K. Vaughn Knight failed to disclose in a 2008 bankruptcy petition that a business owned by his client, former Northwest Arkansas developer Brandon Barber, netted more than $4 million that year, a U.S. bankruptcy trustee testified Wednesday.
Terry Lee of Siloam Springs, testifying in the third day of Knight’s trial in federal court, said EIA International LLC was not on the list of 25 Barber-controlled businesses or entities in the bankruptcy petition that Knight filed on Barber’s behalf on July 31, 2008.
Testimony during the trial showed that Barber used the limited-liability company in two real estate transactions in 2008. One, called the Ball Park or Outfield transaction netted $3.2 million for Barber, the sole owner of the company, and the other, called the Spring Creek land sale, netted nearly $900,000.
Under questioning by First Assistant U.S. Attorney Wendy Johnson, Lee said that Barber was required to disclose any businesses that he had owned and operated within six years of filingthe bankruptcy petition.
Knight is on trial on charges of conspiracy to commit bankruptcy fraud, bankruptcy fraud, making false statements and five counts of money laundering.
Lee also said the bankruptcy petition did not disclose information about the money held for Barber in Knight’s lawyers trust account, which is used by attorneys to hold clients’ money for safe keeping.
Money in the account included nearly $689,000 from the Ball Park land transaction from March 31, 2008. Barber obtained the money in the land “flip” deal in which his EIA purchased 28 acres from John David Lindsey Development LLC for $2 million and sold it the same day for $3.2 million to Outfield Development LLC owned by developer Bob Gaddy.
The $689,000 was part of the $1.2 million profit from the deal.
Lee said he learned of the existence of EIA when searching for the $689,000 after U.S. Bankruptcy Judge Ben Barry ruled on Nov. 9, 2010, that he would not discharge Barber from his debts. Lee said a footnote in Barry’s order questioned the location of the $689,000, adding that James Van Doren, co-defendant in the case with Barber and Knight, said he never received the money.
A settlement agreement in the March 31, 2008, Ball Park transaction had noted that the $689,000 went to Van Doren’s Epsilon Investments LLC, Van Doren testified Tuesday. Hesaid, though, he did not accept the money and that it went, instead, into Knight’s lawyers trust account.
In response to a Nov. 17, 2010, email from Lee to Knight, Knight - who was Barber’s attorney in the bankruptcy - said he didn’t recall the specifics of the $689,000 in the Ball Park transaction but said he would try to get the information together and report back to Lee.
According to testimony in the trial, Knight was the escrow agent in the Ball Park transaction and the $689,000 went into escrow in his lawyers trust account.
The government produced an email dated Dec. 9, 2010, from Knight to Lee in which Knight stated that the $689,000 grew out of a transaction involving EIA International LLC. Lee said that statement was when he first learned of the existence of EIA International.
Later, he said, Knight sent him the lawyers trust account records involving Barber. Lee said that although he and another attorney studied the records, they never could figure out what money went where.
He also said he never was able to find any assets of Barber’s that were unencumbered by liens and could be used to satisfy his debts to his many creditors.
Johnson also questioned Lee about the income section in the Barber bankruptcy petition. The petition showed that Barber’s income in 2007 from his Barber Group development company was $3,773.17.
For 2008, his income was listed as $714.69 from his NWARE Investments LLC, which Barber had created that year, and $2,712.26 from theBarber Group.
Lee said he raised questions in 2010 about the income Barber and Knight reported because it seemed obvious that Barber could not live on the meager income he reported in his petition. He said he also found it hard to believe that Barber did not have a bank account or a car.
Former Barber employee Stacey McSpadden testified Wednesday that Barber did not drive at that time because he had lost his driver’s license as part of a driving-while-intoxicated conviction. And banks refused requests to open bank accounts in his name, she said, because of the debts he had amassed.
On Wednesday, Johnson recited for Lee what the government claimed were nine money payments to Barber, some from Knight’s lawyers trust account, that occurred in late 2008 and totaled more than $53,000. Lee said that income never was listed in the petition.
Knight attorney David Matthews asked Lee whether the money that was not reported in the petition amounted to transfers to infuse Barber’s business with cash. If they were done in the ordinary course of business, he said, the bankruptcy laws say Barber would not have to report them.
Lee said if there was money in the lawyers trust account, Barber was obligated to report it.
Lee also admitted under Matthews’ questioning that it was Barber, not Knight, who was required to sign the bankruptcy petition as providing true information.
Testimony is to resume at 8:30 a.m. today.
Northwest Arkansas, Pages 7 on 11/07/2013