where the money ultimately ends up

9 because it gets commingled, transferred, re-commingled,

10 transferred, broken up, and then you add in the fictitious

11 vendors and the bogus documentation, and it does a very good

12 job of hiding the tracks of where the money ultimately goes,

13 making it very difficult to answer that question.

14 It does not make it difficult at all to determine what

15 their cash flow was and whether or not they were solvent,

16 though, because you just have to look at the bank statements

17 and pick them out. It is a big job because there is a lot of

18 them. And we have looked at this on numerous dates. This is

19 not an anomaly. It was a constant business practice that they

20 conducted.

21 Q. So if I understood your testimony, sir, what you have

22 is kiting constantly between, I think you told me, over twenty

23 bank accounts which permit the fiction of large balances,

24 multiple deposits, all drawn however on a much smaller sum of

25 actual hard cash. Is that a fair summary?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 80 of 202
81

1 A. That is fair. They did not use all twenty accounts,

2 but they used a large number of them.

3 Q. Now, sir, I would like to turn to the relationship

4 between Terry Manufacturing and Perky Cap company, if I could.

5 You are aware that Perky Cap was a vendor of head wear to Terry

6 Manufacturing?

7 A. I am, yes.

8 Q. All right. And you are aware of an assertion made in

9 this case that Terry Manufacturing acquired more caps as its

10 principals acquired additional stock; that somehow there was a

11 symbiotic relationship between the purchase of stock and the

12 purchase of caps. Are you aware of that assertion?

13 A. I am aware of that.

14 Q. All right. Have you attempted to plot the actual

15 acquisition of head wear by Terry Manufacturing from Perky Cap?

16 A. Yes, I have.

17 Q. Did you find any relationship between the timing of

18 stock acquisition by insiders, by Cotina Terry, by Allie

19 Robinson, by Roy and Rudolph and the actual purchase of caps by

20 Terry Manufacturing and Perky Cap?

21 A. I found a correlation. I don’t think it is a

22 relationship.

23 Q. All right. Tell me what you uncovered in that regard.

24 A. The more stock they bought, the worse it got.

25 Q. All right. Well, I’m going to start on the left-hand

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 81 of 202
82

1 side here. I take it you begin with the initial acquisition of

2 caps in 1991?

3 A. That is correct.

4 Q. All right. You were using what documents to base this

5 analysis on?

6 A. Financial statements of Perky Cap.

7 Q. Did you also use their actual accounts payable ledgers

8 and their sales shipment ledgers?

9 A. Yes, I did.

10 Q. Now, the peak point occurs in, what, approximately

11 June of 1994?

12 A. Sometime between, yeah, July of ‘94 and June of ‘95.

13 Q. And the volume of caps acquired by Terry Manufacturing

14 consistently declines thereafter?

15 A. That is correct. It is up and down and up and down

16 but, as you can see from the trend, it is a pretty consistent

17 trend downward.

18 Q. All right. Now, the first of the transactions we are

19 challenging, the Cotina Terry note, the Allie Robinson note,

20 are executed in November of 2001. Was there any relationship

21 between that stock purchase and an increase in cap purchases,

22 as best you can ascertain?

23 A. There is no increase at all shown in that timeframe.

24 Q. Now, the second or the final transaction, of course,

25 is the May 31 purchase of stock and note. Did you see any

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 82 of 202
83

1 relationship there between stock and cap sales?

2 A. I saw no change in the trend that I had seen before,

3 which was up a little bit, down a lot, up a little bit, down a

4 lot, up a little bit, down a lot, consistently going down.

5 Q. Okay. So as the Terry family acquires more stock, as

6 a general matter, Terry Manufacturing acquires fewer caps?

7 A. That appears to be the case, yes.

8 Q. All right. Did you attempt to ascertain whether Terry

9 Manufacturing somehow benefitted by this relationship by

10 discounts or obtaining additional funds or some concessions

11 from Perky Cap?

12 A. Yes.

13 Q. And what did you conclude in that regard?

14 A. I am not aware of any concessions or discounts at all

15 received by Terry Manufacturing.

16 Q. All right. I have placed before you a cost benefit

17 chart that you have prepared; is that correct, Mr. Alexander?

18 A. That is correct.

19 Q. And what does this document reflect?

20 A. It is simply an objective analysis of the payments

21 made by the estate related to Perky Cap for the period where we

22 studied cash payments which was the years 2000 through the

23 filing date in 2003. We compared those payments to the amount

24 of hats received, the value of the hats received.

25 Q. And what did you find in that regard?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 83 of 202
84

1 A. Well, I found that there was a five hundred and

2 ninety-seven thousand in loan payments that we are talking

3 about here. In addition, there was one point six million

4 dollars of additional payments made by TMC to Perky Cap.

5 During that same timeframe, however, only one point three

6 million in hats were acquired, which left a difference or a net

7 cost of nine hundred and forty-six thousand dollars. There was

8 no benefit at all received from Perky Cap.

9 Q. Just focusing a minute on the relationship with

10 respect to caps, the vendor relationship, was Terry

11 Manufacturing a net borrower or was it a net beneficiary or a

12 net lender under that relationship?

13 A. Or a net loss, either one. Net lender, net loss.

14 Q. All right. So as I understand what you have put

15 before the court, it received a million three in caps and it

16 paid a million, six seven?

17 A. That is correct.

18 Q. Sir, I would ask you to turn to tab number twenty19 three in the binder. It is the Perky Cap tax return for 1998.

20 A. Okay. 

21 Q. Sir, this is your area of expertise but not mine. It

22 is my appreciation that the loss, the operating loss for Perky

23 Cap for that year is approximately two hundred and thirty

24 thousand dollars. Am I reading that correctly?

25 A. You are.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 84 of 202
85

1 Q. All right. And of that, about fifty-six thousand

2 dollars was depreciation?

3 A. Yes, that is correct.

4 Q. So on a cash basis, this company lost about a hundred

5 and eighty thousand dollars that year?

6 A. Yes.

7 Q. Now the next tab is for 1999, which shows an operating

8 loss of a hundred and twenty-five thousand, five hundred and

9 seventy dollars. Do you see where I am reading from?

10 A. Now I do, yes.

11 Q. And, again, there was about forty thousand dollars of

12 depreciation?

13 A. Yes.

14 Q. So on a cash basis this company lost about eighty-five

15 thousand dollars in 1999?

16 A. That is correct.

17 Q. All right.

18 THE COURT: Wait a minute. Are we looking at the 1999,

19 1120-S?

20 MR. BARRIERE: Yes, sir. That is behind tab twenty21 four.

22 THE COURT: Okay. Wait a minute. I am seeing a

23 schedule K-1 behind twenty-four.

24 MR. BARRIERE: It may be out of order. May I approach,

25 Your Honor?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 85 of 202
86

1 THE COURT: Yes. Let’s see. Behind twenty-three, we

2 have got the ‘98.

3 MR. BARRIERE: Right.

4 THE COURT: Behind twenty-four, the first thing I am

5 seeing is the shareholder –

6 MR. BARRIERE: I apologize. I think they were just

7 incomplete copies. I am going to give you mine. 

8 THE COURT: Okay. Mr. Brazeal, if you look at your tab

9 twenty-four, what is the first thing you are looking at?

10 MR. BRAZEAL: The 1120-S, 1999.

11 THE COURT: Okay. You’ve got 1120-S for 1999. Okay.

12 Well, you have got what you are supposed to have then. All

13 right. Thank you.

14 BY MR. BARRIERE: 

15 Q. All right. So my question, sir, am I correct on

16 understanding on a cash basis this company lost approximately

17 eighty-four thousand dollars in 1999?

18 A. You are correct.

19 THE COURT: Okay. So you are taking a loss and then

20 you are adding back the depreciation?

21 THE WITNESS: That’s correct. 

22 THE COURT: Okay. Thanks.

23 Q. Turning next to 2000, am I correct in understanding –

24 I hope the court has the correct –

25 THE COURT: I do have. I have got an 1120-S for 2000.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 86 of 202
87

1 MR. BARRIERE: Thank you.

2 Q. An operating loss of four hundred and eleven thousand,

3 four hundred and sixty-five dollars; depreciation of thirty

4 thousand, eight fifty-nine?

5 A. That is correct.

6 Q. So a cash loss of approximately, what, three hundred

7 and eighty-one thousand dollars?

8 A. Yes.

9 Q. Now, the other thing that interested me, at the top of

10 that page it has (d) – it should be (e) – total assets, seven

11 hundred and fifty-nine thousand, eight twenty-nine. Do you see

12 what I am referring to on the 2000 tax return?

13 A. Yes.

14 Q. What does that figure represent?

15 A. It is the same number that shows up on page four of

16 schedule “L,” which is the balance sheet and it is the total

17 assets of the company at the end of the year.

18 Q. Is that on a book basis?

19 A. Yes.

20 Q. All right. My question to you, sir, you have told us

21 in the past during voir dire that you engaged in business

22 appraisals and valuations from time to time; is that correct?

23 A. That is correct.

24 Q. You have advised both buyers and sellers of companies?

25 A. That is correct.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 87 of 202
88

1 Q. You have testified with respect to business

2 valuations, have you not, as an expert?

3 A. Yes, I have.

4 Q. All right. Based upon that, sir, what is your opinion

5 as to the reasonableness of an arm’s-length purchase of ten

6 percent of this company’s stock for two hundred thousand

7 dollars in 2000, given the operating results, given the

8 company’s valuation of its assets?

9 A. The facts I have would say that the ten percent

10 purchase was not arm’s length.

11 Q. All right. Could you elaborate on that?

12 A. Well, the company is losing money. For someone to pay

13 for a company that is losing money, you would then look to see

14 are there underutilized assets that have hidden value, and

15 there doesn’t appear to be any of that type of information, at

16 least available to me, and then, as we all, I think, know, this

17 company ultimately filed for bankruptcy and is in Chapter 7.

18 Q. Rough math, ten percent, two hundred thousand, the

19 company would be worth two million dollars; is that correct?

20 A. Ignoring minority discounts, which can be very steep

21 but, yes, very simply speaking, it would imply that the company

22 is worth more than two million dollars.

23 Q. Did you see anything in these tax returns for ‘98, ‘99

24 and 2000 that led you to conclude that this company could

25 reasonably be valued at anything approaching two million

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 88 of 202
89

1 dollars?

2 A. No.

3 Q. Let me turn your attention next to Exhibit 26. That

4 is the 1120-S for the year 2001. Am I correct that this

5 company, Perky Cap, experienced a loss in that year, an

6 operating loss of five hundred and nine thousand dollars?

7 A. That is correct.

8 Q. Depreciation of twenty-one thousand or, on a cash

9 basis, what, approximately four hundred and ninety thousand

10 dollars?

11 A. That is correct.

12 Q. And it was reflecting book assets at that time of six

13 hundred and eighty thousand dollars?

14 A. That is correct.

15 Q. All right. Now, sir, if I could ask you to, while

16 we’re on the 2001 tax return, I will direct your attention to

17 the K-1s. They are the last several pages of that return, the

18 last four pages of that return. 

19 A. Yeah. In my copy, they are after page four of the

20 1120 but I have them, yes.

21 Q. All right. What does that show with respect to –

22 there is a summary sheet for the state of Georgia corporation.

23 What does that show with respect to the percentage of stock

24 owned by Mr. Horton as of the end of 2001?

25 A. It shows that he owns twenty-three point three-three

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 89 of 202
90

1 percent.

2 Q. And what does it show with respect to James Reynolds?

3 A. That Mr. Reynolds owns the same amount, twenty-three

4 and a third percent.

5 Q. Thirty-three percent for Rudolph Terry and then the

6 two, ten percents sold to, I think we referred to earlier, the

7 Terry women; correct?

8 A. That is correct.

9 Q. All right. Now you’re aware, are you not, sir, that

10 Mr. Horton and Mr. Reynolds purportedly sold stock to Roy and

11 Rudolph Terry in May of 2002?

12 A. That is correct.

13 Q. That is what the documentation says, at least?

14 A. That is right.

15 Q. And they purportedly acquired approximately thirty,

16 thirty-one percent for, what, six hundred and twenty-seven

17 thousand dollars?

18 A. That is my recollection, yes.

19 Q. All right. Now, let’s look at that 2002 tax return.

20 It shows the company that year only lost eight thousand, three

21 hundred and seven dollars, correct?

22 A. That is correct.

23 Q. Now, if I could get you to look to the K-1s for that

24 year, they are the last six pages, I believe. Do you see the

25 K-1 for Mr. Horton?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 90 of 202
91

1 A. I do. 

2 Q. And what does it show with respect to his ownership at

3 the end of 2002 and after he supposedly sold his stock to Roy

4 and Rudolph Terry?

5 A. It shows him still being an owner of Perky Cap at the

6 same percentage of ownership as the previous year.

7 Q. All right. What about Mr. Reynolds?

8 A. It shows Mr. Reynolds still being an owner in Perky

9 Cap at the same percentage as the previous year.

10 Q. Now this return, like the other returns, was prepared

11 by David Giddens. Have you noticed that?

12 A. Yes.

13 Q. All right. Are you aware that Mr. Giddens has been

14 deposed in this proceeding?

15 A. Yes.

16 Q. You are aware that he is Mr. Horton’s personal

17 accountant?

18 A. Yes.

19 Q. That he also provides accounting services for Mr.

20 Horton’s various companies?

21 A. Yes.

22 Q. Finally, let’s look at 2003, Exhibit 28. The company

23 lost five hundred and seventy-four thousand dollars that year?

24 A. That is correct.

25 Q. Depreciation of thirty-three thousand dollars?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 91 of 202
92

1 A. Right.

2 Q. Which means the cash loss was, what, approximately

3 five hundred and forty thousand dollars?

4 A. Yes.

5 Q. All right. So am I correct, then, sir, this company

6 lost money every single year that you have studied Perky Cap?

7 A. Yes.

8 Q. Have you reviewed the K-1s for this year?

9 A. Not that I can recall, no.

10 Q. Well, let me direct your attention to – 

11 A. You said – 

12 Q. 2003. 

13 A. Oh, yes, I have. When you said this year, I thought

14 you meant the next year, 2005. 

15 Q. Well, I will direct your attention to the K-1s. They

16 are the last, I believe, five or six pages of the exhibit. 

17 A. I have looked at those, yes.

18 Q. And those returns continued to show stock owned by Mr.

19 Horton and Mr. Reynolds?

20 A. Well, actually they don’t. They show Horton,

21 Reynolds, Terry, Cotina Terry and Allie Robinson filing final

22 K-1s and continuing K-1s for Jack Perkinson and Melanie Nugent.

23 But the confusing thing, and I think what you’re talking about,

24 is the percentages shown would indicate that they still own the

25 company. So I’m not sure if the form is filled out right and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 92 of 202
93

1 the percentages are wrong, or if the percentages are right and

2 the form is filled out wrong.

3 Q. You are aware, are you not, Mr. Horton has

4 acknowledged selling his stock to Ms. Nugent in 2003?

5 A. I am.

6 Q. Reviewing these documents, do you find any evidence

7 whatsoever that Roy and Rudolph Terry actually received any

8 stock in 2002 when they purportedly acquired thirty-one percent

9 of the stock from Mr. Horton and Mr. Reynolds?

10 A. I don’t see any evidence of stock acquisition by the

11 Terry brothers in that year.

12 Q. How many hours, approximately, have you and your team

13 at AEA invested in reviewing and organizing the books and

14 records of Terry Manufacturing?

15 A. I haven’t looked at it lately but it is thousands of

16 hours.

17 Q. During the course of those thousands of hours of

18 investment, have you uncovered a single document which

19 evidences that this stock sale actually occurred? I’m talking

20 about the May of 2002 sale. 

21 A. No, other than what has been produced in this case,

22 no.

23 Q. Now, sir, I would like you, if I could, to look at

24 Exhibits 31, two, three, four, five, six. They are invoices of

25 Terry Manufacturing to Wholesale Distributors. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 93 of 202
94

1 A. I see those.

2 Q. All right. Each of these invoices references

3 merchandise and related services and then various amounts. Do

4 you see what I am referring to?

5 A. I do.

6 Q. Did in fact Terry Manufacturing sell any product to

7 Wholesale Distributors as evidenced by those invoices?

8 A. I can’t find any product that was sold and it is my

9 belief that there was no product sold.

10 Q. All right. You are aware that Mr. Horton has

11 testified that this represented uniforms purchased by Wholesale

12 Distributors that never left the offices of Terry

13 Manufacturing?

14 A. I recall that testimony, yes.

15 Q. At the time that you took over this company, did you

16 find any uniforms lying about?

17 A. Not that was property of – there were very few. They

18 were reject uniforms but nothing in the magnitude of the

19 numbers shown on these invoices, no.

20 Q. Did you interview persons involved in the actual

21 production at Terry Manufacturing at the time you became

22 trustee?

23 A. Yes, I did.

24 Q. In the course of those interviews, was there any

25 suggestion that Terry Manufacturing had produced and sold to

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 94 of 202
95

1 Wholesale Distributors what are referenced here as literally

2 millions of dollars of product?

3 A. No, there was no indication that that ever occurred.

4 Their only customer for BDU’s, which are the uniforms I think

5 Mr. Horton was referring to, was the U. S. Government and, at

6 the point those goods were finished and placed in a warehouse,

7 the title to those goods passed to the U. S. Government.

8 Q. Was that pursuant to the contract with the United

9 States government?

10 A. Yes, and they had strict oversight and they came in

11 and inventoried periodically and clearly marked the inventory.

12 That is how we could tell it was not the estate’s.

13 Q. Let me ask you next to turn to Exhibit 37. It is an

14 invoice, Wholesale Distributors, American Testing Laboratories,

15 sold to Terry Manufacturing, miscellaneous merchandise, one

16 million, three hundred and seventy-five thousand dollars. Do

17 you see where I am referring to?

18 A. I do.

19 Q. All right. Based upon hundreds of hours, thousands of

20 hours you have invested in your study of this case, have you

21 found any evidence that Wholesale Distributors ever sold

22 anything to Terry Manufacturing?

23 A. No.

24 Q. Likewise, Exhibit 38 shows Wholesale Distributors

25 invoice for five hundred and ten thousand dollars. Any

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 95 of 202
96

1 evidence whatsoever that that reflects the sale of actual goods

2 to Terry Manufacturing?

3 A. None.

4 Q. And finally one dated November 1, 2002, a monthly

5 statement for five hundred and ten thousand dollars. Any

6 evidence that actually occurred?

7 A. No.

8 Q. It would follow the binder, sir, a series of

9 additional Terry Manufacturing invoices for product to

10 Wholesale Distributors. Any evidence that any of those reflect

11 actual sales of goods or products to Wholesale Distributors?

12 A. No, no evidence.

13 Q. Let me direct your attention to Exhibit 30, a

14 memorandum from Rudolph Terry to Dudley Horton dated December

15 6, 2002. 

16 A. Okay.

17 Q. Was this document among those that you secured at the

18 time you took over as trustee of Terry Manufacturing?

19 A. Yes.

20 Q. All right. Have you attempted to correlate the

21 various switching of checks referenced in Mr. Terry’s

22 memorandum to these various invoices?

23 A. Yes.

24 Q. And what have you concluded in that regard?

25 A. With respect specifically to this memorandum, I can’t

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 96 of 202
97

1 recall, and they are not all provided as exhibits here, but

2 generally speaking what we were able to determine is that

3 simply checks were being swapped and the net result was money

4 would flow in for about forty-five days into the accounts of

5 Terry Manufacturing and then it would be paid back, plus a

6 substantial fee at the end of the forty-five day period.

7 Q. Did this paper work have the effect of evidencing to

8 the outside world there was really a vendor/supplier

9 relationship here, a vendor/purchaser relationship, I should

10 say?

11 A. Yes. It also had the effect of evidencing sales to

12 the outside world that, for accounting purposes, at least, do

13 not exist. That is unquestionable.

14 MR. BRAZEAL: Judge, I’m going to object and move to

15 strike unless Mr. Alexander can demonstrate that these invoices

16 were ever presented to the, quote, outside world. In other

17 words, he may suspect that is what they were used for but,

18 unless he has some evidence that they were used for that

19 purpose, then I believe his testimony in that regard should be

20 stricken.

21 THE COURT: Overruled.

22 BY MR. BARRIERE: 

23 Q. Mr. Alexander, as a follow-up, have you reached a

24 conclusion as to whether the financial – strike that. You are

25 aware of financial statements routinely being issued to banks

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 97 of 202
98

1 and creditors of Terry Manufacturing by Terry Manufacturing;

2 are you not?

3 A. Yes.

4 Q. And those financial statements routinely had

5 statements of operations reflecting sales by Terry

6 Manufacturing?

7 A. Yes.

8 Q. And have you reached a conclusion as to the accuracy

9 of those statements of operation and, in particular, the

10 representation with respect to sales?

11 A. The sales are grossly overstated.

12 Q. Are you of the opinion, sir, that the machinations as

13 reflected by these exhibits are one of the machinations used to

14 fabricate those sales?

15 A. Yes.

16 Q. Now, sir, I will note for the purposes of the record

17 that the first of these dummy invoices is dated early summer of

18 2002, shortly after the purported sale of the stock. Based

19 upon your review of these invoices, based upon your review of

20 the tax returns, have you reached an opinion as to whether the

21 stock in Perky Cap was actually conveyed from Mr. Horton and

22 Mr. Reynolds to Roy and Rudolph Terry?

23 A. Based on my review of all of the evidence and

24 principally placing heavy weight on the tax return, I do not

25 believe that the sale took place. I believe it was a

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 98 of 202
99

1 simulation.

2 Q. You have been a certified fraud examiner for how long

3 sir?

4 A. Since the early nineties.

5 Q. So based upon that approximately sixteen years basis,

6 you have from time to time been called upon to evaluate whether

7 purported transactions were in fact simulations? 

8 A. Correct. Substance over form evaluations is one of

9 the roles fraud examiners and CPAs play traditionally.

10 Q. And you brought that experience to bear here today?

11 MR. BRAZEAL: Your Honor, I think I’m going to have to

12 object to this line of questioning. This was not contained in

13 Mr. Alexander’s report. There has been no notice provided that

14 he was going to proceed with this line of questioning. I don’t

15 think it is even appropriate to have experts opine in that

16 regard, Your Honor.

17 MR. BARRIERE: Do you want me to respond?

18 THE COURT: Yes.

19 MR. BARRIERE: Well, two points, Your Honor. First,

20 Mr. Giddens wasn’t made available to us until March 17. That

21 is when we got these tax returns. Let me finish, Ellis, and

22 then you can respond. That we would dispute whether these

23 transactions occurred has been, I think, known to all parties.

24 Indeed the stipulation itself, number eleven, says the parties

25 do not stipulate as to whether shares were actually

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 99 of 202
100

1 transferred. I don’t think we have got either a surprise issue

2 here.

3 MR. BRAZEAL: Well, the – 

4 MR. BARRIERE: Let me finish. This is information we

5 derived directly from their accountant from information that

6 was first made available to us on March 17.

7 MR. BRAZEAL: Your Honor, there was no effort made to

8 depose Mr. Giddens until the end of January. That was when we

9 were first asked if Mr. Giddens could be deposed and we

10 accommodated him in that regard.

11 I don’t have any problem, Your Honor, with the facts

12 being laid out. The facts are the facts and Mr. Horton can

13 testify about the facts. I do have a problem with someone who

14 claims to be and has experience in fraud accounting providing

15 some opinion about whether this was fraudulent or not when we

16 have not previously been made aware that he was going to

17 testify in that regard.

18 THE COURT: Okay. I am going to overrule the

19 objection. I want to hear the testimony and sort it out but I

20 do want to hear the testimony.

21 BY MR. BARRIERE: 

22 Q. I think my question is you brought to bear your

23 experience of fifteen or sixteen years as a fraud examiner?

24 A. Yes.

25 Q. And based upon that you concluded these transactions

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 100 of 202
101

1 were a simulation?

2 A. That is correct. Mr. Barriere, because of the break

3 and the objection, you were talking about the stock sales being

4 a simulation, correct? 

5 Q. Yes, and that is your conclusion?

6 A. That is my conclusion and the other thing I forgot to

7 mention is further evidence of that is a pattern and practice

8 of simulating transactions as it relates to these Wholesale

9 Distributors transactions.

10 Q. I may have asked this question, and I apologize. You

11 previously testified that in your judgment the price paid by

12 Cotina Terry and Allie Robinson does not reflect an arm’s13 length transaction?

14 A. You have asked me that and I said that it is not.

15 Q. All right. What is your conclusion with respect to

16 the price purportedly paid by Mr. Roy and Rudolph Terry in the

17 summer of 2002?

18 A. It is the same conclusion.

19 MR. BARRIERE: Your Honor, I may be finished with the

20 witness if you will bear with me for just a moment.

21 (Pause) 

22 Q. Sir, you were asked, were you not, to consider whether

23 Terry Manufacturing received any benefit, any value, from

24 having paid just shy of six hundred thousand dollars for the

25 stock. Have you reached any conclusions in that regard?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 101 of 202
102

1 A. I have.

2 Q. And what are those conclusions?

3 A. Terry Manufacturing received no benefit whatsoever.

4 In fact, the relationship related to the stock, if it is

5 related to Perky Cap, was a loss.

6 Q. Now one of the loans that has been at issue, loan

7 dated August 6, 2001. The information pertaining to that

8 appears behind tab forty-five. Do you see that promissory

9 note, sir?

10 A. Yes.

11 Q. All right. Are you aware of any document which

12 purports to tie the granting of this loan on August 6, 2001, to

13 either the Terry women’s purchase of stock in November of 2000

14 or Roy and Rudolph’s purchase of stock in 2002?

15 A. Would you mind re-asking that question? 

16 Q. Sure. Are you aware of any document that purports to

17 condition the making of this loan to the Terry family buying

18 stock from Mr. Reynolds and Mr. Horton?

19 A. No.

20 Q. All right. Now the third page, right behind the

21 promissory note, is a payment history produced by American Real

22 Estate. Do you see that?

23 A. Yes.

24 Q. All right. And that evidences this loan was made on

25 August 7 and repaid in full on October 31?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 102 of 202
103

1 A. That is correct.

2 Q. The loan was a million, five hundred thousand dollars;

3 is that correct?

4 A. Yes.

5 Q. And American Real Estate was paid back a million, six

6 hundred and fifty-nine thousand dollars on this loan?

7 A. That is right.

8 Q. Have you attempted to ascertain what that works out to

9 on an annual basis as far as an interest rate?

10 A. I have made an approximation of it, yes.

11 Q. And what is that, sir?

12 A. Over forty percent.

13 Q. Okay. Does the fact that Terry Manufacturing was out

14 borrowing money at forty percent in your view support your

15 conclusion as to reasonableness or adequacy of capital?

16 A. Yes.

17 Q. In what regard?

18 A. It is clear evidence that they have inadequate

19 capital.

20 Q. Borrowing at twice credit card debt?

21 A. Yes. Twice many times junk-bond debt, yes.

22 Q. Sir, I would like for you to turn now to Exhibit 22.

23 This is an agreement between American Real Estate, Perky Cap,

24 Roy and Rudolph Terry. Are you familiar with it generally?

25 A. Yes, I am.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 103 of 202
104

1 Q. All right. Does this agreement contemplate American

2 Real Estate assisting in the solicitation of a loan from

3 Peoples Bank?

4 A. Yes.

5 Q. Okay. Is there any mention made in this document

6 whatsoever that as a condition to soliciting Peoples Bank, the

7 Terry brothers would buy the balance of Mr. Horton and Mr.

8 Reynolds’ stock?

9 A. No.

10 Q. What consideration, if any, is to be given to American

11 Real Estate for its assistance in securing that loan pursuant

12 to this document?

13 A. What I see this document doing is paying off the

14 Farmers and Merchants Bank of Eatonton loan. That was the

15 purpose of this transaction.

16 Q. You have reviewed Mr. Horton’s deposition in this

17 case?

18 A. I have.

19 Q. And you are aware as a result that he had personally

20 guaranteed that loan?

21 A. The Farmers and Merchants Bank loan, yes, I am aware

22 of that.

23 Q. So the net result of getting the Peoples Bank loan was

24 to pay off a loan that he was personally liable for?

25 A. That is correct.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 104 of 202
105

1 Q. And just so the record is clear, there seems to be no

2 connection based on this document between the Peoples Bank loan

3 ultimately made and the sale of stock?

4 A. That is correct.

5 Q. Now you are aware from opening statements, among

6 others, that there was a five million, five hundred thousand

7 dollar line of credit made available to Terry Manufacturing by

8 – excuse me – to Roy and Rudolph Terry personally by American

9 Real Estate. You are aware of that, are you not?

10 A. I am.

11 Q. Okay. Have you seen any document that suggests in any

12 way that the granting of that loan to the Terrys individually

13 was somehow conditioned upon Cotina Terry and Allie Robinson

14 buying stock from Mr. Reynolds and Mr. Horton?

15 A. No.

16 MR. BARRIERE: Your Honor, in connection with this

17 witness’ testimony, I would like to introduce as Exhibit 51 the

18 recap of payments made on these loans.

19 THE COURT: Okay. And where is that?

20 MR. BARRIERE: It may be easier for me to take your

21 PowerPoint back, Your Honor.

22 MS. LASKY: I have got an extra one.

23 MR. BARRIERE: That would be 51. His asset and

24 liability sheet is already a part of his tax return but, for

25 your purposes, Judge, I am going to go ahead and reintroduce it

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 105 of 202
106

1 because it would be easier for you to review, if you wish to,

2 in connection with post-trial briefing.

3 I’m going to introduce – that will be 51 – excuse me

4 – 52. The accounts payable vendor analysis we would offer as

5 Exhibit 53. This is already part of the record. The cost

6 benefit analysis as Exhibit 54.

7 And with that, Your Honor, I would ask to pass the

8 witness.

9 THE COURT: Okay. Any objections to those?

10 MR. BRAZEAL: Your Honor, I don’t have any objection.

11 I wonder if I could just get a copy.

12 MS. LASKY: Yes, I will provide you a copy in one

13 moment.

14 THE COURT: Let’s do this. It is almost twelve noon.

15 We are going to break for lunch and then we will start cross16 examination at 1:30 p.m. and, in the meantime, you can exchange

17 whatever documents.

18 All right. We will see you at 1:30.

19 (Recess from 12:02 p.m. until 1:47 p.m.)

20 THE COURT: Please be seated. All right. We have got

21 Mr. Alexander on the stand. We finished direct examination

22 before lunch and now, Mr. Brazeal, you will start Cross.

23 MR. BRAZEAL: Thank you, Your Honor. Before we get

24 started, I wanted to move to introduce Exhibits – let’s see,

25 Your Honor. I have provided you with a copy of a listing of

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 106 of 202
107

1 defendants’ trial exhibits or I gave it to your deputy. I

2 believe that Mr. Barriere was fine with Exhibits 1 through 61,

3 and then the remaining ones are the expert reports which we

4 will take up at some point.

5 THE COURT: All right.

6 MR. BARRIERE: When you listed globally Peoples Bank

7 loan documents, what does that consist of, Ellis?

8 MR. BRAZEAL: It is the note and – I can show it to

9 you.

10 MR. BARRIERE: Why don’t we do this? Why don’t you go

11 ahead and admit 1 through 56 and then you and I at the break

12 can talk about 57 and 58 just so I can see what they are. Does

13 that work for you?

14 THE COURT: That is fine. We will admit 1 through 56

15 now and, if there is a problem later, just let me know.

16 MR. BARRIERE: I don’t anticipate one, Your Honor. I

17 just wanted to look at what he is referring to.

18 THE COURT: Okay.

19 MR. BRAZEAL: And then, Your Honor, the other point

20 that I wish to make, I believe my CD with the exhibits has been

21 loaded onto your computer and hopefully you are more computer

22 proficient than I am. It wouldn’t be hard.

23 THE COURT: Yeah, I have them right here.

24 MR. BRAZEAL: Okay.

25 THE COURT: Go ahead.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 107 of 202
108

1 MR. BRAZEAL: Thank you, Judge.

2 CROSS EXAMINATION

3 BY MR. BRAZEAL: 

4 Q. Mr. Alexander, during your direct examination, your

5 counsel asked you whether there was any evidence of this stock

6 acquisition from May of 2002, and your testimony was not a

7 single document other than what has been produced in this case.

8 Is that substantially what you testified?

9 A. Yes.

10 Q. All right, sir. What documents have been produced in

11 this case which you reviewed related to that stock sale and as

12 evidence of whether it occurred or not?

13 A. I was principally referring to the bill of sale which

14 I think exists in that transaction. I would have to review the

15 documents, but I have seen a bill of sale. What I haven’t seen

16 is a stock certificate.

17 Q. All right. Mr. Alexander, what I have brought up is

18 Exhibit 46. Is this the bill of sale of common stock that you

19 were referring to?

20 A. Yes, and you can see where the stock certificate

21 number is blank.

22 Q. Right. Okay. Did you also review the document which

23 I have pulled up as Exhibit 47 which reflects that Mr. Horton

24 and Mr. Reynolds resigned from the Board of Directors and as

25 officers of Perky Cap?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 108 of 202
109

1 A. Yes, I saw that.

2 Q. All right. Is that some evidence that a stock sale

3 did or did not take place?

4 A. It could be but it could not be. I mean, it is not

5 directly related to the sale of the stock.

6 Q. Well, I think you have read Mr. Horton’s testimony,

7 have you not?

8 A. I was there when he testified. I don’t believe I have

9 read it.

10 Q. All right, sir. Did you hear his testimony that he

11 and Mr. Reynolds stepped down from the board and as officers at

12 the time that the stock sale occurred on or about May 30 of

13 2002?

14 A. Yes, I remember that.

15 Q. All right, sir. Mr. Alexander, what about Exhibit 48?

16 A. I have seen that, too, yes.

17 Q. All right. Do these documents lend any credence to

18 the fact that there was a stock sale on or about May 30, 2002?

19 A. I gave them all consideration when I rendered my

20 opinion.

21 Q. Okay. And it is your opinion that no stock was ever

22 transferred, is that your opinion?

23 A. I guess I would say in my vernacular, which is the

24 stock sale, based on the totality of the evidence, okay, the

25 stock sale was a simulation. And the evidence that I am

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 109 of 202
110

1 looking at is the tax returns that reflect the ownership

2 remaining constant and the lack of a stock certificate in spite

3 of the paperwork that was done that, on the face of the

4 paperwork, appears to be a transfer of ownership occurred.

5 Q. Were there any actions taken by the Terrys as if they

6 had become controlling members and now could direct the

7 transactions that Perky Cap would undertake?

8 A. In what sense? Are you talking about the Peoples Bank

9 loan? 

10 Q. Yeah. Was the Peoples Bank loan evidence that the

11 Perky Cap members, the Terrys, saw themselves as the stock

12 owners of Perky Cap and had the ability to control it?

13 A. I have heard Mr. Horton’s testimony along those lines

14 and I can’t recall it but I have heard his testimony along

15 those lines. I have also seen the documents that say the

16 purpose of the Peoples Bank loan was to pay off the Farmers and

17 Merchants Bank loan, and I am also aware that – I’m not sure

18 that occurred.

19 Q. Mr. Alexander, I will represent to you that this is

20 the one point five million dollar loan document evidencing the

21 one point five million dollar loan that Perky Cap obtained from

22 Peoples Bank. Are you familiar with that loan, Mr. Alexander?

23 A. I am.

24 Q. All right, sir. And the signature lines of the note

25 indicate that Roy Terry is the vice-president and Rudolph Terry

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 110 of 202
111

1 is the secretary/treasurer; do they not?

2 A. That is what it says, yes. Mr. Brazeal, do you have

3 a hard copy? 

4 Q. I do have a hard copy. 

5 A. I would appreciate being able to review the whole

6 document.

7 Q. I will be more than happy to bring you the whole

8 document.

9 (Pause)

10 MR. BRAZEAL: Your Honor may I approach the witness?

11 THE COURT: Yes.

12 MR. BRAZEAL: Thank you, Your Honor. 

13 Q. Mr. Alexander, I want to direct your attention to the

14 last two pages of the document, which is a corporate resolution

15 to borrow. 

16 A. Corporate resolution to borrow or to guarantee? 

17 Q. That one is for Terry Manufacturing. Look at the next

18 document, which is from Perky Cap Company which is a corporate

19 resolution. Mr. Alexander, does that not reflect, at least

20 based upon the representations of Mr. Perkinson, Mr. Terry, Mr.

21 Roy Terry and Mr. Rudolph Terry, that they are the officers of

22 Perky Cap?

23 A. That is what the document says.

24 Q. All right, sir. And could you tell us what you

25 understand about the one point five million dollar loan from

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 111 of 202
112

1 Peoples Bank? And by that, I mean do you understand the

2 purpose for which the loan was taken out?

3 A. Well, I understand there are different versions of the

4 purpose of that loan. There is the version stated in the

5 documentation reviewed on my direct, which would release Mr.

6 Horton of the guarantee, and transfer, I think, the guarantee

7 obligation to Terry Manufacturing. There is another purpose

8 that has been asserted somehow to provide temporary, at least

9 a portion of it, temporary working capital for a limited period

10 of time. There is a lot of conflicting evidence about the time

11 and how the money was used.

12 Q. All right. Was there any conflict about the fact that

13 the entire one point five million dollars that was borrowed

14 from Peoples Bank by Perky Cap was ultimately deposited into a

15 debtor bank account?

16 A. No, there is no conflict there.

17 Q. All right, sir. And at the same time, Perky Cap

18 pledged certain of its assets, did it not, to secure the one

19 point five million dollar loan? Namely, the plant and

20 equipment.

21 A. Yeah. I couldn’t remember whether the equipment was

22 pledged or not but I remember the real estate was pledged and

23 I also remember this side deal that Mr. Horton cut for the

24 promise to repurchase that collateral if for some reason there

25 was a default in the note by Perky Cap.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 112 of 202
113

1 Q. And is it unusual for one company to borrow money and

2 funnel it directly into another company?

3 A. You know, this transaction had a lot of unusual

4 elements about it. It starts with how the bank underwrote the

5 transaction. Instead of their chief credit officer who is

6 responsible for underwriting the credit, the president overrode

7 that person and completely usurped their underwriting process

8 to make this loan. The credit officer even testified that he

9 thought Perky Cap was insolvent when the loan was made, which

10 is unusual. 

11 And then the third point that was unusual was the

12 after the fact, side deal struck between Mr. Horton and Peoples

13 Bank to repurchase the collateral in the event of default.

14 And, yes, the money transferring the way it did is unusual.

15 Now, if you take out all of those unusual elements and then

16 assume they don’t exist, then the answer to your question is,

17 no, companies borrow money and transfer it all of the time, but

18 it is the totality of the facts and circumstances that make

19 this a relatively unique transaction.

20 Q. Was it customary for company “A,” Perky Cap, to borrow

21 money from a bank, to pledge its collateral and then to pay all

22 of the proceeds of that loan into company “B,” the debtor?

23 A. Is it customary for Perky Cap to pledge its assets and

24 pay them into the debtor? The whole transaction of the money

25 being borrowed to pay off the loan guaranteed by Mr. Horton,

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 113 of 202
114

1 okay, and then it to be diverted through the Terry accounts and

2 ultimately, based on my analysis, out to the Terrys, the whole

3 thing is unusual, and I don’t know the answer to your question

4 about is this customary beyond saying it is really unusual.

5 Q. All right. What analysis have you conducted to show

6 that the money went out to the Terrys?

7 A. We are talking about the Peoples Bank loan again? 

8 Q. Right. 

9 A. The analysis that I testified to last summer.

10 Q. Okay. Have you reviewed the analysis from the Warren

11 Averett firm which shows that those funds were utilized to

12 sustain the debtor’s business?

13 A. I have read their report.

14 Q. Do you not agree that that money was utilized to

15 sustain the debtor’s business?

16 A. I don’t agree that that analysis shows where the money

17 went at all, no.

18 Q. Okay. Were you aware that they reached the

19 conclusion, though – and that is the Warren Averett firm –

20 reached the conclusion that the one point five million dollars

21 from Peoples Bank was used to sustain the operations of the

22 debtor?

23 A. I believe so, yes. I think I have read that.

24 Q. And were you aware that that analysis was based upon

25 records, all of which were in your custody and control?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 114 of 202
115

1 A. I know that they came and they used the records that

2 we used to come up with their analysis. Also I know there are

3 several fundamental flaws in their analysis.

4 Q. All right. Well, we will get to that in due course,

5 Mr. Alexander. You do believe that this was a dummy stock

6 sale, the sale in May of 2002; is that correct?

7 A. The evidence indicates to me, when you weigh it all,

8 that the stock sale was a simulation. It is based on the fact

9 that Mr. Horton has engaged in other simulated transactions,

10 not the least of which to mention the Wholesale Distributors’

11 transaction is a carbon copy of the Omni Investment Credit

12 factor fraud transaction that resulted in Mr. Rudolph Terry

13 going to prison. The documentation is virtually identical.

14 So based on that pattern and practice and based on

15 other elements, yeah, I believe it is a simulation.

16 Q. The document that you have that leads you to believe

17 that it is a simulation is Mr. Horton’s tax return; is that

18 correct?

19 A. It is the tax return, it is the lack of a stock

20 certificate, and then it is also the price paid for the stock

21 in light of the operating history of the company.

22 Q. What would’ve been the purpose for dummying up a stock

23 sale?

24 A. There is a lot of transactions that I have looked at

25 in this bankruptcy that I believe we will never know the real

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 115 of 202
116

1 story and this is one of those that I am not sure why this was

2 done the way it was done.

3 Q. So, Mr. Alexander, you’re telling us that you don’t

4 have any opinion that you can give us today about why the stock

5 sale was dummied up, so to speak?

6 A. I can’t answer the motive question on that.

7 Q. Or how it could have been used?

8 A. I don’t understand that question.

9 Q. Well, I mean, you were saying the motive for it, and

10 my question is – I mean, how would it have been used? How

11 would the stock sale have been used for some improper purpose?

12 A. I can’t answer that question.

13 Q. All right, sir. And did you review Mr. Giddens’

14 deposition?

15 A. I don’t believe so, no.

16 Q. All right. Were you aware that in Mr. Giddens’

17 deposition that he confirmed that Mr. Horton never took a loss

18 write-off from the Perky Cap stock?

19 A. I will have to let that speak for itself.

20 Q. All right, sir. I mean, you’re saying that the K-1

21 evidences that there was no stock transaction and one possible

22 reason perhaps for not actually transferring the stock would be

23 so that someone could obtain the write-down or the write-off of

24 the loss from the company. Is that a possibility?

25 A. I don’t think that is what I am saying. What I am

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 116 of 202
117

1 saying is that tax return was filed with the federal government

2 under penalties of perjury and it reflects that he still owns

3 the stock. So I am placing more weight on that evidence than

4 the paperwork that was done up to try to support that the stock

5 did transfer.

6 Q. Okay. And what I am asking you to consider is that

7 there was no monetary advantage to Mr. Horton in reporting it

8 that way on his tax return, as confirmed by Mr. Giddens,

9 because he was unable to use the loss to his benefit. Were you

10 aware of that?

11 A. I can’t speak to that.

12 Q. All right, sir. Were you aware of the fact that Mr.

13 Giddens testified that he did not discuss the stock transaction

14 with Mr. Horton?

15 A. I will really just have to let his testimony speak for

16 itself. No, I haven’t read his deposition.

17 Q. All right, sir. Are you aware of the fact that he

18 said that he did not present the K-1 to Mr. Horton – I am sorry

19 – that he did not review the K-1 with Mr. Horton?

20 A. No.

21 Q. All right, sir. As I understand it, Mr. Alexander,

22 Perky Cap Company filed bankruptcy; is that your understanding?

23 A. That is my recollection.

24 Q. All right, sir. Did you ever contact the trustee in

25 the Perky Cap Company to try to ascertain from the Perky Cap

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 117 of 202
118

1 stock book whether the stock transfer actually occurred?

2 A. I did not.

3 Q. All right, sir. So thousands of hours spent in this

4 case trying to determine whether the debtor’s business

5 operations, we now have got you impugning the integrity of Mr.

6 Horton, claiming that he dummied up a stock sale, and you never

7 attempted to review the stock book or the corporate records of

8 Perky Cap; is that what you’re telling us, Mr. Alexander?

9 A. No, that is not true.

10 Q. Well, tell us what you did. 

11 A. I didn’t make any attempts after they filed for

12 bankruptcy but, before they filed for bankruptcy, I had several

13 conversations with Melanie Nugent and her husband, who I can’t

14 remember his name at this time. They sent us substantial

15 amounts of records and we reviewed all of those. It raised as

16 many questions as it answered and it did not answer this

17 question.

18 Q. What about the Perky Cap stock book; did you ever

19 review that?

20 A. We asked for everything they had and, to my knowledge,

21 we didn’t receive a Perky Cap stock book.

22 Q. All right, sir. Mr. Alexander, we reviewed earlier

23 the documents associated with the May 30 of 2002 stock sale,

24 the one we have been discussing, and you were there for Mr.

25 Horton’s deposition. Do you recall that Mr. Horton indicated

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 118 of 202
119

1 that part of the overall transaction was that they were

2 acquiring the remaining stock of Perky Cap, that being the

3 Terrys, to the exclusion except for Mr. Perkinson’s stock and

4 that, because of that, they were stepping down from the board

5 and resigning as officers. Do you recall that?

6 A. Not in that level of detail but that sounds right.

7 Q. All right. You made some mention in your direct

8 testimony, Mr. Alexander, that you thought that, or a purpose

9 of the loan from Peoples Bank was to see that the Farmers and

10 Merchants Bank was paid off, the loan was paid off, and that

11 that loan had been guaranteed by Mr. Horton. Do you recall

12 that?

13 A. Yes.

14 Q. All right, sir. Do you know or were you aware that

15 Mr. Horton actually had to pay off the Farmers and Merchants

16 note himself?

17 A. I wasn’t aware if it had been paid off. I was aware

18 that the proceeds of the Peoples Bank of Eatonton loan was not

19 used for that purpose.

20 Q. All right, sir. So we have reviewed several documents

21 concerning the stock sale that purport to exhibit that a stock

22 sale occurred. There is one document that is the K-1 to Mr.

23 Horton’s tax return that did not reflect any change in the tax

24 return in the K-1 reflection of the stock ownership. And Mr.

25 Giddens testified that he did not discuss the K-1 with Mr.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 119 of 202
120

1 Horton.

2 Isn’t it just as likely, Mr. Alexander, that the

3 document that is wrong is the one document that you are relying

4 upon, the K-1 to Mr. Horton’s return that Mr. Giddens admits

5 that he never reviewed with Mr. Horton? Isn’t that just as

6 possible, Mr. Alexander?

7 A. You know, if that is all that there was, that might be

8 worth additional consideration but, even if the stock did

9 transfer, it is not possible for those payments that were made

10 to in any way equate to the fair value of that stock. In other

11 words, those payment streams couldn’t possibly be equivalent

12 value because that stock is a stock in a company that is losing

13 money, is insolvent and all of its assets are pledged.

14 Q. I understand that, Mr. Alexander, and I understand

15 your point about it is that the stock payments themselves,

16 whether they actually paid more for the stock than you or I

17 would’ve paid, that is your point about it. 

18 A. Paid more than fair market value.

19 Q. Paid more than fair market value but, if we go back to

20 November 10 of 2000, there is no dispute but what that sale

21 took place; is that right, the stock sale from November 10 of

22 2000?

23 A. I don’t have the same criticisms of that. That is the

24 Cotina Terry and Allie Robinson transaction? 

25 Q. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 120 of 202
121

1 A. No, I don’t have the same criticisms of that

2 transaction.

3 Q. And they paid the same pro rata price back in November

4 of 2000; did they not?

5 A. I think the math works out that way.

6 Q. All right, sir. So the exorbitant price that you

7 claim for May of 2002 where you say they dummied up the stock

8 sale, that was the same price per share from November of 2000

9 where you admit that the stock sale occurred; is that not

10 right, Mr. Alexander?

11 A. I think that is right. So when the ten percent

12 transaction took place, the price per share was the same as

13 when the controlled transaction took place, which is another

14 extremely unusual event because control comes with a premium,

15 so normally you would pay more for that. But the whole thing

16 just doesn’t make any sense because you have got a company,

17 like any company who is having severe financial trouble and

18 ends up filing for bankruptcy, stockholders don’t usually

19 receive any value in those situations and their stock is

20 usually not worth very much. And both of these transactions

21 people are paying, what you would back into on a conservative

22 basis, two million dollars for this company.

23 Q. Mr. Alexander, since you brought up the issue of the

24 price paid for the stock, let’s consider your testimony earlier

25 this morning where you indicated that the value of the stock,

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 121 of 202
122

1 I believe you indicated that it was not an arm’s-length

2 transaction; is that essentially what you testified or is that

3 your opinion?

4 A. Yes.

5 Q. All right, sir. And that applies to both the stock

6 sale in November of 2000, which you admit occurred, and the

7 stock sale in May of 2002, which you dispute occurred; is that

8 correct? 

9 A. Yes. 

10 Q. All right, sir. Now, if it wasn’t arm’s-length, that

11 implies there was something else going on; right? Is that what

12 you’re telling us, that there was some impropriety or something

13 going on other than just the purchase of the stock?

14 A. Well, if you want to back into it, maybe what I am

15 really talking about is arm’s-length in the context of fair

16 market value, willing buyer/willing seller. It is not a fair

17 market value transaction, and that is what I meant by saying it

18 was not arm’s length.

19 Q. Okay. So you’re not intimating that there was

20 anything improper about the price paid, that there was some

21 other motive or something going on; you’re basically just

22 saying because more than fair market value was paid for the

23 stock, that it wasn’t arm’s length?

24 A. Yeah, I think what I’m really saying is that to the

25 extent there was any benefit to the estate of Terry

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 122 of 202
123

1 Manufacturing of having this relationship with Perky Cap, to

2 the extent that relationship was purchased above fair market

3 value, that diminishes the estate.

4 Q. Do you have any judgment as to why the Terrys paid the

5 amounts that they did for the stock at issue, the Perky Cap

6 stock?

7 A. No.

8 Q. Have you read the testimony or were you aware of the

9 testimony from both Mr. Horton and Mr. Terry that Mr. Terry

10 believed that he could develop a synergy between Terry

11 Manufacturing, which manufacturers, as I understand it,

12 everything basically but caps, and Perky Cap, which

13 manufactures the caps? Were you aware of that testimony?

14 A. Yes.

15 Q. All right, sir. And so the value to Mr. Terry might

16 be greater than fair market value, or at least he might have

17 thought that it was; is that not true?

18 A. I don’t know. I am here testifying about fair market

19 value.

20 Q. All right, sir. So you’re not here to tell us that

21 Mr. Terry himself didn’t believe that that might have been a

22 fair value when he was purchasing the stock, a fair value to

23 him, something he was willing to pay to procure that stock?

24 A. I don’t want to mince words with you but fair value in

25 the context that I am using it here is fair value to the

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 123 of 202
124

1 estate, which is fair market value, and if Mr. Terry for

2 whatever reason believed that it was worth more to him

3 personally than fair market value, I think it is only

4 appropriate for me to testify to what fair market value is and,

5 if there is any special value that goes beyond that that would

6 not inure to the benefit of the estate, I don’t think is fair

7 to the estate to count that in this analysis.

8 Q. I understand. Because you said it was not an arm’s9 length transaction, I just want to make sure that you weren’t

10 aware of any facts or evidence that might suggest that, you

11 know, Mr. Terry wasn’t buying it at what he deemed to be an

12 appropriate price. That is meant to be a question. 

13 A. I’m not sure I understood what the question was.

14 Q. Well, the question about it is what you are testifying

15 is it is not arm’s-length because it wasn’t fair market value

16 for the stock; is that correct?

17 A. Yes, it is one of the reasons.

18 Q. All right, sir. And my question for you is are you

19 aware of any facts which would suggest that Mr. Terry had any

20 improper motive in paying that much for the stock?

21 A. In the micro view of just this one transaction, am I

22 aware of any facts, I think any of the facts I have already

23 testified about. In the macro view, I mean, there is a lot of

24 information that raises a lot of questions about Mr. Terry’s

25 motives.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 124 of 202
125

1 Q. What did Mr. Terry have to gain by paying too much for

2 the stock?

3 A. I can’t possibly answer that question. I do not know.

4 Q. That is my point, Mr. Alexander. Thank you.

5 Mr. Alexander, you earlier testified that you could

6 find no connection between the November 10, 2000, stock

7 purchases by the Terry women and the five point five million

8 dollar loan of that same date from American Real Estate; is

9 that correct?

10 A. That is correct.

11 Q. All right, sir. Were you aware that in the loan

12 agreement for the five point five million dollar – that in the

13 loan agreement for the five point five million dollar loan that

14 there was cross-default language between the five point five

15 million dollar loan and the stock purchase notes?

16 A. Yes.

17 Q. All right, sir. Did that not join the two together in

18 some sense?

19 A. I considered it when I rendered my opinion.

20 Q. All right. So your opinion is there was no

21 connection. You’re not telling the court that there are not

22 documents which reflect a connection between the two?

23 A. Well, you know, I think that the evidence is clear

24 there is a cross-default provision in there. Also cross25 default provisions are common between multiple loan agreements

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 125 of 202
126

1 all done for different purposes when the lender is the same

2 entity. So I don’t think it establishes any special connection

3 between the two transactions, and that was considered in my

4 opinion.

5 Q. All right. Mr. Alexander, I guess my question for you

6 is suppose that the payments on the stock purchase notes had

7 stopped, suppose that Terry Manufacturing had stopped making

8 the payments from the Cotina Terry note and the Allie Robinson

9 note, would American Real Estate, owned by Mr. Horton, have had

10 the right to call the five point five million dollar loan due

11 and payable based upon the cross-default language?

12 A. And based upon my training as an accountant, I will

13 answer that question. I would assume so.

14 Q. All right, sir. Were you aware from the payment

15 history on the Cotina Terry and the Allie Robinson notes that

16 they were always timely made?

17 A. Yes.

18 Q. All right, sir. And is that unusual for this debtor

19 to make timely payments?

20 A. Oh, it depends on who it is. 

21 Q. I think that’s right. And with the trade vendors,

22 they did not pay timely but with the banks and with Mr. Horton,

23 American Real Estate, it appears that they did pay timely; is

24 that right? Is that essentially true?

25 A. You can really cut it a little bit differently with

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 126 of 202
127

1 the – I’m going to set Mr. Horton to the side but, if you set

2 off Mr. Horton to the side, he fits in the same category as

3 everyone else who would have immediately terminated this

4 company’s existence if they hadn’t been paid timely. The power

5 company, people like that, transportation companies, all were

6 paid timely and Mr. Horton also fits in that category, but I

7 don’t understand why.

8 Q. You don’t think calling a five point five million

9 dollar loan due might not have been a reason to keep him paid

10 timely?

11 A. A five point five million dollar loan? 

12 Q. Yes, sir. 

13 A. You know, not having a debt come due immediately, yes,

14 that would be a reason to pay it. They didn’t pay a lot of

15 debts timely.

16 Q. No, I understand that, but they paid Southtrust

17 timely, correct?

18 A. Correct.

19 Q. And they paid Mr. Horton timely and his company,

20 American Real Estate, correct?

21 A. The situation with Southtrust is a little different

22 because what you have is you have Southtrust is on one side of

23 what I will call the knowledge wall. In other words, they are

24 outside. They do not have any idea of the financial problems

25 Terry Manufacturing is going through. Okay. And then even the

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 127 of 202
128

1 unsecured creditors who also are on the outside are probably

2 even further away. And then you have this group of people,

3 which I will call, for lack of a better word, profiteers who

4 are kind of inside the wall. I mean, their only existence in

5 many cases is to serve and feed the desperate financial

6 situation of Terry, and the transactions of Mr. Horton’s fit

7 right into that category because I have looked at two of his

8 transactions, one through American Real Estate and one through

9 Wholesale Distributors, and he was earning forty percent fees.

10 And it is impossible for a company in the textile business to

11 ever pay that type of return on capital. In other words, they

12 were walking dead. 

13 The profiteers were in there. They had to know that

14 they were there to extract a profit while the company was still

15 a walking corpse. So I put them in a different category than

16 Southtrust. Southtrust had be paid timely because you couldn’t

17 keep the facade going if you ever missed a payment with

18 Southtrust.

19 Q. What about the facade with Mr. Horton? You don’t

20 think there was any facade towards Mr. Horton?

21 A. I think it is a measure of degrees. You know, it kind

22 of raises a question about victims and the range of victims.

23 There are the innocent victims and then there is the people who

24 were profiting on the situation and some of them got burned,

25 too.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 128 of 202
129

1 Q. Well, and my point about it is, if Mr. Horton is owed

2 five point five million dollars on note “A,” which is from

3 American Real Estate, is he going to engage in activity that is

4 going to bring about – that he thinks is going to bring about

5 the debtor’s downfall so that the debtor won’t be able to repay

6 the five point five million dollars?

7 A. I can’t speak to that.

8 Q. Well, I mean, I think what you’re saying is that he

9 was a profiteer and he was going in and he was making forty

10 percent and that is one of the things that contributed to the

11 debtor’s downfall. Why would anybody engage in activity he

12 thinks is going to bring about the downfall of a company when

13 he is owed five and a half million dollars by them?

14 MR. BARRIERE: Let me just interpose an objection, Your

15 Honor. I don’t mean to break this off, but there seems to be

16 some misleading questioning. The loan at issue here is not to

17 Terry Manufacturing. I want to make sure we are talking about

18 the same loan. This is a loan to Roy and Rudolph Terry, so the

19 constant reference to the debtor under this loan is misleading,

20 and I think it is confusing the testimony we are getting in

21 response.

22 THE COURT: Okay. I mean, basically we have got a

23 fraudulent conveyance case and we have heard very little lately

24 about the Cotina Terry and the other Terry family member, and

25 then we are kind of going off into other stuff. I mean, I am

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 129 of 202
130

1 just – I think we are getting a little bit far afield. Let’s

2 try to stick close to the issues. I know it is a complicated

3 and there are a lot of pieces. 

4 I mean, I guess the point is there is a five point

5 five million dollar loan from this real estate outfit that Mr.

6 Horton owns or has an interest in and, you know, that has an

7 impact. I think I see your point, that it has an impact.

8 Okay. I mean, I think I see the point. Let’s try to stick

9 with what we have got here, the fraudulent conveyance case and

10 this five hundred and ninety-six thousand dollar piece that is

11 really at issue.

12 MR. BRAZEAL: Judge, respectfully, the Cotina Terry and

13 Allie Robinson notes were both executed on the same day as the

14 five point five million dollar loan and, as Mr. Barriere

15 pointed out, the five point five million dollar loan was to the

16 Terry brothers individually, but that money went into the

17 debtor’s coffers. There was money advanced in November,

18 December and January. 

19 And under Rubin versus Manny Hanny, the case that we

20 talked about earlier today, Your Honor – and I am digressing a

21 bit but I’m trying to lay the groundwork for the remainder of

22 his examination – Mr. Barriere says that the guaranty that

23 Terry Manufacturing gave for those two stock notes on November

24 10 of 2000 was in itself a fraudulent conveyance because the

25 debtor didn’t receive any value.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 130 of 202
131

1 THE COURT: Right. I understand that.

2 MR. BRAZEAL: And my argument is that the five point

3 five million dollar loan from Mr. Horton, which closed on the

4 same day, and which was to the Terry brothers and it was

5 guaranteed by Terry Manufacturing, that those proceeds were

6 then put into the debtor. So the totality of the

7 circumstances, in looking at reasonably equivalent value, is

8 that on November 10 of 2000 Terry Manufacturing, and over the

9 next couple of months, obtained five and a half million dollars

10 from the Terrys who borrowed it and gave a guaranty of four

11 hundred thousand dollars.

12 THE COURT: But didn’t Mr. Alexander already testify

13 that there is no – I mean, they may have taken place on the

14 same day but is there a relationship between those two?

15 MR. BRAZEAL: Well, that is what I was trying to get

16 at, Your Honor. I was getting at the fact that they are cross17 defaulted.

18 THE COURT: Okay.

19 MR. BRAZEAL: And under the Rubin versus Manny Hanny

20 case, benefit to a debtor – I mean, essentially what happened

21 is – well, I guess I ought to question Mr. Alexander about it.

22 THE COURT: Well, if you think it is central to your

23 defense, I don’t want to cut you off but I am kind of

24 struggling with this. I am kind of struggling with the

25 connection between the five point five million, you know, in

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 131 of 202
132

1 this case but go ahead. I will overrule the objection and let

2 you go for a while.

3 Why don’t you rephrase your question. I’m sure Mr.

4 Alexander has lost track of – 

5 MR. BRAZEAL: I’m sure, Judge. I have, as well.

6 BY MR. BRAZEAL: 

7 Q. Mr. Alexander, my question was having to do with

8 whether you thought that Mr. Horton had inside knowledge about

9 the debtor. You talked about a facade. Is it possible, Mr.

10 Alexander, that the debtor was making regular payments to Mr.

11 Horton, (a), so that the five point five million dollar loan

12 didn’t get called, which the debtor had guaranteed, and, (b),

13 so that Mr. Horton would think everything was rosy? Is that a

14 possibility?

15 A. I am having difficulty because I don’t think I have a

16 copy of the five point five million dollar loan and, if I could

17 get a copy of that loan, if I am going to be cross-examined on

18 it, and – 

19 THE COURT: Okay. It is Exhibit 1; isn’t it?

20 THE WITNESS: Yes, that is all I need.

21 MR. BARRIERE: If I could approach, Your Honor, I have

22 a copy of the loan agreement if that would be of any assistance

23 to the witness for the five point five million dollar loan.

24 THE WITNESS: Yeah.

25 (Pause) 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 132 of 202
133

1 BY MR. BRAZEAL:

2 Q. Where I want to wind up on the loan agreement or on

3 the five point five million dollar loan with you is for you

4 confirm through the loan agreement, or whatever documents you

5 deem appropriate, that there was cross-default language and

6 that, had the Terrys not made payments timely on the note – or

7 the debtor not made payments timely on the Cotina Terry note or

8 the Allie Robinson note, that American Real Estate would have

9 had the right to call the five point five million dollar loan?

10 MR. BRAZEAL: Do you stipulate to that?

11 MR. BARRIERE: Your Honor, in the interest of

12 expedition, the document says that there are cross-default

13 provisions and I presume if the Terrys hadn’t paid their other

14 notes, those rights might or might not have been exercised.

15 THE COURT: Okay. I see Exhibit 2, which is the loan

16 agreement, paragraph twelve, which begins at the bottom of page

17 five, which is this cross-default provision, I believe, that

18 Mr. Brazeal is referring to. I see it right here.

19 MR. BRAZEAL: Thank you, Your Honor. And Exhibit 10 –

20 I may not even have to approach the witness. Brent, do you

21 stipulate that Exhibit 10 is a guaranty by the debtor, Terry

22 Manufacturing, of the five point five million dollar loan?

23 MR. BARRIERE: I do. It speaks for itself.

24 MR. BRAZEAL: All right. Thank you.

25 BY MR. BRAZEAL: 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 133 of 202
134

1 Q. So, Mr. Alexander, when the loan agreement and the

2 guaranty are taken into account, is it true that if defaults

3 had been made on the two stock purchase notes that American

4 Real Estate could have demanded the balance on the five point

5 five million dollar loan from Terry Manufacturing Company?

6 A. As an accountant, I would assume so, but I want to

7 make sure the record is clear that I am a CPA and not a lawyer.

8 Q. Okay. 

9 A. I’m not trying to not answer the question; I just –

10 there are licensing issues at hand here.

11 Q. Fair enough. Mr. Alexander, I would like to turn your

12 attention to Exhibit 54. I wish I could figure out how to show

13 it on the screen. 

14 MR. BARRIERE: It is our exhibit?

15 MS. LASKY: Uh-huh.

16 MR. BARRIERE: There is a binder in front of him.

17 THE COURT: That is not it. It is the other one.

18 MS. LASKY: I will get it. 

19 (Pause) 

20 BY MR. BRAZEAL:

21 Q. Mr. Alexander, as I understand it, Exhibit 54 is where

22 you looked at the debtor’s relationship with Perky Cap and

23 tried to ascertain whether there was a benefit received by the

24 debtor from the transaction or whether there was a net cost; is

25 that correct?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 134 of 202
135

1 A. Yes, based on cash received and cash paid.

2 Q. All right, sir. Now the five hundred and ninety-seven

3 thousand dollars represents the amount that the debtor paid on

4 the three stock purchase notes; is that correct?

5 A. Yes. The three loans at issue, yes.

6 Q. All right, sir. And what does the one point two – I

7 am sorry – one point three-two-two million dollar figure

8 represent?

9 A. Those are Perky Cap sales to Terry Manufacturing over

10 the same period of time.

11 Q. All right. So that was money that was – no, those

12 were caps, I take it, received by Terry from Perky?

13 A. It is the value of the caps received from Perky.

14 Q. All right, sir. Then you have got payments to Terry

15 Manufacturing to Perky during the same time of one point six16 seven-one?

17 A. That is correct.

18 Q. Were those payments for the purchase of the caps?

19 A. Some of them were.

20 Q. Okay. What were the other payments for?

21 A. Some of them appear to be paying Perky Cap’s payroll

22 and other advances for Perky Cap’s working capital needs.

23 Q. Okay. We discussed earlier the Peoples Bank loan of

24 one point five million dollars, the proceeds of which were paid

25 into the debtor; were they not?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 135 of 202
136

1 A. They were deposited into a debtor account.

2 Q. All right, sir. And if you really wanted to conduct

3 or present the court with a benefit cost analysis on that

4 relationship, would it not include the one point five million

5 dollars that the debtor obtained through the loan initiated

6 with Peoples Bank by Perky Cap and Mr. Horton?

7 A. That is a listing of Perky Cap sales off of their

8 sales register and checks made payable to Perky Cap and it does

9 not include anything else. Now whether you should include the

10 loan proceeds or not gets back, I think, to a fundamental

11 difference in my position in the bank cases and I think the

12 banks, which boils down to whether or not anyone could

13 reasonably trace on a specific identification those loan

14 proceeds in light of the degree of commingling, falsification

15 of documentation like the Wholesale Distributors transactions

16 that we saw in this matter. 

17 And it is my opinion that you cannot do it on a

18 specific identification; that you have to step back and do it

19 the same way the IRS does it when they have people evading

20 taxes and look at it in global. When you do that, you see that

21 the money, when you analyze the money, including this Peoples

22 Bank of Eatonton loan, that it came in and that money was

23 funneled out, in addition to money that was actually earned on

24 the operations was funneled out on top of that money. So more

25 money was funneled out than ever came in from sources like

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 136 of 202
137

1 Peoples Bank of Eatonton.

2 Q. I understand what you’re saying about that, Mr.

3 Alexander, when you look globally; but if we look only at the

4 Perky Cap transactions with the debtor, the transactions where

5 money went into the debtor, regardless of what happened to it,

6 right, would you not have to say that there was a net benefit

7 to the debtor by virtue of the fact that they obtained another

8 one point five million dollars from Peoples Bank? 

9 A. What I just said was the money came in and went out.

10 Q. All right. So if the money came in, if the one point

11 five million dollars had come in and was then utilized by the

12 debtor in its operations, that instead of there being a net

13 cost of nine hundred and forty-six thousand dollars, there

14 would be a net benefit of a little over five hundred thousand;

15 is that correct?

16 A. In the purely hypothetical sense, in the simplest

17 world where you have books and records and arm’s-length

18 transactions, had the money come in and been spent for company

19 purposes, I would agree in that hypothetical that the one

20 million five should be shown on that chart; but that is not the

21 situation we are dealing with. We are dealing with the

22 situation where thirteen million dollars in fifty days was

23 deposited into an account. That is the same time frame of the

24 May 2000 loan. And of the thirteen million, seven million of

25 it was just them churning money all over the place causing it

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 137 of 202
138

1 to lose its identity.

2 So in that scenario it is my opinion that you cannot

3 assert that the million five went into this account and was

4 spent on operations, and there is a whole litany of reasons why

5 you can’t.

6 Q. Were you aware that Mr. Slaton and Mr. Averett differ

7 with your analysis?

8 A. I am aware that they differ with me.

9 Q. Were you aware that they contend that the one point

10 five million dollars was used to sustain the debtor’s

11 operations?

12 MR. BARRIERE: Your Honor, I’m going to have to object.

13 I believe the record is, one, that those were – 

14 THE COURT: I will tell you what. If I don’t have to

15 listen to your explanation, I will sustain your objection.

16 MR. BARRIERE: Thank you. 

17 BY MR. BRAZEAL: 

18 Q. As far as the Wholesale Distributors and American

19 Testing Laboratories transaction, you testified, Mr. Alexander,

20 that those would have affected the outside world or something

21 to that effect; is that correct?

22 A. I am not sure I recall that testimony affecting the

23 outside world.

24 Q. Well, I think you were trying to say that those

25 transactions could have been presented to the outside world as

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 138 of 202
139

1 a means of pumping up sales of the debtor; is that consistent

2 with your recollection of your testimony?

3 A. Well, if that is what you heard, let me restate it to

4 be more clear. The documentation of those transactions

5 attempts to support a legitimate sale that, when you further

6 probe into it, you quickly discover was, under accounting

7 terms, which looks at the substance of the transaction over the

8 form, was not a legitimate sale, that goods never shipped, they

9 never transferred, no sale occurred. One would do that when

10 they were trying to generate support, including cash movement,

11 okay, one would do that if they were trying to generate

12 legitimate support to support the scams and shams that they

13 were running with their audited financial statements.

14 Q. My only question, Mr. Alexander, was do you have any

15 testimony today, is there any evidence that those particular

16 transactions at issue were ever listed in the debtor’s accounts

17 payable – I am sorry – well, accounts receivable or accounts

18 payable?

19 A. As I started this out, you recall that there is no

20 debtor’s accounts payable record, and the only receivables

21 record relates to the McDonald’s business. There was never any

22 accounts receivable records located. So the answer to that

23 question is I have no idea what was listed, if one ever

24 existed, in the accounts payable or the accounts receivable

25 record.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 139 of 202
140

1 Q. Do you know whether those specific transactions were

2 ever utilized in any financial statement that the debtor

3 provided to any one?

4 A. I think the limit of my testimony is it is the type of

5 documentation that one would generate to disguise and support

6 the legitimacy of otherwise illegitimate circumstances, just

7 like the Omni Investment Credit transactions – 

8 Q. I understand. Just so we can try to get to the bottom

9 of the testimony, Mr. Alexander, I am just trying to make sure

10 that you’re not telling the court that there was some specific

11 use that you are aware that was made of those transactions as

12 far as deceiving Southtrust Bank or anyone in the outside

13 world?

14 A. All I am saying is I’m holding up – all I’m saying is

15 it lists merchandise and related services, no quantity, there

16 is no price, there is no date shipped. It is all indicia of a

17 bogus transaction, and then the money being transferred is

18 being transferred in such an obvious way that you can see a

19 million three goes out – comes in and a million, three seventy20 five is paid back forty-five days later.

21 Q. Mr. Alexander, that is not my question. 

22 A. I am sorry.

23 Q. My question is do you have any evidence that the

24 documents related to these sets of transactions were ever

25 utilized to present a false picture to the outside world?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 140 of 202
141

1 A. I don’t know of a circumstance where these particular

2 documents were used by anyone other than the Terrys and Mr.

3 Horton.

4 Q. That’s my question. Thank you, sir.

5 MR. BRAZEAL: Judge, that concludes a significant part

6 of my testimony or cross-examination of Mr. Alexander; however,

7 I do have some other things to run by him. For instance, Your

8 Honor, the debtor’s conduct and the fact that the debtor –

9 well, I just have some other questions for him in that regard.

10 THE COURT: Now is as good a time as any.

11 MR. BRAZEAL: Okay. 

12 BY MR. BRAZEAL:

13 Q. Mr. Alexander, you have already testified that the

14 debtor engaged in what you have termed as commingling; is that

15 correct?

16 A. Yes.

17 Q. All right, sir. What about money-laundering?

18 A. Earlier I have referred to the process of transferring

19 the money around and the issuance of checks to fictitious

20 vendors and the creation of bogus documentation as the kind of

21 techniques that people use when money-laundering, and that is

22 the extent of my reference to that word.

23 Q. All right, sir. Did the debtor, Terry Manufacturing,

24 ever use its funds to pay what you deemed to be personal

25 obligations of members of the Terry family?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 141 of 202
142

1 A. There is a large list of payments to a large group of

2 people that fall outside of the normal business activities of

3 the company. Some of them are very clear to see that they were

4 directly related to the Terrys’ personal benefit and some of

5 them were to people that we have so far determined just do not

6 exist.

7 Q. Sir, is it your testimony that Terry Manufacturing

8 customarily paid obligations of the individual Terrys?

9 A. No, it is my testimony that the Terrys individually

10 looted the company, but I don’t ascribe that to Terry

11 Manufacturing, the entity.

12 Q. Well, now, my only point about it was and I think what

13 you’re saying is the Terrys who controlled Terry Manufacturing

14 utilized the company to pay many of their personal obligations;

15 is that true?

16 A. I don’t know. What I don’t know is the whole question

17 of control, I think, is a murky legal question because there

18 are fifty-two stockholders that held preferred stock but they

19 all had the unilateral right to convert it to common and I

20 haven’t even run the numbers of whether they could end up

21 controlling the company after that happened. I don’t know.

22 But clearly the Terrys were the operators. They were the

23 owner/operators.

24 Q. Do you have any evidence that the preferred

25 shareholders ever participated in running the company or

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 142 of 202
143

1 operating the company?

2 A. No, I don’t think they ever did. They are just like

3 any other passive shareholder where someone who is running the

4 company owns some interest in the company but that the company

5 is largely held by a wider group of people.

6 Q. I’m just trying to make sure that I have got your

7 testimony correct because I keep getting some – well, the

8 Terrys operated the company; is that right? The Terrys

9 individually, Roy and Rudolph, operated Terry Manufacturing; is

10 that right?

11 A. Well, as you may or may not be aware, there are others

12 matters, recovery actions I am pursuing, and there are certain

13 joint venture partners that played an active role.

14 Q. Cintas?

15 A. Certain individuals at Cintas, yes.

16 Q. All right, sir. Well, I guess my question for you is

17 did the Terrys, through their operation of the company – I’m

18 talking about the Terrys individually – utilize company assets

19 for personal benefit?

20 A. I have been able to show they utilized some of the

21 company assets for personal benefit.

22 Q. All right, sir. In your prior testimony you also

23 indicated that they had engaged in what you termed skimming?

24 A. Yes.

25 Q. All right, sir. Could you tell us what skimming is

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 143 of 202
144

1 and, as briefly as you can, how that was utilized to divert

2 assets from Terry Manufacturing?

3 A. And I want to be clear, when you say “they,” we

4 arrived on-site and took control over the property on a Friday

5 afternoon, sometime around three o’clock. I can’t remember the

6 date. And we were supposed to come on Monday, so we surprised

7 them a little bit. And when we entered the controller’s

8 office, there was a stack of deposits related to the McDonald’s

9 business that dates back six months where they had set this

10 money aside and had bundled it up. It was in check form still

11 and they were holding it. I subsequently deposited those

12 checks and, by and large, they all cleared. And during that

13 same six-month period, they were depositing some of the checks.

14 So in that sense they were taking one check and setting it

15 aside – that’s the skim – and then maybe two or three checks

16 they would deposit and run through their bank account, and that

17 is what I meant by my previous testimony on skimming.

18 Q. All right, sir. 

19 A. And the person that I believe was doing that, because

20 I located the documents in his office, is not one of the

21 Terrys.

22 Q. All right. So you believe it was someone other than

23 the Terrys who was skimming those proceeds off or those funds?

24 A. I just know that is where I found the money, in

25 someone else’s office, not one of the Terrys.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 144 of 202
145

1 Q. Is it true that the Terrys provided fraudulent

2 financial statements to some of the creditors of Terry

3 Manufacturing?

4 A. I believe Mr. Terry has admitted to that in his plea

5 arrangement.

6 Q. All right, sir. Is it true that the Terrys, as you

7 testified earlier, came up with a fraudulent appraisal for the

8 plant or your best judgment about it is that they did?

9 A. I would like to just stop at the point of recognizing

10 his handwriting. I don’t really know who all was involved in

11 that.

12 Q. What about check kiting; did the debtor engage in

13 check kiting?

14 A. You know, check kiting has a real specific, narrow,

15 legal definition. It has a definition in my trade, too. So to

16 set that issue aside, there was rampant transferring of money,

17 some might be kiting, some not, but it all achieved an increase

18 in float, usable cash balances higher than the true available

19 funds, which is one of the problems of doing any kind of

20 tracing analysis because the bank says the money is there but

21 it is really not there. It is only there because they have

22 been transferring the money around. So you can clear a check

23 but, had they been operating legitimately, it shouldn’t have

24 ever cleared.

25 Q. Is that why the debtor maintained twenty-three bank

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 145 of 202
146

1 accounts, so that it could transfer the money around as you

2 have described?

3 A. I don’t know that. I don’t know why they maintained

4 so many accounts.

5 Q. Is it typical for a company of Terry Manufacturing’s

6 size to maintain twenty-three bank accounts?

7 A. The number of accounts is unusual.

8 Q. Did you ever find any books and records which

9 reflected any Board of Directors meeting or meetings of

10 shareholders of Terry Manufacturing?

11 A. Well, I was shown the Board of Directors book and I

12 was shown what I believe to be the stock book and I was shown

13 a whole filing cabinet of legal documents related to corporate

14 formalities on Friday and Friday night we were broken into and

15 there was only two things that we have identified that were

16 stolen and one was everything in that filing cabinet containing

17 the corporate formalities was stolen and ten empty boxes for

18 computers was stolen.

19 Q. Okay. So your testimony is, I suppose, that you at

20 one point saw a stock book or a minute book but you were never

21 able to review them in any detail?

22 A. Well, that day I didn’t review the corporate documents

23 but later, particularly related to the stock offerings that

24 were done, we went to the law firms and we recovered their copy

25 of those documents, so we have those.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 146 of 202
147

1 Q. Do you have any documents which indicate that they had

2 any regular Board of Directors meetings of Terry Manufacturing?

3 A. You know, when you say regular, I don’t have anything

4 that would indicate monthly meetings. Like I said, I have any

5 documents that would be entered into at the time of making a

6 loan transaction, some of the stuff you were showing me earlier

7 today. I have got typical, closely-held company documentation.

8 Q. All right, sir.

9 (Pause)

10 MR. BRAZEAL: Judge, I am in the place of my cross11 examination where I was going to deal with the tracing analyses

12 that were performed by Mr. Slaton, which was the report of

13 February 24. And if Mr. Slaton is going to testify about that,

14 then I really won’t belabor the point of going through it with

15 Mr. Alexander.

16 THE COURT: Here is what I would like you to do. Mr.

17 Barriere had Mr. Alexander up for about two hours this morning

18 and you have had him for about an hour and a half. If you have

19 any more questions that deal with his approximately two hours

20 of testimony, I think now is the time to ask them; but I really

21 don’t want you to spend any more time trying to force other

22 stuff through his mouth because, I mean, he is not going to

23 agree with what those guys say, so I think it is a waste of

24 time to try to get him to do it because I can tell you right

25 now he is not going to do it.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 147 of 202
148

1 MR. BRAZEAL: I concur with you, Your Honor.

2 THE COURT: So why don’t you just finish up with

3 anything more you need to ask that he has testified to this

4 morning, and then if you want to offer – well, actually it is

5 not your case yet, so you’re going to have to wait for your

6 case in chief and then we will see what you’re going to offer.

7 So let’s just see if we can finish cross if you have

8 any more but getting into this other stuff is really pretty far

9 afield at this point.

10 MR. BRAZEAL: Judge, the point about it is that Mr.

11 Slaton’s report utilizes – 

12 THE COURT: You have to remember we are on cross13 examination. He didn’t say anything about those guys unless

14 maybe it was responsive to a question you put to him earlier.

15 So I don’t see – I just don’t see where you’re going at this

16 stage of the trial with all of that.

17 MR. BRAZEAL: Judge, what he did testify to was that

18 there was no consideration received by the debtor, no

19 reasonably equivalent value that the debtor received. The

20 records that Mr. Slaton based his report on were all taken from

21 the trustee and they reflect that those three loans at issue,

22 the three that I have argued – 

23 THE COURT: I don’t really care what this guy Slaton

24 said at this point. If you have got a document that you want

25 Mr. Alexander to look at that you don’t think he has

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 148 of 202
149

1 considered, that he has misinterpreted, you can do that; but I

2 don’t really want to argue about what this other guy – I mean,

3 I understand we have got this mass of documents out there.

4 Alexander has looked at the documents. He has come to one

5 conclusion. You have had some guys who have looked at them and

6 maybe come to a different conclusion. Let’s just stick with

7 Mr. Alexander’s view at this point and then, if you want to

8 offer testimony at a later part of the trial as to somebody

9 else’s view, fine, but I would really like to kind of stick

10 with what Mr. Alexander said and any further cross you have of

11 that. I mean, I just don’t want you to try to force somebody

12 else’s testimony through his mouth. It is just not going to

13 get us anywhere.

14 MR. BRAZEAL: I understand that, Your Honor. I guess

15 what I want to make sure of is on my direct that –

16 THE COURT: But you are on cross.

17 MR. BRAZEAL: No, I understand but that on my direct

18 there is not going to be an objection made if I have to put Mr.

19 Alexander back on to identify some of these records.

20 THE COURT: We are going to end this real quick because

21 I don’t want to sit here and argue about what you might do and

22 what he might object to in the future. All I want to do is if

23 you have got any more questions within the scope of the direct

24 examination, ask them and, if you are done, let’s move on.

25 MR. BRAZEAL: Okay. Thank you, Judge.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 149 of 202
150

1 BY MR. BRAZEAL: 

2 Q. Mr. Alexander, I have pulled up on the screen what we

3 have marked as, and what has been proffered to the court as

4 Defendant’s Exhibit 58. 

5 A. Can you give me a shot of the whole document? 

6 Q. Sure. I will give you the entire document. We

7 utilized it in your deposition.

8 THE COURT: Did Mr. Alexander prepare this list?

9 MR. BRAZEAL: That is my understanding, Your Honor. At

10 least that is what came out in his deposition.

11 May I approach him, Your Honor?

12 THE COURT: Yes. 

13 BY MR. BRAZEAL:

14 Q. Mr. Alexander, during your deposition I had just asked

15 you to confirm that this exhibit and the attachments reflect

16 funds that were paid into the Bank of Wedowee, Terry

17 Manufacturing account; and I believe you confirmed that they

18 did, and that is my sole question as to this exhibit?

19 A. I honestly don’t recall that. I’m still back on did

20 I prepare this document, and anything you have got to refresh

21 my memory about the source of this document, I would appreciate

22 it.

23 MR. BARRIERE: Your Honor, not to belabor this, I am

24 fairly confident this is a document generated by counsel for

25 the Bank of Wedowee. It has his exhibit identification on it.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 150 of 202
151

1 If the witness can identify it, fine; if he can’t, I would

2 suggest we move on.

3 THE COURT: Okay. Mr. Brazeal, what is this? I’m

4 looking at Exhibit 58, third-party checks deposited into Terry

5 Manufacturing Company, Inc. Account.

6 MR. BRAZEAL: Judge, during Mr. Alexander’s deposition

7 I just asked him whether he disputed whether any of these

8 checks were actually deposited into the debtor’s account. I

9 think Mr. Barriere is correct, I misspoke. I do not believe

10 that Mr. Alexander prepared the document.

11 MR. BARRIERE: I object to this on relevance, Your

12 Honor –

13 THE COURT: I’m going to sustain. I don’t see the

14 relevance.

15 BY MR. BRAZEAL: 

16 Q. Mr. Alexander, do you still have a copy of your report

17 before you?

18 A. I do. I think it is Exhibit 44.

19 Q. I would like to direct your attention, Mr. Alexander,

20 to paragraph one on page four of your report. I would like to

21 direct your attention to the last sentence in that paragraph.

22 You testified during your direct examination that the debtor

23 used trade debt as a de facto revolving credit facility, which

24 is the language that you used here also. And I believe you

25 testified a bit earlier today during your cross about the check

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 151 of 202
152

1 kiting, and you also indicated that the debtor borrowed money

2 or had off-balance-sheet loans, I believe, and that all of

3 these were used as a way to sustain the debtor’s business

4 operations. Is that correct?

5 A. Yes.

6 Q. All right, sir. 

7 A. To continue.

8 Q. And is it true that, when you referred to private

9 persons in this opinion, that that would include the loans from

10 Mr. Horton and/or American Real Estate?

11 MR. BARRIERE: I object to the form of the question.

12 As to which loans are you talking about? Are you talking about

13 the three loans or a different loan?

14 MR. BRAZEAL: I’m talking about the three loans at

15 issue.

16 THE COURT: I will overrule the objection. I mean, I

17 think the question – you’re talking about TMC obtained off18 balance-sheet loans from private persons; were those persons

19 either Mr. Horton or who was the other –

20 MR. BARRIERE: Mr. Reynolds.

21 THE COURT: Mr. Reynolds. 

22 THE WITNESS: In the analysis – let me back up. The

23 analysis that I did of sources and uses of cash, we broke the

24 cash receipts into two – three groups – customers, capital

25 contributors which would be direct banks and stockholders, and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 152 of 202
153

1 then this large group of other moneys that flowed through the

2 accounts. And then we analyzed the use of those funds in those

3 groups the same way anyone who was trying to find out where the

4 money went and trace the funds would do it given the amount of

5 transfers and lack of documentation.

6 Mr. Horton’s loans are in that third group, which is

7 the group of deposits that came in. Whether all of his money

8 is in there or not, Your Honor, I don’t know. I haven’t even

9 looked to see, but there is money coming in. It goes into the

10 accounts and then it goes out. 

11 You cannot ascertain from this language that it is my

12 opinion – it is not to say that it is my opinion that that

13 money was used for operations. What I’m trying to say is that

14 money flowing into this company from undisclosed sources was

15 used to hide the true economic circumstances of Terry, and they

16 did it by transferring money around and creating thirteen

17 million in float when there is really only twelve – six million

18 in float and that kind of stuff. But when you go through a

19 tracing analysis the way it can be done, which is back to my

20 opinion, more money went out than came in. So it was all spent

21 by being taken out of the company.

22 Q. Mr. Alexander, I am just trying to determine whether

23 you believe that some of these loans from private persons were

24 used to sustain the operations of the debtor?

25 A. I think my opinion is, based on the way I have

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 153 of 202
154

1 approached the analysis, is the loans from the private persons,

2 to the extent there was any benefit, it was merely temporary.

3 Q. Did you say in order to sustain its operations

4 temporarily in your report?

5 A. No.

6 Q. Thank you. Mr. Alexander, I’m going to refer you to

7 what we have tendered as Exhibit 60, which I believe you

8 indicated was a document that you prepared while you were

9 working on the case to reflect funds that the Terrys

10 themselves, the Terry brothers received. Is that correct?

11 A. I can’t recall my testimony but I think – at least I

12 was trying to convey that that is a preliminary schedule and

13 the reason I can tell that, the number on there is twenty

14 million, one hundred and eight thousand dollars, and – is that

15 a receipts or a disbursement schedule? I can’t tell that. 

16 Q. I took it that it was a receipts because it said

17 receipts. 

18 A. Well, because it has got brackets on it, I believe it

19 is a disbursement schedule and the actual, final total of that

20 number was thirty-one million, two hundred and eighty-three

21 thousand dollars. So that is a preliminary schedule.

22 Q. As far as American Real Estate Investment Co., do you

23 believe that that number is correct, the eight point six-seven24 two, nine twenty-eight?

25 A. No.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 154 of 202
155

1 Q. Do you believe it is greater or lower?

2 A. I believe that number is too high. Like I said, it is

3 preliminary.

4 Q. Well, do you believe it is a net number?

5 A. Sitting here today, I don’t know, Ellis. There was

6 ten boxes, about twenty-five hundred documents in each box that

7 backs up that work and that is one schedule out of a process

8 that took place over many months.

9 Q. All right. I will present you with what has been

10 marked as Exhibit 61. Do you recognize that document?

11 A. It is part of a document. Can I see the whole thing?

12 Q. Sure.

13 (Pause) 

14 A. It is also a preliminary document.

15 Q. So you don’t know whether the numbers on American Real

16 Estate are correct or not?

17 A. I couldn’t tell you from that document.

18 MR. BRAZEAL: Judge, I think that completes my cross of

19 Mr. Alexander.

20 THE COURT: All right. We will break for fifteen

21 minutes.

22 (Recess from 3:23 p.m. until 3:44 p.m.)

23 THE COURT: Please be seated. 

24 MR. BARRIERE: Your Honor, unless the court has

25 questions, I am going to ask that Mr. Alexander be excused and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 155 of 202
156

1 I will call my next witness.

2 THE COURT: All right. Thank you. You may step down.

3 MR. BARRIERE: Your Honor, the trustee calls N. D.

4 Horton.

5 THE COURT: Okay.

6 (N. D. HORTON, JR., WITNESS, SWORN)

7 DIRECT EXAMINATION

8 BY MR. BARRIERE: 

9 Q. Good afternoon, Mr. Horton. 

10 A. How do you do, sir? 

11 Q. My name is Brent Barriere. I think we have met

12 before. I have a few questions for you this afternoon. The

13 first of which is could you state your full name and address

14 for the record, please? 

15 A. Nevilles Dudley Horton, Jr., 257 Rose Creek Road,

16 Eatonton, Georgia, 31024. 

17 Q. Mr. Horton, what is American Real Estate? 

18 A. It is a company that primarily deals in real estate

19 investments and it is a limited partnership between N. D.

20 Horton, Jr., myself, as a limited partner; Jamie Reynolds is a

21 limited partner; and RJ&J Enterprises, Inc., which is the

22 general partner; and I am the president of RJ&J Enterprises,

23 Inc. 

24 Q. It is a Georgia limited partnership? 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 156 of 202
157

1 Q. And where is its offices located? 

2 A. In Eatonton, Georgia. 

3 Q. All right. Does American Real Estate have offices

4 separate from your personal office? 

5 A. Yes, sir. 

6 Q. Does it have its own employees? 

7 A. It has an office in Greensboro, Georgia. 

8 Q. In Greensboro, Georgia? 

9 A. Yes, sir. 

10 Q. All right. If I go to that office today, am I going

11 to meet persons employed by American Real Estate? 

12 A. Yes, sir. 

13 Q. How many employees does American Real Estate have? 

14 A. Two, I think. 

15 Q. Two, you think. All right. 

16 A. Maybe three. 

17 Q. Two or three employees? 

18 A. Yes. 

19 Q. All right. And it keeps its own financial books and

20 records separate and apart from N. D. Horton’s books and

21 records? 

22 A. Yes. 

23 Q. And there is an American Real Estate tax filing

24 separate from N. D. Horton’s tax filing; is that correct? 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 157 of 202
158

1 Q. All right. It has its own bank accounts? 

2 A. Yes. 

3 Q. All right. It has investments in a variety of real

4 estate which is not your personal real estate; is that correct?

5 A. That is true, yes. 

6 Q. And that has been true from the time American Real

7 Estate was formed until today; is that correct? 

8 A. Yes. 

9 Q. All right. When was American Real Estate formed? 

10 A. It was in the mid eighties. I think it was ‘84, but

11 it may have been ‘85. 

12 Q. Okay. Now, in Louisiana we use a terribly gobbled

13 term, that it is a separate juridical entity, and that just

14 means it is a separate legal entity separate from N. D. Horton.

15 Is that true about American Real Estate? 

16 A. Yes, sir. 

17 Q. All right. Now, what about Wholesale Distributors;

18 is Wholesale Distributors a corporation? 

19 A. It is a trade name actually. American Testing

20 Laboratories, Inc. is the corporation that does business as

21 Wholesale Distributors and also as Horton Components. 

22 Q. Horton Components. Where is American Testing

23 Laboratories? Shall I refer to it as Wholesale Distributors or

24 American Testing Laboratories, or you don’t care, either one?

25 A. Whichever way you want to. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 158 of 202
159

1 Q. Either one will work. All right. Wholesale

2 Distributors, where is its office located? 

3 A. It is located on the Milledgeville Highway adjoining

4 Horton Homes property. 

5 Q. It is a corporation, I take it? 

6 A. Yes, sir. 

7 Q. Organized under the laws of the state of Georgia? 

8 A. Yes, sir. 

9 Q. Files its own tax returns? 

10 A. Yes, sir. 

11 Q. Has its own auditors? 

12 A. Yes, sir. 

13 Q. American Real Estate has its own auditors; is that

14 correct? 

15 A. Yes, sir. 

16 Q. Does it generate annual audited financial statements?

17 A. We don’t do audited statements. We do a statement.

18 Q. You do a financial statement for American Real

19 Estate. Is that reviewed by an outside accounting firm? 

20 A. No, sir. 

21 Q. All right. Wholesale Distributors, it generates an

22 annual financial statement, I take it? 

23 A. Yes, sir. 

24 Q. Is that reviewed by an outside accounting firm? 

25 A. No, sir. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 159 of 202
160

1 Q. All right. Who generates those financial statements

2 for Wholesale Distributors? 

3 A. Rick Cogdill. 

4 Q. What firm is he with? 

5 A. Well, he is a CPA and he is employed by American

6 Testing or Wholesale Distributors. 

7 Q. Okay. And who prepares the financial statements for

8 American Real Estate? 

9 A. Carol Jones. 

10 Q. Okay. And she is an employee of American Real

11 Estate? 

12 A. Yes. 

13 Q. All right. Now, Wholesale Distributors, you told me

14 has its offices there in Eatonton, has its own office. Does it

15 have its own employees? 

16 A. Oh, yes, sir. 

17 Q. How many employees, approximately? 

18 A. I would say around a hundred and fifty. 

19 Q. A hundred and fifty employees? 

20 A. Yes. 

21 Q. Could you describe for the court the business of

22 Wholesale Distributors; what does it do? 

23 A. Well, it is a distribution company. It started out

24 – 

25 Q. I am sorry. I was distracted. It is a distribution

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 160 of 202
161

1 company? 

2 A. It is a distribution company. It sells to

3 manufacturers or businesses or wholesalers. They make molding,

4 picture frame molding, pictures, mirrors. They buy from

5 different companies and then sell it to smaller EOM

6 manufacturers or EOM manufacturers of large size. 

7 Q. I am sorry. EOM? 

8 A. Yes. 

9 Q. I am sorry. That acronym, I am not familiar with.

10 What does that stand for? 

11 A. It is a designation that suppliers use and they sell

12 an EOM manufacturer who takes their product, along with other

13 products, and puts them together and then sells the finished

14 product like we do with houses with Horton Homes. 

15 Q. All right. Does Wholesale Distributors primarily

16 sell to manufacturers of mobile homes or prefabricated houses?

17 A. They sell – it is a big portion of their business but

18 it is not half of their business even now. 

19 Q. Does Wholesale Distributors sell fabric? 

20 A. Yes. 

21 Q. All right. Sell uniforms? 

22 A. No, sir. 

23 Q. No finished goods of that sort? It is not in the

24 textile business? 

25 A. No, sir. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 161 of 202
162

1 Q. All right. Are there other shareholders of Wholesale

2 Distributors besides yourself? 

3 A. Yes. 

4 Q. Or this is American Testing? 

5 A. American Testing, yes. 

6 Q. There are other shareholders? 

7 A. Yes. 

8 Q. All right. You are an officer of that company? 

9 A. Yes. 

10 Q. You are a director of that company? 

11 A. Yes. 

12 Q. And you told me a moment ago with respect to American

13 Real Estate that it has a corporate general partner. I think

14 you called it RJR? 

15 A. RJ&J Enterprises, Inc., and it is a general partner

16 and makes all of the decisions for American Real Estate because

17 Jamie Reynolds is a limited partner and is not involved in the

18 day-to-day operation, and I am a limited partner and can make

19 no decisions as a limited partner, as an individual, but as the

20 president of RJ&J Enterprises, Inc., I can make the decision.

21 Q. All right. Who are the officers of RJ&J Enterprises?

22 A. I couldn’t name them from – I know that my wife is an

23 officer, Helen N. Horton; my nephew is an officer, R. W. Hicks,

24 Jr.; I am an officer. 

25 Q. Are you a member of the board of directors? 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 162 of 202
163

1 A. Yes, sir. 

2 Q. Are you a shareholder of RJ&J? 

3 A. RJ&J is owned a hundred percent by Horton Industries.

4 Q. And you are a shareholder of Horton Industries? 

5 A. Well, not really. I am the president of Horton

6 Industries but I am not a shareholder. 

7 Q. Really my purpose isn’t to go through your entire

8 conglomerate, sir. I just want to make sure I am clear that in

9 your mind, at least, there is American Real Estate. That is a

10 separate entity? 

11 A. Yes. 

12 Q. You have got a partner there, passive but a partner,

13 Mr. Reynolds? 

14 A. Yes. 

15 Q. And then we have got Wholesale Distributors, American

16 Testing. That is yet a separate entity? 

17 A. Yes. 

18 Q. Where there are other shareholders besides yourself;

19 right? 

20 A. Yes. 

21 Q. And then we have got here, for today’s purposes,

22 individually N. D. Horton and James Reynolds. All four,

23 separate distinct entities; correct? 

24 A. Yes. 

25 Q. All right. Good. Now I want to hand you two things

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 163 of 202
164

1 if I may. The binder, and I am going to have some questions

2 about the documents there, and a loan agreement, and that loan

3 agreement has been marked by your attorney and introduced into

4 evidence – let me see here. I think that is Exhibit 3. You

5 are generally familiar with that loan agreement, sir? 

6 A. I recognize it, yes. 

7 Q. All right. And this was prepared by your attorney,

8 Mr. Schmidt; is that correct? 

9 A. Well, I think it was actually prepared by a member of

10 that firm. I think it was prepared by Mr. Ashley at that time,

11 Seab Ashley, who was one of the partners of the firm. 

12 Q. All right. And that is a firm that represents you on

13 a routine basis; is that correct? 

14 A. Yes, sir, with American Real Estate. 

15 Q. Now we talked a bit today about the five point five

16 million dollar loan referenced in this loan agreement. Who did

17 you negotiate that loan with? 

18 A. With Roy and Rudolph Terry. 

19 Q. All right. Now, sir, I have read this loan agreement

20 and I don’t see anywhere that it conditions American Real

21 Estate loaning Roy and Rudolph Terry up to five point five

22 million dollars upon the Terry women buying your stock. Do you

23 agree with that? 

24 A. I don’t think it was conditioned that we would make

25 them this loan if they bought the additional stock. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 164 of 202
165

1 Q. Okay. You didn’t at any time tell them I am only

2 going to loan you this money, Roy and Rudolph, if your wives,

3 your women, or you buy some more stock from me and my partner;

4 did you? 

5 A. Let me tell you how the deal came about. 

6 Q. Well, first answer my question and then you can give

7 me an explanation. 

8 A. No, sir, I didn’t do that. 

9 Q. Okay. Fair enough. Now if you look at the loan

10 agreement, paragraph nineteen, I am going to read it into the

11 record, sir, and please correct me if I misstate it. Quote: 

12 “This agreement, the promissory notes, the security

13 agreement, pledge agreement and the irrevocable stock

14 powers, guaranty of equity participation, other

15 documentation evidencing the matter set forth herein,

16 hereinafter the loan documents, constitute the entire

17 agreement between the parties. No representations,

18 covenants or warranties not herein expressly set forth

19 shall be binding on the parties hereto. No

20 modification hereof shall be effective unless in

21 writing and subscribed by the parties hereto.” 

22 Unquote. Did I read that accurately, sir? 

23 A. Yes. 

24 Q. All right. Is that paragraph nineteen true and

25 accurate? 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 165 of 202
166

1 A. To borrow a phrase from Mr. Alexander, I am not a

2 lawyer. 

3 Q. Fair enough. 

4 A. And it has got some legalese in there that I think

5 were put in there for our protection, but I couldn’t tell you

6 exactly what it means. 

7 Q. Well, let me come at it this way, sir. You may never

8 have heard of the term “integration clause,” but an integration

9 clause in a contract basically says this deal as written is the

10 sole deal, there are no side deals, there are no oral

11 modifications or side agreements. 

12 A. That’s true. 

13 Q. And that was true here; was it not? 

14 A. Yes. 

15 Q. So there was no side deal not set forth in this loan

16 agreement that there was only going to be a loan if Cotina

17 Terry and Allie Robinson bought stock from you and your

18 partner; correct? 

19 A. That’s true. 

20 Q. And in fact you didn’t exchange or American Real

21 Estate didn’t exchange its agreement to make this loan for five

22 and a half million dollars for their, Ms. Terry and Ms.

23 Robinson, agreeing to buy your stock; correct? 

24 A. Well, I am not real smart, wasn’t the head one in my

25 class, but I don’t believe I would send five and a half million

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 166 of 202
167

1 dollars after four hundred thousand. 

2 Q. Fair enough. Fair enough. So am I correct, sir,

3 consistent with what you told me, that nobody would trade five

4 and a half million dollars for four hundred thousand dollars,

5 these were two separate transactions; correct? 

6 A. Yes, sir. 

7 Q. Okay. And just so I am clear, if Allie Robinson and

8 Cotina Terry hadn’t bought your stock, American Real Estate was

9 going to make this loan; was it not? 

10 A. Well, I asked to tell you how this developed and you

11 asked me to answer your question.

12 THE COURT: Okay. Well, you can do it now. 

13 Q. Now you can do it. 

14 A. The Terrys came to me with a plan to make Perky a

15 minority firm. They already owned a third of it, and they

16 wanted to buy an additional twenty percent so Perky could bid

17 on government contracts, contracts with Coca-Cola and Delta

18 that required minority-owned companies to do it. And they

19 talked to me about doing that, and that made a little sense to

20 me. 

21 And then they asked me about starting Terry

22 Promotional Products, and I said what would that do, and they

23 said, well, they wanted to go on the Internet and that they

24 thought they could really generate some big numbers, and they

25 had some numbers that they called, something like an optimistic

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 167 of 202
168

1 forecast, a realistic forecast and a very conservative

2 forecast.

3 Well, in looking at it, it looked to me like if they

4 could hit the conservative forecast that it would be a very

5 profitable deal. So I looked at both of them and I said would

6 you all be willing to guarantee these very conservative

7 forecasts if we did the deal, and they both said that they

8 would. And I said, well, you know that is going to be you,

9 Roy, and you, Rudolph, and Terry Manufacturing Company

10 guaranteeing it and guaranteeing cross-default on all the notes

11 that we have with you or that we do with you in the future, and

12 they said that they would. 

13 And their plan was that they would buy the additional

14 twenty percent of Perky so they then would have fifty-three

15 percent of it and it would be a minority-controlled firm. And

16 then I can’t recall which one of the brothers, whether it was

17 Rudolph or Roy, that said, “Mr. Horton, we may want to put this

18 in our wives’ names.” And he kind of grinned and he said, “You

19 are married. You know how women kind of want something in

20 their name.” And I grinned back at him and said, “Yeah, I

21 understand that.” 

22 And I didn’t know that the one that is called Terry,

23 I believe it is Cotina Terry, was Roy’s daughter. I thought

24 that was Roy’s wife up until they filed for bankruptcy. I did

25 know that Allie Robinson went by a different last name and she

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 168 of 202
169

1 was Rudolph’s wife, but that is how we got to where we are and,

2 had they come in to close and wanted to change their plan, it

3 would have raised some skepticism on my part as to whether they

4 knew what their plan was, but that’s the way they laid it out

5 and they said they had no problem – and I said to them, I said,

6 “You know, I don’t know you all’s wives, and you all are

7 willing to guarantee these notes?” And they said they were and

8 that Terry Manufacturing would guarantee them also. 

9 And then our lawyer put in the cross-default and the

10 legalese that is required to tie – we thought that we tied them

11 as tight as you could tie a borrower, and I had never loaned

12 anybody five and a half million dollars before. That was the

13 most money I had ever loaned anybody, and I thought it was a

14 real good deal and, as Mr. Alexander described the facade, if

15 there was anybody on the outside of the facade with SouthTrust

16 Bank, it was N. D. Horton, Jr., Jamie Reynolds and American

17 Real Estate and American Testing and Wholesale Distributors.

18 I thought these people were as straight as you could be, and I

19 didn’t have any idea that they had several sets of books and a

20 CPA that produced an audit that we relied on tremendously that

21 was fraudulent. 

22 Q. I think we are getting a little ahead of ourselves.

23 Let me see if I can break it down because you have covered a

24 lot of territory there. First, just so I understand, the five

25 point five million dollar loan agreement, that was five and a

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 169 of 202
170

1 half million dollars to fund what you referred to as the Terry

2 Promotional Products deal; is that correct? 

3 A. That’s what they described it to me as, yes, sir. 

4 Q. And that was the deal where there were conservative

5 and ambitious projections and you wanted a guarantee behind

6 that? 

7 A. Yes. 

8 Q. Now separate and apart from that we had their asking

9 you can we buy another twenty percent of the stock. These are

10 two separate deals; correct? 

11 A. Two totally separate deals, yes, sir. 

12 Q. All right. Fair enough. Now time passes and in

13 August of 2001 there is another loan for a million and a half

14 dollars by American Real Estate. Do you recall that? 

15 A. If you ask me do I specifically recall it, my answer

16 would have to be no. That has been a long time ago. 

17 Q. Fair enough, but it is a good chunk of change and you

18 remember making that loan at some point; don’t you? 

19 A. Yes. 

20 Q. Okay. Now I can certainly put the records up if you

21 would like, but I will ask you to accept that your note from

22 Ms. Terry and your note from Ms. Robinson were executed in

23 November of 2000. 

24 A. Yes. 

25 Q. So about ten months before this loan agreement, okay.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 170 of 202
171

1 And the sale, purported sale to Roy and Rudolph Terry occurred

2 in May of 2002. Does that sound right to you? 

3 A. You are talking about the third stock transaction

4 that we did with them? 

5 Q. Yes, sir. 

6 A. That date sounds reasonably familiar. It was a good

7 while later but I couldn’t tell you from my memory whether that

8 is the date. 

9 Q. Fair enough. I just want to be clear this one

10 million, five hundred thousand dollar loan, that didn’t have

11 anything to do with Cotina and Allie buying your stock back in

12 the prior November; did it? 

13 A. Oh, no, sir. 

14 Q. All right. And it didn’t have anything to do with

15 Roy and Rudolph buying stock the following May; did it? 

16 A. No, sir. 

17 Q. You hadn’t even discussed that yet; had you? 

18 A. I wouldn’t want to testify whether we had discussed

19 it. I don’t know whether we had or not. I don’t recall it. 

20 Q. Fair enough. But, again, like you told me with the

21 last document, two separate transactions, correct? 

22 A. Yes, sir. 

23 Q. All right. Now, sir, if I can approach for a second,

24 I will make it a little easier for you. 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 171 of 202
172

1 Q. Now what I am showing you, sir, is part of Exhibit

2 45. It is a loan payment history on that million five

3 transaction. It is behind tab 45 there. 

4 A. Yes. 

5 Q. Do you see what I am referring to? Generated by

6 American Real Estate; correct? 

7 A. Yes. 

8 Q. And is that the sort of loan payment history that I

9 think you have identified as Carol typically puts together on

10 your various loans by American Real Estate? 

11 A. Yes. 

12 Q. All right. And that evidences that that loan was

13 repaid in, what, October 31, I believe? Do you see the date

14 there?

15 A. I am not sure whether it was repaid on the 26th of

16 October except for twenty-four thousand dollars, and then on

17 October 31st it – 

18 Q. Fair enough. So it appears it was either paid in

19 full on Halloween, October 31st, or partly on the 26th and then

20 on Halloween; right? 

21 A. Yes. 

22 Q. Or approximately, what, two months after the loan

23 closed? 

24 A. Yes, sir. 

25 Q. All right. And how much were you repaid on that

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 172 of 202
173

1 million five loan? What were the total payments on that? 

2 A. Well, as I look at this book, it looks like to me we

3 were repaid a million, six hundred and twenty thousand, four

4 hundred and ninety-six dollars and thirty-eight cents. 

5 Q. Okay. Let’s talk about that five point five million

6 dollar loan. Who made the payments on that loan? 

7 A. Who made the payments? 

8 Q. Yes, sir. 

9 A. The Terrys. 

10 Q. Do you know was it the Terrys individually or was it

11 Terry Manufacturing? 

12 A. I don’t know. 

13 Q. Well, let me ask it a different way. Was that loan

14 being paid timely until Terry Manufacturing went into

15 bankruptcy? 

16 A. Very timely, yes. 

17 Q. Okay. And I take it you don’t know because you

18 didn’t care as long as you got the payment; correct? 

19 A. Well, I didn’t look at the checks to see who they

20 came in, you know. Carol would call me sometimes and say the

21 Terry check came today or the Terry check is a day early, and

22 they were, in all of our dealings with them over nearly a ten23 year span, they were extremely prompt and seemed to look after

24 their business. And I would look at their audited statements

25 and say how do they do it. They just keeping making money and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 173 of 202
174

1 making money and 9-11 comes along and it kind of kicked our

2 feet out from under us, and their CPA audited statements keep

3 coming in and they keep making more money and sales are going

4 up. 

5 Jack Perkinson, who is deceased now, was the president

6 of Perky but had been in the cap business for forty years,

7 would tell me that when you get to doing forty million dollars

8 worth of garments a year that you are a major player in the

9 United States, that very few of them ever get to that size. 

10 Q. Just so I am clear, though, in response to my

11 question, that five point five million dollar loan was being

12 paid and was being paid timely, month-in, month-out, and you

13 are not sure by whom but somebody was sending you those checks;

14 correct? 

15 A. Yes. 

16 Q. All right. Now what about the note Ms. Cotina Terry

17 gave, who was paying on that note? 

18 A. The payments were made monthly. I don’t know that I

19 ever looked at a check to see who the check came from. 

20 Q. Do you know who was paying on the Allie Robinson

21 note? 

22 A. No, sir. 

23 Q. All right. Isn’t it a fact as long as you got your

24 payment, you didn’t care; did you? 

25 A. Well, to be honest, I don’t guess I did. If they

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 174 of 202
175

1 could get somebody else to make their payment, that was good

2 for me. 

3 Q. Fair enough. So as I understand where we are, as of

4 – let’s say as of November 2001 you have made a – or American

5 Real Estate – strike that – American Real Estate has made a

6 five point five million dollar loan that is being paid timely;

7 right? 

8 A. Yes, sir. 

9 Q. You had American Real Estate make a loan of one point

10 five million dollars that has been repaid in full, and you have

11 got these two notes from the Terry women that were being paid

12 month-in and month-out to you and Mr. Reynolds personally? 

13 A. Yes. 

14 Q. And those are all four, separate transactions;

15 correct? 

16 A. Yes. 

17 Q. Okay. Now let’s go forward to May of 2002 when you

18 negotiate the sale of the stock to Roy and Rudolph Terry. The

19 first thing I would like to ask you to look at, sir, is – can

20 I get you to look in that binder behind tab twenty-two, sir? 

21 A. Yes. 

22 Q. All right. And that is an agreement, sir, would you

23 not accept, by which American Real Estate is going to try and

24 help Perky Cap get a one point five million dollar loan? 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 175 of 202
176

1 Q. All right. Assist in the financing for Perky Cap.

2 Was that agreement prepared by your attorneys? 

3 A. I feel certain that it was. You know, I couldn’t

4 tell you that I positively knew or I know that he did it. 

5 Q. Now, sir, you can obviously take your time to read

6 the agreement. It is only a page and a half long. Would you

7 agree with me, sir, that that agreement doesn’t in any way

8 condition American Real Estate assisting in procuring that loan

9 upon Roy and Rudolph Terry buying additional stock from you and

10 Mr. Reynolds; correct? 

11 (Pause)

12 A. It doesn’t say it is conditioned upon it. 

13 Q. In fact, it doesn’t even mention that stock

14 transaction; does it? 

15 A. No, sir. 

16 Q. Okay. 

17 A. But the Peoples Bank wouldn’t have considered making

18 the loan if the Terrys hadn’t been able to put up the land and

19 the building, the equipment and the inventory of Perky Cap. 

20 MR. BARRIERE: Your Honor, I appreciate it but I am

21 going to move to strike. I don’t know how this witness is

22 competent to testify with respect to the mental process of

23 Peoples Bank.

24 THE COURT: All right. 

25 THE WITNESS: Well, I was supposed to help negotiate –

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 176 of 202
177

1 THE COURT: Let’s just do this. I mean, I agree he

2 doesn’t know those things but let’s move on. This is getting

3 kind of far afield again. 

4 MR. BARRIERE: Fair enough, Your Honor. And I will try

5 and be brief because I know the day grows late.

6 BY MR. BARRIERE: 

7 Q. Sir, am I correct, Terry Manufacturing started buying

8 caps from Perky Cap back in, oh, 1990 or so; isn’t that

9 correct? 

10 A. I think they started right after Perky was started in

11 1987, in the late eighties, and continued to be either their

12 largest customer or their second largest customer before they

13 approached us on buying a third of the stock of Perky. 

14 Q. Okay. So you are telling me Terry Manufacturing was

15 actually the largest or the second largest customer before even

16 that initial stock acquisition in 1994; is that correct? 

17 A. That is correct, yes. 

18 Q. Okay. And I take it Terry Manufacturing remained a

19 customer of Perky Cap after that initial stock transaction? 

20 A. Yes, sir. 

21 Q. All right. You saw earlier today in the court Mr.

22 Alexander’s schematic showing a decline in the amount of caps

23 that Terry Manufacturing was buying after 1994. Is that

24 consistent with your recollection? 

25 A. I spoke with the Terrys a couple of times about their

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 177 of 202
178

1 lack of additional business for Perky, that we though they were

2 going to stimulate Perky. During that time, the cap business

3 in the United States was just devastated by imports, and there

4 were twenty-seven cap companies in Georgia and Perky was one of

5 two that survived and then Perky filed for bankruptcy after Mr.

6 Perkinson’s death. So to my knowledge there is just one

7 company making caps in Georgia. The import business has

8 devastated the manufacturing of apparel in this country. 

9 Q. Sir, let me ask you, if you would, to turn to the

10 exhibit behind tab thirty-one. It is an invoice by Terry

11 Manufacturing to Wholesale Distributors, dated July 26, 2002.

12 A. Yes, sir. 

13 Q. Do you have that before you? 

14 A. Yes. 

15 Q. All right. Did Wholesale Distributors actually take

16 delivery of any product from Terry Manufacturing? 

17 A. They bought it. 

18 Q. Can you describe the transaction for us? 

19 A. Yes. The Terrys approached us that they had a big

20 contract with the Department of Defense to make combat uniforms

21 for Iraq, and the United States had not decided to go into Iraq

22 but, as Rudolph Terry told me, he said, “They are going because

23 we made these uniforms, but we can’t get our money on the

24 uniforms until we ship them, and it is putting us in a terrible

25 strain.” And they were going through the process of untangling

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 178 of 202
179

1 their involvement with Cintas and were working on a deal with

2 Riverside to sell them forty-eight percent of Terry Uniforms,

3 and they said, “The two have just got us strapped. Would you

4 consider buying some of this inventory until we get to ship it

5 and then we are just going to be flush with money.” 

6 So I had the utmost regard, and I know that I was on

7 the outside of the facade that Mr. Alexander relates to because

8 I thought they were just as straight and honest as they could

9 be. So I told them that, yes, we would do it but, rather than

10 them shipping this stuff to Eatonton to Wholesale Distributors

11 and then shipping it out from there and experiencing the double

12 cost of freight, that if they would separate two times the

13 amount of inventory that we were going to pay for, that they

14 would put it there and separate it for Wholesale Distributors,

15 that we would do it. They thought that they would have it

16 cleared up in thirty, sixty, ninety days and they still hadn’t

17 shipped and still hadn’t shipped and still hadn’t shipped, and

18 we redid it several times. But the intent was, and I really

19 wonder what happened to my uniforms and, if I can find out

20 where they are, I am going to try to retrieve them. 

21 Q. Sir, let me ask you, I am looking at Exhibit 31, 32,

22 33, 34, all the way back through 36. These are all invoices.

23 I have totaled them. You are welcome to do the same. The face

24 amount is two million, five hundred thousand dollars. 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 179 of 202
180

1 Q. So as I understand your testimony, that would have

2 come out to five million dollars worth of uniforms bought – 

3 A. Yes. They claim they had twelve million dollars

4 worth. 

5 Q. Let me make sure I understand. How many uniforms

6 amount to five million dollars? 

7 A. Mr. Perkinson could tell you. I couldn’t. I don’t

8 know but he was our man that was in charge of Perky and was the

9 garment guru of our operation. And they said, you know, we

10 don’t mind giving you twice as many, we will separate twice as

11 many uniforms. So if something happened, surely we could sell

12 them for fifty to sixty cents on the dollar. 

13 Q. All right. So you don’t know how many uniforms we

14 are talking about. Did anyone on your behalf go and inspect

15 these uniforms? 

16 A. Yes. 

17 Q. Who? 

18 A. Mr. Perkinson. 

19 Q. When? 

20 A. On several occasions. 

21 Q. Do you have any idea when that occurred? 

22 A. No, sir. 

23 Q. Mr. Perkinson is dead now, of course; is he not? 

24 A. Yes, sir. He died of cancer. 

25 Q. Is there anybody who is still alive who inspected

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 180 of 202
181

1 these on your behalf? 

2 A. We did not send anybody other than Mr. Perky. 

3 Q. All right. Did you put insurance on these uniforms?

4 A. They were covered under the Terry policy. 

5 Q. Okay. So just so I am clear, you totally had title

6 to these, but you didn’t arrange for insurance on them; right?

7 A. We do that at Wholesale Distributors. A lot of

8 manufacturers put their supplies in our warehouse and then we

9 ship them out for them. 

10 Q. Okay. So do you have any written reports you ever

11 received from Mr. Perkinson on the number of uniforms involved

12 here? 

13 A. No, sir. 

14 Q. Do you have a picture of any of those uniforms? 

15 A. No, sir. 

16 Q. All right. How was Mr. Perkinson employed by

17 Wholesale Distributors? 

18 A. He wasn’t. He worked for Perky Cap. He was the

19 president of Perky Cap Company and we were doing something to

20 facilitate the Terrys, who Mr. Perkinson thought was – and had

21 dealt with them for years, fifteen or twenty years, and he sold

22 them before he even came to – before he started Perky Cap. 

23 Q. All right. Now Exhibit 37 is an invoice from

24 Wholesale Distributors back to Terry Manufacturing. Do you see

25 that? 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 181 of 202
182

1 A. Yes. 

2 Q. Okay. What product did Wholesale Distributors

3 deliver to Terry Manufacturing as evidenced by that? 

4 A. We sold them our inventory that was in their plant

5 back. They paid us for the material or the uniforms. 

6 Q. All right. And the only knowledge you can offer the

7 court of what was actually that inventory is what Mr. Perkinson

8 may have observed; is that correct? 

9 A. Sir?

10 Q. I just want to make clear you personally never saw

11 this stuff; is that right? 

12 A. No, sir. I have never been to Roanoke to look at

13 Terry’s operation. 

14 Q. And you never received an inventory from the Terrys

15 of what they were supposedly selling to you; right? 

16 A. Sir? 

17 Q. You never received an inventory, any detail of what

18 was being purchased by Wholesale Distributors; correct? 

19 A. Other than they was setting aside twice as much in

20 uniforms as we were buying from them. So that if anything

21 should happen and if the government for some reason did not

22 take delivery of the uniforms, that, you know, they had agreed

23 to but, as to whether they did or didn’t was still problematic.

24 THE COURT: Wait a minute. I am losing the time frame

25 here. Were those uniforms still supposed to have been at least

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 182 of 202
183

1 in your mind set aside as of the date of the petition or is it

2 later – now, the bankruptcy petition here was filed –

3 MR. BARRIERE: July 7, ‘03.

4 THE COURT: July of ‘03.

5 THE WITNESS: We thought our uniforms were in the

6 building and, of course, we were as shocked as – Mr. Alexander

7 said that there were people on the outside of the facade and,

8 when the Terry’s wrote that they had overstated their inventory

9 and overstated their accounts receivable by tremendous numbers,

10 and the lady who was the inspector with the U.S. Department of

11 Agriculture said she was there within thirty days of the filing

12 for bankruptcy and the uniforms were there and she counted

13 them. Now, I don’t know whether she counted empty boxes or

14 whether she counted full boxes, but she said she counted them.

15 THE COURT: Okay. But the deal was you actually – I

16 mean, your understanding is you were actually buying five

17 million dollars worth of uniforms. Ten or twelve million were

18 supposedly supposed to be set aside to secure this, but then

19 they were going to buy them back from you at –

20 THE WITNESS: Well, at the time that they shipped, that

21 they would pay us back. 

22 THE COURT: In other words, you weren’t going to be the

23 seller to the government?

24 THE WITNESS: No, sir. No, sir.

25 THE COURT: Okay.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 183 of 202
184

1 BY MR. BARRIERE: 

2 Q. I am a little confused, sir. You are aware of UCC

3 security devices; aren’t you? 

4 A. Oh, yes. 

5 Q. You have given those on probably collateral that one

6 of your companies owned. Why not simply put a UCC encumbrance

7 on these uniforms rather than going through these purported

8 sales? 

9 A. You know, in hindsight, I really wish I had done

10 that, but I didn’t. 

11 Q. Now just so I am clear, sir, I take it not only did

12 you never see these uniforms prior to the Chapter 11 petition,

13 neither you nor anyone on your behalf saw them after the

14 Chapter 11 petition; right? 

15 A. That’s correct. You don’t know where they are; do

16 you? 

17 Q. You will be the first I call, I promise. 

18 A. I appreciate it. 

19 Q. And all of these invoices going to Wholesale

20 Distributors for what is described for miscellaneous

21 merchandise, all of these represent resales of inventory you

22 thought you were buying from Terry Manufacturing; is that your

23 testimony?

24 A. That’s correct, and we came up about two million

25 dollars short. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 184 of 202
185

1 Q. And just so the record is clear, all of these sales

2 back and forth of inventory that may or may not have existed,

3 none of that had anything to do with you selling your stock in

4 Perky Cap to the Terry ladies or Roy and Rudolph Terry; right?

5 A. That’s correct. 

6 MR. BARRIERE: If you will let me have a moment, Your

7 Honor, I may be close to done.

8 (Pause)

9 BY MR. BARRIERE: 

10 Q. Just a couple of final questions, sir. As I

11 appreciate it, the one person you sent out to look at this

12 inventory was Jack Perkinson and he was at that time employed

13 just by Perky Cap Company? 

14 A. He was the president of Perky Cap Company, yes, sir.

15 Q. Okay. And how was it you got Mr. Perkinson to go do

16 this inspection when you were no longer a shareholder of Perky

17 Cap? 

18 A. Friendship is next to godliness. 

19 MR. BARRIERE: I am going to pass the witness, Your

20 Honor.

21 THE COURT: All right. Thank you. Mr. Brazeal.

22 MR. BRAZEAL: Thank you, Your Honor.

23 CROSS EXAMINATION

24 BY MR. BRAZEAL: 

25 Q. Mr. Horton, Mr. Barriere went to some lengths to get

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 185 of 202
186

1 you to say that the loaning of the five point five million

2 dollars was not conditioned upon the purchase of the stock by

3 the two Terry women. That went on for a while; did it not? 

4 A. Yes. 

5 Q. At one point during his examination you indicated

6 that had the Terrys not gone forward with the stock purchase,

7 that you would have had some qualms about their overall

8 business plan; is that correct? 

9 A. Well, I would have questioned what their business

10 plan was in that their purpose in buying the twenty percent of

11 the stock was so Perky could go to a minority-owned firm and it

12 would increase the sales. And I looked at it thinking I

13 believe my thirty something percent might make me more money

14 with them selling government contracts and Coca-Cola and Delta

15 and several other people that they named. And they did sell

16 Coca-Cola a hundred thousand caps after that in one order. 

17 Q. All right, sir. Well, my question for you, Mr.

18 Horton, is both of these transactions closed on the same date,

19 the stock purchases and the five point five million dollar

20 loan. Suppose the Terrys had showed up or apprised you prior

21 to November 10 of 2000 that they still wanted the five point

22 five million dollars which you had been discussing but that

23 they told you that they no longer wanted to purchase the stock

24 in Perky Cap? 

25 A. I would have decided that they didn’t have a plan,

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 186 of 202
187

1 that they were just there to get my five and a half million

2 dollars and wouldn’t have gone forward. 

3 Q. Well, why was there never any discussion of it being

4 conditioned one upon the other? 

5 A. Well, I never had any qualms or doubts that their

6 business plan was to make Perky a minority firm, which made

7 sense. That Perky being a minority firm would help on the

8 Terry Promotional Products side because they could reach more

9 people there. They really thought and, based on their

10 projections, that Terry Promotional Products would be bigger

11 than Terry Manufacturing. 

12 Q. And is it true that when you had the discussions with

13 Mr. Terry concerning both the stock purchase and the five point

14 five million dollar loan that you never had any reason to doubt

15 that he was going to go forward with either one of them? 

16 A. No reason to question it. They had always done for

17 nearly ten years everything they said they would do exactly as

18 they said they would, and I had no reason to question it. 

19 Q. All right, sir. How many prior loans had you made to

20 American Real – I am sorry. How many loans had you or American

21 Real Estate made to the Terrys individually or to the company

22 prior to the November 10, 2000, loan, the five point five

23 million dollar loan? 

24 A. I don’t have the exact number but it was more than a

25 few. It was a good many loans and they had always repaid and

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 187 of 202
188

1 been very prompt in their payment. 

2 Q. All right, sir. Mr. Horton, would you say that it

3 wasn’t conditioned, that is, the five point five million on the

4 stock sale, just because – I mean, that issue never came up in

5 any conversations with Mr. Terry; did it? 

6 A. No, sir, it never came up, and I had no reason to

7 question or to insert verbiage that it was conditioned one upon

8 the other. 

9 Q. All right, sir. And since both transactions occurred

10 on the same day, just to make sure the record is clear, if Mr.

11 Terry had shown up or had apprised you that he was no longer

12 going to go forward with the stock purchase, would you have

13 made the five point five million dollar loan? 

14 A. I don’t think I would have because he would not be

15 carrying out his plan as he outlined it to me and that he would

16 just – I don’t think I would have. 

17 Q. Now the one point five million dollar note from

18 August of 2001, Mr. Alexander went through some calculations

19 and came up with a large interest rate that he said is many

20 times junk bond rate. Could you explain to us, Mr. Horton, the

21 purpose for the hundred thousand dollar fee that was paid in

22 connection with that note? 

23 A. As I recall it, they had an opportunity to buy a big

24 buy of cloth at a real bargain price, they told me, and that

25 they would have the money to do it but that they had to do it

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 188 of 202
189

1 now or lose the opportunity to do it, and that if we would do

2 it, that they would pay us a hundred thousand dollars of profit

3 sharing, along with the nine and a half percent interest rate

4 or whatever it was. 

5 Q. All right, sir. And, Mr. Horton, if we fast forward

6 to the Peoples Bank loan, which was the one point five million

7 dollar loan from Peoples Bank to Perky Cap, which occurred on

8 or about May 30 of 2002? 

9 A. Yes. 

10 Q. Were you instrumental in obtaining that loan from the

11 bank? 

12 A. Well, I went and talked to Chuck Haley who is the

13 president of the bank and told him that the Terrys had bought

14 thirty percent of Perky from us back in ‘94 and they had bought

15 another twenty percent several years later and that they wanted

16 to buy the rest of our stock, that Mr. Perkinson wanted to keep

17 his sixteen percent and that Jamie and I were going to sell

18 them the rest of our stock, and they wanted to put up the Perky

19 Cap building and land and borrow a million and a half dollars,

20 and I carried the audited financial statement for Terry

21 Manufacturing with him and he looked at that and I said they

22 are willing for Terry to guarantee the loan and Rudolph Terry

23 to personally guarantee it and Roy Terry to personally

24 guarantee it. They are going to take this million and a half

25 dollars and put it into Terry Manufacturing until they can ship

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 189 of 202
190

1 these uniforms to Iraq and they can close this deal with

2 Riverside Manufacturing on the sale of forty-eight percent of

3 the Terry Uniforms to Riverside. 

4 Riverside said they were willing to buy a minority

5 position in it in order for Terry Uniforms to be a minority

6 firm, and they thought they could make more money with forty7 eight percent of the income from them than they could a hundred

8 percent if they did it on their own. And both of those deals

9 were supposed to close fairly soon, and Mr. Haley asked me, he

10 said how long –

11 MR. BARRIERE: Excuse me, Your Honor. I think we are

12 about to get into just rank hearsay.

13 THE COURT: Sustained. 

14 BY MR. BRAZEAL: 

15 Q. Mr. Horton, insofar as the one point five million

16 dollars from Peoples Bank, was it your understanding that that

17 money was going to be put into Terry Manufacturing? 

18 A. Absolutely, and the statement that they are reading

19 from this loan agreement that the million dollars would be paid

20 off at the Farmers and Merchants Bank within ninety days was

21 from the close of the Riverside deal or either the shipment of

22 the uniforms to Iraq. It was never intended to be paid out of

23 the proceeds of the million and a half dollars. And they keep

24 bringing up that – 

25 MR. BARRIERE: I object, Your Honor. It is completely

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 190 of 202
191

1 non-responsive. 

2 THE COURT: Sustained.

3 Q. Mr. Horton, did you have any conversations with

4 either Roy Terry or Rudolph Terry about obtaining this money

5 that was eventually obtained from Peoples Bank from SouthTrust

6 Bank? 

7 A. No, sir. 

8 Q. Did you ever have any discussions with them about –

9 well – (pause). Now, as part of the Peoples Bank loan, were

10 you required to essentially guarantee that loan, you,

11 individually? 

12 A. I told Mr. Haley I would not guarantee it but that I

13 would buy it back if they defaulted on it, that whatever the

14 unpaid balance was, that I would pay it off, and they were to

15 pay five hundred thousand dollars in some ninety days and then

16 it would be amortized on a ten-year basis. 

17 Q. All right, sir. Mr. Horton, this transaction that

18 has been contested by Mr. Alexander as to whether it actually

19 occurred, that is, the sale of the stock at the end of May of

20 2002, did that transaction take place? 

21 A. Yes, sir, it took place and I don’t know why he

22 hasn’t, in these thousands of hours he spent, he hasn’t looked

23 – 

24 MR. BARRIERE: Objection, Your Honor. 

25 Q. That’s fine, Mr. Horton. 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 191 of 202
192

1 A. – in the stock book.

2 THE COURT: Sustained. 

3 Q. Mr. Horton, my question for you is after May 30 of

4 2002, when you sold your – when you and Mr. Reynolds sold your

5 remaining stock in the company, did either one of you continue

6 to act in any way on behalf of Perky Cap? 

7 A. No, sir. 

8 Q. All right, sir. So you didn’t have any further

9 involvement with Perky Cap after May 30 of 2002? 

10 A. No, sir. 

11 Q. All right, sir. And that is because you believed

12 that you had sold all of your stock? 

13 A. I had sold all of my stock in it. 

14 Q. All right, sir. And insofar as your K-1 to your 2002

15 tax return, which reflects at the end of 2002 that there was

16 still some ownership by yourself in the Perky Cap Company, do

17 you have any recollection of reviewing that K-1? 

18 A. No, sir. And, you know, I – 

19 THE COURT: Okay. He asked you if you recalled seeing

20 it and your answer is no. Thank you. 

21 Q. Did you ever have any discussions with Mr. Giddens

22 about the May 30, 2002, stock transaction? 

23 A. At any time? 

24 Q. At any time. 

25 A. Well, we discussed it, you know – 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 192 of 202
193

1 Q. Subsequently? 

2 A. Subsequently. 

3 Q. Did you have any discussion with Mr. Giddens about

4 the May 30, 2002, stock sale prior to the preparation or during

5 the preparation of your tax return for that year? 

6 A. I don’t recall but, if I did, apparently he didn’t

7 pick up on it and didn’t record it. 

8 Q. All right, sir. Now the transaction where the one

9 point five million dollars was obtained from Peoples Bank

10 occurred on or about May 30 of 2002? 

11 A. Yes. 

12 Q. As did the stock purchase by the Terrys of the

13 balance of your and Mr. Reynolds’ stock in Perky Cap, the same

14 day; is that right? 

15 A. Yes. 

16 Q. All right, sir. Had the Terrys reneged on their

17 obligation and, I take it – well, let me just ask you about

18 that, Mr. Horton. What conversations did you have with them

19 about the sale of the remaining stock in the company? That is,

20 either Roy or Rudolph. 

21 A. I couldn’t recall the specific conversations that we

22 had. 

23 Q. All right. Well, did they initiate this purchase of

24 your remaining shares, or did you initiate it? 

25 A. No, sir. They asked me about buying the rest of it

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 193 of 202
194

1 and then mortgaging the assets of Perky, the land and building

2 and equipment, and I said, “Well, if Mr. Perkinson doesn’t have

3 an objection to it and you buy us out, I don’t care if you

4 borrow money on it because I won’t own any of it.” 

5 Q. All right, sir. And, in fact, had you remained a

6 member of Perky Cap and not sold your stock at that point in

7 time, would you have arranged for the Peoples Bank loan? 

8 A. No, sir.

9 MR. BARRIERE: Judge, we have gone down this path

10 before, Your Honor, and I have kept my mouth shut. This is

11 just complete speculation. The witness has testified he did

12 sell and now the question is if you hadn’t sold, what would you

13 have done. It is not probative evidence and I ask that it be

14 excluded.

15 THE COURT: Sustained.

16 MR. BRAZEAL: Your Honor, we haven’t been down this

17 particular path, with all due respect.

18 THE COURT: Sustained.

19 MR. BRAZEAL: Thank you, Your Honor.

20 THE COURT: Sustained.

21 MR. BRAZEAL: Yes. Thank you, Your Honor.

22 THE COURT: All right. We have gone quite a ways

23 afield and I kind of let everybody do it, okay. It is twenty

24 until five. We are going to go for twenty minutes. I feel

25 certain we won’t finish the trial but, from here on end, we are

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 194 of 202
195

1 going to rein in much tighter. We have got a fraudulent

2 conveyance case. I expect the evidence to relate somehow to

3 the issues that have been pled, you know, in the complaint and

4 the answer and, if I don’t see it real quick, we are going to

5 move on, and I am certainly not above asking the lawyer to sit

6 down and the witness to stand down if I don’t see it. So we

7 are going to go from here.

8 And when I make an evidentiary ruling, that is it. It

9 is no longer subject to argument. Now if you don’t like it,

10 you can take it up on appeal, but we are going to move on and

11 we are not going to argue evidence forever.

12 So with that, you get twenty minutes and then we are

13 going to call it a day and then I do intend to finish this

14 tomorrow.

15 MR. BRAZEAL: Thank you, Your Honor. Your Honor, I

16 apologize if I appeared to be contesting your – 

17 THE COURT: No apology. Just move on.

18 BY MR. BRAZEAL: 

19 Q. Mr. Horton, how was American Real Estate capitalized

20 and, to be more specific, insofar as the loan that was made

21 from American Real Estate to Perky Cap – I am sorry – from

22 American Real Estate to the Terrys, the five point five million

23 dollar loan, where did American Real Estate obtain the five

24 point five million dollars? 

25 A. From their operating funds and from various – they

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 195 of 202
196

1 may have borrowed some of it from me personally and they may

2 have borrowed some of it from RJ&J Enterprises, Inc. 

3 MR. BRAZEAL: Judge, I don’t believe I have anything

4 more for Mr. Horton as far as the cross of his direct.

5 THE COURT: All right. Redirect.

6 MR. BARRIERE: Very briefly, Your Honor.

7 REDIRECT EXAMINATION

8 BY MR. BARRIERE: 

9 Q. Mr. Horton, I forgot to ask you, am I correct, sir,

10 is David Giddens your personal accountant? 

11 A. Yes. 

12 Q. He also acted obviously as the accountant for Perky

13 Cap Company? 

14 A. Yes, sir. 

15 Q. And he acts as the accountant for a number of your

16 companies; is that correct? 

17 A. That’s correct.

18 MR. BARRIERE: Thank you, Your Honor. Nothing further

19 from this witness.

20 THE COURT: Okay. Thank you, sir. You may step down.

21 Mr. Barriere, we have got about fifteen minutes.

22 MR. BARRIERE: I can be done in three. Ms. Lasky is

23 going to introduce a number of depositions which we can do, I

24 suppose, with you on or off the bench. Beyond that, sir, we

25 are going to be resting.

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 196 of 202
197

1 THE COURT: Okay.

2 MR. BARRIERE: I would simply re-urge, given that this

3 witness has now testified unambiguously that there was no

4 connection between these other loans and the three transactions

5 that bring us here today, I would re-urge my motion to exclude

6 the testimony on that, which I believe may permit us to finish

7 this trial today.

8 THE COURT: Okay. Well, we would finish your part of

9 the trial today.

10 MR. BARRIERE: Fair enough.

11 THE COURT: Okay. So what’s with the depositions now?

12 MR. BARRIERE: We have multiple depositions we need to

13 enter into the record. We have designations and I will simply

14 have Ms. Lasky identify those specific depositions to be

15 entered into the record on the record.

16 THE COURT: Okay. Well, let’s go ahead and let’s do

17 that now.

18 MS. LASKY: The first is Plaintiff’s Exhibit 55. It is

19 a deposition of Mr. Horton, taken on February 8, 2006.

20 THE COURT: Okay. Are you offering the whole thing?

21 MS. LASKY: Yes. That is the whole transcript.

22 MR. BARRIERE: But you have designations, don’t you,

23 specific designations?

24 MS. LASKY: I don’t think we do for Mr. Horton.

25 MR. BRAZEAL: For Mr. Horton?

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 197 of 202
198

1 MS. LASKY: Yes.

2 MR. BRAZEAL: What would be the purpose for that?

3 MS. LASKY: Well, pursuant to Federal Rule 32, you can

4 designate depositions of a party for any purpose and this is so

5 that the court has a complete record of Mr. Horton’s testimony

6 prior in this case.

7 MR. BRAZEAL: That’s fine. I thought we were just

8 trying to present it all to the judge and present any – well,

9 that’s fine.

10 THE COURT: Let me see what it is. I mean, we had Mr.

11 Horton testify. Why do we need his deposition?

12 MR. BARRIERE: I don’t know that you do. I would

13 withdraw that one.

14 MS. LASKY: Okay. So 55 will be the deposition of

15 David Giddens who was the accountant for Mr. Horton and that

16 has been designated. The designations are attached.

17 THE COURT: Okay. So is there any objection to the

18 deposition of David Giddens?

19 MR. BRAZEAL: None, Your Honor.

20 THE COURT: Okay. So 55, the Giddens deposition, is

21 admitted.

22 MS. LASKY: And the next set of depositions are

23 collectively appraisers’ depositions and these are relevant

24 based on the solvency issue that Mr. Brazeal –

25 THE COURT: Okay. So those are appraisals of Terry

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 198 of 202
199

1 Manufacturing assets and it supports your contention that Terry

2 would have been insolvent as of December 31, 1999?

3 MR. LASKY: It supports that and it also – yes, it

4 does, and it would also rebut any presumption or any evidence

5 that Terry Manufacturing was solvent during that time.

6 THE COURT: Okay. Well, I mean, they haven’t done

7 their case in chief, so all it is, is just your contention.

8 Okay. Mr. Brazeal, any objection to the appraisals?

9 MR. BRAZEAL: No objection.

10 THE COURT: Okay. Those are admitted.

11 MS. LASKY: 56 is Richard Dobbins and that has been

12 designated. 57 is David Bowen. 58 is John Hall.

13 MR. BARRIERE: Your Honor, we have a housekeeping

14 question. Mr. Lambert’s deposition, we are going to introduce

15 if and only if Mr. Averett testifies with respect to solvency.

16 Would you prefer we withhold that for rebuttal purposes?

17 THE COURT: Yeah, why don’t you save that for rebuttal.

18 That would make that easier.

19 MR. BARRIERE: Fair enough.

20 MS. LASKY: Do you want to save Mr. Henderson, as well?

21 MR. BARRIERE: I would go ahead and –

22 MS. LASKY: We referenced that today. So now I am on

23 59, James Henderson.

24 THE COURT: Okay. And who is he?

25 MS. LASKY: He was – well, his letterhead was used for

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 199 of 202
200

1 appraisals of equipment, and Mr. Alexander testified –

2 THE COURT: He is an appraiser?

3 MS. LASKY: Yes, he is an appraiser,

4 THE COURT: All right. Any objection to 59?

5 MR. BRAZEAL: No, Your Honor.

6 THE COURT: Thank you. It is admitted.

7 MS. LASKY: The next group are the creditor depositions

8 and these all evidence that these were creditors of Terry

9 Manufacturing as of November 10, 2000, the date of the first

10 transaction at issue in this case.

11 MR. BARRIERE: Your Honor, I guess a question for the

12 court. We have a – these are being introduced solely for the

13 standing issue.

14 MS. LASKY: It is part of the stipulation.

15 MR. BARRIERE: If it is already covered by the

16 stipulation, I wonder if the court would prefer not to be

17 burdened by the additional deposition transcripts. I am

18 referring specifically to stipulation fourteen which states,

19 and I quote:

20 “A number of entities were unsecured creditors of

21 Terry Manufacturing prior to November 10, 2000, the

22 date on which Cotina Terry and Allie Robinson deliver

23 their respective promissory notes to Messrs. Horton

24 and Reynolds and remain unsecured creditors of Terry

25 Manufacturing as of the date Terry Manufacturing filed

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 200 of 202
201

1 for relief under Chapter 11 of the Bankruptcy Code.”

2 THE COURT: Okay. I see where you are going.

3 MR. BARRIERE: “These unsecured creditors include,” and

4 then a laundry list. We have those depositions. I am not

5 asking for advice on how to run my case but, quite frankly, if

6 the court is satisfied with the stipulation on this topic, I

7 will not burden the record with what are another ten

8 depositions, I believe.

9 THE COURT: I appreciate that. No, I think the

10 stipulation is sufficient on that. Thank you.

11 MR. BARRIERE: Thank you, Your Honor. And I believe

12 with that, Your Honor, the plaintiff rests.

13 THE COURT: Okay. We are going to call it a day. We

14 will start back at nine o’clock tomorrow morning with Mr.

15 Brazeal as your case in chief.

16 Good evening.

17 (Off the record at 4:59 p.m.)

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 201 of 202
202

C E R T I F I C A T E

I certify that the foregoing is a correct transcript

from the electronic sound recording of the proceedings in the

above-entitled matter.

 

 

 

 Patricia Basham, Transcriber

 Date: April 17, 2006

 

Case 2:06-cv-00746-WHA Document 2-2 Filed 08/18/2006 Page 202 of 202
IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

NORTHERN DIVISION

 

In the matter of: )

 )

TERRY MANUFACTURING COMPANY, )

INC., ) 

Debtor ) Case No. 03-32063 

J. LESTER ALEXANDER, III )

Trustee for Terry Manufacturing )

Co., Inc. and Terry Uniform )

Co., LLC )

 )

vs. ) Adv. No. 05-03042

 )

N. D. HORTON, JR., ET AL. )

 Montgomery, AL

 March 29, 2006, 9:21 a.m.

 

TRANSCRIPT OF PROCEEDINGS

BEFORE THE HONORABLE WILLIAM R. SAWYER

UNITED STATES BANKRUPTCY JUDGE

Vol. II - Pages 203 to 268

APPEARANCES: Brent B. Barriere

 Catherine E. Lasky

 Phelps Dunbar, LP

 365 Canal St., Suite 2000

 One Canal Place

 New Orleans, LA 70130

 C. Ellis Brazeal, III

 Walston, Wells

 & Birchall LLP

 1819 Fifth Ave. N, #1100 

 Birmingham, AL 35203

 

Electronic Recorder 

Operator: Linda Bodden

Transcriber: Patricia Basham

 6411 Quail Ridge Drive

 Bartlett, TN 38135

 9O1-372-O613

Proceedings recorded by electronic sound recording;

Transcript produced by transcription service.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 1 of 66
204

INDEX

WITNESS DIRECT CROSS REDIRECT RECROSS

Jesse Slaton 221 236 -- --

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 2 of 66
205

1 (CALL TO ORDER)

2 THE COURT: Please be seated.

3 MR. BARRIERE: Good morning, Judge.

4 THE COURT: Good morning. Let’s see. My recollection

5 is the plaintiff rested yesterday afternoon. So, Mr. Brazeal,

6 you are up.

7 MR. BRAZEAL: Thank you, Your Honor. Judge, I believe

8 that we will have a fairly short day which I think is probably

9 in all of our interest.

10 First just a few housekeeping matters, Your Honor.

11 Yesterday there was an Exhibit 57 which constituted the Peoples

12 Bank loan documents and Mr. Barriere has stipulated to those

13 coming in.

14 MR. BARRIERE: That’s correct, Your Honor.

15 THE COURT: Okay. My recollection was we admitted

16 Exhibits 1 to 56 yesterday; is that correct?

17 MR. BRAZEAL: That’s correct, Your Honor.

18 THE COURT: Okay. So now we are saying 57 comes in?

19 MR. BRAZEAL: Yes, Your Honor, and then I have three

20 additional exhibits which are not contained on the disk which

21 are Exhibits 74, 75 and 76. Exhibit 74 is a document, funds

22 received personally, which Mr. Alexander has indicated

23 constitute preliminary work as to funds that were received from

24 various entities such as American Real Estate and others. And

25 what I have done since yesterday is added the backup to it or

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 3 of 66
206

1 the detail.

2 THE COURT: Is that the one he said was wrong, though?

3 MR. BRAZEAL: Well, I will get to that Judge. I will

4 try to get to that. Yeah, what he said was, I think, they were

5 preliminary numbers. And what I did last night, Your Honor, is

6 I went back and I got the detail that goes along with it. And

7 if you compare the detail of Exhibit 74 to Exhibit 76, in

8 exhibit 76 are payment histories on three of the American Real

9 Estate notes. You know, they match up. And Mr. Barriere is

10 stipulating to 76 coming in, not that it is correct but that

11 this is what my client has produced.

12 Mr. Alexander is not here this morning and that is why

13 Mr. Barriere has agreed to stipulate to those documents.

14 THE COURT: Okay. So 74 and 76 come in or just 76?

15 MR. BRAZEAL: 74, 76 and also 75, Your Honor, which is

16 the backup to the document that says funds used personally.

17 Have I stated anything wrong?

18 MR. BARRIERE: Your Honor, I want to make the record

19 clear. I am not objecting to the admission of these documents.

20 I have little trouble by the use of the term “stipulation.” As

21 I appreciate it from Mr. Alexander’s testimony, the two

22 documents, 74 and 75, he identified as preliminary work papers

23 as to which he could not attest as to the accuracy or the

24 ultimate use. So I am admitting them. I am not stipulating it

25 for the accuracy and the like.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 4 of 66
207

1 With respect to 76, we, again, do not object to its

2 admission. This is a loan payment history that was produced by

3 American Real Estate. We have no knowledge as to its accuracy.

4 THE COURT: Okay. So we will admit 74, 75 and 76.

5 MR. BRAZEAL: Thank you, Your Honor. The difference in

6 74 and 75 from yesterday is that they now have the backup.

7 THE COURT: Okay.

8 MR. BRAZEAL: Judge, the deposition of Roy Terry is on

9 your CD as Exhibit 73, and I would now offer the deposition of

10 Mr. Terry.

11 THE COURT: Okay. And that is 73. Mr. Barriere, any

12 objection to 73?

13 MR. BARRIERE: My only question, Your Honor, is it is

14 a rather lengthy deposition. Are you seeking to admit the

15 entire or specific designations?

16 THE COURT: Well, this is forty pages. Is that the

17 entire deposition or is that –

18 MR. BARRIERE: I think it is probably a hundred and

19 twenty pages.

20 MR. BRAZEAL: Your Honor, I have read that through, his

21 deposition –

22 THE COURT: Okay. This is probably it. The transcript

23 that I am looking at is pretty dense.

24 MR. BARRIERE: It is probably four pages to the page,

25 so I suspect it is a hundred and sixty pages.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 5 of 66
208

1 MR. BRAZEAL: Well, I will tell you what, Judge, with

2 your permission, I have read that through and I thought most of

3 it was relevant.

4 THE COURT: We will just let it in. I will look at it.

5 That is 73?

6 MR. BRAZEAL: Yes, Your Honor.

7 THE COURT: Okay.

8 MR. BRAZEAL: And then, Your Honor the two remaining

9 issues and potential witnesses are Mr. Slaton and Mr. Averett,

10 who are both here this morning, and it involves the deposition

11 testimony from Mr. Slaton concerning the tracing analysis of

12 the three loans and then Mr. Averett who provided some expert

13 testimony about insolvency.

14 As I understood Your Honor yesterday, you had grave

15 reservations, I guess, about the connection between the three

16 loans that we traced and the subject of this litigation, the

17 three stock purchase notes.

18 THE COURT: All right. Well, here’s the thing. Every

19 once in awhile I pinch myself to remind myself that what we

20 have really got here is a five hundred and ninety-six thousand

21 dollar fraudulent conveyance case. 

22 MR. BARRIERE: That’s right.

23 THE COURT: And you and Mr. Barriere filed right

24 before trial a fairly tight stipulation as to the mechanics of

25 how that took place and, you know, after reading the pleadings,

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 6 of 66
209

1 reading your stipulations and a few other things, I had sort of

2 a feeling that I thought maybe I knew what this case is about

3 and then there is all of this talk about all of this other

4 stuff that sounds to me like you’re trying another case. So I

5 was confused there. 

6 You know, after listening to a day of testimony and

7 spending some time refreshing myself, I am very reluctant – I

8 mean, I will hear you out. I am very reluctant to go down this

9 road of tracing all of this money. I actually thanked in my

10 prayers one night Mr. Barriere and the lawyers for the three

11 banks when they managed to settle their case because I thought

12 I was going to have to spend a great deal of time tracing there

13 because it seemed to me that was central to that case.

14 You know, if I had my choice of a root canal and

15 looking at your tracing analysis, I think it is an easy call.

16 MR. BRAZEAL: Right.

17 THE COURT: I am not going to go there unless you can

18 show me why it is we need to because I still don’t see any tie

19 at all between this tracing – or, maybe to put the question a

20 little bit differently, even if this evidence shows what you

21 think it shows, so what? How does that impact this adversary

22 proceeding that we have got right here? I mean, it may be

23 relevant, you know, in other context and other cases but how is

24 it relevant to this fraudulent conveyance case involving Mr.

25 Horton and Mr. Reynolds, and that is my question.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 7 of 66
210

1 MR. BRAZEAL: And, Judge, I can understand from

2 reviewing the stipulation how you thought that the case had a

3 very narrow scope. But, you know, back in our response to the

4 summary judgment, there were a number of issues we raised and

5 the stipulations were not meant to be exclusive. Those were

6 just the ones that Mr. Barriere and I could agree upon.

7 THE COURT: Right. I understand that and I do remember

8 the summary judgment motion. I thought the nub of the issue

9 was – apparently there’s really no dispute in the evidence or

10 among you that basically, you know, the Terry women got about

11 twenty percent of the stock and then at a later point in time

12 Roy and Rudolph Terry got some more Perky Cap stock.

13 MR. BRAZEAL: Yes, Your Honor.

14 THE COURT: And, in consideration, some notes were

15 signed and five hundred and ninety-six thousand dollars was

16 paid, half to Reynolds and half to Horton.

17 MR. BRAZEAL: That is correct.

18 THE COURT: So that is fairly focused. Then the

19 question is, okay, what did Terry Manufacturing get for this

20 five hundred and ninety-six thousand dollars. That is where I

21 thought that I couldn’t say that there was simply no evidence

22 or no dispute, but now your standard is a lot different. It is

23 pretty easy to beat a summary judgment motion. All you have

24 got to do is show something. You know, before, Mr. Barriere

25 had to show there was no dispute at all in the evidence. Now,

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 8 of 66
211

1 instead of going a hundred percent of the way, he has only got

2 to go to fifty-one percent, preponderance.

3 MR. BRAZEAL: I understand.

4 THE COURT: Given that, how do you get there? And like

5 I said, I am reluctant to wander through all of these

6 transactions which appear to me to be, you know, either

7 unrelated or just background unless you can make some showing.

8 MR. BRAZEAL: Judge, we believe that, when you look at

9 the totality of the transactions, that the debtor did receive

10 some value that it would not have received had the stock

11 purchases not occurred, and I will just try to make it brief,

12 Your Honor.

13 As to the first stock transaction at issue in this

14 case – there was a prior one back in the nineties, but the

15 first stock transaction that is at issue in this case was

16 November 10 of 2000, and that was the day that the Terry women

17 purchased twenty percent of the stock or a stock purchase note

18 – well, two of them, each in the amount of two hundred thousand

19 dollars.

20 On that same day, American Real Estate company, owned

21 by Mr. Horton which, according to Mr. Barriere under Louisiana

22 terminology, is juridically separate, but it is still a company

23 that Mr. Horton said that he controls and controlled alone,

24 loaned five point five million dollars to the Terry brothers

25 that day.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 9 of 66
212

1 THE COURT: Let me stop you right here because I am

2 confused about something and maybe you can straighten me out

3 real quick. There is this talk about a five point five million

4 dollar note or a five point five million dollar loan. Do I

5 have a copy of it in here or somewhere?

6 MR. BRAZEAL: You do, Your Honor. I believe it is

7 Exhibit 1.

8 THE COURT: All right. Exhibit 1 of yours or Exhibit

9 of –

10 MR. BRAZEAL: Exhibit 1 of defendant’s Your Honor, but

11 I will be glad to give you a hard copy.

12 THE COURT: No, I have got your exhibits right here.

13 Let me just get it up in front of me so that I can take a quick

14 look. Yeah, here it is. You’re right. It is five point five

15 million dollar promissory note and the payee is American Real

16 Estate and it is signed by Rudolph and Roy Terry.

17 Is this signed by them in their individual capacities

18 or as officers of – 

19 MR. BRAZEAL: I believe in their individual capacities,

20 Your Honor. We have not argued anything other than that.

21 THE COURT: Okay. So we have had this reference, this

22 testimony as to this five point five million dollar. Then also

23 there was some testimony yesterday – you know, first we heard

24 from Mr. Alexander about some invoices that he thought were

25 bogus and then we had some testimony from Mr. Horton, something

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 10 of 66
213

1 to the effect that there was this, you know, five million

2 dollars, I thought I paid for some uniforms that for some

3 reason or another Terry had sold but couldn’t get shipped to

4 the military. Is there any relationship between this five

5 point five million dollar note and those invoices and the

6 uniforms? Is that completely unrelated?

7 MR. BRAZEAL: Your Honor, I would submit to you they

8 are unrelated. There is no nexus in time. And, Judge,

9 following the loan closing and the stock sale closing, which

10 both took place on November 10 of 2000, five point five million

11 dollars was advanced to the Terry brothers and I don’t think

12 there is any dispute but what the five point five million

13 dollars was input into the debtor. And Mr. Horton’s testimony

14 was that Mr. Terry had asked him to go forward with both of

15 these transactions, the stock purchase and the loan, and that

16 Mr. Horton said he did not condition one upon the other and

17 that was because they never had any discussions about one not

18 taking place.

19 But he further said that had Mr. Terry not showed up

20 and purchased the stock, that he would have been, you know,

21 departing from his proposed business plan and therefore Mr.

22 Horton said that he did not believe that he would have loaned

23 him the five and a half million dollars.

24 And what’s more, Your Honor, on some of these

25 triangular, reasonably equivalent value cases, a couple of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 11 of 66
214

1 which we cited yesterday, they reflect that consideration can

2 come from another party. So on the day that the four hundred

3 thousand dollar guaranty of the two stock purchases was

4 executed by Terry Manufacturing, the Terry brothers got the

5 right to draw down five and a half million dollars and then

6 over the next five months put that into the debtor. And Mr.

7 Terry says in his deposition that, had he not go forward with

8 the stock purchase, he did not think Mr. Horton would’ve gone

9 forward with the other.

10 And then you have the same sort of testimony, Your

11 Honor, when you get to the Peoples – and remember, Your Honor,

12 which you probably do, that the stock purchase notes and the

13 five point five million dollar note were cross-collateralized

14 – not cross-collateralized but – 

15 THE COURT: Cross-defaulted, right. I remember that.

16 MR. BRAZEAL: Yes, sir. And so we would say, (a), that

17 that demonstrates that there was some value for the guaranty

18 that Terry gave that day and that being the ability to get this

19 five and a half million dollars in the next few months.

20 Secondly, Your Honor, they have attached not only the

21 guaranty but each subsequent payment made on the notes. And

22 because the loans were cross-defaulted, if the debtor had

23 stopped making payments on the stock note, Mr. Horton would

24 have been able to call the five point five million dollar note,

25 which had been guaranteed by Terry Manufacturing.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 12 of 66
215

1 And so my point on that, Your Honor, was for each and

2 every payment that the debtor made, which they are seeking to

3 set aside, they were able to prevent the five point five

4 million dollar loan from being called.

5 And then, Your Honor, there is another loan in August

6 which was actually repaid, and then there is the one in May of

7 2002, which generated a fair amount of testimony yesterday over

8 whether the stock purchase actually occurred.

9 But Mr. Terry also testified that, had he not

10 purchased the stock on that day, that he would not have had

11 control over Perky Cap and did not believe that he would have

12 been able to obtain the loan from Peoples Bank.

13 So that is mine suggested nexus, Your Honor.

14 THE COURT: So you’re wanting to put depositions in or

15 offer testimony or what is it you are seeking to do today?

16 MR. BRAZEAL: Today what we have, Your Honor, is Mr.

17 Slaton from the Warren Averett firm who can testify as to what

18 occurred with the proceeds of those loans. I don’t think there

19 is any dispute from the trustee’s side – obviously as to the

20 entire report, right? I mean, I know there is a dispute as to

21 that but there is no dispute that the money went into the

22 debtor. The question is what happened after it went into the

23 debtor.

24 Your Honor, I believe that once the debtor receives

25 the money, that that is a benefit to the debtor; but I know

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 13 of 66
216

1 that in the prior case, Your Honor, you had indicated that you

2 wanted to look at the tracing analysis. I was trying to think

3 if there is some way to do it without taking up too much of

4 your time.

5 THE COURT: Mr. Barriere, I will hear from you in a

6 minute. I’m trying to gather my thoughts here for just a half

7 a second. Sort of the problem is Terry Manufacturing is such

8 a can of worms and you try to pick up one little piece of it,

9 or you start to pick one and you end up with a whole can of

10 worms no matter where you start in the whole mess. 

11 I mean, certainly you can make an argument – well,

12 certainly you can make an argument that the evidence does not

13 support what it is he says it means. That is not really what

14 I’m trying to figure out right now. I mean, relevance is just

15 if there is any tendency to make the existence or nonexistence

16 of one material issue either more or less likely, and that is

17 all that Mr. Brazeal has to show to put it up and then, once it

18 is in, you know, then counsel can argue – I mean, there will

19 certainly be arguments as to what the evidence actually means

20 once it gets in. 

21 I guess if that is the theory of your defense, you

22 know, I don’t a hundred percent understand it yet, but I guess

23 the point is maybe it is better to let it in and try to grasp

24 it later. Mr. Barriere, what are your thoughts?

25 MR. BARRIERE: Well, if I may, Your Honor, I wanted,

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 14 of 66
217

1 because I do think there is a – a reference to the bank cases

2 isn’t appropriate. Maybe I can just illustrate what I think is

3 sort of the fundamental difference here. 

4 In the bank cases we basically had this issue, the

5 banks, Terrys, Terry Manufacturing. All right. And I think

6 this part, at least, our cases agree to. Money loaned to the

7 Terrys individually, the Terrys had then transferred a portion,

8 not all but most of the funds to Terry Manufacturing. And

9 Terry Manufacturing, of course, has made all of the repayments.

10 So, here, we had a classic, triangular indirect benefit issue.

11 Did Terry Manufacturing get enough benefit from the funds

12 flowing through the Terrys to, if you will, equalize the

13 payments to the bank. And the reason the tracing was so

14 relevant there, Your Honor, is part of the debate was is it

15 enough that the dollars just get into the account, or does it

16 matter actually how the funds were used? 

17 And you will recall the debate between the trustee,

18 well, you know, this was really just part of an elaborate

19 scheme to get money to the Terrys or their benefit and, of

20 course, Mr. Averett apparently was going to tell us, no, no,

21 all of these funds really went for legitimate corporate

22 purposes. That is why we were faced with that root canal like

23 undertaking.

24 We have a very different situation here. What Mr.

25 Averett here proposes to talk about is money going from now

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 15 of 66
218

1 American Real Estate to Mr. Slaton to the Terrys down to Terry

2 Manufacturing, but that is not the transaction we are arguing

3 about. 

4 The transaction we are arguing about is Horton,

5 Reynolds, sell stock, no loan. It was stocks transferred to

6 Terry insiders with TMC paying on it. There is no tracing to

7 be done in this transaction, okay. What we have is this effort

8 to say, well, okay, but about the same time a related entity,

9 American Real Estate, makes a loan to the Terrys. A loan I

10 might add the one thing I think we did hear, clear and

11 unambiguous, is they were two separate transactions. You know,

12 we had a lot of talk about, well, if this had happened, I might

13 have done this, but one thing he told us several times was

14 these were two, separate, unrelated transactions. 

15 He made that loan and now we are going to have a

16 witness to tell us, well, okay, the money went to the Terrys

17 and then it went down to Terry Manufacturing and, once it got

18 to Terry Manufacturing, it would have been used for legitimate

19 business purposes, not for personal needs or inappropriate

20 purposes, what have you.

21 It strikes me this is so far afield. Again, in this

22 case, it was the case. It was the loan that was at issue.

23 None of these loans are at issue other than being put up as

24 sort of a straw man, in my judgment, for value for these stock

25 transactions.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 16 of 66
219

1 So, as I said, you have to go through multiple hoops.

2 You have to jump to the premise that somehow these, by the

3 definition of Mr. Horton, unrelated loans really provide value

4 for the stock payments. And then to say, well, now that I have

5 gotten past that huge hurdle, I need to trace how those funds

6 were actually used. And that is why I think it simply doesn’t

7 meet the relevance threshold, Your Honor.

8 THE COURT: Okay. Here is what I am going to find. I

9 mean, I agree with one thing you say, Mr. Barriere, we have an

10 extra degree of attenuation here that we did not have in the

11 bank case. The fact that Mr. Brazeal’s defense is both

12 complicated and difficult to prove doesn’t mean that he

13 shouldn’t be allowed to – I mean, I agree there is certainly a

14 factual issue at some point I may have to decide or will have

15 to decide about whether or not there was in fact any factual

16 linkage. If no, then that’s the end of the story. If yes,

17 then there still is a very difficult complicated case of the

18 so-what, even if it was, you know, in the final analysis, you

19 know, the Terry women end up with twenty percent of the stock

20 and didn’t pay for it. The Terrys ended up with – Roy and

21 Rudolph ended up with another block of stock. Was it – 

22 MR. BARRIERE: Thirty-one percent, assuming it was

23 transferred. Thirty-one percent.

24 THE COURT: That’s right. The additional, the 2002

25 transfer and, again, that was paid. But that is all something

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 17 of 66
220

1 kind of downstream that I am going to have to decide. I think

2 today all I have got to decide is whether or not Mr. Brazeal

3 meets the threshold requirement. And the fact that you can

4 look at the same evidence that he does and come to a different

5 conclusion doesn’t necessarily keep the evidence out. All it

6 says is we will get something to argue.

7 So I am going to overrule the trustee’s objection. I

8 am going to allow the defendants to put on that evidence. Did

9 you want to do some by live testimony or is this going to be

10 all by deposition or how do you prefer to do it?

11 MR. BRAZEAL: Your Honor, I have him here.

12 THE COURT: Okay. Well, that’s fine.

13 MR. BRAZEAL: I don’t have a problem with stipulating

14 to Mr. Averett’s deposition that was taken on the tracing

15 analysis, but I think that Mr. Barriere may want to put him on

16 the stand.

17 THE COURT: Well, that is your call.

18 MR. BARRIERE: And just so the record is clear, Your

19 Honor, I am still going to object to Mr. Averett testifying

20 because of the fact that he didn’t write, read or review the

21 report. I am not going to object to Mr. Slaton testifying.

22 THE COURT: Okay. 

23 MR. BRAZEAL: Your Honor, I will call Jesse Slaton.

24 THE COURT: All right. 

25 (JESSE SLATON, WITNESS, SWORN)

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 18 of 66
221

1 DIRECT EXAMINATION

2 BY MR. BRAZEAL: 

3 Q. Would you state your name and address for the record?

4 A. Jesse Slaton, 2500 Acton Road, Birmingham. 

5 Q. And, Mr. Slaton, where are you employed? 

6 A. Warren, Averett, Kimbrough & Marino. 

7 Q. All right, sir. And what sort of business is that?

8 A. It is a Certified Public Accounting firm. 

9 Q. Mr. Slaton, how long have you been with Warren

10 Averett? 

11 A. Approximately six years. 

12 Q. All right, sir. Could you give us a brief sketch of

13 your educational background? 

14 A. I have a bachelor’s of business administration degree

15 from the University of Montevalo with a concentration in

16 accounting. 

17 Q. All right, sir. And subsequent to graduating from

18 Montevalo, did you go directly to work for Warren Averett? 

19 A. I did. 

20 Q. All right, sir. And at some point did you take and

21 pass the CPA exam? 

22 A. I did. 

23 Q. All right. So are you a licensed CPA in the state of

24 Alabama? 

25 A. Yes. 

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 19 of 66
222

1 Q. All right. And have you ever had any challenges to

2 your licensure or any type of action against your CPA license?

3 A. No, sir. 

4 Q. All right, sir. Could you tell the court what type

5 of matters you work on at Warren Averett? 

6 A. Various types, including income tax issues, audits of

7 financial statements, consulting distressed businesses, various

8 things such as that. 

9 Q. In connection with your consulting of distressed

10 businesses, would you give us a little more elaboration on what

11 that involves? 

12 A. Generally we are the consultants for the debtor. In

13 many cases when the debtor becomes distressed, we assist them

14 in improving their operations; we assist them in restructuring

15 their obligations. 

16 Q. All right, sir. Were you and your firm asked to

17 provide some services to the defendants in this action? 

18 A. Yes. 

19 Q. All right, sir. And could you tell us briefly what

20 you were requested to do? 

21 A. We were asked to trace the loan proceeds of certain

22 loans to their final use in Terry Manufacturing Company. 

23 Q. All right, sir. And as I understand it, there were

24 three loans. One was a five and a half million dollar loan

25 which we were discussing briefly before, and then there was a

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 20 of 66
223

1 one and a half million dollar loan in August of 2001 and a one

2 and a half million dollar loan in May of 2002; is that correct?

3 A. That is my recollection, yes. 

4 Q. All right, sir. And did you prepare a report in

5 connection with your engagement? 

6 A. Yes, I did. 

7 MR. BRAZEAL: And, Judge, just because these documents

8 are so hefty, I thought what I would do is provide hard copies

9 to everyone. It is a lot easier to go through them.

10 THE COURT: Okay. 

11 MR. BRAZEAL: Your Honor, may I approach the witness?

12 THE COURT: Yes, sir

13 MR. BRAZEAL: Thank you.

14 BY MR. BRAZEAL:

15 Q. Mr. Slaton, I have presented you with what has been

16 marked as Defendant’s Exhibit 62. Could you identify that for

17 the record?

18 A. This is the report that was prepared at the request of

19 you on February 24 of 2006.

20 Q. All right, sir. And tell the court what methodology

21 you utilized to determine or to trace the proceeds of the three

22 loans at issue?

23 A. We first obtained from the trustee detail of the

24 specific loan proceeds related to the three loans in question

25 and we traced those loan proceeds into the operating account of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 21 of 66
224

1 Terry Manufacturing at the Bank of Wedowee. From there, we

2 traced those funds into either a sweep account at Bank of

3 Wedowee that is also a Terry Manufacturing account or to a

4 canceled check for a transaction that was written directly from

5 that account. 

6 At times, that money – in all situations, that money

7 that was transferred to the sweep account was then transferred

8 back into that Bank of Wedowee operating account. And from

9 that operating account, transfers were made to the First Bank

10 of Tuskegee and we traced those to the First Bank of Tuskegee

11 and to those deposit tickets.

12 And then once it arrived in the First Bank of

13 Tuskegee, we traced that to a canceled check or the ultimate

14 use of the funds.

15 Q. All right, sir. And what records did you use to

16 determine the ultimate use of the funds?

17 A. We used the records that were provided by the trustee

18 and only those records. That consisted of a report that he had

19 prepared that indicated the proceeds and the bank of deposit

20 for the proceeds, and then the bank statements specifically

21 that were also in his custody, and a worksheet of cash

22 disbursements from those accounts prepared by the trustee.

23 Q. All right, sir. I am going to –

24 MR. BRAZEAL: May I approach the witness, Your Honor?

25 THE COURT: Yes, sir. 

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 22 of 66
225

1 Q. Mr. Slaton, I have presented you with what has been

2 marked as Defendant’s Exhibit 63 and 64. Would you identify

3 Defendant’s Exhibit 63 first and then the second one? 

4 A. Defendant’s Exhibit 63 is a schedule of the loans and

5 their specific loan proceeds that were disbursed at various

6 times, which was prepared from a schedule provided by the

7 trustee entitled “Funds Received Personally Detail.” 

8 Q. All right, sir. What about Exhibit 64?

9 A. Exhibit 64 is what I would refer to as a lead schedule

10 for the particular disbursement of the loan.

11 Q. All right, sir. And would you just walk us through

12 Exhibit 64 just as an example to show us how, first, the

13 proceeds that we’re talking about and then, you know, the

14 different bank accounts they went into and then where they went

15 out of the bank accounts?

16 A. To do that, I will start with Exhibit 63. 

17 Q. All right, sir. 

18 A. We had a loan from American Real Estate to Terry

19 Manufacturing Company, Inc. for five point five million dollars

20 that was – the first disbursement from that loan was dated 11-

21 13 for one million, nine hundred and ninety-four thousand, nine

22 hundred and sixty dollars, deposited into the Bank of Wedowee

23 account number 5011256.

24 That particular loan is reflected in Defendant’s

25 Exhibit 64. The proceeds – 

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 23 of 66
226

1 Q. Mr. Slaton, before we – 

2 THE COURT: Let me just stop here for a minute. Maybe

3 this is easy but I am confused. I am looking at Exhibit 63,

4 and we have got a five point five million dollar loan and I see

5 that there is a loan dated November 20, 2000. Do you see that?

6 THE WITNESS: Yes, sir. I believe Mr. Averett in his

7 deposition stated that that 11-20 date was incorrect. I

8 believe the date was the thirteenth?

9 THE COURT: Okay. Because I was wondering how you are

10 showing a one point nine – million, nine ninety-four, nine

11 sixty drawn on the thirteenth if the loan wasn’t entered into

12 until a week later.

13 THE WITNESS: Yes, sir. It was an error.

14 THE COURT: Okay. 

15 THE WITNESS: The eleven – I’m sorry, do you want me to

16 continue? 

17 THE COURT: Go ahead.

18 THE WITNESS: This 11-13 loan for five point five

19 million dollars was broken up in multiple disbursements. The

20 first of which appears to have occurred on 11-13 for one

21 million, nine ninety-four, nine sixty, as also is reflected in

22 the information prepared by the trustee which is referenced

23 behind it at D-1.1.

24 This one million, nine hundred and ninety-four

25 thousand dollar loan was then traced by us into the Bank of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 24 of 66
227

1 Wedowee’s account at the Bank of Wedowee by looking at the

2 deposit ticket and then also seeing it show up in the bank

3 account.

4 BY MR. BRAZEAL: 

5 Q. So then, Mr. Slaton, are you telling us – and let’s

6 just take that first transaction, the one point nine-nine-four

7 million dollars. Is that dealt with in Exhibit 64?

8 A. Yes.

9 Q. All right, sir. And Exhibit 64 contains the documents

10 which reflect where those funds traveled?

11 A. Exactly.

12 Q. All right, sir. 

13 A. And in Exhibit 64 you will note that on 11-13 the bank

14 showed a balance of one thousand, eight hundred and eighty-four

15 dollars and seventy-seven cents prior to the deposit.

16 Q. All right, sir. 

17 A. We can trace the deposit going in after that beginning

18 balance. That is the start of the tracing with Defendant’s

19 Exhibit 64.

20 Q. All right, sir. And then what else does Defendant’s

21 Exhibit 64 reflect occurred with the one point nine-nine-four

22 million dollars?

23 A. It reflects that portions of it were transferred out

24 into the sweep account, also a Bank of Wedowee account, and

25 then those same portions transferred back in, and then the

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 25 of 66
228

1 disbursement of two checks, one check, 1062, to the United

2 States Treasury for four hundred thousand, six hundred and

3 seventy dollars, and check number 1066 to the Bank of Wedowee

4 for a loan payment. And then those proceeds were swept back

5 into this operating account and then transferred to the Bank of

6 Tuskegee.

7 Q. All right, sir. And once they were transferred to the

8 Bank of Tuskegee, do you have any records to reflect what

9 occurred to the funds then?

10 A. Yes. We have the bank statements that were provided

11 by the trustee for the First Bank of Tuskegee, as well as a

12 detail provided by the trustee of disbursements during this

13 same time frame that indicate the use of the funds for the same

14 time frame.

15 Q. All right, sir. And if you would just go through some

16 of the disbursements just by way of example on Defendant’s

17 Exhibit 64?

18 A. Sure. For instance, if you refer to what is

19 referenced as BOW-1.3 titled “Phelps Cash Reconstruction

20 Tracking Sheet,” that was prepared by the trustee, it has the

21 details of those transactions and you can see transactions such

22 as checks to the United States Postal Service, checks to

23 various companies that appear to be ordinary business

24 transactions of Terry Manufacturing.

25 Q. All right, sir. Mr. Slaton, how do we know that the

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 26 of 66
229

1 one point nine-nine-four million dollars in proceeds of the

2 first draw from the five point five million dollar loan were

3 then utilized for the checks reflected in the report prepared

4 by the trustee?

5 A. Well, we determined the balance in the account prior

6 to the funds being deposited into the First Bank of Tuskegee

7 account.

8 Q. All right, sir. And how much was that?

9 A. It was, to give you an exact, I can’t just do it right

10 off of the top of my head. Give me just one second. (Pause)

11 It is included in our report titled D-2, balance detail for the

12 First Tuskegee Bank accounts for that particular loan. We said

13 that on 11-10 the bank account had a balance of eighteen

14 thousand, one hundred and fifty-seven dollars and three cents.

15 Q. All right, sir. And can you show us where that is

16 reflected in Defendant’s Exhibit 64? In other words, take us

17 to the actual bank record and/or record of the trustee that

18 reflects that number. 

19 A. Sure. The bank statement, First Tuskegee Bank account

20 number 1109308, which is referenced on the first page as BOW21 1.2, if you go to page ten of that bank statement under the

22 daily balance summary – 

23 THE COURT: Okay. We are on Exhibit 64 and where

24 within Exhibit 64 now?

25 THE WITNESS: Under the bank statement referenced as

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 27 of 66
230

1 BOW-1.2.

2 THE COURT: Okay. All right. 1.2.

3 THE WITNESS: Page ten of that bank statement.

4 THE COURT: Okay. I have it.

5 THE WITNESS: On 11-10, it shows that the balance in

6 the bank was eighteen thousand, one hundred and fifty-seven

7 dollars and three cents.

8 THE COURT: Okay. I see that.

9 THE WITNESS: That is prior to the 11-13 deposit.

10 THE COURT: Okay.

11 THE WITNESS: Then from there, if you look at all of

12 the transactions prepared by the trustee during that time

13 frame, and then you look at the bank statements, when the

14 balance drops below the balance of eighteen thousand, one

15 hundred and fifty-seven dollars and three cents, which I have

16 dated on 12-11 of 2000, the balance shows to be five thousand,

17 three hundred and one dollar and ten cents.

18 BY MR. BRAZEAL: 

19 Q. All right. So you started out with a balance, did you

20 say, of approximately eighteen thousand?

21 A. Correct.

22 Q. And that dropped down to how much?

23 A. Five thousand, three hundred and one dollars and ten

24 cents.

25 Q. All right. And in the interim, this one point nineCase 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 28 of 66
231

1 nine-four million dollars came into that First Tuskegee bank

2 account?

3 A. Correct.

4 Q. And was written out in various checks which have been

5 compiled in a report prepared by the trustee?

6 A. Correct.

7 Q. All right, sir. And your review of that report from

8 the trustee reflects that most of the expenditures appear to be

9 ordinary business expenditures?

10 A. They appear to be.

11 Q. All right, sir. And so your point about it, I take

12 it, is that if the one point nine-nine-four million was used

13 for those expenditures because you started out with a fairly

14 low balance in the account and then you looked at the

15 transactions that occurred following that until you arrived at

16 another low balance in the account; is that correct?

17 A. Until I arrived at a balance that was lower than the

18 beginning balance and therefore proving that the one point nine

19 million dollars was used.

20 Q. All right, sir. Now in Defendant’s Exhibit 64, were

21 there any other transfers to the First Tuskegee account during

22 that time frame that were used to write the checks that are

23 reflected in the trustee’s report?

24 A. On Defendant’s Exhibit 64, down at the bottom of the

25 page you will see First Bank of Tuskegee operating as a listing

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 29 of 66
232

1 and there were six transactions totaling one point one million,

2 two hundred and ninety thousand dollars that were transferred

3 during that same time period that were a part of the one point

4 nine million dollars.

5 Q. All right, sir. What happened to the other seven,

6 approximately seven hundred thousand dollars?

7 A. Well, we can document that check number 1062 was

8 written to the U.S. Treasury for four hundred thousand, six

9 hundred and seventy dollars. We can document that check number

10 1066 was written to the Bank of Wedowee for a loan payment of

11 Terry Manufacturing for thirty-three thousand, four hundred and

12 five dollars. And the remaining portions were used up in the

13 subsequent month, the month of December – excuse me – January.

14 Q. All right, sir. So just describe for us in general –

15 well, so your testimony then is that all of those funds or

16 substantially all of those funds appear to have been used for

17 ordinary business expenses?

18 A. Correct.

19 Q. All right, sir. Mr. Slaton, did you employ this same

20 methodology for each of the loan disbursements that we have

21 described?

22 A. Yes.

23 Q. And so, for instance, if we move on to BOW-2, that

24 concerns a one million dollar draw on the five point five

25 million dollar loan; does it not?

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 30 of 66
233

1 A. Correct.

2 Q. All right, sir. And you employed the same methodology

3 as you did for the one point nine-nine-four million dollar

4 draw?

5 THE COURT: Okay. Now where is BOW-2?

6 MR. BRAZEAL: I have got all of those, Judge.

7 THE COURT: Okay.

8 MR. BRAZEAL: And I don’t know if there is some way to

9 short-circuit it. I will be happy to do that, or we can go

10 through each one of them. I mean, I don’t want to go through

11 each one of them. I think they are all pretty self12 explanatory.

13 THE COURT: Well, I think I understand Mr. Slaton’s

14 methodology. I want to make sure I do. What you’re doing is

15 you are identifying when each draw from each one of these loans

16 was made, and then you look to see what happened, you know,

17 what bank account it was deposited in, the balance before and

18 then you see where the money went?

19 THE WITNESS: Yes, sir.

20 THE COURT: Okay. So you used the same methodology in

21 all nine – were there nine of these, total? Well, there would

22 be the five point five was paid out, I guess, in five separate

23 draws, BOW’s one through five. 

24 MR. BRAZEAL: That’s correct, Your Honor.

25 THE COURT: The one point five million from August of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 31 of 66
234

1 ‘01 was paid out in two draws, that being BOW eight and nine,

2 and then the one point five million dollars from May 30 of ‘02

3 was paid in one draw of one point five million, which is BOW4 10. Okay.

5 THE WITNESS: That is a complete listing.

6 THE COURT: All right. Well, I mean, I will let you

7 put the schedules in. I am kind of reluctant to go through

8 every one of those transactions. If you want to go through one

9 or two by way of example, that is fine, but I don’t want to –

10 I mean, you have already done a couple of examples but, I mean,

11 we could spend a couple of days, at least, going through

12 everyone.

13 MR. BRAZEAL: I understand, Judge. That was my

14 concern, as well.

15 THE COURT: I think I see your methodology. Like I

16 said, I don’t want to do every one. If there are a couple more

17 you want to pick out, that is fine, or if you want to move on

18 to something else, that is fine, too. It is your call.

19 MR. BRAZEAL: Judge, I think I will, if it is all

20 right, just introduce the exhibits and then I will move on.

21 THE COURT: Okay. So which exhibits are these now

22 you’re offering?

23 MR. BRAZEAL: I’m going to add, Your Honor, the

24 remainder of the tracing schedules if I could. May I approach,

25 Your Honor?

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 32 of 66
235

1 THE COURT: Yes, sir. 

2 BY MR. BRAZEAL: 

3 Q. Mr. Slaton, I have presented you with the additional

4 tracing schedules. Would you just identify each of those for

5 the court, beginning with Exhibit 65?

6 A. Defendant’s Exhibit 65 is the BOW-2 loan proceeds

7 transaction that was indicated on Defendant’s Exhibit 63.

8 Defendant’s Exhibit 66 is the BOW-3 transaction also

9 indicated on Defendant’s 63.

10 Defendant’s Exhibit 67 is BOW-4, which is indicated on

11 Defendant’s Exhibit 63.

12 Defendant’s Exhibit 68 is BOW-5 which is indicated on

13 Defendant’s Exhibit 63.

14 Defendant’s Exhibit 69 is BOW-8, also indicated on

15 Defendant’s Exhibit 63.

16 And BOW-10 is Defendant’s Exhibit 71 indicated on

17 Defendant’s Exhibit 63. 

18 Q. All right, sir. 

19 A. Excuse me. One more. BOW-9 is also Defendant’s

20 Exhibit 70, which is indicated on Defendant’s Exhibit 63. 

21 Q. All right, sir.

22 MR. BRAZEAL: Your Honor, I would move for the

23 introduction of Exhibits 62 through 71.

24 THE COURT: Okay. Mr. Barriere.

25 MR. BARRIERE: I am objecting to the introduction of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 33 of 66
236

1 all of those, Your Honor.

2 THE COURT: Okay. And then I will overrule the

3 objection and will admit the exhibits.

4 MR. BRAZEAL: I rest, Your Honor.

5 THE COURT: Mr. Barriere.

6 MR. BARRIERE: Thank you, Your Honor.

7 CROSS EXAMINATION

8 BY MR. BARRIERE: 

9 Q. Good morning, Mr. Slaton. I am Brent Barriere. We

10 haven’t met face-to-face until this morning, I believe. We did

11 visit briefly over the telephone. Do you have a copy of your

12 expert report there, sir?

13 A. I do.

14 Q. Just so the record is clear, sir, if you would turn to

15 the first page of the February 24 report, “Purpose of

16 Engagement.” And as I appreciate, Mr. Slaton, you were the

17 author and signatory of this report; is that correct?

18 A. Yes.

19 Q. All right. The last sentence under purpose of

20 engagement reads, and I’m quoting:

21 “The analysis was performed on specific loans that are

22 the subject of the claims against the defendants made

23 by the trustee of Terry Manufacturing Co., Inc.” 

24 Do you see where I am reading from, sir? 

25 A. (No audible response.) 

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 34 of 66
237

1 Q. All right. Now, just so the record is clear, sir,

2 you have performed no analysis whatsoever with respect to the

3 transaction by which Cotina Terry purchased stock from N. D.

4 Horton and James Reynolds and there was a payment on a

5 promissory note in connection with that; you haven’t studied

6 that transaction in any way, have you?

7 A. No.

8 Q. Indeed you weren’t even aware of that transaction

9 until the hour or so before I deposed you on March 17; is that

10 correct?

11 A. That is correct.

12 Q. All right. And likewise you haven’t done any analysis

13 whatsoever with respect to the stock transaction involving

14 Allie Robinson; correct?

15 A. Correct.

16 Q. And likewise you have done no analysis whatsoever with

17 respect to the purported stock sale to Roy and Rudolph Terry on

18 or about May 30, 2002?

19 A. Correct.

20 Q. All right. And so the only loans that you have

21 studied, as I appreciate it, are those identified on D-1, which

22 was a five million, five hundred thousand dollar line of credit

23 by American Real Estate to – well, by American Real Estate – a

24 one point five million dollar line of credit by American Real

25 Estate and a one point five million dollar line of credit by

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 35 of 66
238

1 Peoples Bank; correct?

2 A. Correct.

3 Q. All right. Now with respect to the first of those,

4 the American Real Estate shows as a creditor – you have Terry

5 Manufacturing Company, Inc. as the debtor; is that correct?

6 A. I’m not real certain on that.

7 Q. You don’t know?

8 A. No.

9 Q. Were you provided with any of the loan documentation?

10 A. I don’t recall looking at the loan documentation.

11 Q. Okay. So you were just told to assume that Terry

12 Manufacturing was the debtor for that loan?

13 A. No, I was asked to trace the use of the proceeds.

14 Q. Okay. But the presumption, I take it, for that

15 analysis was that Terry Manufacturing was the borrower on that

16 loan?

17 A. I didn’t make any presumption.

18 Q. You didn’t make any presumption. All right. And

19 didn’t look at the loan documentation, as I understand. All

20 right. Now just so we’re clear on what you actually did,

21 focusing on the first of those, 64, am I correct to understand

22 that in the period in question that you studied, the total

23 deposits into this account amounted to over three million

24 dollars and the payments out amounted to over three million

25 dollars also?

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 36 of 66
239

1 A. I am not sure where you’re getting that.

2 Q. Well, I am just looking at the – you told us that you

3 relied upon these work papers, deposits and disbursements by

4 the trustee and I am looking at the last page, page eight of

5 eight down in the lower, right-hand margin. It will be the

6 second to the last page, Judge, of Exhibit 64.

7 THE COURT: The second to the last page of 64. Okay. 

8 A. I did rely on this.

9 Q. You did rely on it?

10 A. I did rely on this.

11 Q. Okay. And that, at least, reflects that during the

12 period studied, the total debits or the total disbursements out

13 of this account amounted to three million, thirty-five thousand

14 dollars and the total deposits amounted to three million,

15 thirty-three thousand dollars; is that correct?

16 A. I didn’t sum it to get to that point but I suppose

17 that might be correct.

18 Q. Okay. Sir, did you attempt to ascertain – there are,

19 if you work up the column there, deposits into this account

20 from November 1 through November 30; correct?

21 A. Correct.

22 Q. So would I be correct, sir, that in addition to the

23 funds that you studied, the million two that came into this

24 account from the five point five million dollar line of credit,

25 there was an additional, what, one point eight million dollars

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 37 of 66
240

1 deposited into this account during the same time frame?

2 A. Based on this sheet, yes.

3 Q. All right. And you would agree, sir, it is not

4 possible to identify how a specific dollar deposited into the

5 account is applied?

6 A. I would say that it is not possible to specifically

7 identify every dollar, nor is there a need to do that because

8 we are not trading in hens and chickens, we are trading in

9 dollars.

10 Q. Okay. Let me be clear. I have got three million

11 dollars coming into this account during the month of November.

12 I have got three million dollars coming out. A million two is

13 the dollars you are attempting to trace; a million eight are

14 dollars you didn’t trace. You can’t tell from which part or

15 from which particular bucket any particular expenditure was

16 made; correct?

17 A. Not any particular but I can say from this time frame

18 to this time frame, the loan proceeds were used up with those

19 particular disbursements.

20 Q. Well, by way of illustration, you have the first of

21 your deposits, if I’m reading this correctly, came into the

22 account on, what, the 14th of November; is that correct?

23 A. Correct.

24 Q. The 13th of November?

25 A. As indicated on page eight of eight prepared by the

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 38 of 66
241

1 trustee, he shows that to clear on the thirteenth of November,

2 five hundred thousand dollars.

3 Q. Okay. And the same day you have a seventy-five

4 thousand dollar deposit, an eighty thousand dollar deposit. Do

5 you see where I am referring to?

6 A. Sure.

7 Q. Okay. And how the five hundred thousand dollars or

8 the hundred and fifty-three thousand dollars, all deposited on

9 the same day, those funds were all commingled in the account,

10 correct?

11 A. Sure, all money is commingled in business.

12 Q. And how any one of those six hundred and fifty

13 thousand dollars was ultimately applied, we can’t tell. There

14 are no isotopes attached to dollar bills; right?

15 A. You cannot specifically identify them.

16 Q. All right. Now I think you told us and I wanted to

17 make sure I got your testimony that these appear to be ordinary

18 business expenses but you didn’t go back to look at invoices or

19 any supporting documentation for any of these specific

20 disbursements; did you?

21 A. From time to time, we did vouch some canceled checks

22 back to the bank statement to kind of validate this listing.

23 From looking at the listing, it appears, just from scanning

24 through here, that many of these transactions would be ordinary

25 business transactions, such as transactions to the United

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 39 of 66
242

1 States Postal Service, etc., etc.

2 Q. Well, fair enough. Let me ask you a specific

3 question. Now you have got, for example, November 13, the

4 first day of the deposit, there is a check written to First

5 Bank of a hundred and fifty-one thousand, four hundred and

6 seventy-four dollars. Do you see where I am referring to? It

7 is on page four of eight of the trustee’s detail. 

8 A. Four of eight? 

9 Q. Uh-huh. 

10 A. On the thirteenth to First Bank, a hundred and fifty11 one thousand. 

12 Q. Right. 

13 A. Okay.

14 Q. And I presume, sir, you can’t tell us today whether

15 that was the payment on a loan from First Bank or if it was a

16 transfer into Roy Terry’s personal account at First Bank; can

17 you?

18 A. Not with the documentation that we have.

19 Q. And you didn’t go beyond this documentation; did you?

20 A. No.

21 Q. All right. 

22 A. But on the same day I did find that the Terry

23 Manufacturing payroll account was increased by twenty thousand

24 dollars. So, you know, that is an ordinary type business

25 transaction based on the face of the transaction.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 40 of 66
243

1 Q. Based on the face. That is what I’m trying to get to.

2 You simply accepted the name to where the monies went and those

3 appeared to be legitimate names; is that a fair summary?

4 A. I don’t know if I would say it that way, but – 

5 Q. And that is basically the procedure you followed for

6 the balance of the work you did; is that correct, the other

7 schedules?

8 A. Correct.

9 Q. Do you know how much money was paid back on this five

10 point five million dollar line of credit?

11 A. I wasn’t asked to look at that.

12 Q. All right. Do you know who paid it back?

13 A. I have no idea.

14 Q. All right. How about this million five loan, do you

15 know how much money was paid back on that?

16 A. No.

17 Q. And how about the Peoples Bank loan, do you know how

18 much was paid on that?

19 A. No.

20 MR. BARRIERE: I have no further questions, Your Honor.

21 THE COURT: I have got one. I’m not going to cut off

22 your redirect. I wanted to ask one. Get Exhibit 64 in front

23 of you.

24 THE WITNESS: Sure.

25 THE COURT: Okay. And flip to the third page which is

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 41 of 66
244

1 just some copies Of bank documents. Now it looks like the first

2 one in the upper left corner is the deposit for the one point

3 nine million dollar draw that we’ve been talking about?

4 THE WITNESS: Yes, sir. 

5 THE COURT: And then these copies of checks that

6 follow, are these things that you think came from – are these

7 things where you think that the one point nine million dollars

8 went to?

9 THE WITNESS: Yes. These checks are checks from the

10 one point nine million dollars.

11 THE COURT: Okay. Good. That is what I thought you

12 meant. Look at 1056, which is just right below, immediately

13 below the deposit slip.

14 THE WITNESS: Sure.

15 THE COURT: And can you read the payee there?

16 THE WITNESS: Terry Manufacturing Company, Inc. 

17 THE COURT: Okay. So Terry is paying itself twenty18 five thousand bucks?

19 THE WITNESS: It is transferring money, yes, sir.

20 THE COURT: Are you aware, and I don’t know how much

21 involvement – maybe it is good and maybe it is bad but I have

22 been living with this case for three years, and all I am

23 hearing is people fussing about Terry kiting checks and

24 churning accounts and things like that. And it looks to me

25 like the first item I look at here is part of that very scheme

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 42 of 66
245

1 of churning money. I mean, you’re saying it is typical, you

2 know, that this money that came through was paid for business

3 expenses but yet it looks like to me, at least like the first

4 item I looked at, and there are several others to Terry

5 Manufacturing. Actually the next one; the next one, 1056;

6 1057; 1058; 1061. Let’ see, 1062, it looks like maybe is some

7 taxes; and then 1063, again Terry Manufacturing; 1064, Terry

8 Manufacturing; 1065; and then 1066, Bank of Wedowee.

9 I mean, just based on all of the stuff I have heard in

10 the past, this just looks like more of the same check kiting.

11 How do you know that it is not that?

12 THE WITNESS: Can I take you through the transaction?

13 THE COURT: Yes, sir.

14 THE WITNESS: Okay. Let’s take this five hundred

15 thousand dollar transaction. That was check number 1057

16 written from this account.

17 THE COURT: Yes, sir, I have got it right here.

18 THE WITNESS: We can trace that money – let me get the

19 right exhibit here. Exhibit 64 on that first page, we can show

20 that check 1057 went out of the Bank of Wedowee account,

21 5011256, on 11-14, okay. 

22 THE COURT: Okay.

23 THE WITNESS: Then that check was deposited into the

24 First Tuskegee Bank operating account on 11-14, okay, down at

25 the bottom. We can trace that to a deposit in the First

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 43 of 66
246

1 Tuskegee bank account indicated – let me see here – indicated

2 on the bank statement, the First Tuskegee Bank.

3 THE COURT: Where is that? 

4 THE WITNESS: Let me make sure I get you to the right

5 place here. Okay. Give me just a second. Okay. On page

6 eleven of the First Bank statement.

7 THE COURT: Okay.

8 THE WITNESS: On the second row from the bottom – it is

9 going to be kind of hard to read but it is circled and it says

10 BOW-1, one of those deposits on that total deposit that totaled

11 six hundred and fifty-five thousand, five hundred and fifty-six

12 dollars and seventy-five cents, one of those deposits was five

13 hundred thousand dollars. That is a transfer of that money

14 into this First Bank account, okay. From this First Bank

15 account, we looked at the bank statement balance before this,

16 okay.

17 THE COURT: Okay.

18 THE WITNESS: And then we looked at the deposit going

19 in and then we looked at where the balance went below where the

20 beginning balance was. So we know that all of the funds were

21 used in that account during that time frame.

22 THE COURT: Now how do you know that?

23 THE WITNESS: Okay. If you go to – in the expert

24 report we have a sheet in that report that is titled D-2, and

25 it is the balance detail for First Tuskegee Bank.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 44 of 66
247

1 THE COURT: Okay. And that is D-2?

2 THE WITNESS: And the title will say D-2.

3 THE COURT: And that is in Exhibit 62?

4 THE WITNESS: Yes, sir.

5 THE COURT: All right. I have got D-2. What do I need

6 to look at now?

7 THE WITNESS: Do you see on 11-10-2000, the eighteen

8 thousand dollar balance in that account, eighteen thousand, one

9 fifty-seven “o” three?

10 THE COURT: About how many pages deep should I be?

11 THE WITNESS: I am sorry. The twelfth page.

12 THE COURT: Okay. I think I am at the twelfth page, D13 2, balance detail, FTB –

14 THE WITNESS: First Tuskegee Bank.

15 THE COURT: Okay. Now what is it you want me to look

16 at?

17 THE WITNESS: On 11-10-2000, the balance in the account

18 was eighteen thousand, one hundred and fifty-seven dollars and

19 three cents, okay. Subsequent to that, just right after that,

20 you see the five hundred thousand dollar transaction come into

21 the account as a deposit. I showed you that on the First

22 Tuskegee bank account statement. 

23 THE COURT: Okay.

24 THE WITNESS: On 12-11-2000, the balance dropped below

25 where the balance was in the beginning to five thousand

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 45 of 66
248

1 dollars, which would indicate that all deposits made between

2 those two dates, the disbursements from those deposits would be

3 reflected in a listing of checks from that date until the end

4 date. And in looking at – to answer your specific question, I

5 don’t see any evidence of check kiting. I am not asked to look

6 at that. All I am seeing is there is money coming into that

7 account and I am seeing it being used for specific purposes.

8 THE COURT: All right. Mr. Brazeal.

9 MR. BRAZEAL: Nothing, Your Honor.

10 THE COURT: Okay. Thank you, sir. You may step down.

11 THE COURT: Why don’t we break for about fifteen

12 minutes.

13 (Recess from 10:38 a.m. until 10:56 a.m.)

14 THE COURT: Please be seated. 

15 Did you just rest or did you just pass the witness?

16 I couldn’t remember.

17 MR. BRAZEAL: Well, I passed and I now rest.

18 THE COURT: Okay. Good enough. Mr. Barriere, do you

19 have any rebuttal case?

20 MR. BARRIERE: I do not, Your Honor. 

21 THE COURT: Okay. Then we are done with the evidence.

22 Let me just tell you what I would like, would be helpful to me

23 and would be somewhat flexible as to the timing. But I would

24 suggest about thirty days out, what I would like would be

25 proposed findings of fact and conclusions of law from each of

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 46 of 66
249

1 you, and I prefer simultaneous filings. That is, I want each of

2 you to put your best foot forward and tell me what you think,

3 what conclusions, what findings of fact that you want me to

4 draw from the evidence. I am not really looking for a lot of

5 argument at this point. If we stagger them, you know, and have

6 a few rounds – I’m not really looking for argument. I am

7 looking for what each of you think, you know, the evidence

8 showed and basically sort of your dream findings and

9 conclusions that you would like.

10 Now if you feel you have to file a brief and actually

11 submit argument, that is fine. If you want to do closing

12 arguments now, that is fine. I mean, I am flexible as to how

13 you want to present the case. I guess, Mr. Barriere, you’re

14 the plaintiff. What are your thoughts? Do you want to

15 summarize now or would you rather do a brief?

16 MR. BARRIERE: I am happy to do either, Your Honor. I

17 don’t think the closing is particularly lengthy, nor

18 particularly complicated. And indeed with respect to the

19 findings of fact and conclusions of law, we could prepare them

20 in less than thirty days. My only holdup potentially would be

21 if you want us to incorporate specific citations to the

22 transcript, and I’m not sure how long that is going to take.

23 I’m not familiar with the system you all have here.

24 THE COURT: No, I don’t want to hold up. No, I don’t

25 want that. All I want to do is I just want to pick a date out

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 47 of 66
250

1 that we can agree on and thirty days is reasonable. As a

2 practical matter, it would be tough for me to get to it much

3 under thirty days anyway. So I guess just pick thirty days and

4 give me your proposed findings and conclusions.

5 MR. BARRIERE: What about Friday, the 28th of April.

6 THE COURT: Okay. All right. Mr. Barriere, you’re the

7 plaintiff, so you get to go first and last.

8 MR. BARRIERE: Thank you, Your Honor.

9 Your Honor, this is a core proceeding brought under

10 both the Alabama Fraudulent Conveyance Act and the Bankruptcy

11 Code. It seeks the recovery of amounts paid in a period that

12 is slightly more than three years – less than three years prior

13 to the Chapter 11 petition which was filed on July 7, 2003.

14 I suppose I end my commentary on this case in some

15 measure where I began, which is in large measure I think the

16 core facts bearing upon the case are stipulated to. There is

17 no dispute that we had three promissory notes given by insiders

18 for the payment of stock. We have no dispute that that stock

19 was exclusively registered in the names of the insiders, if

20 indeed it wasn’t acquired by Roy and Rudolph Terry, and I will

21 talk to that in a moment. There is no dispute that Terry

22 Manufacturing didn’t receive any stock, nor did it receive any

23 of the benefits flowing to a stockholder.

24 In that regard, the court saw the tax returns

25 generated by Mr. Horton’s accountant, Mr. Giddens, that

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 48 of 66
251

1 confirms that there were K-1s issued to each of the

2 shareholders permitting them to take proportionate losses

3 pertaining to Perky Cap. Terry Manufacturing did not benefit.

4 What it did was make all payments on these notes, five

5 hundred and ninety-seven thousand dollars approximately. Those

6 facts are not disputed.

7 The Alabama statute and the Bankruptcy Code are

8 fundamentally similar in nature. I am going to quote from the

9 Alabama Code because I think, if the court finds that they were

10 the trustee under the Alabama code, a finding under the

11 Bankruptcy Code is in effect redundant.

12 A transfer by a debtor is fraudulent as to a creditor

13 whose claim arose before the transfer was made if the debtor

14 made the transfer without receiving a reasonably equivalent

15 value in exchange. I repeat, reasonably equivalent value in

16 exchange for the transfer and the debtor was insolvent at the

17 time or the debtor became insolvent as a result of the

18 transfer.

19 Whether a debtor is insolvent under Alabama law turns

20 on three components like the federal statute. Any one of which

21 will satisfy from a balance sheet standpoint whether

22 unreasonably small capital or did it knowingly incur debts

23 beyond its abilities to pay.

24 The first element, the standing element, we have a

25 stipulation that there were a number of entities that were

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 49 of 66
252

1 unsecured creditors of Terry Manufacturing before the first of

2 the transactions at issue and remained creditors as of the date

3 of the Chapter 11 filing. That is not in dispute. Nor can

4 there be any dispute that there were transfers. We have

5 payments totaling five hundred and ninety-six thousand dollars.

6 Nor do I believe is there serious dispute that Terry

7 Manufacturing was insolvent. The only evidence in that regard

8 was that presented by Mr. Alexander, who has developed, based

9 on I believe credible, indeed compelling evidence, that Terry

10 Manufacturing’s assets were of significantly less value than

11 the amount of its liabilities throughout the period in

12 question. That this company consistently failed to pay its

13 debts as they became due and that it consistently had

14 unreasonably small capital, causing management to basically use

15 its vendors as a de facto line of credit.

16 Hence, the only real question I submit is did Terry

17 Manufacturing receive reasonably equivalent value in exchange

18 for the transfer. Well, we have heard through the course of

19 this case sort of a smorgasbord of what the defendants would

20 submit is reasonably equivalent value. I submit none of those

21 meet the standard.

22 First, of course, there was a suggestion, at least

23 during the summary judgment papers – I’m not sure whether it is

24 being asserted at this time – that Terry Manufacturing has

25 somehow needed its insiders to purchase stock so it could be

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 50 of 66
253

1 assured of a source of caps from Perky Cap. Well, the fact of

2 the matter is that Terry Manufacturing purchased a lot more

3 caps before than after the stock transactions at issue.

4 It was, from 1990 on, according to Mr. Horton, the

5 largest customer of Perky Cap. There simply is no connection

6 between sales of caps and stock acquisitions. Indeed by the

7 trustee’s calculation during the period in question Terry sent

8 more money to Perky Cap than it got back in caps.

9 Second, of course, we had the citation to the loans.

10 Now, I have yet to hear evidence of any connection between

11 these loans and these stock transactions and the reason for

12 that is it simply doesn’t exist. You will recall that what

13 we’re talking about are a sale to the Terry women of twenty

14 percent of the stock, notes given at that time, notes paid.

15 There is no question that there was a five point five

16 million-dollar line of credit for the benefit of Roy and

17 Rudolph Terry established at the same time. But there is

18 simply no consideration connection. Mr. Horton was asked

19 repeatedly was the purchase of the stock a condition of

20 American Real Estate – itself, by his definition, a separate

21 entity from himself, and properly so, it is a separate legal

22 entity – were those connected; would you have only made the

23 loan if they had bought the stock, and the answer was, no,

24 these were separate transactions.

25 Indeed I think he probably was most telling when he

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 51 of 66
254

1 gave us that sort of crooked smile and said, “I would be a fool

2 to loan five point five million dollars so someone would buy

3 four hundred thousand dollars worth of stock from me.” These

4 were separate transactions.

5 Next, we had a claim, well, if there was a default

6 under the stock notes, they would’ve gotten the rest of the

7 five point five or maybe they would have foreclosed or done

8 something on the five point five and they wouldn’t have made

9 subsequent loans. That is not value. That is not value in

10 exchange for these payments. I mean, let’s not lose sight of

11 the reality. Cotina Terry was the signatory to this note.

12 Allie Robinson was the signatory to these notes. Had they

13 simply complied with their obligations, paid their notes, there

14 would be no issue with respect to default. Avoidance of cross15 default cannot be value in exchange to the debtor.

16 We have a one million, five hundred thousand dollar

17 loan made in August and, from a temporal standpoint, at least,

18 it is really unclear how that has anything to do with any stock

19 sales. The loan, as the court will recall, closed on August

20 30, or approximately ten months after the women acquired the

21 stock, approximately ten months before Roy and Rudolph Terry

22 allegedly acquired stock.

23 Again, Mr. Horton was candid enough to tell us that

24 one million dollar loan, one point five million dollar loan,

25 had nothing to do with any of the stock sales. He doesn’t even

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 52 of 66
255

1 recall having discussed the stock sales at the time. The loan

2 closes, is paid off at about a forty percent APR within a

3 matter of sixty days. Again, no connection between the two

4 other than this speculative thought that, well, if the Terry

5 women didn’t pay on their notes as they appropriately should

6 have and Terry Manufacturing didn’t pay on the notes as it in

7 fact did, then maybe there wouldn’t have been a one point five

8 million dollar loan in August. I suggest to you that sort of

9 speculation can’t be evidence of value.

10 I will move forward to May 30. Now Mr. Horton was

11 prepared to tell us, well, gee, he doesn’t know if he could

12 have – he would have pursued the Peoples Bank loan if they

13 weren’t buying this stock. He didn’t get that far. What he

14 simply said was, “I sold my stock and I was instrumental in

15 getting the Peoples Bank loan.”

16 I would point out to the court that this loan is

17 unusual in that it actually has an agreement setting forth why

18 it is being solicited. There is a loan solicitation agreement

19 which Mr. Horton read carefully and confirmed, made no mention

20 of the sale of the stock to Roy and Rudolph Terry. What it

21 says is they are going to try to get a loan from Peoples Bank

22 so they can pay off the Farmers and Merchants Bank and thereby

23 relieve him of his liability, Mr. Horton of his liability on

24 that. Again, no connexity between the two whatsoever.

25 Now the question I suppose that we don’t have a

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 53 of 66
256

1 definitive answer to with respect to that transaction is did it

2 in fact occur. Mr. Horton tells us, oh, yes, I sold my stock,

3 and there indeed is evidence confected at the time that

4 reflects the sale of the stock. On the other hand, however, we

5 have fairly compelling evidence that it may well have been a

6 simulation.

7 First, the tax returns, one thing filed under penalty

8 of perjury. Those don’t show any sale of the stock. Secondly,

9 the price paid, six hundred and twenty-four thousand, six

10 hundred and seventy thousand – I can’t recall. I could find

11 it for the court in a moment – is completely out of character

12 with any rational valuation of Perky Cap. Now, recognize, this

13 is a company that is bleeding money. It has lost money every

14 single year we have tax returns for and, within a matter of two

15 years, will go directly into Chapter 7.

16 Nonetheless, supposedly we have an arm’s-length

17 transaction resulting in six hundred, plus, thousand dollars

18 paid for the stock, not reflected on the tax returns, and done

19 at a time where we plainly have highly dubious sales

20 agreements. I mean, I heard the testimony, as the court did,

21 about how, well, these were sales of inventory that no one

22 could identify, don’t know how many units, where it was stored,

23 who insured it and so forth but we really engaged in these

24 transactions. Unfortunately, of course, the only witness who

25 actually ever saw anything has passed away.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 54 of 66
257

1 What we do know, of certainty, is there was no

2 transfer of product and no one can identify any product that

3 actually transferred.

4 I submit to Your Honor that what was really going on

5 there were disguised, for some reason, disguised movement of

6 funds back and forth. The fact that it occurs the same time as

7 the purported transfer of stock has caused the trustee, I

8 think, quite reasonably to conclude it likely is a simulation.

9 They all look the same.

10 Your Honor, in the final analysis, we have spent most,

11 in my judgment, of two days trying to force a square peg into

12 a round hole. And by that, I mean the defense that was offered

13 in the bank cases that the loans at issue there really were for

14 the benefit of Terry Manufacturing is the theme that we have

15 consistently heard play out, which really has no relevance

16 here. Citation repeatedly in the last two days to the Rubin

17 case versus Manufacturers Hanover, if I can return to my stand,

18 that, of course, was the first case to address the classic,

19 triangular indirect benefit issue where the transaction is

20 between a lender and insiders. The insiders caused the funds

21 to be transferred to the debtor and the debtor repays it. And

22 then the Second Circuit said, look, there is no requirement

23 that the value has to go directly to the debtor. If a benefit

24 flows through the insider and ultimately gets to the debtor,

25 that is okay because what we are looking for here, what we are

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 55 of 66
258

1 ultimately looking for in these cases, when all is said and

2 done, is the balance, the balance of value to the debtor versus

3 value given by the debtor. When all is said and done, that is

4 the equation. And if that value comes through an insider but

5 it is a dollar for dollar or reasonably equivalent value, that

6 is sufficient.

7 Now taking that simplistic approach, which ultimately

8 is the question we are faced with, how does it play out here?

9 Well, the value to Terry Manufacturing from these transactions

10 is in fact zero. The value, if it was given by Mr. Horton and

11 Reynolds, was stock that did not go to this company for which

12 it paid five hundred and ninety-six thousand dollars.

13 Now, you can’t get around that basic equation, I

14 submit to the court, by saying, well, but gosh, there was other

15 stuff going on. Mr. Horton and Mr. Reynolds, they control a

16 company and that company makes some loans to the Terrys and the

17 Terrys probably sent that money down to Terry Manufacturing.

18 Why? Because the statute says it has to be an exchange for,

19 and plainly none of this was in exchange for the sale of the

20 stock. No better evidence than the words that came from Mr.

21 Horton’s mouth, they were completely separate.

22 So, Your Honor, at the end of the day I submit to you

23 when we go back to our balance, the value the defendants have

24 pointed to is simply ephemeral. We started out with what I

25 will call the vendor relationship value. Well, there’s simply

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 56 of 66
259

1 no evidence of that, and that is why we didn’t hear anything

2 about that. So they defaulted to these unrelated loans.

3 That’s no value because it wasn’t given in exchange for this.

4 At the end of the day, what Mr. Brazeal has fought so

5 assiduously is a case we didn’t bring. The case we didn’t

6 bring was – the case we considered, I might add – was American

7 Real Estate loaning five point five million dollars to the

8 Terrys and being repaid approximately two million dollars by

9 Terry Manufacturing, but that is not this case. That case was

10 not brought. There, I think we would have had relevant

11 testimony from Mr. Slaton about how that five point five was

12 used. That would have made some sense, but that is not what we

13 are here to decide today.

14 Let me finally address an affirmative defense that was

15 alluded to in the opening, which is the notion that under the

16 Alabama statute benefit that flows to a third party is benefit

17 to the debtor. There is, of course, no cases so hold. As I

18 appreciate the argument that is going to be that, well, the

19 Terrys received stock having a value equal to or in the range

20 of what was paid for it, I question that. I mean, obviously we

21 have had testimony as to whether the Perky Cap stock was worth

22 what was paid for it or not but I think that is really

23 irrelevant. I don’t think the court even needs to go there.

24 But the fact of the matter is if that is the law, it

25 simply debases fraudulent conveyance actions involving

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 57 of 66
260

1 insiders. If the debtor gets no value, how then can we

2 possibly understand the clear and unambiguous language of the

3 statute? If the debtor made the transfer without receiving a

4 reasonably equivalent value in exchange for the transfer, the

5 statute simply doesn’t support the reading.

6 Now we will acknowledge that a fair reading of one

7 provision of the code is that the debtor in this situation, if

8 the debtor, for example, were indebted to its insiders for a

9 hundred dollars; the bank pays the Terrys – gives the Terrys a

10 hundred dollars and TMC pays a hundred dollars and thereby its

11 indebtedness to a third party is eliminated in that sort of

12 transaction, that makes perfect sense because, at the end of

13 the day, that is value to the debtor albeit not coming directly

14 from the party with whom it had the transfer. That makes

15 perfect sense and we don’t dispute that, but that is not the

16 case here.

17 What these defendants are suggesting is fundamentally

18 different. They would read the statute as such. Horton,

19 Reynolds, transfer stock of the value of six hundred thousand

20 dollars, simply for our discussion; the Terrys get paid six

21 hundred thousand by TMC, Terry Manufacturing; and that that

22 value to the Terrys should be considered the value to Terry

23 Manufacturing. That is simply an invitation to insiders to

24 loot a company. It is going to be a rare occasion where in

25 this sort of transaction the insiders don’t get something. You

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 58 of 66
261

1 could routinely have the debtor make payments to third parties

2 and simply then transfer the money upstream to the insiders.

3 That is precisely the situation we have here. The statue

4 doesn’t permit that, and it would fundamentally debase at least

5 any notion I have or any understanding I have of fraudulent

6 conveyance law.

7 Your Honor, I will close by where I started. I do

8 think this is a pretty straightforward case. The bank cases,

9 we have had a lot of reference to. Those were hard cases.

10 There was a real issue about the bank’s monies ultimately

11 getting into the hands of Terry Manufacturing. There was a

12 real issue about whether the banks had any inkling of the

13 troubles of Terry Manufacturing. 

14 Those are not the case here. Here, there is no issue

15 that the stock got to Terry Manufacturing. There is no issue

16 Terry Manufacturing made the transfers. And ultimately I have

17 to submit there is no issue that Mr. Horton’s acknowledgment

18 that he was engaged in the movement of these peculiar, let’s

19 put it gently, invoices, at least he had some doubts about the

20 integrity of Terry Manufacturing. You don’t go through that

21 level of machinations with a party you believe is going to be

22 repaying your debts in accordance with its terms. 

23 But ultimately I submit that issue only goes to

24 whether with respect to that last transaction there was an

25 actual intent to hinder, delay or defraud. This is an easy

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 59 of 66
262

1 case to decide on a constructive fraud basis, and I think it

2 hits on all fours.

3 Thank you, Your Honor.

4 THE COURT: Thank you.

5 MR. BRAZEAL: Your Honor, in responding to the

6 assertions of the trustee in this case, we have looked at the

7 totality of the relationship between Mr. Horton, his related

8 entity that he controlled, American Real Estate, the Terry

9 brothers, their wives and daughters, and the debtor. 

10 And we have done that for this reason, Judge: While

11 Mr. Horton acknowledged that the stock purchase was separate

12 from the five point five million dollar note, and that was the

13 language that Mr. Barriere asked him about, he further

14 testified that they weren’t completely separate because there

15 was the cross-default language between the two.

16 And he further testified, Your Honor, that if on

17 November 10 of 2000 Mr. Terry had shown up and said, “Well, you

18 know what, I have decided I am not going to buy the stock from

19 you for four hundred thousand dollars that I told you I was

20 going to buy it. I’m not going to buy the stock that I think is

21 part of my overall business plan,” then Mr. Horton says he

22 doesn’t think he would have loaned him the five and a half

23 million dollars.

24 That very same testimony, that testimony of Mr.

25 Horton, is confirmed by the testimony of Mr. Terry, Your Honor.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 60 of 66
263

1 With respect to the Peoples Bank loan, Mr. Barriere

2 indicated that Mr. Horton testified maybe not that it wouldn’t

3 have occurred but for his intervention but that he facilitated

4 it. Well, that is true. That is, obtaining the money from

5 Peoples Bank. But he also unequivocally testified, Your Honor,

6 that had he not – had his stock in Perky Cap not been

7 purchased, had he not resigned from the Board of Directors, he

8 would not have authorized the loan to Perky Cap. 

9 So had his stock not been purchased, had he not been

10 removed from the Board of Directors and as an officer of Perky

11 Cap, Perky Cap would not have been able to obtain the loan from

12 Peoples Bank that was used to put money directly into Terry

13 Manufacturing.

14 Your Honor, what Mr. Slaton’s testimony has shown is

15 that for each of these loans that we have discussed that the

16 money went into Terry Manufacturing, and it appears that it was

17 used for ordinary business purposes. So Mr. Horton has put

18 over seven million dollars into the debtor and so, when you

19 start weighing the scales to see what benefit did the debtor

20 give, which was six hundred thousand in payments, what benefit

21 did the debtor receive from its overall relationship to Mr.

22 Horton, the debtor certainly came off a lot better than Mr.

23 Horton did.

24 Your Honor, Mr. Barriere also referred to the

25 transaction in May of 2002 and suggested that it didn’t occur

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 61 of 66
264

1 because it wasn’t on the K-1 schedule. He said that the price

2 of the stock was somehow indicative of it not actually

3 occurring. Well, if Your Honor will recall, that was the same

4 price that was utilized for the stock purchase back in November

5 of 2000.

6 Your Honor, I would submit to you that the testimony

7 of Mr. Horton and Mr. Terry confirms that this seven million

8 dollars would not have made its way into the coffers had the

9 stock sales not taken place.

10 Finally, Your Honor, on this question about the

11 Alabama fraudulent conveyance statute, the Alabama fraudulent

12 conveyance statute contains language that the Uniform Act does

13 not contain and that no other state’s act contains that I have

14 been able to find. 

15 And if you read the comments to it, which are not

16 terrific – you didn’t write them or Mr. Barriere. It would

17 have been better. If you read the comments to them, they do

18 suggest that this is a situation that they are trying to say is

19 not a fraudulent conveyance, and here’s the reason, Your Honor:

20 If Mr. Horton and Reynolds give value to another,

21 which is the Terrys in this case, as a result of the payments

22 from the debtor, then what they are saying is if they give up

23 six hundred thousand dollars in value, we’re not going to make

24 them pay twice. In other words, if it goes to this person,

25 even if that is not the debtor, if it is to another person as

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 62 of 66
265

1 a result of the transaction, we are not going to make this

2 person pay twice.

3 And so I suggest to you, Your Honor, that the issue of

4 value does come in. I am not suggesting that the stock was

5 worth six hundred thousand dollars fair market value, but I am

6 suggesting that there is a plethora of case law which reflects

7 that the six hundred thousand dollars in note payments on an

8 antecedent debt constitute value, and that the reduction in the

9 value from the Terrys to Mr. Horton and Mr. Reynolds was value

10 that was given to those individuals. In other words, to a

11 person other than the debtor, as part of the transaction.

12 There is no case on it in Alabama. Again, from what

13 I’ve been able to determine, Your Honor, there does not appear

14 to be a case in any other state because that language does not

15 appear anywhere. And my suggestion is, because it is unique,

16 I think the legislature intended what Mr. Barriere would say is

17 a unique situation.

18 Thank you, Your Honor.

19 THE COURT: Okay. Mr. Brazeal, you mentioned a case

20 several times yesterday. I have forgotten the name of it. Can

21 you give me the name and the citation of the case?

22 MR. BRAZEAL: It was the one that Mr. Barriere was

23 discussing. I actually have a memo that has several cases

24 contained in it, which I was going to submit as part of my

25 order.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 63 of 66
266

1 THE COURT: Well, that is fine.

2 MR. BRAZEAL: If you want to look at them in the

3 meantime, I will be glad to furnish them in the meantime.

4 THE COURT: No, that is okay. Realistically I probably

5 won’t get to it much, but I wanted to make sure. You had

6 mentioned the case a couple of times yesterday, and it was one

7 maybe I have read it in the past. I just didn’t remember. I

8 just wanted to make sure at some point in time I have read the

9 case.

10 MR. BRAZEAL: Thank you, Your Honor.

11 THE COURT: Let’s see. Mr. Barriere, you get the last

12 word.

13 MR. BARRIERE: Your Honor, I will simply thank the

14 court for your time and indulgence. As I said, I think at the

15 end of the day, this is an easy case. There was no value to

16 this debtor. Mr. Horton has acknowledged there was no value to

17 this debtor. 

18 I take it from Mr. Brazeal’s silence on the topic in

19 closing, indeed his failure to put on any evidence, there is no

20 dispute that the company was insolvent throughout this period

21 in question. The debtor paid the bills it should not have paid

22 for its insiders’ obligations. And the trustee requests that

23 it be awarded judgment in the amount of the entire payments,

24 plus interest from date of demand and judicial costs.

25 Thank you, Your Honor.

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 64 of 66
267

1 THE COURT: Thank you all. 

2 (Off the record at 11:29 a.m.)

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 65 of 66
268

C E R T I F I C A T E

I certify that the foregoing is a correct transcript

from the electronic sound recording of the proceedings in the

above-entitled matter.

 

 

 

 Patricia Basham, Transcriber

 Date: April 18, 2006

 

Case 2:06-cv-00746-WHA Document 2-3 Filed 08/18/2006 Page 66 of 66
The following items available for viewing US Bankruptcy Court:

#1 Deposition Transcript and Exhibits of Roy Terry dated January 27, 2006

#2 Plaintiff’s Trial Exhibits 1-22 and 45-46

#3 All Defendant’s Trial Exhbits

Case 2:06-cv-00746-WHA Document 2-4 Filed 08/18/2006 Page 1 of 1
NO:99539845.2 

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

IN RE: )

)

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS

 COMPANY, INC. )

) CHAPTER 7

 Debtor )

 ) 

 ______________________________________

IN RE: )

) CASE NO. 03-32213-WRS

TERRY UNIFORM )

 COMPANY, LLC, ) CHAPTER 7

)

Debtor. )

 ______________________________________

J. LESTER ALEXANDER, III, )

TRUSTEE OF )

TERRY MANUFACTURING )

COMPANY, INC. AND ) ADVERSARY PROCEEDING

TERRY UNIFORM COMPANY, LLC )

) NO. 05-________

VERSUS )

)

N.D. HORTON AND JAMES M. )

REYNOLDS, III )

COMPLAINT

NOW INTO COURT, through undersigned counsel, comes J. Lester Alexander, III, the duly

appointed and acting Chapter 7 trustee (the “Trustee”) of Terry Manufacturing Company, Inc. (“Terry

Manufacturing”) and Terry Uniform Company, LLC, (“Terry Uniform”), and for his Complaint against

N.D. Horton, Jr., and James M. Reynolds, III, seeking recovery of fraudulent conveyances and/or

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 1 of 14
NO:99539845.2 2

preferential payments made by Terry Manufacturing to N.D. Horton, Jr. and James M. Reynolds, III,

respectfully represents:

I.

Pursuant to Order of this Court dated May 13, 2004, Mr. Alexander is the duly appointed and

acting Trustee of Terry Manufacturing and Terry Uniform.

II.

N.D. Horton, Jr., is an individual who resides at 257 Rose Creek Road, Eatonton, GA 31024

(hereinafter “Mr. Horton”).

III.

James M. Reynolds, III is an individual who resides at 591 River Lake Dr., N.E., Eatonton,

Georgia 31024. (hereinafter “Mr. Reynolds”).

IV.

This action is a core proceeding within the meaning of 28 U.S.C. §157(b). It falls under this

Court’s jurisdiction pursuant to 28 U.S.C. §1334 and the standard order of reference of core proceedings

to this Court by the United States District Court for the Middle District of Alabama. 

V.

Venue is proper in this district pursuant to 28 U.S.C. §1409(a).

INTRODUCTION

VI.

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 2 of 14
NO:99539845.2 3

This is an action seeking total recovery of approximately $596,738.42 which, upon information and

belief, was paid by Terry Manufacturing to Mr. Horton in the approximate amount of $298,369.21 and

to Mr. Reynolds in the approximate amount of $298,369.21 during the period commencing December 10,

2000 and ending July 7, 2003. Mr. Horton and Mr. Reynolds made three personal loans, with the principal

sums totaling $1,024,000.00, to Rudolph Terry and Roy Terry, Cotina Terry, and Allie Robinson. Roy

and Rudolph Terry, Cotina Terry and Allie Robinson executed promissory notes and loan agreements in

order to purchase Perky Cap Company, Inc. (“Perky Cap”) stock held by Mr. Horton and Mr. Reynolds.

Terry Manufacturing made all payments on the three loans. Terry Manufacturing did not receive any

benefit from these loans. At the time of the payments, Terry Manufacturing had assets which were

unreasonably small in relation to its business and/or was insolvent. 

GROUNDS FOR RELIEF

VII.

Terry Manufacturing filed a Voluntary Petition for Reorganization under Chapter 11 of the United

States Bankruptcy Code on July 7, 2003. Mr. Alexander was appointed as its Chapter 11 trustee on July

11, 2003. Terry Uniform filed a voluntary Chapter 11 petition on July 22, 2003.

VIII.

Rudolph Terry was formerly an officer and director of Terry Manufacturing and, along with his

brother Roy, was a controlling shareholder of Terry Manufacturing. 

IX.

Roy Terry was formerly an officer and director of Terry Manufacturing and, along with his brother

Rudolph, was a controlling shareholder of Terry Manufacturing. 

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 3 of 14
NO:99539845.2 4

X.

Cotina Terry was formerly an officer and director of Terry Manufacturing, and along with her

brothers, Rudolph and Roy Terry, was a shareholder of Terry Manufacturing. 

XI. 

Allie R. Robinson is the wife of Rudolph Terry and a shareholder of Terry Manufacturing.

XII. 

On May 20, 2002 Roy Terry and Rudolph Terry executed a Promissory Note in favor of Mr.

Horton and Mr. Reynolds for the principal amount of $624,000.00 (the “Terry Note”). For and in

consideration of the $624,000.00, Mr. Horton and Mr. Reynolds transferred to Cotina Terry, twentyseven nine hundred (27,900) shares of Perky Cap stock. These shares represented 31 % of the

outstanding Common Stock of that company.

XIII.

The Terry Note was payable in monthly installments to Mr. Horton and Mr. Reynolds

beginning on July 2, 2002 in the amount of $4,680.00 and continuing in that amount until December 2,

2002 at which time the outstanding balance was amortized over 36 equal monthly payments in the amount

of $19,843.03. The final installment on the Terry Note was due on December 5, 2005.

XIV.

Upon information and belief, Terry Manufacturing made payments to Mr. Horton and Mr.

Reynolds totaling $127,986.90.

XV.

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 4 of 14
NO:99539845.2 5

On November 10, 2002 Cotina Terry executed a Purchase Money Promissory Note (“Cotina

Terry Note”) in the principal sum of $200,000.00. The Cotina Terry Note was made payable to Mr.

Horton and Mr. Reynolds and was given for and in consideration of 9,000 shares of Perky Cap stock sold

to Cotina Terry by Mr. Horton and Mr. Reynolds. These shares represented 10 % of the outstanding

Common Stock of that company. 

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 5 of 14
NO:99539845.2 6

XVI.

The Cotina Terry Note was payable in eighteen equal monthly installments in the amount of 

$11,965.42. Payments to Mr. Horton and Mr. Reynolds began on December 10, 2000. Based on

information and belief, all payments were made timely and the Cotina Terry Note was never in default.

Terry Manufacturing paid the Cotina Terry Note in full together with interest at the rate of 9.5 % per

annum. Payments by Terry Manufacturing on the Cotina Terry Note totaled $234,375.81. 

XVII.

On November 10, 2002 Allie R. Robinson executed a Purchase Money Promissory Note (“Allie

Robinson Note”) in the principal sum of $200,000.00. The Allie Robinson Note was made payable to

Mr. Horton and Mr. Reynolds and was given for and in consideration of 9,000 shares of Perky Cap stock

sold to Allie Robinson by Mr. Horton and Mr. Reynolds. These shares represented 10 % of the

outstanding Common Stock of that company.

XVIII.

The Allie Robinson Note was payable in eighteen (19) monthly installments in the amount

of $11,965.42. Payments to Mr. Horton and Mr. Reynolds began on December 10, 2000. Based on

information and belief, all payments were made timely and the Allie Robinson Note was never in default.

Terry Manufacturing paid the Allie Robinson Note in full together with interest at the rate of 9.5 % per

annum. Payments by Terry Manufacturing on the Allie Robinson Note totaled $234,375.81

XIX.

Terry Manufacturing paid Mr. Reynolds and Mr. Horton approximately $23,930.83

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 6 of 14
NO:99539845.2 7

each month on the Cotina Terry and Allie Robinson Notes. That amount was divided equally between Mr.

Horton and Mr. Reynolds. 

XX.

At the time of the payments by Terry Manufacturing to Mr. Horton and Mr. Reynolds, Terry

Manufacturing did not have adequate assets to finance the business that had been conducted, or anticipated

it would conduct. At all times, Terry Manufacturing had unreasonably small capital.

XXI. 

At the time of the payments to Mr. Reynolds and Mr. Horton, Terry Manufacturing was insolvent

in that the fair value of its assets was less than the amount of its liabilities. 

XXII.

Terry Manufacturing received no value for its payments to Mr. Horton and Mr. Reynolds. Upon

information and belief, all payments made by Terry Manufacturing to Mr. Horton and Mr. Reynolds were

made for the purchase of stock in Perky Cap held by Cotina Terry and by Allie Robinson in their individual

capacity.

 XXIII.

 The payments made to Mr. Horton and Mr. Reynolds were made from the corporate assets of

Terry Manufacturing, although the loans made by Mr. Horton and Mr. Reynolds were for the sole benefit

of Rudolph Terry, Roy Terry, Cotina Terry, and Allie Robinson.

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 7 of 14
NO:99539845.2 8

COUNT ONE

 FOR FRAUDULENT CONVEYANCES PURSUANT

TO THE ALABAMA FRAUDULENT TRANSFER ACT, 

ALABAMA CODE 1975, TITLE 8, CHAPTER 9A 

 AND THE GEORGIA FRAUDULENT TRANSFER ACT, 

 GEORGIA CODE, TITLE 18, CHAPTER 2, ARTICLE 4

XXIV.

The Trustee incorporates by reference paragraphs I through XXIII above, as if fully set forth

herein.

XXV.

Pursuant to 11 U.S.C. §544(b), the Trustee enjoys the rights and powers of an unsecured creditor.

Included among these is the right to assert any claims, demands or causes of action an unsecured creditor

would enjoy under the Bankruptcy Code or state law.

XXVI.

The payments made by Terry Manufacturing to Mr. Reynolds and Mr. Horton constitute fraudulent

transfers within the meaning of the Alabama and Georgia Fraudulent Transfer Acts. Terry Manufacturing

received no value for the transfers, and all of the transfers were made at a time when Terry Manufacturing

had unreasonably small assets in relation to its business and was unable to pay its debts as they became

due. Also, the payments occurred at a time when Terry Manufacturing was insolvent.

XXVII.

The Trustee is entitled to judgment against Mr. Horton and Mr. Reynolds voiding the payments

made by Terry Manufacturing to them. At this time, the Trustee believes those payments total

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 8 of 14
NO:99539845.2 9

$596,738.42, but reserves the right to amend his complaint should discovery reveal payments by Terry

Manufacturing to Mr. Horton and/or Mr. Reynolds is in a different amount.

 COUNT TWO

AVOIDANCE OF FRAUDULENT CONVEYANCE

PURSUANT TO 11 U.S.C. §548

XXVIII.

The Trustee incorporates by reference paragraphs I through XXVII above, as if fully set forth

herein.

XXIX.

The payments by Terry Manufacturing to Mr. Horton and Mr. Reynolds constitute fraudulent

transfers and obligations within the meaning of 11 U.S.C. §548. Terry Manufacturing did not receive any

value, much less reasonably equivalent value, for the payments, and the payments were made at a time

when Terry Manufacturing had unreasonably small capital within the meaning of 11 U.S.C. §548(a)(B)(2).

Certain of the payments occurred at a time when Terry Manufacturing was insolvent.

COUNT THREE

AVOIDANCE OF PREFERENCES PURSUANT TO 11 U.S.C. §547

XXX.

The Trustee incorporates by reference paragraphs I through XXIX above, as if fully set forth

herein.

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 9 of 14
NO:99539845.2 10

XXXI.

To the extent Terry Manufacturing received any value for the payments to Mr. Reynolds and Mr.

Horton (which is specifically denied by the Trustee) the payments are still avoidable as preferences. The

payments were on account of an antecedent debt and were made when Terry Manufacturing was insolvent

and permitted Mr. Horton and Mr. Reynolds to receive substantially more property than they would have

received in a case under Chapter 7.

XXXII.

As a result of a series of agreements between Roy Terry, Rudolph Terry, N. D. Horton, Jr. and

James M. Reynolds, III, Messrs. Horton and Reynolds were either the owners of a majority of the

common stock of Terry Manufacturing throughout the year preceding its Chapter 11 filing or had effective

control and dominion over such common stock. Accordingly, Messrs. Horton and Reynolds should be

deemed to be insiders of Terry Manufacturing within the meaning of 11 U.S.C. §101(31) and subject to

the one year preference period set forth in 11 U.S.C. §547.

WHEREFORE, after due proceedings had, J. Lester Alexander, III, the duly acting and appointed

Trustee of Terry Manufacturing and Terry Uniform respectfully requests that there be judgment in his favor

and against N.D. Horton, Jr. and James M. Reynolds, III in the amount of $596,738.42 or such other

amount as discovery may reveal to be paid by Terry Manufacturing to Mr. Horton and /or Mr. Reynolds,

together with attorneys fees, interest, costs and such other relief as to which he may be entitled.

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 10 of 14
NO:99539845.2 11

Respectfully submitted this 10th day of June, 2005.

Respectfully submitted,

PHELPS DUNBAR LLP

By: /s/ Brent B. Barriere 

Brent B. Barriere, T.A. (La. Bar No. 2818)

David L. Patrón (La. Bar No. 22566)

Katherine M. Determan (La. Bar No. 25381)

Catherine E. Lasky (La. Bar No. 28652)

365 Canal Street, Suite 2000

New Orleans, Louisiana 70130-6534

Telephone: (504) 566-1311

Facsimile: (504) 568-9130

ATTORNEYS FOR J. LESTER ALEXANDER, III,

TRUSTEE

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 11 of 14
(Rev. 2/92) ADVERSARY PROCEEDING COVER SHEET ADVERSARY PROCEEDING NUMBER

instructions on Reverse (court Use Only)

PLAINTIFFS

J. Lester Alexander, III, Trustee of Terry

Manufacturing Co., Inc. and Terry Uniform,

LLC

DEFENDANTS

M.D. Norton, Jr. and James M. Reynolds, III

Attorneys (Firm Name. Address, and Telephone No.)

Brent B. Barriere, David (504) 566’~131l

Phelps Dunbar Patron, Katherine M.

365 Canal St., Suite 2000 Determan,

New Orleans, LA 70130 Catherine Lasky

Attorneys (if Known)

PARTY (Check one box only) 0 1. U.S. PLAINTIFF 0 2 U.S. DEFENDANT EEl 3. U.S. NOT A PARTY

CAUSE OF ACTION (WRITE A BRIEF STATEMENT OF CAUSE OF ACTION, INCLUDING ALL U.S. STATUTES INVOLVED)

This action seeks recovery of $596,738 pursuant to 11 U.S.C. Section 547 and 548, and for

fraudulent conveyances pursuant to the Alabama Fraudulent Transfer Act, Alabama Code 1975,

Title 9, Chapter 9A and the Georgia Fraudulent Transfer Act, Georgia Code, Title 18,

Chapter 2, Article 4.

NATURE OF SUIT

(Check the one most appropiate box only.)

EEl 454 To Recover Money or Property 0 455 To revoke an order of confirmation 0 456 To obtain a declaratory judgment

of a Chap. 11, Chap. 12, or Chap. 13 Plan relating to any of foregoing

o 435 To Determine Validity, Priority, or causes of action

Extent of a Lien or Other Interest in

Property 0 426 To determine the dischargeability

ofadebtil U.S.C. §523

o 458 To obtain approval for the sale of 0 459 To determine a claim or cause of F

both the interest of the estate and 0 434 To obtain an injunction or other action removed to a bankruptcy

of a co.owner in the property equitable relief court

o 424 To object or revoke a discharge 457 To subordinate any allowed claim o 498 Other (specify)

11 U.S.C. §727 or interest except where such F subordination is provided in a plan

ORIGIN OF EEl 1 Original 0 2 Removed 0 4 Reinstated 0 5 Transferred CHECK IF THIS IS A CLASS

PROCEEDINGS Proceeding Proceeding or Reopened from Another F o ACTION UNDER F.R.C.P. 23

(Check one box only.) Bankruptcy

Court

NEARESTTHOUSAND FOTHERRELIEFSOUGHT o JURY

DEMAND $ $597,000.00 Attorney fees, costs, interest DEMAND

BANKRUPTCY CASE IN WHICH THIS ADVERSARY PROCEEDING ARISES

NAME OF DEBTOR DANKRUPTCY CASE NO.

Terry Manufacturing Co., Inc. & Terry Uniform 03-32063 _____

DISTRICT IN WHICH CASE IS PENDING DIVISIONAL OFFICE NAME OF JUDGE

Middle District of Alabama William Sawyer

_________________ RELATED ADVERSARY PROCEEDING (IF ANY)

PLAINTIFF DEFENDANT ~ PROCEEDING NO.

DISTRICT DIVISIONAL OFFICE NAME OF JUDGE F

Middle District of Alabama

FILING

FEE (Check one box only.) 0 FEE ATTACHED 0 FEE NOT REQUIRED EEl FEE IS DEFERRED

DATE PRINT NAME SIGNATURE OF ATTORNEY (OR/LAINTIFF)

06/10/2005 Katherine P’l. Determan~ Z~t&~tu ________

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 12 of 14
B 250A

18/96)

United States Bankruptcy Court

Middle District Of Alabama

in re Terry Manufacturing Co., Inc. and Terry Uniform LLC

Debtor ) Case No. 03-32063

Chapter 7

J. Lester Alexander, Ill, Trustee of Terry Mfg.Colnc. . ) —

Plaintiff

N.D. Hodon, Jr. and James M. Reynolds, Ill , Adv. Proc. No.

Defendant

SUMMONS IN AN ADVERSARY PROCEEDING

YOU ARE SUMMONED and required to file a motion or answer to the complaint which is attached to this

summons with the clerk ofthe bankruptcy court within 30 days after the date ofissuance ofthissummons,

except that the United States and its offices and agencies shall file a motion or answer to the complaint

within 35 days.

Address of Clerk:

U.S. Bankruptcy Court

Middle District ofAlabama

P.O. Box 1248

Montgomery, AL 36102

At the same time, you must also serve a copy ofthe motion or answer upon the plaintiffs attorney.

Name and Address of Plaintiffs Attorney:

Brent B. Barriere, David Patron, Katherine M. Determan, Catherine Lasky, Phelps

Dunbar, 365 Canal St., Suite 2000, New Orleans, LA 70130

If you make a motion, your time to answer is governed by Fed. R. Bankr. P. 7012.

IF YOU FAIL TO RESPOND TOTHIS SUMMONS, YOUR FAILURE WILL BE DEEMED TO BE

YOUR CONSENT TO ENTRY OF A JUDGMENT BY THE BANKRUPTCY COURT AND

JUDGMENT BY DEFAULT MAY BE TAKEN AGAINST YOU FOR THE RELIEF DEMANDED

IN THE COMPLAINT.

6/10/05

Date

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 13 of 14
CERTIFICATE OF SERVICE

I, Katherine M. Determan , certify that I am, and at all times during the

(name)

service of process was, notless than 18 years of age and not a party to the matter concerning which service of

process was made. I further certify that the service of this summons and a copy of the complaint was made

NOTE: tfmore space is needed, note ‘See Attached Page” in the

(date) appropriate box and add addirionat addresses to 3rd page of form.

Mail Service: Regular, first class United States snail, postage fully pre-paid, addressed to:

ND. Horton, Jr. James M. Reynolds, Ill

257 Rose Creek Road 591 River Lake Or,, N.E.

Eatonton, GA 31024 Eatonton, Ga 31024

Personal Service: By leaving the process with defendant or with an officer or agent of defendant at:

Residence Service: By leaving the process with the following adult at:

CertifiedMail Service on an Insured Depository Institution: By sendingthe process by certifiedsnail addressed

to the following officer ofthe defendant at:

Publication: The defendant was served as follows: [Describe briefly]

State Law: The defendant was served pursuant to the laws ofthe State of Alabama _____

as follows: [Describe briefly] (name ofstate)

Under penalty of perjury, I declare that the foregoing is true and correct,

Date Signature

Print Name:

Katherine M. Determan

Business Address:

Phelps Dunbar

365 Canal St., Suite 2000

New Orleans, LA 70130

Case 2:06-cv-00746-WHA Document 2-5 Filed 08/18/2006 Page 14 of 14
IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

_____________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

______________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING NO.: 

 ) 05-03042 

INC, AND TERRY UNIFORM ) 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

ANSWER TO COMPLAINT

 COME NOW N.D. Horton, Jr. (“Horton”), and James M. Reynolds (“Reynolds”), 

III, and for their answer to the Complaint of the trustee say as follows: 

First Defense

 In specific response to each of the numbered paragraphs of the trustee’s 

complaint, Horton and Reynolds say as follows: 

Case 2:06-cv-00746-WHA Document 2-6 Filed 08/18/2006 Page 1 of 5
 1. The defendants admit the averments of paragraph 1. 

 2. The defendants admit the averments of paragraph 2. 

 3. The defendants admit the averments of paragraph 3. 

 4. The defendants admit the averments of paragraph 4. 

 5. The defendants admit the averments of paragraph 5. 

 6. The defendants admit that Mr. Horton and Mr. Reynolds made the three 

referenced loans; however, the defendants deny the remaining averments of paragraph 6. 

 7. The defendants admit the averments of paragraph 7. 

 8. The defendants are without sufficient information from which to 

determine the truth or varacity of the averments of paragraph 8, and, therefore, deny same. 

 9. The defendants are without sufficient information from which to 

determine the truth or varacity of the averments of paragraph 9, and, therefore, deny same. 

 10. The defendants are without sufficient information from which to 

determine the truth or varacity of the averments of paragraph 10, and, therefore, deny same. 

 11. The defendants are without sufficient information from which to 

determine the truth or varacity of the averments of paragraph 11, and, therefore, deny same. 

 12. The defendants admit the averments of paragraph 12. 

 13. The defendants admit the averments of paragraph 13. 

 14. The defendants are without sufficient information from which to 

determine the truth or varacity of the averments of paragraph 14, and, therefore, deny same. 

 15. The defendants admit the averments of paragraph 15. 

 16. The defendants admit the averments of paragraph 16, except the 

defendants deny that the payments were made by Terry Manufacturing. 

Case 2:06-cv-00746-WHA Document 2-6 Filed 08/18/2006 Page 2 of 5
 17. The defendants admit the averments of paragraph 17. 

 18. The defendants admit the averments of paragraph 18, except the 

defendants deny that the payments were made by Terry Manufacturing. 

 19. The defendants admit the averments of paragraph 19, except the 

defendants deny the payments were made by Terry Manufacturing. 

 20. The defendants deny the averments of paragraph 20. 

 21. The defendants deny the averments of paragraph 21. 

 22. The defendants deny the averments of paragraph 22. 

 23. The defendants deny the averments of paragraph 23. 

 24. The defendants incorporate herein their responses to paragraphs 1-23 as 

set forth hereinabove. 

 25. These averments do not require an admission or denial since they are not 

factual averments. 

 26. The defendants deny the averments of paragraph 26. 

 27. The defendants deny the averments of paragraph 27. 

 28. The defendants incorporate herein their responses to paragraphs 1-27 as 

set forth hereinabove. 

 29. The defendants deny the averments of paragraph 29. 

 30. The defendants incorporate herein their responses to the above-referenced 

paragraphs 1-29. 

 31. The defendants deny the averments of paragraph 31. 

 32. The defendants deny the averments of paragraph 32. 

Case 2:06-cv-00746-WHA Document 2-6 Filed 08/18/2006 Page 3 of 5
Second Defense

 The complaint fails to state a claim upon which relief can be granted against these 

defendants. 

Third Defense

 The trustee’s claims are barred by the doctrine of unclean hands. 

Fourth Defense

 The trustee’s claims are barred by the doctrine of estoppel. 

Fifth Defense

 The trustee’s claims are barred by the doctrine of waiver. 

Sixth Defense

 The trustee’s claims are barred by the defense of ordinary course of business. 

Seventh Defense

 To the extent that any transfers occurred, the defendants took in good faith and 

provided a reasonably equivalent value. 

\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for American Real Estate 

Investment Company, Ltd, L.P. 

OF COUNSEL: 

WALSTON, WELLS, ANDERSON 

 & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

Case 2:06-cv-00746-WHA Document 2-6 Filed 08/18/2006 Page 4 of 5
CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Answer to Complaint has 

been served by placing same in the United States mail, properly addressed and postage prepaid, 

as follows: 

Brent B. Barriere 

David L. Patron 

365 Canal Street 

Suite 2000 

New Orleans, Louisiana 70130 

This the \11th\ day of July, 2005. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

 

Case 2:06-cv-00746-WHA Document 2-6 Filed 08/18/2006 Page 5 of 5
IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

_____________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

______________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING NO.: 

 ) 05-03042 

INC, AND TERRY UNIFORM ) 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

AMENDMENT TO ANSWER

 COME NOW the Defendants, N.D. Horton, Jr. (“Horton”), and James M. 

Reynolds (“Reynolds”), III, and hereby amend their previously filed answer to assert the 

following affirmative defense: 

Eighth Defense

 33. The defendants plead the applicable statute of limitations. 

Case 2:06-cv-00746-WHA Document 2-7 Filed 08/18/2006 Page 1 of 2
\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for American Real Estate 

Investment Company, Ltd, L.P. 

OF COUNSEL:

WALSTON, WELLS, ANDERSON 

 & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Amendment to Answer has 

been served by placing same in the United States mail, properly addressed and postage prepaid, 

as follows: 

Brent B. Barriere 

David L. Patron 

365 Canal Street 

Suite 2000 

New Orleans, Louisiana 70130 

This the \1st\ day of August, 2005. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

 

Case 2:06-cv-00746-WHA Document 2-7 Filed 08/18/2006 Page 2 of 2
IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING 

) NO.: 05-03042 

INC, AND TERRY UNIFORM ) 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

MOTION TO AMEND ANSWER

 COME NOW the Defendants, N.D. Horton, Jr. (“Horton”), and James M. 

Reynolds, III (“Reynolds”), and hereby file this motion to amend answer say as follows:

 1. Pursuant to Bankruptcy Rule 7015, the Defendants hereby move to 

amend their answer in the above-referenced proceeding as set forth in the attached 

Amendment to Answer. 

Case 2:06-cv-00746-WHA Document 2-8 Filed 08/18/2006 Page 1 of 3
 2. Bankruptcy Rule 7015 provides that the amendment should be 

freely allowed when justice is required. 

 3. There are two additional affirmative defenses stated in the answer. 

First, as the trustee is aware, the defendants loaned additional funds to the debtor. This 

may provide the basis for a defense under 11 U.S.C. § 547 and Alabama Code § 8-9A-8. 

 4. Second, possibly unlike Georgia, Alabama law provides a defense 

for consideration paid to parties other than the debtor. See Ala. Code §§ 9A-8(d). While 

this arguably may be covered by Defendants’ initial affirmative defenses, defendants 

want to ensure that there is no question about this defense being asserted. 

 5. Both of these defenses previously have been made known to 

Plaintiff’s counsel. 

6. Justice would require that the defendants be able to assert these 

defenses. 

 WHEREFORE, premises considered, Defendants, N.D. Horton, Jr., and 

James M. Reynolds, III, respectfully request this Court to allow them to amend their 

answer as set forth in the attached Amendment to Answer. The parties pray for such 

further and other relief as this Court may deem appropriate. 

 

\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for N.D. Horton, Jr., and 

James M. Reynolds, III 

Case 2:06-cv-00746-WHA Document 2-8 Filed 08/18/2006 Page 2 of 3
OF COUNSEL:

WALSTON, WELLS & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Motion to Amend 

Answer has been served by electronic filing purposes and/or by placing same in the 

United States mail, properly addressed and postage prepaid, as follows: 

Katherine Mille Determan 

Phelps Dunbar LLP 

City Plaza 

445 North Boulevard 

Suite 701 

Baton Rouge, LA 70802-5707 

This the \2nd\ day of December, 2005. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

 

 

Case 2:06-cv-00746-WHA Document 2-8 Filed 08/18/2006 Page 3 of 3
IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

_____________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

______________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING NO.: 

 ) 05-03042 

INC, AND TERRY UNIFORM ) 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

AMENDMENT TO ANSWER

 COME NOW the Defendants, N.D. Horton, Jr. (“Horton”), and James M. 

Reynolds (“Reynolds”), III, and hereby amend their previously filed answer to assert the 

following affirmative defenses: 

Case 2:06-cv-00746-WHA Document 2-9 Filed 08/18/2006 Page 1 of 3
Ninth Defense

 34. To the extent that there was a voidable transfer, which the defendants 

deny, the defendants are entitled to a reduction in the amount of liability to the extent of value 

given to the debtor for the transfer or to another person as a consequence of the debtor’s making 

such transfer. 

 Eleventh Defense

35. The defendants gave new value to or for the benefit of the debtor after the 

transfer was made. 

Tenth Defense

 36. The defendants are entitled to a setoff of the amounts due and owing to the 

defendants. 

 

\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for Defendants, N.D. Horton, Jr., 

and James M. Reynolds, III 

OF COUNSEL:

WALSTON, WELLS 

 & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

Case 2:06-cv-00746-WHA Document 2-9 Filed 08/18/2006 Page 2 of 3
CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Amendment to Answer has 

been served via electronic filing and/or by placing same in the United States mail, properly 

addressed and postage prepaid, as follows: 

Brent B. Barriere 

Katherine M. Determan 

365 Canal Street 

Suite 2000 

New Orleans, Louisiana 70130 

This the \2nd\ day of December, 2005. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

 

Case 2:06-cv-00746-WHA Document 2-9 Filed 08/18/2006 Page 3 of 3
#47 TEXT ORDER GRANTING MOTION TO AMEND

NO PDF DOCUMENT AVAILABLE FOR VIEWING

Case 2:06-cv-00746-WHA Document 2-10 Filed 08/18/2006 Page 1 of 1
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 1 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 2 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 3 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 4 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 5 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 6 of 7
Case 2:06-cv-00746-WHA Document 2-11 Filed 08/18/2006 Page 7 of 7
UNITED STATES BANKRUPTCY COURT 

MIDDLE DISTRICT OF ALABAMA 

In re: Case No. 03-32063 

TERRY MANUFACTURING 

COMPANY INC., 

 Debtor. 

In re: Case No. 03-32213 

TERRY UNIFORM 

COMPANY, LLC, 

 Debtor. 

J. LESTER ALEXANDER III, Adv. Pro. No. 05-3042 

TRUSTEE OF TERRY 

MANUFACTURING COMPANY, INC. 

AND TERRY UNIFORM COMPANY, 

LLC 

 Plaintiff, 

v. 

N.D. HORTON, JR., AND 

JAMES M. REYNOLDS, III 

ORDER GRANTING TRUSTEE’S MOTION 

TO AMEND COMPLAINT 

 On January 27, 2006 the Plaintiff filed a Motion to Amend Complaint. (Docs. 1, 

55). The main issue in this Adversary Proceeding is whether payments made by Terry 

Manufacturing on promissory notes given by members of the Terry family in connection 

Case 2:06-cv-00746-WHA Document 2-12 Filed 08/18/2006 Page 1 of 2
with the purchase of stock sold by Defendants constitute fraudulent transfers. The 

Defendants have advanced the argument that certain guarantees made by Terry 

Manufacturing on the promissory notes given by Cotina Terry and Allie Robinson 

constitute reasonably equivalent value. The Plaintiff asserts that the purpose for 

amending the complaint is to put expressly at issue: (1) whether the guarantees are 

enforceable; (2) whether the granting of the guarantee was supported by reasonably 

equivalent value; and (3) whether the satisfaction of the guarantees constitute reasonably 

equivalent value. The Court has considered the motion and notes that it is unopposed. In 

view of that, it is hereby ORDERED that the Plaintiff’s Motion to Amend Complaint is 

GRANTED. (Doc. 55). 

 Done this 30th day of January, 2006. 

 /s/ William R. Sawyer 

 United States Bankruptcy Judge 

c: Brent B. Barriere, 

 Katherine M. Determan, Attorneys for Plaintiff 

 Clyde E. Brazeal, Attorney for Defendant 

Case 2:06-cv-00746-WHA Document 2-12 Filed 08/18/2006 Page 2 of 2
UNITED STATES BANKRUPTCY COURT 

MIDDLE DISTRICT OF ALABAMA 

In re: Case No. 03-32063 

TERRY MANUFACTURING 

COMPANY INC., 

 Debtor. 

In re: Case No. 03-32213 

TERRY UNIFORM 

COMPANY, LLC, 

 Debtor. 

J. LESTER ALEXANDER III, Adv. Pro. No. 05-3042 

TRUSTEE OF TERRY 

MANUFACTURING COMPANY, INC. 

AND TERRY UNIFORM COMPANY, 

LLC 

 Plaintiff, 

v. 

N.D. HORTON, JR., AND 

JAMES M. REYNOLDS, III 

MEMORANDUM DECISION

 This Adversary Proceeding is before the Court upon the motion for summary 

judgment filed by the Plaintiff and Trustee, J. Lester Alexander, III, (“Plaintiff”). (Docs. 

34, 48, 49, 67). The Court has jurisdiction pursuant to 28 U.S.C. § 1334 and this is a core 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 1 of 7
2

proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H). The Court has considered 

the memoranda and arguments made by counsel therein. For the reasons set forth below, 

the Court finds that material facts are in dispute and in view of that the Plaintiff’s motion 

for summary judgment is DENIED. (Doc. 34). 

I. FACTS

The Plaintiff is seeking to avoid payments1

 made by Terry Manufacturing Company2

(“Terry Manufacturing”) to Defendant N.D. Horton, Jr., (“Horton”), in the amount of 

$298,396.30, and to Defendant James M. Reynolds, III, (“Reynolds”), also in the amount 

of $298,369.30.3

 The crux of this Adversary Proceeding involves the purchase of Perky 

Cap Company (“Perky Cap”) stock by Roy and Rudolph Terry, Cotina Terry (daughter of 

Roy Terry), and Allie R. Robinson (wife of Rudolph Terry). At all times relevant to this 

proceeding, Perky Cap was a manufacturer of headwear in Eatonton, Georgia. (Doc. 48; 

Horton Aff. ¶ 2). The myriad of transactions underlying the claims asserted in this 

Adversary Proceeding began sometime in 1994, when Horton, who at that time along 

with Reynolds owned a majority of shares of Perky Cap, negotiated with the Terrys an 

 

1

 In this Adversary Proceeding the Trustee asserts claims pursuant to the Georgia and Alabama fraudulent 

conveyance provisions, and as avoidable fraudulent conveyances and preferences pursuant to 11 U.S.C. § 

548 and 11 U.S.C. § 547. (Doc. 1). However, the present motion for summary judgment was brought 

solely upon the theory of constructive fraudulent transfers and hence that is the only theory addressed by 

this Memorandum Decision. 

 

2

 Terry Manufacturing filed a voluntary Chapter 11 petition in this Court on July 7, 2003. (Case No. 03-

32063, Doc. 1). Terry Uniform, an affiliated entity, filed a voluntary Chapter 11 petition on July 22, 2003. 

(Case No. 03-32213, Doc. 1). Joint Administration of these two cases was ordered by this Court’s Order of 

October 3, 2003. J. Lester Alexander, III, was appointed Chapter 11 Trustee by Order of this Court on July 

10, 2003. (Doc. 20). The Chapter 11 cases of Terry Manufacturing and Terry Uniform were converted to 

cases under Chapter 7 of the United States Bankruptcy Code, by Order of the Court dated May 13, 2004. 

(Case No. 03-32063, Doc. 579). J. Lester Alexander, III, was appointed Trustee of both Chapter 7 cases. 

3

 Horton and Reynolds will at times be collectively referred to as Defendants. 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 2 of 7
3

option agreement to purchase 30,000 shares of the outstanding common stock of Perky 

Cap which amounted to 33% of the outstanding shares. (Doc. 48; Horton Aff. ¶ 2). In 

accord with that understanding, on June 6, 1994, Roy and Rudolph Terry purchased 

10,000 shares each individually, and purchased 10,000.00 shares jointly. (Doc. 48; 

Horton Aff. ¶ 2). On that same day, Horton and Reynolds granted the Terry family the 

option to purchase an additional 45,900 shares of outstanding Perk Cap common stock. 

(Doc. 48; Horton Aff. ¶ 2-3) 

With the aforementioned purchases of stock in mind, in November 2000, the Terrys 

and the Defendants engaged in the following transactions which are at the heart of this 

Adversary Proceeding. On November 10, 2000, Allie R. Robinson purchased 9,000 

shares of Perky Cap common stock. In exchange for the stock, Allie Robinson executed 

a promissory note payable jointly to Horton and Reynolds in the amount of $200,000.00 

plus 9.5% interest. These shares represented 10% of the outstanding common stock of 

Perky Cap. (Docs. 34, 38; Lester Aff. ¶ 14-15; Horton Aff. ¶ 2-3). 

On November 10, 2000, Cotina Terry executed a promissory note identical in form to 

that of the Allie Robinson note. The principal sum of the note made payable jointly to 

Horton and Reynolds was $200,000.00, with an interest rate of 9.5%, and was given in 

consideration of 9,000 shares of Perky Cap stock sold to Cotina Terry. (Docs. 34, 38; 

Lester Aff. ¶ 14-15; Horton Aff. ¶ 2-3). Terry Manufacturing was a guarantor on both 

the Cotina Terry and Allie Robinson notes. (Doc. 49; Ex.’s 6, 8). 

On May 20, 2002, Roy and Rudolph Terry executed a promissory note payable to 

Horton and Reynolds jointly in the principal amount of $624,000.00 at an interest rate of 

9.0%. In consideration of the note, Horton and Reynolds transferred to Roy and Rudolph 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 3 of 7
4

Terry jointly, 27, 900 shares of Perky Cap stock. These shares represented 31% of the 

outstanding common stock of that company. (Doc. 34; Lester Aff. ¶ 17). Combined with 

the aforementioned transfers of stock, this purchase resulted in the Terry family owning 

84% of Perky Cap, with the ability to exercise full control over the company. (Docs. 34, 

48; Lester Aff. ¶ 17; Horton Aff. ¶ 3). 

 Terry Manufacturing made payments to Horton on the Cotina Terry and Allie 

Robinson note in the amount of $234,375.81. Identical payments, totaling $234,375.81 

were also made on these notes by Terry Manufacturing to Reynolds. Terry 

Manufacturing made payments totaling $127,986.98 on the Roy and Rudolph Terry 

notes. (Doc. 34; Lester Aff. ¶ 16). It is these payments that the Plaintiff is now seeking 

to avoid. 

II. CONCLUSIONS OF LAW

A. Summary Judgment Standard

Summary judgment is proper only when there is no genuine issue of any material 

fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 

56, made applicable to Adversary Proceedings pursuant to Fed. R. Bank. P. 7056; 

Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2553, 91 L.Ed. 2d 265 

(1986); Jones v. City of Columbus, 120 F.3d 248, 251 (11th Cir. 1997). Federal Rule of 

Civil Procedure 56(c) states the following: 

The judgment sought shall be rendered forthwith if the pleadings, depositions, 

answers to interrogatories, and admissions on file, together with the affidavits, if 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 4 of 7
5

any, show that there is no genuine issue as to any material fact and that the 

moving party is entitled to judgment as a matter of law. 

Fed. R. Civ. P. 56(c). The facts must be viewed in a light most favorable to the 

nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 

2505, 91 LED. 2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. at 322; Hail v. Regency

Terrace Owners Association, 782 So.2d1271, 1273 (Ala. 2000). At the stage of summary 

judgment, “the judge’s function is not himself to weigh the evidence and determine the 

truth of the matter but to determine whether there is a genuine issue for trial.” Anderson 

v. Liberty Lobby, Inc., 477 U.S. at 249. To avoid an adverse ruling on a motion for 

summary judgment,“the nonmoving party must provide more than a mere scintilla of 

evidence.” See Loyd v.Ram Industries, Inc., 64 F.Supp.2d 1235, 1237 (S.D. Ala. 1999) 

(quoting Combs v.Plantation Patterns, 106 F.3d 1519, 1526 (11th Cir. 1997). 

B. Discussion

 

The Court finds that there are material facts in dispute in this Adversary 

Proceeding. Central to the Plaintiff’s fraudulent conveyance claims on the theory of 

constructive fraud is determining whether Terry Manufacturing received reasonably 

equivalent value in exchange for making payments on promissory notes executed by the 

Terrys for the purpose of purchasing Perky Cap Stock. The Plaintiff avers that Terry 

Manufacturing did not receive any value at all for making payments to Horton and 

Reynolds, much less reasonably equivalent value. (Doc. 34). The Plaintiff further 

asserts that Terry Manufacturing received no benefit from making the payments and that 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 5 of 7
6

it was not a signatory to any of the subject notes. The Defendants have put forth several 

ways in which they claim Terry Manufacturing received reasonably equivalent value: (1) 

by realizing a dollar for dollar reduction on its guaranteed obligation; (2) by receiving an 

indirect benefit from the business decision of the Terrys to acquire Perky Cap stock; and 

(3) because Terry Manufacturing and the Terrys were alter egos, a benefit to one 

constituted a benefit to the other. The Defendants also alternatively argue that under 

Alabama Code § 8-9A-8(d), Horton and Reynolds are entitled to an offset in the amount 

of the value of the stock given to the Terrys. The Trustee has vigorously countered each 

of the arguments advanced by the Defendants, however, the Court finds that at this point 

the necessity for a trial has been amplified. (Doc. 67). 

 The Court finds material facts in dispute rendering disposition by way of 

summary judgment inappropriate. See Taylor v. Riverside-Franklin Prop. (In re: Taylor), 

228 B.R. 491, 498 (Bankr. M.D. Ga. 1998)(the court is hesitant to decide such matters at 

summary judgment stage because fraudulent conveyances are fact intensive by nature). 

III. CONCLUSION

 

For the reasons stated above, the Plaintiff’s motion for summary judgment is 

DENIED. (Doc. 34). The Plaintiff’s claims asserted in the Complaint pursuant to the 

Alabama and Georgia fraudulent conveyance statutes, and as avoidable fraudulent 

conveyances and preferences pursuant to 11 U.S.C. § 548 and 11 U.S.C. § 547, are 

subject to trial. The Defendants’ Motion to Extend Deadline to Respond to Plaintiff’s 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 6 of 7
7

Reply Brief is DENIED as moot. (Doc. 65). The Court will enter an Order consistent 

with this Memorandum Decision by way of a separate document. 

 Done this 16th day of February, 2006. 

 /s/ William R. Sawyer 

 United States Bankruptcy Judge 

c: Brent B. Barriere, Attorney for Plaintiff 

 C. Ellis Brazeal, III, Attorney for Defendants 

Case 2:06-cv-00746-WHA Document 2-13 Filed 08/18/2006 Page 7 of 7
IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

_____________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

______________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING NO.: 

 ) 05-03042 

INC, AND TERRY UNIFORM ) 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

ANSWER TO FIRST AMENDED COMPLAINT

 COMES NOW the defendants, N.D. Horton, and James M. Reynolds, and for 

their response to the first amended complaint of the trustee say as follows: 

 33. The defendants admit that they received guaranties from Terry 

Manufacturing regarding the Allie Robinson Note and Cotina Terry Note. The defendants deny 

the remaining averments of paragraph 33. 

Case 2:06-cv-00746-WHA Document 2-14 Filed 08/18/2006 Page 1 of 3
GENERAL

 The defendants incorporate herein all of their previously pled responses and 

defenses to the claims set forth in this action. 

 

\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for Defendants N.D. Horton and 

James M. Reynolds, III 

OF COUNSEL:

WALSTON, WELLS, & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Answer to First Amended 

Complaint has been served by electronic filing purposes, as follows: 

Brent B. Barriere 

Katie Lasky 

365 Canal Street 

Suite 2000 

New Orleans, Louisiana 70130 

This the \24th\ day of March, 2006. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

 

Case 2:06-cv-00746-WHA Document 2-14 Filed 08/18/2006 Page 2 of 3
Case 2:06-cv-00746-WHA Document 2-14 Filed 08/18/2006 Page 3 of 3
Case 2:06-cv-00746-WHA Document 2-15 Filed 08/18/2006 Page 1 of 2
Case 2:06-cv-00746-WHA Document 2-15 Filed 08/18/2006 Page 2 of 2
UNITED STATES BANKRUPTCY COURT 

MIDDLE DISTRICT OF ALABAMA 

In re: Case No. 03-32063-WRS 

TERRY MANUFACTURING 

COMPANY INC., 

 Debtor. 

J. LESTER ALEXANDER III, TRUSTEE 

 Plaintiff, Adv. Pro. No. 05-3042-WRS 

v. 

N.D. HORTON, JR., AND 

JAMES M. REYNOLDS, III 

 Defendants. 

MEMORANDUM DECISION

 This Adversary Proceeding came before the court for trial on March 28 and 29, 2006. 

Plaintiff J. Lester Alexander, III (Trustee), present in person and by counsel Brent B. Barriere 

and Catherine E. Lasky. C. Ellis Brazeal, counsel for the Defendants N.D. Horton and James M. 

Reynolds, III, was present as was Defendant N.D. Horton, Jr. The Court heard evidence and 

took the Adversary Proceeding under advisement. The Parties have filed Proposed Findings of 

Fact and Conclusions of Law. (Docs. 86, 87). For the reasons set forth below, judgment is 

entered in favor of the Trustee and against Defendants Horton and Reynolds in the amount of 

$596,738.60. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 1 of 16
 -2-

I. FACTS

 This Adversary Proceeding is part of a large and unusually complex bankruptcy case. 

The discussion of the facts will be divided in three parts. In the first part, the Court will discuss 

the Terry Manufacturing bankruptcy case and the criminal proceedings against Roy and Rudolph 

Terry. The transactions which gave rise to this Adversary Proceeding did not take place in a 

vacuum but rather in the context of a larger universe of facts. It is necessary to provide some 

background to give context to the immediate facts of the transactions in question. In the second 

part, the Court will set out the facts of the transactions which are directly relevant to this 

Adversary Proceeding. These facts are not in dispute and are taken directly from a stipulation 

filed by the parties. In the third part the Court makes findings of fact on several matters which 

are in dispute, most notably the question of whether Terry Manufacturing received reasonably 

equivalent value in return for cash transfers totaling $596,738.60. 

A. Background

 Terry Manufacturing, Inc., filed a voluntary petition in bankruptcy pursuant to Chapter 

11 of the Bankruptcy Code in this Court on July 7, 2003. J. Lester Alexander was appointed as a 

Trustee in the Chapter 11 case on July 11, 2003.1

 This Chapter 11 case was converted to a case 

under Chapter 7 on May 13, 2004. This Court’s Memorandum Decision of May 13, 2004, 

details some of the Court’s concerns in this case. (Case No. 03-32063, Doc. 580). The record in 

 

1

 Trustees are not usually appointed in cases under Chapter 11 in this Court. See, 11 U.S.C. § 

1104. It is highly unusual for one to be appointed so soon after the filing of the petition. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 2 of 16
 -3-

this bankruptcy case is replete with evidence of missing records, check kiting, and large 

unexplained transfers of millions of dollars. 

 Terry Manufacturing was in the business of making uniforms and sportswear. It had 

contracts to supply uniforms to the McDonalds’ hamburger restaurants and to the United States 

Department of Defense. Terry Manufacturing was a minority owned business which, from all 

outside appearances, was well positioned to compete for large contracts to supply uniforms to 

large institutional purchasers. Terry Manufacturing had its principal place of business in 

Roanoke, Alabama, and at one time employed a large number of people there. 

 The principals of Terry Manufacturing are two brothers, Roy and Rudolph Terry. Roy 

Terry was the Chief Executive Officer, first in command, and Rudolph Terry was the Chief 

Financial Officer, second in command and partner in crime. In June of 2005, Roy Terry entered 

into an agreement with the Government to plead guilty to 13 counts of mail fraud, wire fraud and 

a whole potpourri of wrongdoing and skullduggery, all relating to Roy Terry’s leadership at 

Terry Manufacturing. The Government’s criminal case against Roy Terry is set forth in 

considerable detail in a Plea Agreement which is on file with the District Court in Case No. 05-

CR-141, in proceedings styled United States v. Roy Terry. The parties (Roy Terry and the 

Government) agree, on page 9 of the Plea Agreement, that “the actual loss in this case is more 

than $20 million but less than $50.”2

 

 Roy Terry pledged his cooperation to the Government in the Plea Agreement, which 

resulted in the indictment of Rudolph Terry on similar charges in proceedings styled United 

 

2

 Roy Terry reserved his right to argue that the loss would have been less had he been permitted 

to “implement his business plan for Terry Manufacturing Company into and through the 

Company’s bankruptcy proceedings.” Such a claim is outrageous. Roy Terry’s only plan was to 

loot the estate. Had he been permitted to fully implement his plan, the loss would have been 

more than $50 million. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 3 of 16
 -4-

States v. Rudolph Terry, Case No. 06-CR-52. The Government has concluded that Rudolph is 

less culpable than Roy in that his recommended sentence is only 48 months, while Roy’s is 133 

months. Neither Rudolph nor Roy has, as of yet, been sentenced. It is of more than passing 

interest here that the $5.5 million loan from American Real Estate to Roy Terry is discussed in 

both plea agreements. Both Roy and Rudolph Terry have pleaded guilty to, among other things, 

having made misrepresentations to Horton in connection with the loan. 

 

B. Stipulated Facts

 The parties entered into a Stipulation of Facts. (Doc. 83). The stipulation provides as 

follows: 

 

1. Messrs. Horton and Reynolds were owners of common stock of Perky Cap Company, 

Inc. (“Perky Cap”), a manufacturer headquartered in Eaton [sic], Georgia. 

2. On November 10, 2000, Cotina Terry, daughter of Roy Terry, executed a Purchase 

Money Promissory Note (the “Cotina Terry Note”) in the principal sum of TWO 

HUNDRED THOUSAND NO/100 ($200,000.00) DOLLARS, bearing interest at the 

rate of 9% per annum. 

3. The Cotina Terry Note was made payable to Mr. Horton and Mr. Reynolds, and was 

purportedly given in consideration of 9,000 shares of Perky Cap common stock to 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 4 of 16
-5-

Cotina Terry by Messrs. Horton and Reynolds. These shares represented ten (10%) 

percent of the outstanding common stock of the Company. 

4. Terry Manufacturing was not a signatory to the Cotina Terry Note. 

5. All payments on the Cotina Terry Note were made by Terry Manufacturing to 

Messrs. Horton and Reynolds. The Note was paid in full with payments totaling 

TWO HUNDRED THIRTY-FOUR THOUSAND, THREE HUNDRED SEVENTYFIVE DOLLARS AND 81/100 ($234,375.81). 

6. On November 10, 2000, Allie Robinson, wife of Rudolph Terry, executed a 

promissory note in a form identical to that executed by Cotina Terry. The note was 

designated a Purchase Money Promissory Note (the “Allie Robinson Note”), and, like 

the note executed by Cotina Terry, was in the principal sum of TWO HUNDRED 

THOUSAND ($200,000.00) DOLLARS, and provided for 9.5% interest. Also, like 

the Cotina Terry Note, the promissory note executed by Allie Robinson was given for 

and in consideration of 9,000 shares of Perky Cap Stock sold to Ms. Robinson by 

Messrs. Horton and Reynolds. These shares represent (10%) percent of the 

outstanding common stock of Perky Cap. 

7. Terry Manufacturing was not a signatory to the note executed by Ms. Robinson. 

8. Terry Manufacturing executed written guarantees of the promissory notes executed 

by Ms. Terry and Ms. Robinson. 

9. The Perky Cap common stock purchase by Cotina Terry and Allie Robinson was 

registered in their names, and they received all benefits flowing to holders of Perky 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 5 of 16
-6-

Cap Stock, which would have included recognizing for federal tax purposes their 

respective shares of losses recorded by Perky Cap, a sub-s corporation. 

10. Terry Manufacturing was never a shareholder of Perky Cap. None of the stock 

purchased by Ms. Robinson or Ms. Terry was registered in its name. 

11. On May 20, 2002, Roy and Rudolph Terry jointly executed a promissory note, in 

favor of Messrs. Horton and Reynolds, in the principal amount of SIX HUNDRED 

TWENTY-FOUR THOUSAND NO/100 ($624,000.00) DOLLARS, and bearing 

interest at the rate of 9.5% per annum. In consideration thereof, Messrs. Horton and 

Reynolds purportedly transferred to Roy and Rudolph Terry, jointly, 27,900 shares of 

Perky Cap common stock, representing thirty-one (31%) percent of the outstanding 

common stock of that company. The parties do not stipulate as to whether the shares 

were actually transferred. If, in fact, the shares were transferred, they were registered 

in the name of Roy and Rudolph Terry, individually, and Terry Manufacturing had no 

interest in the shares whatsoever. 

12. Terry Manufacturing made all payments on the note executed by Roy and Rudolph 

Terry. Payments continued until May, 2003, and totaled ONE HUNDRED 

TWENTY-SEVEN THOUSAND, NINE HUNDRED EIGHTY-SIX DOLLARS 

AND 98/100 ($127,986.98). No payments were made after the Chapter 11 filing by 

Terry Manufacturing. 

13. Terry Manufacturing made total payments of FIVE HUNDRED NINETY-SIX 

THOUSAND, SEVEN HUNDRED THIRTY-EIGHT DOLLARS AND 60/100 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 6 of 16
-7-

($596,738.60) to Messrs. Horton and Reynolds in connection with the promissory 

notes executed by Cotina Terry, Allie Robinson and Roy and Rudolph Terry. 

14. A number of entities were unsecured creditors of Terry Manufacturing prior to 

November 10, 2000 (the date on which Cotina Terry and Allie Robinson delivered 

their respective promissory notes to Messrs. Horton and Reynolds), and remained 

unsecured creditors of Terry Manufacturing as of the date Terry Manufacturing filed 

for relief under Chapter 11 of the Bankruptcy Code. These unsecured creditors 

include American Express, Southern Mills, Arkansas State Highway Employees 

Retirement System, Arkansas Department of Economic Develop, CIT Financial 

Services, Miliken & Company, Darwood Manufacturing, HLC Industries, Inc., 

Atlantic Thread and Supply Company, Inc., and Bonifay Manufacturing Company. 

C. Additional Findings of Fact

 1. Reasonably equivalent value

 Reduced to its most basic terms, this Adversary Proceeding involves the repayment of 

debts owed by Terry insiders, (Roy Terry, Rudolph Terry, Cotina Terry and Allie Robinson), by 

Terry Manufacturing. The debts were owed to Defendants Horton and Reynolds. As set forth in 

Part I(B) above, the parties do not dispute this much. The dispute here centers on whether Terry 

Manufacturing received reasonably equivalent value in exchange for the payments of the 

indebtedness owed by the Terry insiders. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 7 of 16
-8-

 The Defendants contend that Terry Manufacturing received value in that on the same date 

of the execution of the Promissory Notes by Cotina Terry and Allie R. Robinson, (November 10, 

2000), in favor of Horton and Reynolds, American Real Estate Investment Company made a loan 

of $5,500,000, to Rudolph and Roy Terry. The loan was guaranteed by Terry Manufacturing. 

The logic of this claim is immediately suspect. Why such a byzantine structure? American Real 

Estate loans $5.5 million to Roy and Rudolph, so Terry Manufacturing should pay the 

promissory notes owed by Cotina and Allie to Horton and Reynolds? Arguments such as this 

leave one grasping madly for a bottle of aspirin. 

 Apparently recognizing the incongruity of their argument on its face, the Defendants 

layer an additional claim on what is already a convoluted argument. Roy and Rudolph, the 

Defendants claim, transferred some, or most, or all, of the $5.5 million to Terry Manufacturing. 

Why so much? Horton testified at trial that one would not send $5.5 million to safeguard 

$400,000. It is also true, that there is a daisy chain of millions of dollars of cash transferred 

between Terry Manufacturing and related entities. Even if one can identify $5.5 million 

transferred by Roy and Rudolph to Terry Manufacturing, tens of millions of dollars were 

transferred out, leaving one no closer to an explanation which rings true. 

 Horton testified at trial that he would not have made the loans to Cotina Terry and Allie 

Robinson for the purchase of the Perky Cap stock, but for the repayment of the loan by Terry 

Manufacturing. Horton’s claim is wholly lacking in logic. The repayment of the Cotina and 

Allie loans by Terry Manufacturing was not done until a later point in time. The documentary 

evidence at trial shows a complex relationship between Terry Manufacturing on the one hand 

and Horton and Reynolds on the other. None of this documentary evidence suggests any 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 8 of 16
-9-

relationship to the Cotina and Allie loans. Having considered Horton’s testimony, the Court 

finds that it is not credible and that his claims of a tie have been fabricated to provide a defense 

to the Trustee’s avoidance action. 

 The Terry Manufacturing bankruptcy proceedings have been of unusual complexity. The 

Court has struggled with the bankruptcy case and dozens of adversary proceedings such as this 

spun off in all directions for more than three years. If one thing can be said with any certainty at 

all, it is that nothing in this case is as it first glance seems. Having considered the testimony of 

the witnesses, having considered the voluminous record in this Adversary Proceeding, having 

struggled to make some sense of this matter, the Court finds that the $5.5 million loan to Roy and 

Rudolph, while made on the same day as the promissory notes by Cotina and Allie, were not 

made in exchange for one another. None of the documents created on November 10, 2000, 

suggest such a connection and no credible evidence supports such a finding. Indeed, it appears 

that the $5.5 million loan was made as a result of the fraud perpetrated by Roy and Rudolph 

Terry and had nothing to do with the purchase of the Perky Cap stock by Cotina and Allie. 

 The Defendants argue that Terry Manufacturing further received a benefit in that when 

Cotina and Allie bought stock in Perky Cap they assured Terry Manufacturing a ready source of 

caps, which would enhance the sales of uniforms by Terry Manufacturing. The evidence did not 

bear out this contention. First, it appears that Perky Cap had been selling caps to Terry 

Manufacturing long before Cotina and Allie had purchased any stock. The evidence further 

showed that Perky Cap was anxious to sell its products to Terry Manufacturing and that it was 

not necessary to purchase Perky Cap stock as an inducement. Second, there are many suppliers 

of caps throughout the world who are capable of producing the caps needed by Terry 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 9 of 16
-10-

Manufacturing. There was no evidence that the purchase of caps had ever been a problem for 

Terry Manufacturing. 

 The Defendants contend that further value to Terry Manufacturing may be inferred from 

a $1.5 million loan from Peoples Bank, which Horton claims he was instrumental in obtaining 

for Terry Manufacturing. The Peoples Bank loan was the subject of another fraudulent 

conveyance proceeding which was pending in this Court for several years. See, Alexander v. 

The Peoples Bank, Adversary Proceeding No. 04-3061, in the United States Bankruptcy Court 

for the Middle District of Alabama. The Peoples Bank Adversary Proceeding was consolidated 

with Adversary Proceedings brought against First Tuskegee Bank and Bank of Wedowee in 

Adversary Proceedings 04-3062 and 04-3063. The three Adversary Proceedings were 

consolidated and referred to informally as the “Three Bank Case.” The Three Bank Case was 

hotly litigated for more than two years and came before the Court a number of times on motions 

to dismiss, motions to compel, motions for summary judgment and the like. The Trustee reached 

separate settlements with each of the three banks and none went to trial. Nevertheless, the Court 

became familiar with the facts of those cases. Each of the Three Banks screamed long and loud 

about fraud perpetrated by Roy and Rudolph Terry, check kiting, destruction of records, and the 

rest of a now familiar litany of depredations. 

 The problem with all of the Defendants’ arguments which contend that value for the 

payments in question was given in the form of one or more loans to Terry Manufacturing is that 

there is no credible evidence that this is so. The Terry Manufacturing bankruptcy has generated 

a mountain of paper, not one page of which suggests that there was a connection. Second, 

considering the way in which Terry Manufacturing did business, this claim does not make sense. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 10 of 16
-11-

Third, the trial testimony offered in support of this defense suffers from the appearance that it is 

nothing more than a post hoc attempt to bolster a defense to the Trustee’s fraudulent conveyance 

suit, which does not ring true. Having considered all of the evidence, the Court finds that none of 

the loans to Terry Manufacturing (the $5.5 million from American Real Estate, the $1.5 from 

Peoples Bank, and the advance from Wholesale Distributors) were given in exchange for the 

payments in question on the indebtedness owed by the Terry insiders. 

 

 2. Insolvency

 The payments in question were made between December 10, 2000, and May of 2003. It 

is necessary for the Trustee to prove that Terry Manufacturing was insolvent at the time the 

payments were made. The Trustee is a Certified Public Accountant. Alexander, together with 

his firm AEA Group, LLC, examined the books and records of Terry Manufacturing. 

Alexander’s report is offered as Plaintiff’s Exhibit 44. Alexander concludes that Terry 

Manufacturing was insolvent at least as early as July 7, 1999. The Court, having heard 

Alexander’s testimony and having reviewed his report, finds that he is forthright and credible. 

Based upon Alexander’s testimony, the Court finds that Terry Manufacturing was insolvent on 

July 7, 1999, and at all times subsequent through the date of the petition in bankruptcy, which 

was July 7, 2003. 

 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 11 of 16
-12-

II. CONCLUSIONS OF LAW

 This Adversary Proceeding was brought by a Trustee in bankruptcy to recover certain 

payments made by the Debtor as fraudulent conveyances. This Court has jurisdiction to hear this 

Adversary Proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding. 28 U.S.C. § 

157(b)(2)(F). 

A. Fraudulent Conveyance law

 A trustee in bankruptcy may recover a fraudulent conveyance under several different 

theories. Applicable here is 11 U.S.C. § 544(b) and Alabama Code § 8-9A-5.3

 The stipulation 

provided by the parties identifies a number of actual creditors who were in existence as of 

November 10, 2000. See, Section I(B)(14) above. 

 The Trustee in bankruptcy succeeds to the interests of existing creditors. Section 

544(b)(1), of Title 11, United States Code, provides as follows: 

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

property or any obligation incurred by the debtor that is voidable 

under applicable law by a creditor holding an unsecured claim that 

is allowable under section 502 of this title or that is not allowable 

only under section 502(e) of this title. 

 

3

 The Alabama Fraudulent Conveyance Act, 8-9A-1, et. seq., defines the cause of action 

differently depending upon whether the creditor who brings suit is in existence at the time of the 

transfer. Because the cause of action for creditors who are in existence at the time of the transfer 

action requires proof of fewer elements than does the cause of action for creditors whose claim 

arises after the transfer, a trustee in bankruptcy will usually try to identify creditors whose claims 

were in existence at the time of the transfer. Cf. 8-9A-5 (present creditors) and 8-9A-4 (future 

creditors). Because the Trustee in this case has elected to stand in the shoes of existing creditors, 

the Court will consider Ala. Code § 8-9A-5, rather than § 8-9A-4. 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 12 of 16
-13-

 As we have identified creditors whose rights the Trustee has succeeded to, we must next 

look to “applicable law,” which is the Alabama Uniform Fraudulent Transfer Act. Section 8-9A5(a) of the Code of Alabama, provides as follows: 

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

claim arose before the transfer was made if the debtor made the 

transfer without receiving a reasonably equivalent value in 

exchange for the transfer and the debtor was insolvent at the time. 

 There are four elements to the Trustee’s case: 

 1. Is there a creditor who was in existence at the time the transfers in question were 

made? 

 2. Were transfers made? 

 3. Did the Debtor receive “reasonably equivalent value in exchange for the transfer?” 

 4. Was the Debtor insolvent at the time? 

 The first two elements are established pursuant to stipulations entered into by the parties. 

The fourth element, solvency, was established by Alexander’s testimony and was not disputed in 

the Defendant’s case. Therefore, this case turns on the question of whether the cash transfers in 

question, which total $596,738.60, were made in exchange for reasonably equivalent value. 

B. Reasonably Equivalent Value

 This Adversary Proceeding turns on the question of whether Terry Manufacturing was 

given reasonably equivalent value for the cash transfers in question. Value is further defined, at 

Ala. Code § 8-9A-3, as follows: 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 13 of 16
-14-

(a) Value is given for a transfer if, in exchange for the transfer, 

property is transferred or an antecedent debt is secured or satisfied, 

but value does not include an unperformed promise to furnish 

support to the debtor or another person made otherwise than in the 

ordinary course of the promisor’s business. 

* * * 

(c) A transfer is made for present value if the exchange between 

the debtor and the transferee is intended by them to be 

contemporaneous and is in fact substantially contemporaneous. 

 The facts of this Adversary Proceeding are analogous to the facts of a case handed down 

by the United State Court of Appeals for the Eleventh Circuit sixteen years ago. General Electric 

Credit Corporation of Tennessee v. Murphy (In re: Rodriguez), 895 F.2d 725 (11th Cir. 1990). In 

Rodriguez, a corporate debtor, Domino Investments, Inc., made payments on a loan made to 

International Aviation Investment, Inc., by General Electric. International Aviation had 

purchased a jet airplane financing the purchase with a loan from General Electric. When 

International Aviation could no longer make the payments, Domino Investments made the 

payments for a period of time. International Aviation was a wholly owned subsidiary of 

Domino. The trial court found that General Electric had failed to show that Domino had 

received either a direct or indirect benefit as a result of the transfer. 

 The analysis provided by the Eleventh Circuit in Rodriguez is instructive here. “The 

purpose of voiding transfers unsupported by ‘reasonably equivalent value’ is to protect creditors 

against the depletion of a bankrupt’s estate. (citations omitted). Therefore, this provision does 

not authorize voiding a transfer which ‘confers an economic benefit upon the debtor.’ either 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 14 of 16
-15-

directly or indirectly.” Rodriguez, 895 F.2d 725, 727. Also instructive is this passage from 

Chase & Sanborn. 

It has long been established that “whether fair consideration has 

been given for a transfer is ‘largely a question of fact, as to which 

considerable latitude must be allowed the trier of the facts.’” Mayo 

v. Pioneer Bank & Truste Co., 270 F.2d 823, 829-30 (5th Cir. 

1959)(Wisdom, J.), cert. denied, 362 U.S. 962, 80 S.Ct. 878, 4 

L.ed.2d 877 (1960). The burden of proving lack of “reasonably 

equivalent value” * * * rests on the trustee challenging the 

transfer. (citation to Rodriguez). Nordberg v. Arab Banking 

Corporation, (In re: Chase & Sanborn Corporation), 904 F.2d 588, 

593-94 (11th Cir. 1990). 

 It should be noted that both Rodriguez and Chase & Sanborn are fraudulent conveyance 

cases decided under § 548 and not under State fraudulent conveyance statutes. However, 

operative language of § 548 and Alabama Code § 8-9A-5 is nearly identical. For this reason, the 

analysis provided in Rodriguez and Chase & Sanborn is exceedingly persuasive, if not strictly 

speaking, binding on this Court. The Defendants have cited the Court to the indirect benefit rule, 

citing a case from the Second Circuit. This Court agrees that the indirect benefit rule applies 

here and further finds, as a factual matter upon its independent review of the evidence, that no 

indirect benefit was provided to Terry Manufacturing.4

 Therefore, this Court has considered 

whether an indirect benefit was provided to Terry Manufacturing and finds that one has not. 

 Some of the promissory notes owed by Terry insiders, and paid by Terry Manufacturing, 

were guaranteed by Terry Manufacturing. Thus, it might be argued that Terry Manufacturing 

 

4

 In a decision handed down in 1993, this Court applied the “indirect benefit rule” in a case 

decided under § 547 of the Bankruptcy Code. See, Memory v. Alfa Mutual Fire Insurance 

Company (In re: Martin), 205 B.R. 646, 650 (Bankr. M.D. Ala. 1993)(Steele, C.J.)(Applied 

indirect benefit rule without expressly determining that it applied in that case). 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 15 of 16
-16-

received value by discharging its liability on the guarantee. However, the execution of the 

guarantee agreements by Terry Manufacturing was, in itself, a fraudulent conveyance because it 

is part and parcel of a transfer for which it did not receive consideration. 

 The Defendants cite the Court to decision handed down by the Eleventh Circuit in 

Grissom v. Johnson (In re: Grissom), 955 F.2d 1440 (11th Cir. 1992), as controlling precedent 

here. (Doc. 86, p. 10). As Grissom is no longer good law in light of the Supreme Court’s 

decision in BFP v. Resolution Trust Corporation, 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 

(1994); the Court declines to consider Grissom here. 

III. CONCLUSION

 Terry Manufacturing made payments totaling $596,738.60 to Horton and Reynolds for 

debts owed by the Terry insiders. As the Court has found that no value was received by Terry 

Manufacturing in exchanges for the payments, the payments in question are constructively 

fraudulent and are to be set aside for the benefit of the creditors of Terry Manufacturing. 

Judgment will be entered by way of a separate document. 

 

 Done this 30th day of May, 2006. 

 /s/ William R. Sawyer 

 United States Bankruptcy Judge 

c: Brent B. Barriere, 

 Catherine E. Lasky, Attorneys for Trustee 

 C. Ellis Brazeal, III, Attorney for Defendants 

Case 2:06-cv-00746-WHA Document 2-16 Filed 08/18/2006 Page 16 of 16
UNITED STATES BANKRUPTCY COURT 

MIDDLE DISTRICT OF ALABAMA 

In re: Case No. 03-32063-WRS 

TERRY MANUFACTURING 

COMPANY INC., 

 Debtor. 

J. LESTER ALEXANDER III, TRUSTEE 

 Plaintiff, Adv. Pro. No. 05-3042-WRS 

v. 

N.D. HORTON, JR., AND 

JAMES M. REYNOLDS, III 

 Defendants. 

JUDGMENT

 For the reasons set forth in the Court’s Memorandum Decision of this date, the 

Court finds in favor of the Plaintiff and against Defendants N.D. Horton, Jr., and James 

M. Reynolds, III, in the amount of $596,738.60. 

Done this 30th day of May, 2006. 

 /s/ William R. Sawyer 

 United States Bankruptcy Judge 

c: Brent B. Barriere, 

 Catherine E. Lasky, Attorneys for Plaintiff 

 C. Ellis Brazeal, III, Attorney for Defendants 

Case 2:06-cv-00746-WHA Document 2-17 Filed 08/18/2006 Page 1 of 2
Case 2:06-cv-00746-WHA Document 2-17 Filed 08/18/2006 Page 2 of 2
1 

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

 ) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

COMPANY, INC., ) 

 ) CHAPTER 7 

 Debtor ) 

 ) 

________________________________________________________________________ 

IN RE: ) 

 ) 

TERRY UNIFORM ) CASE NO. 03-32213-WRS 

COMPANY, LLC, ) 

 ) 

 Debtor ) 

________________________________________________________________________ 

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, ) ADVERSARY PROCEEDING NO.: 

INC, AND TERRY UNIFORM ) 05-03042 

COMPANY, LLC ) 

 ) 

VERSUS ) 

 ) 

N.D. HORTON AND JAMES M. ) 

REYNOLDS, III ) 

MOTION TO ALTER OR TO AMEND 

AND/OR FOR FURTHER FINDINGS 

 COME now the defendants, N.D. Horton, Jr. (“Horton”), and James M. 

Reynolds, III (“Reynolds”), and pursuant to Bankruptcy Rules 9023 and 7052, hereby 

move this Court to alter or to amend its judgment and/or to make additional findings of 

fact and conclusions of law. For its motion, the defendants say as follows: 

Case 2:06-cv-00746-WHA Document 2-18 Filed 08/18/2006 Page 1 of 4
2 

 1. By Judgment dated May 30, 2006, this Court rendered a judgment 

in favor of the Trustee and against defendants Horton and Reynolds. The basis for this 

judgment is set forth in this Court’s Memorandum Decision of like date. 

 2. Pursuant to Rule 9023, the defendants request this Court to 

reconsider its decision and to vacate the judgment for all of the reasons set forth in the 

defendants’ proposed Order of Judgment (Doc. 86). 

 3. More specifically, but without limitation, the defendants request 

this Court to address their arguments regarding: 

 a) the source of the funds (para. F. in Doc. 86); 

 b) Ala. Code §§ 8-9A-8 (para. H in Doc. 86); and 

 c) the efficacy of the guaranties. 

4. First, pursuant to the case of Royal Crowne Bottlers of North 

Alabama, Inc., vs. Garrett 23 B.R. 28 (Bkrtcy. N.D. Ala. 1982), this Court must 

determine the source of the funds utilized to pay the defendants. This seems particularly 

imperative where the Trustee contends that extensive commingling occurred, and Mr. 

Horton and American Real Estate loaned millions of dollars to Terry Manufacturing 

Company, Inc. (“TMC”). Without requiring the Trustee to bear this burden, this Court is 

ordering Mr. Horton and Mr. Reynolds to re-pay funds that may have originated from 

their own coffers. 

 4. Second, under Alabama Code Section 8-9A-8(d), a good faith 

transferee is entitled to an offset to the extent of value given to the debtor for the transfer 

“or to another person as a consequence of the debtor making such transfer.” It is clear 

that the benefit conferred on another, namely the reduction in the Terrys’ liability on the 

Case 2:06-cv-00746-WHA Document 2-18 Filed 08/18/2006 Page 2 of 4
3 

Notes, occurred as the result of the consequence of TMC making such payments on the 

Notes. It is further clear that a reduction in debt constitutes value under Alabama Code 

Section 8-9A-3(a). Therefore, Horton and Reynolds are due an offset which negates any 

award to the Trustee. 

 6. Finally, the Court found that the guaranties submitted by TMC 

regarding the stock loans were fraudulent conveyances as well. However, it is 

undisputed that TMC obtained several million dollars on the same day that TMC 

executed the guaranties at issue. There was no evidence to suggest that the several 

million dollars did not constitute reasonably equivalent value for the execution of the 

guaranties. 

 7. Pursuant to Rule 7052, even if this Court does not vacate the 

judgment against Horton and Reynolds, this Court should render further findings of fact 

and conclusions of law regarding issues a) and b) set forth in paragraph 3 hereof. 

 WHEREFORE, premises considered, N.D. Horton, Jr. and James M. 

Reynolds, III, respectfully request this Court to reconsider and vacate its Judgment and 

Memorandum Decision of May 30, 2006, and/or to render further findings of fact and 

conclusions of law. The Defendants pray for such further and other relief as this Court 

may deem appropriate. 

\s\ C. Ellis Brazeal III

C. Ellis Brazeal III 

Attorney for N.D. Horton, Jr., and 

James M. Reynolds, III 

Case 2:06-cv-00746-WHA Document 2-18 Filed 08/18/2006 Page 3 of 4
4 

OF COUNSEL:

WALSTON, WELLS & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Motion to Alter or 

to Amend and/or for Further Findings has been served via electronic filing purposes 

and/or by placing same in the United States mail, properly addressed and postage 

prepaid, as follows: 

Catherine E. Laskey 

Phelps Dunbar LLP 

City Plaza 

445 North Boulevard 

Suite 701 

Baton Rouge, LA 70802-5707 

This the \9th\ day of June, 2006. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

 

Case 2:06-cv-00746-WHA Document 2-18 Filed 08/18/2006 Page 4 of 4
NO.99609916.2 

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

IN RE: ) 

) 

TERRY MANUFACTURING ) CASE NO. 03-32063-WRS 

 COMPANY, INC. ) 

) CHAPTER 7 

 Debtor ) 

 ) 

 ______________________________________ 

IN RE: ) 

) CASE NO. 03-32213-WRS 

TERRY UNIFORM ) 

 COMPANY, LLC, ) CHAPTER 7 

) 

Debtor. )

 ______________________________________

J. LESTER ALEXANDER, III, ) 

TRUSTEE OF TERRY ) 

MANUFACTURING COMPANY, INC. ) 

AND TERRY UNIFORM ) 

COMPANY, LLC ) ADVERSARY PROCEEDING 

) NO. 05-03042 

VERSUS ) 

) 

N.D. HORTON, JR. AND JAMES ) 

M. REYNOLDS, III ) 

TRUSTEE’S OPPOSITION TO THE MOTION TO ALTER OR TO AMEND 

AND/OR FOR FURTHER FINDINGS FILED BY DEFENDANTS

Trial of this adversary proceeding was conducted over two days with the Court 

admitting numerous exhibits and accepting 14 stipulations from the parties. At the 

Court’s request, the Trustee and Defendants then submitted extensive proposed findings 

of fact and conclusions of law. Approximately one month later the Court issued a 

detailed sixteen-page decision in which it concluded, inter alia, that the Trustee had 

sustained his burden of proof that transfers to the Defendants constitute fraudulent 

conveyances under both the Alabama Fraudulent Transfer Act and the Bankruptcy Code, 

and granted judgment in favor of the Trustee. 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 1 of 10
- 2 - 

NO.99609916.2 

Acting under the guise of Rule 7052 motion, Defendants seek a complete reversal 

of the Court’s decision. Specifically, Defendants assert: 

(1) The Trustee was required, but failed to demonstrate that funds paid to 

Defendants were the funds of Terry Manufacturing; 

(2) The Court failed to recognize that relieving Terry Manufacturing insiders 

of debts owed to Defendants constituted reasonably equivalent value to Terry 

Manufacturing; and 

(3) The Court erred in concluding that other loans to Roy and Rudolph Terry 

constitute reasonable value for transfers made by Terry Manufacturing notwithstanding 

Mr. Horton’s often repeated testimony that those loans and payments were completely 

unrelated. 

What Defendants seek is nothing less than a new trial followed by reversal. That 

relief is generally not available under Rules 9023 and 7052 and is particularly 

inappropriate under the facts of this case. 

1. The Standard For Relief Under Rules 7052 and 9023. 

Reconsideration of a judgment “is an extraordinary remedy to be employed 

sparingly in the interests of finality and conservation of scarce judicial resources.” 

Wendy’s Int’l v. Nu-Cape Construction, 169 F.R.D. 680, 685 (M.D. Fla. 1996). Courts 

considering motions which demand substantive changes to the judgment1

 and are brought 

pursuant to Bankruptcy Rule 9023 or Rule 59(e) of the Federal Rules of Civil Procedure 

have held that such motions should only be granted when there is: “(1) an intervening 

change in controlling law; (2) the availability of new evidence; and (3) the need to correct 

 

1 As discussed infra, the Trustee has sought amendment to the judgment to grant pre-judgment 

interest and costs. A request for this sort of ministerial relief is subject to a far less exacting standard. 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 2 of 10
- 3 - 

NO.99609916.2 

clear error or manifest injustice.” Wendy’s Int’l, 169 F.R.D. at 684; Sussman v. Salem, 

Saxon and Nielsen, 153 F.R.D. 689, 694 (M.D. Fla. 1994). More specifically, 

“reconsideration under Fed. R. Civ. P. 59(e), made applicable here by Bankruptcy Rule 

9023, is merited when there has been a clear error or manifest injustice in an order of the 

court or if newly discovered evidence is unearthed.” In re Bird, 222 B.R. 229, 235 

(Bankr. S.D.N.Y. 1998). Defendants have not alleged that any of those circumstances 

have occurred in this case and, in fact, cannot make such a showing. 

A Rule 59(e) motion should not be used to advance arguments or theories that 

could and should have been made before the court entered judgment. See, e.g., Mincey v. 

Head, 206 F.3d 1106, 1137 (11th Cir. 2000); LB Credit Corp. v. Resolution Trust Corp., 

49 F.3d 1263 (7th Cir. 1995); Concordia College Corp. v. W.R. Grace & Co., 999 F.2d 

326 (8th Cir. 1993); In re Bruetman, 259 B.R. 672, 673-74 (Bankr. N.D. Ill. 2001); In re 

James B Downing & Co., 94 B.R. 515, 523 (Bankr. N.D. Ill. 1988). A Rule 59 motion 

cannot be used to give a party “two bites at the apple.” See American Home Assur. Co. v. 

Glenn Estess & Associates, Inc., 763 F.2d 1237 (11 Cir. 1985). 

In addition to the Defendants’ request that this Court reverse its previously 

rendered judgment, the Defendants’ Motion asks this Court to make additional factual 

findings pursuant to Bankruptcy Rule 7052. That Rule and its counterpart, Federal Rule 

of Civil Procedure 52, “are essentially designed to create a record upon which the 

appellate court may obtain the necessary understanding of the issues to be 

determined....”. The rules are not to be employed to create “findings more favorable to 

[the movant”], rather than for the purpose of creating more accurate findings for purposes 

of appellate review. Rule 52(b) is not to be used to obtain a rehearing on the merits nor 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 3 of 10
- 4 - 

NO.99609916.2 

to relitigate old questions and such a motion may not be used to raise arguments which 

could have been made in advance of the prior court's ruling.” Midwestone Bank and 

Trust v. Commercial Federal Bank, 331 B.R. 802, 813 (S.D. Iowa 2005) (citing Gutierrez 

v. Ashcroft, 289 F.Supp.2d 555, 561 (D.N.J. 2003) and Diocese of Winona v. Interstate 

Fire & Cas. Co., 89 F.3d 1386, 1397 (8th Cir.1996)). 

 Rule 7052 does not require this Court to make any further factual findings or 

conclusions of law in this matter. “An issue that is distinctly presented in the pleadings 

and necessarily resolved may be reflected in the decision that includes that point, 

although it may not be expressly mentioned in the decision.” Grubb v. Public Utilities 

Commission, 281 U.S. 470 (1930). 

1. Defendants Stipulated That the Funds Received By Them Were Paid From 

 Accounts of Terry Manufacturing. The Trustee Did Not Have the Burden 

 of Disproving the Unsubstantiated Theory – First Suggested in Defendants 

 Present Motion – That Funds Loaned by Defendants May Have Been 

 Used For Payments to Them. 

For the first time in this litigation, the Defendants now assert that the Trustee did 

not bear his burden of determining “the source of the funds utilized to pay the 

defendants.” Motion at ¶ 4. The Trustee proved, and the Defendants did not dispute, that 

all payments to the Defendants were made from Terry Manufacturing’s accounts. In fact, 

the Defendants’ expert witness, Jesse Slaton, testified regarding his elaborate tracing 

analysis, but never suggested that any funds other than those of Terry Manufacturing 

were used to pay the Defendants. The Defendants’ attempt to raise this issue for the first 

time at this late date is untimely and improper as the Defendants have presented no new 

evidence to substantiate this claim. 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 4 of 10
- 5 - 

NO.99609916.2 

The Defendants’ reliance upon Royal Crowne Bottlers of North Alabama v. 

Garrett for this proposition is also untimely and misplaced. 23 B.R. 28 (Bankr. N.D. Ala. 

1982). First, because Royal Crowne was decided in 1982, it is certainly not “an 

intervening change in controlling law.” In addition, there is no dispute in this case that 

the funds paid to the defendants came from Terry Manufacturing’s accounts. The parties 

specifically stipulated to that fact. See Paragraphs 5, 12 and 13 of the Stipulated Facts, 

May 30th Memorandum Decision. 

2. The Court Properly Rejected the Novel Theory That Relieving Insiders of 

 Indebtedness Owed to Defendants Constitutes Reasonably Equivalent 

 Value to Terry Manufacturing. 

 The Defendants attempt to reassert their previously rejected argument that under 

the Alabama Fraudulent Transfer Act, if the transferee gives value to a third person in 

consideration of the transfer by the debtor, the value given by the transferee is set off 

against the value of the property the transferee received from the debtor. Specifically, the 

defendants argue that as a result of the payments by Terry Manufacturing, the Cotina 

Terry Notes and Allie Robinson Notes were paid in full, and the balance of the 

Roy/Rudolph Terry Note was substantially reduced. The Terry family members received 

a benefit by the reduction of their indebtedness to Horton and Reynolds. This “benefit,” 

defendants argue, must be offset against any liability Horton and Reynolds may have to 

the Trustee. 

 The Trustee already addressed this issue in his Proposed Findings of Fact and 

Conclusions of Law and addresses it here only to restate that under the Defendants’ 

reading of the statute, creditors will have no remedy when insiders cause the debtor to 

make transfers which solely benefit the insiders. Indeed, if the Defendants are correct, an 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 5 of 10
- 6 - 

NO.99609916.2 

insider may cause a corporate debtor to employ all of its assets in transactions for which 

the debtor receives absolutely no benefit and those transfers will be effectively immune 

from attack as long as the insiders receive some benefit. This would completely 

eviscerate any possibility of recovering fraudulent transfers involving insiders and as this 

Court recognized is an untenable and erroneous interpretation of the law. 

 As this Court recognized, the various “benefits” supposedly received by Terry 

Manufacturing and cited by the defendants do not constitute value given in exchange for 

the payments made by Terry Manufacturing. Further, this Court explicitly held that it 

agrees that the 

indirect benefit rule applies here and further finds, as a factual matter upon 

its independent review of the evidence, that no indirect benefit was 

provided to Terry Manufacturing. Therefore, this Court has considered 

whether an indirect benefit was provided to Terry Manufacturing and finds 

that one has not. 

Memorandum Decision at page 15. This Court unequivocally rejected the Defendants’ 

indirect value theory and their novel interpretation of the Alabama Fraudulent Transfer 

Act. The Defendants’ Motion provides no valid reason for a reconsideration of those 

findings. 

3. Defendants Are Badly Mistaken That The Evidence Established That 

 Loans to Roy and Rudolph Terry Were Tied to the Payments At Issue; On 

 the Contrary, Mr. Horton Repeatedly Acknowledged That the Loans and 

 Payments Were Entirely Unrelated. 

This Court also repeatedly rejected the defendants’ arguments that the Perky Cap 

stock purchases by Roy and Rudolph Terry, the Perky Cap stock purchases by Cotina 

Terry and Allie Robinson, or the loan from the Peoples Bank were related to or “given in 

exchange for the payments in question on the indebtedness owed by the Terry insiders.” 

See, e.g., Memorandum Decision at pages 8-9 (“Horton testified at trial that he would not 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 6 of 10
- 7 - 

NO.99609916.2 

have made the loans to Cotina Terry and Allie Robinson for the purchase of the Perky 

Cap stock, but for the repayment of the loan by Terry Manufacturing. Horton’s claim is 

wholly lacking in logic....None of this documentary evidence suggests any relationship 

to the Cotina and Allie loans.”); Memorandum Decision at 10 (“The problem with all of 

the Defendants’ arguments which contend that value for the payments in question was 

given in the form of one or more loans to Terry Manufacturing is that there is no credible 

evidence that this is so.”); Memorandum Decision at 16 (“...the execution of the 

guarantee agreements by Terry Manufacturing was, in itself, a fraudulent conveyance 

because it is part and parcel of a transfer for which it did not receive consideration.”). 

This Court found unequivocally that the stock purchases, loans or guarantees 

provided no value in exchange for the payments made by Terry Manufacturing to the 

defendants. Neither Rule 9023 nor Rule 7052 require this Court to make any further 

factual findings or conclusions of law on this issue because the defendants’ Motion 

offered no additional evidence, changes in the law nor proof of clear error. 

 4. The Trustee’s Motion to Alter or Amend Seeks Ministerial Relief Which 

 May Be Granted Under Rule 9023 Relief. 

 The Trustee also filed a Motion to Alter or Amend requesting that the judgment 

include an award of interest and costs in its judgments. As more fully detailed in that 

Motion, the Trustee’s Motion asks this Court to address a purely ministerial issue that is 

provided for under the Federal Rules of Civil Procedure and Bankruptcy Rules. The 

Trustee’s Motion, unlike the Motion filed by the defendants, does not require any 

additional findings of fact or conclusions of law or reversal of this Court’s prior findings 

on substantive issues. 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 7 of 10
- 8 - 

NO.99609916.2 

 In fact, the Trustee’s motion seeking costs need not rely upon Rule 59 of the 

Federal Rules of Civil Procedure. “A motion respecting costs is not a motion to alter or 

amend a judgment under Rule 59. Rule 59 applies to motions for reconsideration of 

matters encompassed in a decision on the merits of the dispute, and not matters collateral 

to the merits. A motion for costs does not seek reconsideration of substantive issues 

resolved in the judgment, but relates exclusively to the collateral question of what is due 

because of the judgment.” Lucas v. Florida Power & Light Co., 729 F.2d 1300, 1301 

(11th Cir. 1984). 

 In fact, the United States Supreme Court has held that a post judgment motion for 

costs seeks “only what was due because of the judgment....Assessment of such costs 

does not involve reconsideration of any aspect of the decision on the merits. Under Rule 

54(d), the ‘prevailing party’ automatically is entitled to costs ‘unless the court otherwise 

directs.’....we are satisfied that a motion for costs filed pursuant to Rule 54(d) does not 

seek ‘to alter or amend the judgment’ within the meaning of Rule 59(e). Instead, such a 

request for costs raises issues wholly collateral to the judgment in the main cause of 

action, issues to which Rule 59(e) was not intended to apply.” Buchanan v. Stanships, 

Inc., 485 U.S. 265, 268-69 (1988). See also, White v. New Hampshire Dept. of 

Employment Security, 455 U.S. 445, 450 n.9 (1982); United States. v. Real Property and 

Residence Located at Route 1, Box 111, Firetower Road, Semmes, Mobile County, 

Alabama, 920 F.2d 788, 791, n. 4 (11th Cir. 1991); Samaad v. City of Dallas, 922 F.2d 

216 (11th Cir. 1991); Alimenta v. Anheuser-Busch Companies, Inc., 803 F.2d 1160, 

1162-63 (11th Cir. 1986). 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 8 of 10
- 9 - 

NO.99609916.2 

 Similarly, post-judgment interest is statutorily mandated (28 U.S.C. § 1961) and 

therefore “does not involve reconsideration of any aspect of the decision on the merits.” 

See, e.g., Lorenzen v. Employees Retirement Plan of the Sperry and Hutchinson Co., Inc., 

896 F.2d 228, 233 (7th Cir. 1990) (holding that “a request for post judgment interest is 

plainly not an attempt to alter or amend the judgment”). The Trustee’s request for prejudgment interest is properly styled as a Rule 59 Motion, but unlike defendants’ Motion, 

does not ask the Court make any additional findings on substantive issues and causes of 

action already fully considered by the Court. 

 For the foregoing reasons, the Trustee respectfully requests that this Court deny 

the defendant’s Motion to Alter or Amend and/or for Further Findings and affirm its May 

30, 2006 judgment in its entirety. 

 Respectfully submitted, 

 PHELPS DUNBAR LLP 

 By: /s/ Catherine E. Lasky 

 Brent B. Barriere, T.A. (La. Bar No. 2818) 

 David L. Patrón (La. Bar No. 22566) 

 Catherine E. Lasky (La. Bar No. 28652) 

 365 Canal Street, Suite 2000 

 New Orleans, Louisiana 70130-6534 

 Telephone: (504) 566-1311 

 Facsimile: (504) 568-9130 

 ATTORNEYS FOR J. LESTER ALEXANDER, 

 III, TRUSTEE 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 9 of 10
- 10 - 

NO.99609916.2 

CERTIFICATE OF SERVICE

 I certify that a copy of the foregoing pleading has been filed into the record and 

further served on the following counsel by facsimile, this 23rd day of June, 2006: 

C. Ellis Brazeal III 

Watson, Wells, Anderson & Berchall LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, AL 35203 

 /s/ Catherine E. Lasky 

Case 2:06-cv-00746-WHA Document 2-19 Filed 08/18/2006 Page 10 of 10
UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF ALABAMA

In re Case No. 03-32063-WRS

 Chapter 7

TERRY MANUFACTURING

COMPANY INC.,

 Debtor

J. LESTER ALEXANDER III, TRUSTEE, 

 Plaintiff Adv. Pro. No. 05-3042-WRS

 v.

N. D. HORTON JR.,

 Defendant

ORDER DENYING MOTION TO ALTER OR AMEND FILED 

BY THE DEFENDANTS AND GRANTING IN PART AND 

DENYING IN PART PLAINTIFF’S MOTION TO ALTER AND AMEND

This Adversary Proceeding came before the Court for a telephonic hearing on July 11,

2006, upon the Motion to Alter and Amend filed by Defendants N.D. Horton, Jr., and James M.

Reynolds, III, (Doc. 91); and upon the Motion to Alter and Amend filed by Plaintiff J. Lester

Alexander, III. (Doc. 90). The Plaintiff was present by counsel Brent B. Barriere and the

Defendants were present by counsel C. Ellis Brazeal, III. The Court would note that these

matters first came on for hearing on June 27, 2006. These motions have been briefed. (Doc. 99,

100).

For the reasons set forth on the record, both on June 27, 2006, and on July 11, 2006, the

Motion to Alter and Amend filed by the Defendants is DENIED.

Case 2:06-cv-00746-WHA Document 2-20 Filed 08/18/2006 Page 1 of 2
For the reasons set forth on the record, both on June 27, 2006, and on July 11, 2006, the

Motion to Alter and Amend filed by the Plaintiff is GRANTED insofar as the Plaintiff contends

that he is entitled to costs. The motion is DENIED insofar as the Plaintiff seeks an award of

prejudgment interest.

 Done this 17th day of July, 2006.

/s/ William R. Sawyer

United States Bankruptcy Judge

c: Brent B. Barriere, Attorney for Plaintiff

 C. Ellis Brazeal III, Attorney for Defendant

Case 2:06-cv-00746-WHA Document 2-20 Filed 08/18/2006 Page 2 of 2