Roger and Shirley Bailey now see their adult son only at court proceedings.
Shirley Bailey, of Scott, and her once favorite child, Jeffrey Bailey, who lives in Texas, have become enmeshed in bitter legal fights stemming from who should have paid payroll taxes for Rig-Up Electrical Services Inc., which was owned by Roger and Shirley Bailey.
In 2008, the Baileys sold nearly all of the company’s assets to their son’s company. Shirley Bailey said in court filings that it wasn’t until after Rig-Up was sold that she learned it owed about $1.1 million in unpaid payroll taxes for 2007-08. The taxes remain unpaid and, with nearly a decade of interest accruing, the unpaid amount had ballooned to $3 million as of December.
She alleged that her son knew that the taxes hadn’t been paid but didn’t tell her, an accusation Jeffrey Bailey denies. Shirley Bailey also alleged that her son told the company’s bookkeeper and CFO not to mention the tax issue to his mother so he could buy the company’s assets at a discount.
The CFO, Roy Johnson, denied knowing about the unpaid taxes until after the company was sold in August 2008. The bookkeeper, however, said in a 2012 deposition that she was told by Jeffrey Bailey “around August” 2008 not to talk to his parents about the payroll tax issue.
Meanwhile, as the battle between the parents and their son was playing out, Shirley Bailey was fighting the Internal Revenue Service over a $2.4 million bill she received in 2013 for a civil penalty tied to the unpaid payroll taxes. The IRS alleged that she, as president of the company, which provided electrical services for oil and gas drilling rigs and equipment, was the “responsible person” and required to pay the penalty.
In May, she agreed to pay the IRS $500,000 to settle the case over the penalty, but the $3 million in unpaid taxes remains. Rig-Up has no assets left to pay the assessment, according to Reba Wingfield of Deininger Wingfield & Corry of Little Rock, who represented Shirley Bailey in the IRS case.
Bailey and her husband, however, have notched one victory in their fight against their son. In December, a judge for the U.S. District Court for the Southern District of Texas found that Jeffrey Bailey was responsible for the payroll taxes, not his parents. Jeffrey Bailey had filed suit in that court in 2012, seeking to have his parents declared responsible for the taxes.
U.S. District Judge Lynn Hughes pounced on Jeffrey Bailey in the ruling, filed Dec. 13. “Jeffrey’s not telling Roger and Shirley about the unpaid taxes induced them reasonably to enter into the sales agreement by fraud,” he wrote. “Standing mute is a misrepresentation if that person had a duty to speak. … As vice president, whose role was chief operating officer, Jeffrey owed a fiduciary duty to the company. Also, as a son, his parents trusted him to disclose material facts.
“His not disclosing what he then knew to be millions in unpaid taxes materially misrepresented the company’s condition,” Hughes wrote.
Jeffrey Bailey has appealed the ruling to the 5th U.S. Circuit Court of Appeals.
Hughes’ finding is not binding on the IRS, said Wingfield, Shirley Bailey’s attorney in the IRS case. But Hughes’ ruling could be used to calculate damages in a 2010 lawsuit the parents brought against their son in Lonoke County Circuit Court, Wingfield said.
Wingfield said the lessons to be gleaned from the Baileys’ nearly decade-long legal battles could be that when selling a company, due diligence needs to be done and sellers should not trust “somebody else to do it.”
Wingfield said the Baileys trusted their son to run the company, and he’s the one who set up the contract for the sale. “They loved their son,” she said. “And they listened to him, … he just didn’t turn out to be the caliber of son that they thought he was.”
Jeffrey Bailey’s attorney, Richard Wilson of Houston, referred Arkansas Business to his appeal for comment.
“There is no evidence Jeff Bailey knew of the unpaid payroll taxes prior to the asset sale,” Wilson said in the brief to the 5th Circuit. “If he had known about the unpaid payroll taxes prior to the closing, Jeff Bailey would have told Roger and Shirley Bailey.”
Starting the Company
With just an eighth-grade education, Roger Bailey taught himself to be an electrician. After jobs at Timex, he started working for oilfield companies. In the 1980s, Roger Bailey began working for Helmerich & Payne Drilling of Tulsa, which drills oil and natural gas wells for production companies. Officials at Helmerich & Payne encouraged Bailey to start his own business to provide electrical services for oil and gas drilling rigs and equipment.
So he did. Roger Bailey used about $60,000 from his 401(k) account to form Rig-Up Electrical in 1996. His biggest client was Helmerich & Payne.
Rig-Up also built parts for drilling rigs.
At one time, Rig-Up had nearly 200 employees, Roger Bailey said in a 2015 deposition taken for the proceeding against the IRS. “We were building four drilling rigs a month,” he said.
The work was being done out of the company’s building in Channelview, Texas.
Roger Bailey’s wife, Shirley, whom he married in 1966, handled the books for the company in a portable building next to their home in Scott. Together they had three children. Jeffrey was the youngest.
Growing up, Jeffrey Bailey said in a 2015 deposition, he wasn’t close to his father, but he had a good relationship with his mother.
After graduating high school in 1997, Jeffrey Bailey worked at a number of jobs, including United Parcel Service. In 2002, he went to his parents and asked for a job at Rig-Up “because I couldn’t find one in Arkansas at the time,” Jeffrey Bailey said in the deposition.
Jeffrey Bailey started working for the family business in 2002 as an electrical helper. He soon was promoted.
In 2005, he was paid $52,500, and a year later, when he was named vice president, he was paid $86,000. In 2007, he earned $114,000.
Shirley Bailey estimated that the company generated revenue of $5 million-$10 million annually.
Returning to Arkansas
In 2006 and 2007, Roger and Shirley Bailey, who were traveling between Texas and Arkansas for the business, began thinking of retiring and selling the company.
Shirley Bailey said her son was trained to operate the company in Texas while they were in Arkansas.
Jeffrey Bailey disputed his level of involvement in the company, however.
“My job was to run the fabrication side and the painting,” he said during the bench trial in front of Judge Hughes in Texas. “That was it.”
In 2006, Shirley Bailey also hired a bookkeeper in Texas, who was responsible for the payroll, tax reporting and payments in addition to the reconciliation of the company’s checking accounts and lines of credit. Unbeknownst to anyone at the time, starting in the first quarter of 2007, the payroll taxes stopped being paid.
The bookkeeper, Michelle Rougeau, said in a deposition in 2015 that she was using a QuickBooks program, and every time she made payroll, the program would calculate the payroll tax. Rougeau said she would record that liability as a deduction from the bank account as an electronic funds transfer. But the money was never transferred to the IRS.
That failure would lead to lawsuits and bad blood between the parents and their son.
For Sale
In 2007, Shirley and Roger Bailey sought to sell Rig-Up, putting a $12 million asking price on it.
Jeffrey Bailey told his parents he wanted to buy the company and hired Harris Arthur, a certified public accountant in Houston, in early 2008 to straighten out the accounting and prepare the financial statements.
“I discovered the bookkeeping was less than it should have been,” Arthur said in the 2016 bench trial in Texas.
In April or May 2008, Arthur realized the payroll taxes had not been paid. He began looking into the issue as the sale of the company moved forward. Arthur said that he told Jeffrey Bailey to talk to his parents about the unpaid taxes before the sale.
Shirley Bailey said her son never told her about the unpaid taxes, alleging that he failed to disclose the information to get the company’s assets for a lower price.
Shirley Bailey alleged that the bookkeeper and CFO also knew about the unpaid taxes but didn’t say anything to her about it, something CFO Johnson denied.
Jeffrey Bailey hired Johnson at the end of 2007 to help find financing to allow him to buy Rig-Up’s assets. (Johnson testified at the bench trial that he took the title of CFO to make himself look good in front of banks that he was asking for financing to buy the assets of Rig-Up. But he said he had no experience or training in finance.)
An Eight-Year Silence
On Aug. 13, 2008, nearly all of Rig-Up’s assets were sold to Jeffrey Bailey’s newly created company, which had a similar sounding name, Rig-Up Services Inc. That company provides similar services to those that were provided by Rig-Up Electrical Services.
Shirley Bailey said the purchase price was $4.4 million.
After the sale, Jeffrey Bailey wasn’t happy to learn that, within a week before the closing, his parents had borrowed $500,000 from their company’s line of credit, which he said he would have to pay.
The parents returned $200,000. “The increased debt is not at issue here,” Judge Hughes wrote. “It does not affect who is responsible for unpaid taxes.”
About six weeks after the sale, Arthur, the CPA, sent a letter telling Roger and Shirley Bailey about the taxes.
“I was concerned that they hadn’t been told about the payroll tax liability,” Arthur said at the bench trial. “I had a duty to notify them or to make sure they knew about it, not knowing if they had or hadn’t been notified.”
The letter was the first time Roger and Shirley Bailey learned of the unpaid taxes.
At the bench trial, Jeffrey Bailey said he, too, didn’t learn until after the sale that the payroll taxes hadn’t been paid. But he said in the 2015 deposition that the payroll tax bill wasn’t much of a concern to him because there was nothing he could do about it.
“It’s not my fault,” Jeffrey Bailey said. “I didn’t do this.”
He said he didn’t call his parents after learning about the unpaid taxes because he was upset at them over the $500,000 they got from the line of credit. “I didn’t plan on speaking to them ever again,” Jeffrey Bailey said at the 2016 bench trial.
And he’s kept his word. “I haven’t … spoken a word to my parents in almost eight years now,” he said.