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‘Straw man’ Lawsuit Reveals Complex Baldwin Business Partnerships

By Rob Holbert & Gabe Tynes

If you were nosing through Baldwin County land sales records and happened across a particular sale of 247 acres of real estate near Magnolia Springs, you’d have reason to believe Oct. 28, 2005 was a very good day for Hopper Land Development South LLC.

On that day, a company founded just weeks earlier appears to have purchased that property for $2.4 million from a local farming family, then turned around and sold it the same day for twice the money. On paper at least, it might look like Hopper LDS made an astonishing score that day, but in reality that transaction set into motion a four-year-long lawsuit that went to the Alabama Supreme Court and back in an attempt to prove that some of Baldwin County’s biggest movers and shakers had concocted a scheme to defraud another local businessman of millions.
The case of Bass Enterprises LLC and Phillip Bass v. Pennstar LLC, Alabama Capital, Clarence Burke and David Delaney — to name the most important defendants — was decided by Baldwin County Circuit Court Judge Joseph Norton in 2017 when, just before the trial, the judge issued a summary judgment on the defendants’ behalves and subsequently sealed much of the information contained in court records.

But Bass and his attorney Will Chason appealed the case to the Supreme Court, where in November 2018 it was affirmed in favor of the defendants, but without opinion, essentially closing the books on Bass’ attempt to claim he was defrauded. But the two sides remained locked in legal action known as a “sale for division” to allow them to split the property. And they’re still fighting over the way the original deal went down.

On June 5, Pennstar filed an intent to purchase Bass’ part of the property and the litigants last met in circuit court July 23, with Norton ordering them to reach an agreement on finding an appraiser. But with no agreement made, a hearing scheduled Aug. 27 will likely consider the terms of having the property appraised, with the possibility it could soon be auctioned on the courthouse steps.

What makes this case of particular interest is not only Bass’ claims that Burke, the president of Baldwin County Sewer Service and a well-known developer in Baldwin County, and Delaney, a prominent South Alabama lender, conspired to use a Ponzi scheme to defraud Bass, but also that those sealed records reveal many of the business and political connections between some of the major players in Baldwin County development over the past two decades, according to charts entered as exhibits in the case that provide a guide through the labyrinth of intermingled companies involved in the case.

The charts were created by Lindsey Boney, a certified public accountant and fraud examiner hired by Bass to provide a guide through the labyrinth of intermingled companies involved in the case. They were put together using bank records, checks and U.S. Department of Housing and Urban Development (HUD) settlement statements, most of which were provided by Pennstar. Neither Burke, Delaney nor attorney Larry Sutley, who now represents Pennstar in the case, responded to multiple attempts to solicit comment for this story.

In 2005, Phillip Bass had recently sold the South Alabama Sewer Service Corporation in Gulf Shores to Baldwin County Sewer Services (BCSS) LLC. According to Boney’s investigation entered into court records, Burke and the Delaneys each controlled 43.5 percent of BCSS. Bass’ lawyer contended that Burke and Delaney knew Bass had been “paid a substantial amount of money for the sewer system and wanted to entice him to invest in other property for the benefit of BCSS and defendants,” according to a complaint initially filed in 2014.

Claiming breach of contract, fraud, misrepresentation, suppression, breach of fiduciary duty and civil conspiracy, among other things, at the complaint’s core is a deal Burke presented to Bass whereby they would partner in the purchase of 247 acres near Magnolia Springs that Burke had identified as a prime location for a wastewater treatment facility.

They would each pony up half the $4.88 million purchase price — $20,000 an acre — and Burke would immediately begin the permitting process through the Alabama Department of Environmental Management (ADEM). Once the permits were issued, Burke would then buy back Bass’ half of the property for his initial investment plus $300,000 more.

So on that day near the end of October 2005, Bass provided more than $2.44 million for his half-share of the property. But the complaint contends Burke, without informing Bass, actually arranged to buy the property for a total of $2.44 million through the use of a “straw man,” Hopper Land Development South LLC. Therefore, the money Bass put up represented the total amount paid to the Nolte family, the sellers.

According to court records, Pennstar also borrowed $700,000 from Delaney’s company Alabama Capital on Oct. 10, 2005, using it to buy the assignment of a purchase contract between two men — Bill Springer and Michael Weiss — who had previously agreed to purchase the property for $10,000 an acre. That brought the total amount paid for the property that day to more than $3.1 million, with Bass putting in 77 percent of the money, but both sides getting 50 percent of the ownership according to court records.

As for Wayne Hopper, the namesake of Hopper Land Development, those involved with the case claim he netted a mere $1,000 for his part in that day’s transactions. Hopper was brought into the plan by his old college roommate, former Baldwin County Commissioner Tucker Dorsey, who has worked for and partnered with Burke for years, even during his time on the commission.

According to a summary of the argument filed with the appeal, “a purported 50/50 deal was not a 50/50 deal in reality,” while the sales price was also falsified twice on federal HUD settlement statements. The day before closing, HUD statements signed by Burke and Bass represented both sides paying $2.44 million apiece for the property.

While records show $5.5 million went to closing, including the $700,000 for Springer and Weiss and the two checks from Pennstar and Bass, Bay Title then wrote a $2.4 million check back to Hopper Land Management South, which was owned by Pennstar. Bank records entered into evidence actually show the check Pennstar wrote for the transaction bounced.

Now the two sides are left trying to divide the land, with Bass claiming 77 percent of the property and Pennstar claiming 50 percent.

‘Straw man’ Lawsuit Reveals Complex Baldwin Business Partnerships

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‘A well-planned scheme’

The original complaint states that Bass would not know the actual purchase price of the property for nearly a decade after Hopper Land Management South was used as a “straw company,” as he was repeatedly reassured by Burke the ADEM permits for the new sewer plant were pending. Bass was also unaware Pennstar, BCSS and Hopper Land Development were one in the same, with Burke and the Delaney family controlling equal shares, according to Boney’s investigation.

“None of the defendants have disputed that it was expressly misrepresented that both Pennstar and Bass were paying $2,442,535 for a 50-percent interest based on a fictional contract sales price of $4,880,000,” the appeal continued. “Instead, the defendants attempt to allude the evidence, misdirect the court, reframe the issues and mischaracterize the nature of the fraud claims. None of the defendants deny … the overall business plans alleged and supported by Bass … Hopper Land, owned by Pennstar and controlled by Burke, Dorsey, David (Delaney) and Michael (Delaney), used Bass’ money to pay for the property. It was an undetectable, well-planned scheme.”

Also, it wasn’t long after Burke’s company obtained control of the Nolte property that he was using it as collateral for loans with Alabama Capital, a financial lending company owned and operated by the Delaney family. Burke had a history of borrowing from Alabama Capital, and the Delaneys owned an equal stake in Baldwin County Sewer Service, according to a flow chart showing Burke and the Delaneys shared ownership of multiple companies. The Nolte’s Magnolia Springs property, paid for mostly by Bass, became part of the Burke-Delaney relationship.

According to an affidavit by David Delaney, on Oct. 10, 2005, Pennstar executed a mortgage in favor of Alabama Capital LLC pledging lots in the Islandwood Subdivision as security for a $700,000 loan. Eighteen days later the Noltes sold their property to Hopper Land Development Services and later that day Hopper sold the property to Bass Enterprises and Pennstar.

On Dec. 15, 2005, Pennstar executed a mortgage in favor of Alabama Capital pledging lots in the Islandwood Subdivision for an underlying debt of $2,005,000. Also on that date, Pennstar gave Alabama Capital an “additional security mortgage” pledging Pennstar’s half-interest in the Nolte Property as security for the original $700,000 loan.

A couple of years later, on Jan. 3, 2007, Pennstar gave a mortgage to Alabama Capital pledging half-interest in the Nolte property and other collateral as security for a $1.7 million loan, according to Delaney’s affidavit. And almost two years later, on Dec. 31, 2009, Pennstar and Alabama Capital entered into a “cross collateralization agreement” clarifying “certain real property collateralized certain pre-existing debt obligations” owed by Pennstar to Alabama Capital.

In mid-December of 2015, Baldwin County probate records reflect that Burke, through Pennstar LLC — which Exhibit C in the appeal claims to be equally owned by companies controlled by Burke and the Delaneys — granted a $700,000 mortgage on the property to Alabama Capital, owned by the Delaneys. A little over a year later, in January 2007, Burke and Pennstar would again secure a loan with the Delaneys’ company — this time for $1.4 million — using the property as collateral. Bass’ complaint says he remained totally unaware the land in which he’d sunk $2.4 million was now security for more than $2 million in loans.

In August 2006, Bass Enterprises entered into a purchase agreement with Pennstar and Burke in which Bass would receive $3,087,500 for his half of the property — a profit of more than $500,000 — once the ADEM permits were finally approved. But the purchase agreement fell through and Bass’ suit claims Burke never obtained the permits or even showed proof of applying for them, even while suggesting he had.

“Pennstar LLC and Clarence Burke represented to me that Baldwin County Sewer Systems LLC intended to develop a wastewater treatment plant on the Nolte property. It was understood and agreed that I would get my investment returned when BCSS acquired the necessary permits from the Alabama Department of Environmental Management and other regulatory departments,” Bass stated in a July 2014 affidavit.

He went on: “During the 2006-2013 time period, I occasionally discussed my investment with Mr. Burke. In response, he always eased my concerns by representing to me that the permitting process was ongoing.”

Bass claims that in 2013 he went to Burke’s office with his wife and expressed a desire to have his investment returned, only to learn the earnest money deposited with Bay Title per the terms of the contract “was not, in fact, deposited.”

“Prior to the lawsuit, Bass clearly had no idea that Hopper Land was owned by Pennstar,” the appeal stated. “It took Burke 18 pages of deposition transcript to answer, albeit incorrectly, how much Pennstar paid for its 50-percent interest in the property.”

In pretrial motions, the Delaney defendants actually asked the court to stop Bass’ attorneys from referring to Hopper Land Development South as a “sham company” or “straw man,” but that is how Dorsey referred to it in an interview last year with Lagniappe. He said Hopper LDS was used in order to conceal from the Noltes that they would be selling their property to Clarence Burke for fear the price would be increased as he was one of the county’s bigger developers at the time.

“There were times when he was kind of trying to be more anonymous than running through the front door with Elite Development or Wolf Creek Industries, something everyone knew was him,” Dorsey said. “For some reason — I don’t remember what the reason was — we had another deal where he thought he’d gotten crossed up with the Noltes and he felt like they wouldn’t sell the land if they thought it was him, so we were looking for an intermediary company to screen him from the purchaser.”

He went on to say, “That was the only time we built a straw company like that.”

As for why the property sale price increased by more than $2.4 million on the same day, Dorsey pointed to the white hot real estate market in Baldwin in the mid-2000s.

“Real estate was going pretty crazy back then,” he said.

In a deposition, David Delaney denied having knowledge of the deal, but Bass’ lawyers said handwritten notes, obtained via subpoena, indicate otherwise. As part of a larger plan between Burke, the Delaneys and other investors, Bass suggested the construction of the new sewer plant in Magnolia Springs hinged on closing the existing sewer plant on Fort Morgan Road south of Oyster Bay, then developing that site into a marina with commercial, retail and residential properties.

According to Boney’s investigation, a company called The Oyster LLC was formed to oversee that development and was owned 45 percent apiece by Pennstar LLC and Cunningham & Foley Land Development Inc. and 10 percent by Dorsey.

But during deposition, Delaney was asked to identify and describe any companies, organizations or entities in which he and Clarence Burke shared common financial or ownership interests, directly or indirectly. He said he and Burke both owned common stock in Benchmark Homes Inc. and denied having any other shared common financial or ownership interest.

In an affidavit, Delaney said Alliance Ltd. was a non-managing member of Pennstar until 2009, when it sold its 50-percent interest to Burke for $10. Alliance is a general partner of Small Business Management Corporation (SBMC), which is the managing member of Alabama Capital LLC, owned by the Delaneys, according to Boney’s examination. Boney also found that at the time of the Nolte deal, Alliance and Burke also had equal shares in Pennstar, BCSS and Hopper Land Development.

One family’s perspective
Perhaps the best narrators of the deal and the years of litigation since is Phillip Bass’ wife, Nell “Boots” Bass, and their daughter, Karen Bass. In an interview earlier this month, they described Phillip’s relationship with Burke before and after the sale and claimed the family was lured into the scheme in 2005, only to be kept ignorant of it until 2013.

Phillip Bass, they disclosed, is increasingly suffering from Alzheimer’s and other health problems, which Boots largely attributes to the case. But since they met in first grade through the nearly 60 years of marriage that she has been by his side, Boots described Phillip as a “fast learner” and capable man who built South Alabama Sewer Corporation from the ground up after recognizing a need in Gulf Shores.

“We started South Alabama when Gulf Shores didn’t even have a system,” Boots said. “They were emptying into a treatment pond and all of Gulf Shores was under a moratorium.”

Phillip Bass made a “sizable” investment into a treatment plant, lift stations, lines and personnel, quickly expanding the company’s footprint into Orange Beach and Foley. Burke, who was building subdivisions, became a frequent contact for establishing new customers.

“Clarence was going to build two subdivisions in Magnolia Springs, but there were no lines on the property or leading to the property where he was going to build the subdivisions,” Boots said. “My husband has always been a very generous individual. So he made a deal with Clarence. He said, ‘you run the lines and I will give you back the tap fees … then I will take possession of the lines.’ So it was perfect for Clarence. He got his subdivisions because he was paid back for running the lines. We got the lines. That was the first time Clarence started looking into how much money you can make off of sewer. That was when … he saw himself as the next sewer czar.”

Although Phillip had been approached by the city of Gulf Shores about purchasing the plant, Boots recalled, “they just did not see the value in it. So that never went anywhere.”

Instead, “I think Delaney saw it because they were into Benchmark Homes and [Burke] would run the lines, build the homes, but they still had to have sewer. Benchmark was doing a tremendous amount of business and they were running all over the county, so it was right after that, they started figuring [the value] out.”

Soon after BCSS purchased South Alabama in a stock sale, Boots said the company substantially raised its rates. But the transfer of ownership and separate negotiations for the purchase of the Fort Morgan property were smooth, so Phillip had no reason to be suspicious of Burke’s motives when he was approached for an investment in the Nolte property.

“I had asked [Phillip] not to not do a deal with Delaney and Clarence without my being involved,” she recalled. “But he did the $2.4 million. And I noticed when the bank statement came in and he explained to me, ‘Don’t worry, this is a good deal. They’ve assured me when they get the permits we’re not only to get the $2.4 million back, but we’re going to get a $300,000 kicker.’”

So in the years afterward, Boots thought little of it. But as Phillip began to experience vision problems around 2013, he asked her to take over the family’s taxes and forward them to their accountant.

“In 2013 … my goodness, there was [that $2.4 million], still outstanding,” she said. “And I said, ‘[Phillip], I’m going to get this land appraised and put our half up for sale.’”

They hired appraiser Les Farmer, whose work typically entails researching probate records on the property before determining a value. It was there Farmer found documents inconsistent with his knowledge of the property’s ownership.

“Farmer started calling about finding all of these things about Hopper Land Development,” Boots continued. “It was opened up and it remained in business I think for two months before it was closed. In that time the Delaneys had paperwork done where they really owned it. So when [the deal] closed, it was the Delaneys that were getting the money. They took ownership of Hopper Land Development.”

Indeed, evidence admitted in the case indicates that along with the $1,000 payment for acting as manager for Hopper Land Development, the Delaneys and Burke offered Wayne Hopper an indemnification agreement holding him harmless from any claims or liability as a result of his role.

“They indemnified him because they knew what they were doing was fraud,” Boots suggested, noting Hopper was living in Atlanta at the time. “And across state lines, no less.”

For his part, Hopper said his involvement was limited and he was “just doing a favor for a friend” when Dorsey asked him to act as a “straw man” for the deal.

The lawsuit was beset by delays and Norton’s judgments were often in favor of the defendants, but as Bass’ legal team took depositions and gathered evidence in the case, Boots said Phillip became more aware he was taken advantage of.

“When he began to find out he had been defrauded by people he thought were friends, then I think he had a nervous breakdown,” Boots said. “When he sat in those depositions and heard what Clarence and Tucker had to say about him, it just really affected him … So I myself, personally, blame them for everything that my husband is going through now.”

Bass’ own deposition in 2015 was contested as it became apparent he could not recall relevant facts due to the onset of dementia and Alzheimer’s. The plaintiffs did not argue on behalf of Phillip’s deposition — “We didn’t need it. We already had everything in writing.” — but as part of a 2017 motion to have the case dismissed, the defendants also challenged Boots’ durable power of attorney, even requesting the court appoint a guardian over her husband.

“The defendants tried to get custody of my husband,” she said. “Can you believe anyone would go that far?”

Norton eventually denied all relief on the question of Bass’ competency, but the episode was one of many in the case that left Boots with the impression “this whole thing has been such a despicable experience.”

“You know, I don’t understand the mind or the integrity of people like this, but they didn’t get here by being nice people,” Boots said. “It’s just a story of greed. People who had everything going for them, but it wasn’t enough … The sad thing to me is — and I’ve always believed — [Phillip] thought these people were his friends.”

Pointing fingers

In affidavits between 2014 and 2017, David Delaney kept his business relationship with Burke at arm’s length.

“Various entities owned by the DeLaney family began financing Clarence Burke, entities owned by Clarence Burke, and many other small businesses as a federal licensee under the Small Business Investment Act of 1958 … Our equity financings have always been carefully utilized in a non-controlling, non-managerial and passive manner,” he wrote in 2014.

 
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