William R. Sawyer, United States Bankruptcy Judge.
This Adversary Proceeding was called for trial on November 4, 2013. Plaintiff Daniel G. Hamm
This is an extraordinary case of fraud on a massive scale that was perpetrated by Defendant Timothy McCallan ("McCallan") on thousands of victims. McCallan
McCallan used attorneys as a "front" to perpetuate his scheme and to provide it an air of legitimacy. McCallan's scheme was most recently fronted by Keith Nelms ("Nelms"), an Alabama attorney whose license has since been suspended for his many unethical activities.
From the viewpoint of the customer, or victim, McCallan's scheme began with mass media advertising — television, radio, billboards, etc. — designed to appeal to those in financial distress. The potential customer could call a toll-free number and speak with a representative who would then sign the customer up, promising him that his financial worries would be over. The representative would promise the customer that they would deal directly with his creditors, that all the customer would have to do is pay his money to them instead of his creditors, and that they would take care of the rest. Instead, the customer's money would be siphoned off under the guise of hidden fees and costs, the customer would be that much poorer, and he would default on his debts because his creditors would go unpaid. As the District Court has aptly noted, the effect of McCallan's debt settlement scheme on its victims was "personal economic suicide[.]" McCallan v. Hamm, 2012 WL 1392960, *1, 2012 U.S. Dist. LEXIS 56097, *3 (M.D.Ala. Apr. 23, 2012). This adversary proceeding is an attempt by the Trustee in bankruptcy to recover the money that McCallan defrauded from these victims.
Nelms originally started Allegro in 2007 as a small solo practice law firm. Chase Bank v. Nelms (In re Nelms), 2014 WL 3700511, *3, 2014 Bankr. LEXIS 3158, *7 (Bankr.M.D.Ala. Jul. 24, 2014). At that time, McCallan was perpetrating his debt settlement scheme through the Hess-Kennedy law firm in Florida and was introduced to Nelms through that firm. Nelms, 2014 WL 3700511 at *1-2, 2014 Bankr. LEXIS 3158 at *4-7. After the State of Florida moved against Hess-Kennedy in mid-2008, McCallan tabbed Nelms and Allegro to continue his debt settlement
Nelms ostensibly "hired" McCallan and his entities, AmeriCorp and Seton, to handle back-office processing for Allegro; however, McCallan was effectively running Allegro. Nelms, 2014 WL 3700511 at *3-4, 2014 Bankr. LEXIS 3158 at *8. Allegro's marketing, form letters, and call centers were provided by McCallan's entities, and payments from Allegro's customers were controlled by McCallan's entities, though the paperwork listed Nelms as the customers' attorney. Through this setup, McCallan charged Allegro's customers massive up-front hidden fees for merely holding their money, sent a portion of the collected fees to Nelms, and pocketed the rest.
When the State of Alabama learned of the nature of Allegro's activities and fee structure with its clients, it placed Allegro in receivership under the control of Louis Colley ("Colley") in July 2009. Cut off from the wellspring of his ill-gotten gains, Nelms filed Chapter 7 bankruptcy on February 22, 2010. (Case No. 10-30430, Doc. 1). Daniel G. Hamm ("Hamm") was appointed as the Trustee in the Nelms bankruptcy and, upon learning of the nature of Nelms's involvement in Allegro, pulled its components (Allegro Financial and Allegro Law) into Chapter 7 bankruptcy as well. (Case Nos. 10-30630 and 10-30631). Hamm was also appointed Trustee in the Allegro bankruptcies.
On May 20, 2010, Colley filed a motion for administrative expenses for the payment of almost $400,000 in invoices sent by AmeriCorp and Seton. (Case No. 10-30631, Doc. 74). The Court issued a Memorandum Decision in July 2010 in which it deferred payment, expressed its concerns about the value of the services allegedly rendered, and asked the following questions:
(Case No. 10-30631, Doc. 105, p. 15).
To answer these questions, one must have the records of the Allegro companies. Yet, Allegro did not keep its own records and it did not own or control the data that its business activities generated. Nelms was incapable of answering these questions because he did not keep his own records. Instead, almost all of the business records of the Allegro companies were kept by AmeriCorp. Therefore, the key to understanding what happened to the money of the victims (creditors in the Allegro bankruptcies) was to get these records from AmeriCorp, which was controlled by McCallan.
As the Court will discuss below, it has taken years of litigation to learn the answers to these questions. However, a review of the Allegro claims register reveals that 5,214 claims have been filed by Allegro's creditors for a total amount of $102,949,220.72. (Case No. 10-30631). The evidence will support a range of figures both as to the numbers of victims and the amount by which they were defrauded. The Court has heard figures as high as 30,000 victims and $160,000,000.00. As a result of the duplicity of McCallan, Nelms,
In his capacity as Trustee of the Allegro bankruptcies, Hamm filed suit against McCallan, AmeriCorp, and Seton on February 15, 2011. (Doc. 1). In his amended complaint, Hamm asserted that the Defendants served as the alter ego of Allegro, and sought turnover of property of the estate (Count I), avoidance of preferential transactions (Count II), avoidance of post-petition transfers (Count III), avoidance of fraudulent transfers (Count IV), and an accounting of the fees the Defendants collected (Count V). (Doc. 6).
McCallan moved to dismiss (Docs. 28 & 29), while AmeriCorp and Seton moved to compel arbitration (Docs. 31 & 33). The Court denied both motions on July 8, 2011. (Doc. 66). AmeriCorp and Seton appealed the denial of their motion to compel arbitration and moved to stay proceedings pending appeal (Docs. 70 & 74), and McCallan likewise moved to compel arbitration (Doc. 72). The Court denied McCallan's motion to compel arbitration and he appealed. (Docs. 98 & 104). The Court also denied AmeriCorp's and Seton's motions to stay proceedings and ordered the parties to commence discovery. (Doc. 99). The Court subsequently issued a report and recommendation for the benefit of the District Court, to which the Defendants objected. (Docs. 140 & 147). The District Court ultimately affirmed this Court's denial of the Defendants' motion to compel arbitration. McCallan v. Hamm, Case No. 2:11-cv-784-MEF, 2012 WL 1392960, *7, 2012 U.S. Dist. LEXIS 56097, *22 (M.D.Ala. Apr. 23, 2012) (Docs. 194 & 195).
Hamm learned early in the Allegro bankruptcy proceedings that Nelms and Allegro did not keep and maintain their own business records. He was told by Nelms, McCallan, and others that the Allegro records were kept by AmeriCorp in an electronic form on AmeriCorp's computer servers. Hamm asked McCallan for access to the Allegro records (Docs. 7 & 8) but was refused.
The first discovery hearing in this litigation took place on August 18, 2011, where the Court first discussed production of the Allegro database. As a result of discussions had at the August 18, 2011 hearing, the Court entered its first discovery order on August 22, 2011 ("First Discovery Order"). (Doc. 103). In the First Discovery Order, the Court set out a process that was designed to give Hamm access to the electronic database kept by AmeriCorp that held all of the business records of the Allegro companies. The First Discovery Order called for two things. First, it required a meeting between technical experts for both parties to discuss production of the database and to arrive at means of getting Hamm access to the Allegro records. Second, it called for the lawyers to discuss the matter and then report to the Court whether the problem had been resolved. (Doc. 103).
The intent of the First Discovery Order was to permit Hamm to inspect, copy or clone the database. A trustee in
In direct contravention of the First Discovery Order the Defendants refused to permit Hamm access, forcing Hamm to file his first motion to compel. (Docs. 112 & 113). The Court held an evidentiary hearing on November 14, 2011, and granted Hamm's motion to compel the same day ("Second Discovery Order"). (Doc. 138).
The Second Discovery Order provided, in part, that:
(Doc. 138).
On January 13, 2012, the Court awarded Hamm attorneys' fees in the amount of $29,687.95 for the costs he incurred in filing his motion to compel. (Doc. 154). The Second Discovery Order was simple and direct: allow Hamm access to the computer servers, so that he could clone the database in order to have his own copy of the data that he could use in his efforts to administer the Nelms and Allegro bankruptcy estates.
On January 25, 2012, Hamm filed his first motion for sanctions, claiming that McCallan had not complied with the Second Discovery Order and had committed a host of discovery depredations. (Doc. 155). On February 14, 2012, Charles Parnell, Julian Spirer and Mark Rosenberg — the Defendants' first team of lawyers — moved to withdraw, citing in part McCallan's lack of cooperation in complying with the Second Discovery Order. (Doc. 168).
The Court held a hearing on Hamm's first motion for sanctions on February 16, 2012 and granted it in part and denied it in part. (Doc. 177). Hamm had requested entry of default judgment as a sanction for the Defendants' failure to comply with the Second Discovery Order. (Doc. 155). He also requested an additional $42,787.75 in attorneys' fees. (Doc. 175). The Court denied Hamm's request for default judgment, but it held the Defendants in contempt and again ordered them to produce
McCallan did not appear at the March 5, 2012 hearing. The Court found McCallan in contempt of court and issued a warrant for his arrest. (Doc. 183). On March 7, 2012, the Court granted the motion to withdraw as counsel filed by Parnell, Spirer and Rosenberg. (Doc. 184).
On March 8, 2012, McCallan was stopped by police in New Jersey for speeding. The police officer checked the national NCIC database, discovered the bench warrant issued by the Court, and arrested McCallan. The following day McCallan was released from jail and was ordered to appear in this Court not later than March 14, 2012. (Doc. 198).
On March 14, 2012 a second team of lawyers from the firm Haskell Slaughter entered their appearance on behalf of the Defendants.
The Defendants produced data stored on a CD (compact disc) rather than allowing access as ordered by the Court in the Second Discovery Order. (Doc. 138). Since production was made by way of delivering a CD and not by providing Hamm actual access to computer servers, the Defendants' production was facially deficient. The Defendants attempted to cover this defect by claiming (falsely as it would turn out) that the servers had been deactivated, and for that reason production by the method called for in the Second Discovery Order was not technologically possible. (Doc. 190).
On September 24, 2012, Hamm filed a second motion to compel in which he asserted that the data produced by the Defendants was not usable.
(Doc. 239, Ex. 1, pp. 28-29) (emphasis added).
This discussion went on for some time but this exchange captures the positions of the parties. Hamm's counsel, Steve Olen, repeatedly demanded that he be given access to the database as it existed when Allegro was operating and the Defendants' counsel, Meredith Lees ("Lees"), stated that it was technologically impossible, that production would have to be made in another manner. The problem with the alternate means was that even if the data was contained in the database, it was not accessible.
The exchange which best captures the duplicity of Defendants' counsel is as follows:
(Doc. 239, Ex. 1, pp. 33-36) (emphasis added).
The position taken by Defendants' counsel, Meredith Lees and Thomas Mancuso, here was outrageous. To begin with, the Court's Second Discovery Order required the Defendants to make their computer servers available to Hamm's computer experts, so that he could make his own copy of the database. (Doc. 154). By that time, the Court had already conducted several hearings, as well as one full-blown evidentiary hearing, on the question of production and functionality of the database. The purpose of the Second Discovery Order was to stop just this sort of game-playing. Yet, Lees persisted in the false argument that production could not be made in the manner called for by the Court's order because it was technologically impossible.
Mancuso raised their duplicity to another level when he falsely claimed that Colley and Hamm had obtained control of the Allegro database. But it was McCallan, acting through AmeriCorp and Seton, who controlled the database at all times, because it was McCallan who was running Allegro. Mancuso's claim that his clients no longer controlled the database was patently false. Indeed, it was Mancuso who filed a "Notice of Compliance" five months earlier, contending that the Defendants were then in compliance with the Court's Second Discovery Order — because they had produced a copy of the database. (Docs. 190 & 197). Nowhere in these responses did Mancuso claim the database was no longer in the control of the Defendants.
To understand the problem that Hamm was having with discovery, one must understand something of AmeriCorp's databases and of databases in general. At the evidentiary hearing conducted on February 21-22, 2013, the Court learned that AmeriCorp used Microsoft SQL Server, a relational database. "SQL" means survey query language. Large quantities of data may be stored and later accessed. The data is stored in tables that are defined by the user, and the means by which the tables relate to one another is also defined by the user. There are two primary means to accessing data in a database. First, one may write a query — a question — where the database program will access the database and arrive at an answer. Second, the user may use a "front-end application," which is a separate program used to access the data.
Writing a query requires knowledge of database operations and some expertise. More importantly, in order to write a
(Doc. 259, pp. 95-96).
The significance of this testimony is that Long had assistance from AmeriCorp personnel to obtain the information necessary to write queries. Hamm's expert, Jeff Middleton, testified that he was not given the information necessary to write a query. Counsel for the Defendants postured that Hamm did not understand the Defendants' business, or that his experts did not understand the database, but the Defendants' own expert undercut that argument. Long was able to write queries to access the data because AmeriCorp personnel gave him assistance as to how the information in the various tables were related.
The following hypothetical will illustrate this point. Assume that one has a paper telephone directory with 30,000 entries — that is 30,000 names with corresponding addresses and telephone numbers. Assume further that someone takes a pair of scissors and cuts up the directory so that a reader could not tell which name went with which address or telephone number. Assume further that all of these separate tables — names, addresses, and telephone numbers — are thrown into a barrel, shaken up, and given to someone from out-of-town. In theory, the entire directory could be produced without providing any useful information.
The same is true of databases. If there are thousands of entries organized by different tables, but there is no way to relate an entry's information in one table to its corresponding information in other tables, the entire database could be produced without providing anything usable. That is what the Defendants produced throughout the course of this litigation. Even if they produced all of the data — a doubtful assumption in this case — there was no way to relate the data, rendering it useless. In essence, the Defendants produced the barrel with all of the information in it, but no way to relate one piece of information to another.
The other means of accessing a database is through a "front-end application." A front-end application is a computer program that enables a user to access data in a database without having to write a query. An example that would be familiar to those who work in the federal court system is the CM/ECF system. The data in a federal court's files is maintained in a database known as "Informix." That is, all of the information in the various clerks' offices resides in an Informix database. The means by which users — e.g., lawyers, judges, and administrative staff — access the Informix database is by way of a front-end
Returning to the AmeriCorp database, the point of the Court's Second Discovery Order was to permit Hamm and his computer experts and accountants to clone or copy the front-end applications. In spite of repeated orders that the front-end applications be produced, and contrary to repeated representations from the Defendants and their counsel that they had been produced, a database with working front-end applications was not in fact produced until November 26, 2012. (Doc. 224, p. 30). The Defendants' actions of producing data without a front-end application effectively kept Hamm and his experts in the dark as to what was actually in the database.
When Hamm filed his second motion to compel, on September 24, 2012, the Court initially scheduled an evidentiary hearing on Hamm's motion for November 5, 2012. (Doc. 207). On October 29, 2012, Defendants filed an "Emergency Motion to Continue" the evidentiary hearing, complaining that Hurricane Sandy made it impossible to prepare for the hearing. (Doc. 210). The Defendants attached copies of news articles about Hurricane Sandy's imminent landfall in the New York area, but failed to mention that the computer servers containing the Allegro database had been moved to Florida a year or more earlier. Not realizing that it had again been misled by the Defendants and their counsel, the Court rescheduled the evidentiary hearing for January 29, 2013. (Doc. 216).
On January 23, 2013, Hamm filed a second motion for sanctions. (Doc. 224). Thirty pages long, the motion scathingly set out the Defendants' multitudinous discovery violations in excruciating detail. (Doc. 224). This triggered another request for delay from the Defendants, so the Court rescheduled the evidentiary hearing for February 21, 2013. (Doc. 231).
The evidentiary hearing on Hamm's second motion for sanctions lasted two days. (Docs. 259 & 261). Hamm called Jeffrey Middleton ("Middleton"), a computer expert, who testified that the database produced by the Defendants in April 2012 was not accessible, for the reasons already discussed, and was also incomplete based on the presence of additional documents in their November 2012 production. (Doc. 259, pp. 24-67). Middleton's testimony was forthright and credible.
Defendant Timothy McCallan also testified on February 21, 2013. McCallan acknowledged that he was the owner and chief executive officer of AmeriCorp and Seton. (Doc. 259, p. 111). The next exchange was astounding:
(Doc. 259, pp. 113, 118). Testimony by Oscar Nunez, AmeriCorp's IT manager, was even more illuminating:
(Doc. 259, p. 182) (bracketed matter added).
Oscar Nunez's testimony shows that the representations made by the Defendants' counsel, Meredith Lees and Thomas Mancuso, were false in two respects. First, their assertion that it was impossible to provide access to the database was proven false because the servers containing the database were fully operational and were being maintained in Florida. There was no reason why the Defendants could not comply with the Court's Second Discovery Order by providing Hamm access to the servers. Second, the Defendants' assertion that they needed a continuance due to Hurricane Sandy was shown to be false, again because the servers were in Florida, not New York.
The Court took Hamm's second motion for sanctions under advisement. In late June of 2013, the Defendants finally provided Hamm access to the servers (and database) in Florida.
On June 6 and 7, 2013, the Defendants' second team of lawyers moved to withdraw their appearance, citing the Defendants' refusal to communicate with them or to pay their fees.
(Doc. 303, pp. 4-7). Based on McCallan's representations, the Court granted the motions to withdraw filed by the Defendants' counsel on July 23, 2013. (Doc. 296).
Four days after McCallan indicated to the Court that he would not retain new counsel, Mobile lawyer Thomas McAlpine ("McAlpine") entered his appearance on behalf of the Defendants on July 26, 2013 — a Friday — and moved to quash depositions that were scheduled for the following Monday, precisely as the Court had predicted. (Doc. 301). The Court was troubled with both the timing of McAlpine's
McAlpine called the Court's chambers early that Friday and spoke with the undersigned's Judicial Assistant, inquiring about technical matters such as the Court's CM/ECF system. Yet he waited until after 4:00 p.m. to telephone the Court — ex parte — with a false claim that he could not file using the Court's CM/ ECF filing system. McAlpine represented to the Court that he had been advised by the Clerk's office that it would take five days to be approved for a CM/ECF login, and that he needed to file his motion via facsimile. In fact, McAlpine had not even requested a CM/ECF login and did not do so until 4:40 p.m. that Friday; the Clerk's office emailed him his CM/ECF login twenty minutes after it opened the following Monday, less than one business hour after he had requested it. In other words, McAlpine contrived his emergency to try to obstruct the proceedings. Additionally, the Court later learned that McAlpine had not contacted opposing counsel to inform them of his motion to quash.
The Defendants' July 26 "emergency" motion was nothing more than an obstructionist tactic in a case that had seen the Defendants employ a litany of them. The Court denied the Defendants' motion to quash, finding that it was filed in bad faith. (Doc. 300).
On July 29, 2013, counsel requested a telephonic hearing where McAlpine moved to change the location of a deposition scheduled for that Thursday, August 1, from Orlando, Florida to Mobile, Alabama. Again, the Court denied the Defendants' motion, while McAlpine repeatedly interrupted the Court during its ruling. The Court reprimanded McAlpine in its subsequent written order:
(Doc. 302) (parenthetical omitted).
On August 20, 2013, Hamm filed a third motion for sanctions. (Doc. 307). He asserted that he was unable to make distributions to creditors of the Allgero bankruptcy estate due to the Defendants' stonewalling on discovery, causing those creditors to incur continual interest on the outstanding debts they owed that in Hamm's estimate amounted to $895,968.32.
The Defendants, through McAlpine, filed a particularly vituperative response to Hamm's motion. (Doc. 311). They asserted that Allegro should have remained under the control of the Receiver, "stated unequivocally" that Hamm breached his duties as Trustee of the Allegro bankruptcy estate by making "a number of incredibly bad business decisions[,]" and claimed that Hamm's handling of the money was "incredibly inept[ ]" and bore "very closely to abuse of the discretion" of a Trustee.
The Court took Hamm's third motion for sanctions under advisement. Having carefully considered Hamm's motion and the Defendants' response, the Court finds that the motion is well-taken and should be granted as filed. These proceedings were delayed by several years as a result of the Defendants' well-documented obstructionist tactics. The Defendants' intemperate criticism of Hamm's performance as Trustee in the underlying bankruptcy cases is not well-taken. Neither McCallan nor McAlpine have any experience acting as a trustee in cases such as this and they offer no evidence in support of their opposition. Put simply, they do not know of what they speak. The Defendants' objections are overruled and the Court will, by way of a separate document, award sanctions.
On September 30, 2013, McCallan individually moved for summary judgment, supporting his motion in part with documents not previously produced to Hamm. (Doc. 320). Hamm moved to strike those documents and opposed summary judgment. (Docs. 327 & 328).
On October 22, 2013 — just thirteen days before trial — the Defendants moved for the undersigned to recuse himself. (Doc. 332). The merits of the Defendants' motion to recuse will be discussed in greater detail below. Hamm opposed the motion to recuse, reiterating the Defendants' discovery abuses and the impending trial. (Doc. 333). The Defendants dismissed Hamm's response as "based upon hyperbole
The Court heard both motions at a pre-trial hearing on October 28, 2013, and denied both.
(Doc. 344, pp. 44-45). The Court reiterated that it would conduct the trial on November 4, 2013.
The trial took place as scheduled on November 4, 2013, where the following proceedings occurred:
(Doc. 349, pp. 3-5). The Court heard evidence from witnesses called by the Plaintiff until 11:58 a.m. and then broke for lunch. (Doc. 349, pp. 7-93). The Court resumed the trial at 1:04 p.m., where the following proceedings occurred:
(Doc. 349, pp. 93-94) (footnote added). The Court continued to hear evidence from witnesses called by the Plaintiff until it adjourned at 3:03 p.m. (Doc. 349, pp. 95-157).
At the time the this case was called for trial, the Court did not know where McAlpine was or why he was not in court. It elected to proceed, knowing that if McAlpine had a valid reason for not being present, such as car trouble or a significant health issue, that the November 4 proceedings may have been all for naught. McAlpine did not telephone the Court to make everyone aware that he had decided not to attend trial. Moreover, he was not in his office when the Courtroom Deputy telephoned inquiring as to McAlpine's whereabouts. The individual who answered the telephoned claimed to not know where he was. Neither McAlpine nor any representative of the Defendants has contacted the Court at any time since the November 4, 2013 trial to explain their absence or request a further hearing. It is clear beyond all doubt that the Defendants and their counsel wilfully absented themselves from the trial.
All of this smacks of the worst kind of gamesmanship. McAlpine's actions, leading the Court to believe that he would be present for trial and then not appearing, not advising that he would not appear, and then willfully absenting himself so as to create uncertainty, is utterly inexcusable conduct.
At the conclusion of the November 4, 2013 trial, the Court requested that the Plaintiff provide "Proposed Findings of Fact and Conclusions of Law." The Plaintiff complied on December 3, 2013. (Doc. 355). The Defendants have not filed a response. The Court accepts the proposed findings of fact and conclusions of law, except to the extent inconsistent with the conclusions of law reached in this opinion. The Court attaches a copy of the proposed findings of fact and conclusions of law as Appendix B.
Notwithstanding the Court's acceptance of the proposed findings of fact as submitted by the Plaintiff, a brief summary of the facts is appropriate here. Defendant Timothy McCallan operated a fraudulent debt management and debt settlement business. The primary vehicle through which McCallan operated his scheme was Defendant AmeriCorp. The "front" for the scheme — that is, the face actually shown to the public — was Allegro Finance and Allegro Law. Both of the Allegro entities were owned by Keith Nelms. Nelms was a practicing lawyer with an office on Cobbs Ford Road in Prattville, Alabama. Nelms had no experience in the debt management business and, in his testimony in several
Using a sophisticated array of advertisements and telemarketers, McCallan induced at least 5,214 individuals to sign up for his program. His victims signed up under the belief that they would be represented by an attorney, Nelms, and that he would negotiate a settlement with their creditors (usually credit card companies). McCallan instructed these individuals to stop paying on their debts directly, and induced them into transferring a portion of their income to entities controlled by him, with the promise that their debts would be taken care of. They were not. Virtually all of the money paid by Allegro customers toward the goal of debt settlement was siphoned off by McCallan and those in league with him. The Court finds that AmeriCorp, Seton, and McCallan defrauded their victims out of $102,949,220.72.
The Court will divide its Conclusions of Law into three parts. In Part A, the Court will consider its jurisdiction and adjudicatory power. In Part B, the Court will discuss the Defendants' motion to recuse the undersigned. In Part C, the Court will consider whether default judgment is appropriate.
A district court has original jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). A district court may refer all such cases to the bankruptcy judges for the district, 28 U.S.C. § 157(a), and the District Court for the Middle District of Alabama has done so. See General Order of Reference — Bankruptcy Matters (M.D. Apr. 25, 1985).
"`Arising under' proceedings are matters invoking a substantive right created by the Bankruptcy Code." Continental Nat'l Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1345 (11th Cir. 1999). A proceeding is "related to" a bankruptcy case when "`the outcome of the proceeding could conceivably have an effect on the estate being administered in bankruptcy.'" Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir.1990) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). "`An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.'" Id. (quoting Pacor, 743 F.2d at 994).
Counts II, III, and IV (avoidance of preferences, post-petition transfers, and fraudulent transfers) of Hamm's amended complaint invoke substantive rights created by the Bankruptcy Code and are thus "arising under" proceedings. In its decision affirming this Court's denial of arbitration, the District Court ruled that Counts I and V (turnover and accounting) are more properly characterized as breach-of-contract claims. McCallan v. Hamm, 2012 WL 1392960, *5, 2012 U.S. Dist. LEXIS 56907, *15 (M.D.Ala. Apr. 23, 2012). These claims could still conceivably have an effect on the Allegro bankruptcy
Absent consent of the parties, a bankruptcy court may not enter final judgment in non-core proceedings. 28 U.S.C. § 157(c)(1); see also N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71-72, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). A bankruptcy court may enter final judgment in a core proceeding under 28 U.S.C. § 157(b)(1) so long as it involves the restructuring of debtor-creditor relations and not merely the augmentation of the bankruptcy estate. Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 2614, 180 L.Ed.2d 475 (2011); see also N. Pipeline Constr. Co., 458 U.S. at 71, 102 S.Ct. 2858; Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1951-54, 191 L.Ed.2d 911 (2015) (Roberts, C.J., dissenting).
In its decision affirming this Court's denial of arbitration, the District Court held that Counts I and V of Hamm's amended complaint are non-core. McCallan, 2012 WL 1392960 at *5, 2012 U.S. Dist. LEXIS 56097 at *15. Counts II, III, and IV are nominally core proceedings under 28 U.S.C. § 157(b)(2)(F) and (H), but under the facts of this case they merely seek augmentation of the bankruptcy estate and thus fall under the Stern exception to a bankruptcy court's power of final adjudication over core claims.
A bankruptcy court otherwise lacking adjudicatory power may nevertheless enter a final judgment with the express or implied consent of the parties. Wellness Int'l Network, 135 S.Ct. at 1947-48 (majority opinion); 28 U.S.C. § 157(c)(2). Such consent must "be knowing and voluntary." Wellness Int'l Network, 135 S.Ct. at 1948. "[T]he key inquiry is whether `the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case' before the non-Article III adjudicator." Id. (quoting Roell v. Withrow, 538 U.S. 580, 590, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003)).
Hamm consented to adjudication by this Court when he filed his complaint. AmeriCorp and Seton asserted counterclaims against Hamm (in his capacity as Trustee of the Allegro estate) for breach of contract and quantum meruit. (Doc. 32). Also, the Receiver, Louis Colley, filed an administrative claim on their behalf in the Allegro bankruptcy for almost $400,000. (Case No. 10-30631, Doc. 74). "A creditor who files a proof of claim in a bankruptcy case submits to the bankruptcy court's equitable jurisdiction for determination not only of the claim itself, but also of any counterclaim or defense that must necessarily be resolved in the claims allowance process." DePaola v. Sleepy's, LLC (In re Prof'l Facilities Mgmt, Inc.), 61 Bankr.Ct.Dec. 203, 2015 WL 6501231, *4, 2015 Bankr. LEXIS 3643, *10 (Bankr. M.D Ala. Oct. 27, 2015); see also Katchen v. Landy, 382 U.S. 323, 330, 334-35, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); Stern, 131 S.Ct. at 2607-08, 2616-18. This Court, in Prof'l Facilities Mgmt., extended this
McCallan filed his initial answer as to Counts II, III, and IV on July 21, 2011, and did not expressly refuse his consent to adjudication by this Court.
After the Supreme Court remanded Wellness Int'l Network to the Seventh Circuit, the Seventh Circuit determined that the defendant had waived his right to an Article III adjudicator by failing to timely raise it — a matter of five months. Wellness Int'l Network, Ltd. v. Sharif, 617 Fed.Appx. 589, 590 (7th Cir.2015). Notably, that case, like this one, also involved protracted litigation caused by a "pattern of discovery evasion" by the defendant, and resulted in an entry of default judgment by the bankruptcy court. Wellness Int'l Network, 135 S.Ct. at 1941.
Here, McCallan and his co-Defendants waited almost two years to demand a jury trial and to refuse consent to adjudication by this Court. By that time, he had already violated at least three of this Court's discovery orders, provoked two motions to compel by Hamm, and had been arrested as a consequence of the bench warrant issued by this Court. Under these facts, the Court readily concludes that McCallan's jury trial demand and assertion of his right to an Article III adjudicator were untimely. Alternatively, McCallan (and his counsel) waived those rights by failing to subsequently reiterate them and by giving the Court (and opposing counsel) the false impression that they intended to defend this suit at a bench trial conducted by this Court.
In short, all of the parties have consented to final adjudication by this Court.
The Defendants assert recusal is mandated pursuant to 28 U.S.C. § 455(a) and (b)(1).
(Doc. 332, McCallan's affidavit).
The Defendants cite Glassroth v. Moore, 229 F.Supp.2d 1283, 1285 (M.D.Ala.2002), for the proposition that the Court "may not pass upon the truthfulness of the facts stated in the affidavit" and that the undersigned must recuse if the facts in the affidavit are material, stated with particularity, and would convince a reasonable person that a personal bias exists. (Doc. 332).
Before addressing the merits of the motion to recuse, it is appropriate to consider the differences between §§ 144 and 455 of
Section 144 permits a party to file "a timely and sufficient affidavit that the judge before whom the matter is pending has a personal bias or prejudice either against him or in favor of any adverse party[.]" 28 U.S.C. § 144. If a party files such an affidavit, the presiding "judge shall proceed no further therein," and "another judge shall be assigned to hear such proceeding." 28 U.S.C. § 144. When a party files an affidavit under § 144, "`the trial judge may not pass upon the truthfulness of the facts stated in the affidavit even when the court knows these allegations to be false.'" Glassroth, 229 F.Supp.2d at 1285 (quoting United States v. Alabama, 828 F.2d 1532, 1540 (11th Cir.1987)). "Instead, the judge's inquiry is limited to determining whether the facts alleged are legally sufficient to require recusal." Id. "For an affidavit to be legally sufficient, the party must show that `(1) The facts are material and stated with particularity, (2) The facts are such that, if true they would convince a reasonable person that a bias exists and (3) The facts must show the bias is personal, as opposed to judicial in nature.'" Id. (quoting United States v. Alabama, 828 F.2d at 1540). In other words, § 144 requires a judge to recuse himself upon a party's subjective, good faith, and timely assertion that the judge harbors a personal bias or prejudice for or against a party. However, § 144 only applies to district judges, not bankruptcy judges. See Liteky v. United States, 510 U.S. 540, 548, 114 S.Ct. 1147, 127 L.Ed.2d 474 (1994); Seidel v. Durkin (In re Goodwin), 194 B.R. 214, 221 (9th Cir. BAP 1996).
Section 455, on the other hand, applies to bankruptcy judges under Bankruptcy Rule 5004(a), and has three distinct components. The first component, 28 U.S.C. § 455(b)(2)-(b)(5), provides objective bases on which a judge must recuse due to his personal interest in a matter or his personal relationship with someone involved in the matter. Liteky, 510 U.S. at 548, 114 S.Ct. 1147. The second component, 28 U.S.C. § 455(b)(1), provides a subjective basis for a judge to recuse due to personal bias or prejudice. Id. In other words, § 455(b)(1) "duplicate[s] the grounds of recusal set forth in § 144 (`bias or prejudice')," but differs from § 144 in that it is applicable to all judges, it does not require the judge's automatic recusal or his acceptance as truth of an affidavit asserting bias or prejudice, and it places the obligation to identify the existence of bias or prejudice on the judge himself. Id. The third component, 28 U.S.C. § 455(a), is a "catchall" provision "covering both `interest or relationship' and `bias or prejudice' grounds, but requiring them all to be evaluated on an objective basis, so that what matters is not the reality of bias or prejudice but its appearance." Id. (internal citation omitted, emphasis in original).
The language from Glassroth that the Defendants rely on is in regard to § 144, not § 455, and this Court is not bound by § 144. See Glassroth, 229 F.Supp.2d at 1285; Goodwin, 194 B.R. at 221. "Section 455 does not require the judge to accept all allegations by the moving party as true. If a party could force recusal of a judge by factual allegations, the result would be a virtual `open season' for recusal." United States v. Greenough, 782 F.2d 1556, 1558 (11th Cir.1986). Moreover, an affidavit offered by McCallan, a Defendant, is clearly not being offered by an "objective" or "disinterested" observer, and his assertion otherwise is
A judge shall "disqualify himself... [w]here he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceedings[.]" 28 U.S.C. § 455(b)(1).
The Supreme Court has made clear that the word "personal" in § 455(b)(1) does not "create a complete dichotomy between court-acquired and extrinsically acquired bias[.]" Liteky, 510 U.S. at 550, 114 S.Ct. 1147. Rather, the terms "bias" and "prejudice" are pejorative in that they "describ[e] dispositions that are never appropriate." Id. at 549, 114 S.Ct. 1147 (emphasis in original). However, "[n]ot all unfavorable disposition towards an individual (or his case) is properly described by those terms." Id. at 550, 114 S.Ct. 1147 (emphasis in original). Rather, "[t]he words connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess ..., or because it is excessive in degree...." Id. (emphasis in original).
To that end, an extrajudicial source, while the most common basis to show bias or prejudice on the part of a judge (i.e., the extrajudicial source doctrine), is not the only basis to assert bias or prejudice. "A favorable or unfavorable predisposition can also deserve to be characterized as `bias' or `prejudice' because, even though it springs from the facts adduced or the events occurring at trial, it is so extreme as to display clear inability to render fair judgment." Id. at 551, 114 S.Ct. 1147. This is sometimes referred to as the "pervasive bias" exception to the extrajudicial source doctrine.
However, the burden of proof for "pervasive bias" based on a judicial source is a demanding one. "The judge who presides at a trial may, upon completion of the evidence, be exceedingly ill disposed toward the defendant, who has been shown to be a thoroughly reprehensible person. But the judge is not thereby recusable for bias or prejudice, since his knowledge and the opinion it produced were properly and necessarily acquired in the course of the proceedings, and are indeed sometimes (as in a bench trial) necessary to completion of the judge's task." Id. at 550-51, 114 S.Ct. 1147. "Also not subject to deprecatory characterization as `bias' or `prejudice' are opinions held by judges as a result of what they learned in earlier proceedings. It has long been regarded as normal and proper for a judge to sit in the same case upon its remand, and to sit in successive trials involving the same defendant." Id. at 551, 114 S.Ct. 1147.
Consequently, "judicial rulings alone almost never constitute a valid basis for a bias or partiality motion." Id. at
An example of a judicial remark evidencing a deep-seated antagonism that rendered fair judgment impossible was present in Berger v. United States, in which the district judge stated, during a World War I era criminal espionage trial of German-Americans:
Berger v. United States, 255 U.S. 22, 28, 41 S.Ct. 230, 65 L.Ed. 481 (1921); see also Liteky, 510 U.S. 540, 555, 114 S.Ct. 1147 (citing this language in Berger as an example of recusable judicial language).
All of the remarks the Defendants cite as examples of the undersigned's bias or prejudice took place in judicial orders, judicial opinions, and judicial hearings; i.e., there is no extrajudicial source. While strong, the undersigned's language does not demonstrate any pervasive or deep-seated bias within the meaning of Liteky. Regarding the Allegro business model and its relationship with AmeriCorp, it is important to note that the undersigned presided over the Allegro bankruptcy. The Court was inundated with letters and phone calls from angry Allegro clients who were victimized by its business practices. By advising its clients to pay Allegro and to stop paying their debts, Allegro doomed its clients to what the District Court aptly described as "personal economic suicide[.]" McCallan, 2012 WL 1392960 at *1, 2012 U.S. Dist. LEXIS 56097 at *3. Allegro's practice of charging its clients massive front-loaded fees for providing (in most cases) no services was both unethical and fraudulent.
The Receiver filed an administrative expense claim in the Allegro bankruptcy on behalf of AmeriCorp and Seton. In the course of administering the Allegro bankruptcy it soon became apparent that most of the money flowing into Allegro was being siphoned off to AmeriCorp, and that AmeriCorp was doing the legwork of communicating with Allegro's clients and negotiating settlement of their debts. The undersigned was not required to turn a blind eye to the fact that McCallan and AmeriCorp had a similar arrangement with a Florida law firm, Hess-Kennedy, and that Hess-Kennedy's clients had likewise been defrauded. Faced with such a business,
"`Impartiality is not gullibility. Disinterestedness does not mean child-like innocence. If the judge did not form judgments of the actors in those court-house dramas called trials, he could never render decisions.'" Liteky, 510 U.S. at 551, 114 S.Ct. 1147 (quoting In re J.P. Linahan, Inc., 138 F.2d 650, 654 (2d Cir.1943)).
With regard to McCallan, the other Defendants, and their lawyers, all of the complained-of language refers to what McCallan and his lawyers have done, not to any inherent personal characteristics they have (unlike the language in Berger). According to Hamm's complaint, which the Court had to accept as true in ruling on the motions to dismiss and to compel arbitration, McCallan acted as the principal of AmeriCorp and Seton and masterminded both the Hess-Kennedy and Allegro schemes. If true, McCallan defrauded thousands of people out of millions of dollars. Criticism of such conduct would not be "undeserved" or "excessive in degree." See Liteky, 510 U.S. at 550, 114 S.Ct. 1147.
Moreover, McCallan's conduct in this litigation was abusive and contemptuous. He ignored Hamm's initial discovery request of records necessary to administer the Allegro bankruptcy estate. When the Court ordered him to turn over the records, he withheld many computer files and turned over many others that were unreadable. When the Court ordered him to turn over readable and usable files, he ignored that order, forcing the Court to hold him in contempt and to issue a warrant for his arrest. Even after being arrested, McCallan still abused the discovery process and disobeyed the Court's order by sending Hamm millions of files lacking front-end applications to make them readable, or the internal connections to show which piece of information applied to which client. He also continued to withhold key information. In doing so, he and his lawyers lied to the Court about the location and operability of AmeriCorp's servers. He ultimately dragged out discovery for more than two years with his stalling tactics, wasting countless resources and hours of the Court's time, Hamm's time, and even his own lawyers' time.
Finally, McCallan has a history in this litigation of breaking off communication with his lawyers and not paying them when he gets in trouble with the Court over his litigation conduct, or when his lawyers demand payment for the services they have rendered. McCallan had already done this to two sets of lawyers when McAlpine first appeared on his behalf. McAlpine then inauspiciously introduced himself to the Court by means of an improper ex parte communication and a falsehood, all for the purpose of filing an eleventh-hour motion that, given the history of this litigation, was blatantly sought in bad faith. McAlpine's demeanor and conduct toward the Court since then has been unprofessional, rude, and deliberately provocative. Finally, despite having ample warning of the trial date, neither McCallan nor McAlpine, nor any other representative of the Defendant, bothered to appear at trial or gave any notice or indication that they would not appear.
Liteky instructs that a court's efforts at ordinary courtroom administration are not grounds for recusal. Id. at 556, 114 S.Ct. 1147. Although the Court's efforts at administering this case have gone far beyond ordinary, they have been necessitated by the Defendants' unwarranted and persistent conduct. "`We cannot assume that judges are so irascible and sensitive that they cannot fairly and impartially deal with resistance to their authority
"Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned."
"Under § 455, the standard is whether an objective, fully informed lay observer would entertain significant doubt about the judge's impartiality." Christo v. Padgett, 223 F.3d 1324, 1333 (11th Cir. 2000); see also Mantiply v. Horne (In re Horne), ___ Fed.Appx. ___, ___, 2015 WL 6500754, *2, 2015 U.S.App. LEXIS 18742, *5 (11th Cir. Oct. 28, 2015) (unpublished). "`The inquiry of whether a judge's impartiality might reasonably be questioned under § 455(a) is an objective standard designed to promote the public's confidence in the impartiality and integrity of the judicial process.'" Evergreen Sec., Ltd., 570 F.3d at 1263 (quoting Davis v. Jones, 506 F.3d 1325, 1332 n.12 (11th Cir. 2007)). "Thus, the court looks to `the perspective of a reasonable observer who is informed of all the surrounding facts and circumstances.'" Id. (quoting Cheney v. U.S. Dist. Court for the Dist. of Columbia, 541 U.S. 913, 924, 124 S.Ct. 1391, 158 L.Ed.2d 225 (2004)) (emphasis in original).
"There are twin, and sometimes competing, policies that bear on the application of the § 455(a) standard. The first is that courts must not only be, but must seem to be, free of bias or prejudice. Thus the situation is viewed through the eyes of the objective person. A second policy is that a judge, having been assigned to a case, should not recuse himself on unsupported, irrational, or highly tenuous speculation. If this occurred the price of maintaining the purity of the appearance of justice would the power of litigants or third parties to exercise a veto over the assignment of judges." Greenough, 782 F.2d at 1558. "[R]eady recusal benefits the judge who steps aside, and the litigant who sought this outcome, but it may injure the judge who must take over the case and the litigant aggrieved by the substitution. Until Congress decides that the costs of
The Supreme Court held in Liteky that the extrajudicial source factor applies to § 455(a), see 510 U.S. at 554, 114 S.Ct. 1147, and, as noted above, all of the bases the Defendants assert as grounds for recusal are remarks made in the course of judicial proceedings — either this adversary proceeding or the Allegro bankruptcy. Thus, the Defendants' recusal motion cannot succeed under § 455(a) unless the undersigned's remarks would display a deep-seated favoritism or antagonism that would lead an objective, fully informed lay observer to question the Court's impartiality.
A lay observer who was fully informed of the nature of the Allegro business model, the ruinous effect Allegro had on its clients, Allegro's relationship with AmeriCorp and McCallan, and McCallan's (and his lawyers') conduct in this litigation would not reasonably question the Court's impartiality based on the remarks the Defendants complain of. A lay observer with even a modest understanding of finance and credit would conclude that Allegro's activities with AmeriCorp and McCallan were predatory and fraudulent. Moreover, a fully informed lay observer would not reasonably expect a court to disregard a litigant's or lawyer's misbehavior in front of it, or ignore when a litigant violates its orders or intentionally provokes it. All of the statements the Defendants complain of have been made by the Court in response to what either Allegro or the Defendants have done in conducting their businesses and this litigation. That is not a sufficient reason to question the Court's impartiality.
Bankruptcy Rule 7055 incorporates Rule 55 of the Federal Rules of Civil Procedure. "When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." FED. R. CIV. P. 55(a). "If the plaintiff's claim is for a sum certain or a sum that can be made certain by computation, the clerk — on the plaintiff's request, with an affidavit showing the amount due — must enter judgment for that amount and costs against a defendant who has been defaulted for not appearing and who is neither a minor nor an incompetent person." FED. R. CIV. P. 55(b)(1).
"It is well established that the district court has the authority to dismiss or to enter default judgment, depending on which party is at fault, for failure to prosecute with reasonable diligence or to comply with its orders or rules of procedure." Flaksa v. Little River Marine Constr. Co., 389 F.2d 885, 887 (5th Cir.1968).
"The failure to appear at a duly scheduled trial after months of preparation by the parties and by the trial court is a serious offense for which the entry of a default is appropriate." Gulf Coast Fans, Inc. v. Midwest Elecs. Imps., Inc., 740 F.2d 1499, 1512 (11th Cir.1984). Default has been entered and affirmed for less. In McGrady v. D'Andrea Elec., Inc., 434 F.2d 1000 (5th Cir.1970), the defendant corporation filed as its purported answer a letter from its president denying the allegations of the complaint. McGrady, 434 F.2d at 1001. When the defendant failed to appear at a pre-trial conference it had received notice of, the district court entered default, denied the defendant's motion to set aside the default, and later entered final judgment in favor of the plaintiff. Id. The Fifth Circuit affirmed, and "deem[ed] it unnecessary to decide whether [the defend]ant's purported `answer' was adequate," because the defendant's failure to appear at the pre-trial conference "disclose[d] sufficient evidence of [the defend]ant's delay and failure to comply with court rules to justify the entry of a default" under Rule 55. Id.
"Put differently, even assuming a defendant has appeared and answered, the court still has the authority to order an entry of default when there is sufficient evidence of defendant's dilatory tactics or failure to comply with court orders and the rules of procedure." Liberty Mut. Ins. Co. v. Fleet Force, Inc., 2013 WL 3357167, *9, 2013 U.S. Dist. LEXIS 91716, *28 (N.D.Ala. Jul. 1, 2013) (emphasis in original). The record in this case is replete with such conduct. Although the Defendants filed motions to compel arbitration (Docs. 31 & 72) and answers and affirmative defenses (Docs. 32, 73, & 206), and McCallan individually filed a motion to dismiss (Doc. 28) and a motion for summary judgment (Doc. 320), the Defendants also engaged in two years of abusive and stonewalling conduct during discovery and failed to appear at trial. They have also flouted the Court's orders, including a failure to pay prior sanctions the Court has imposed on them (Doc. 154).
An entry of default in this case would not be at odds with Bass v. Hoagland. In Bass, the Fifth Circuit stated that Rule 55(a)
Bass v. Hoagland, 172 F.2d 205, 210 (5th Cir.1949). Taken out of context, this language suggests that the Defendants did not subject themselves to default by failing to appear at trial. However, the Fifth Circuit later clarified its Bass holding:
Fehlhaber v. Fehlhaber, 681 F.2d 1015, 1027 (5th Cir. Unit B 1982)(emphasis added)
Fehlhaber makes clear that default judgment was improper in Bass because the defendant had not received actual notice of the trial date, not because the defendant's earlier answer denying the claims excused his failure to appear at trial. The former rationale implicated the defendant's due process rights, while the latter rationale did not.
The Fifth Circuit's decision in Seven Elves, Inc. v. Eskenazi is in much the same vein. In Seven Elves, Eskenazi and two other defendants were represented by the same attorney until Eskenazi fired him. Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 398-99 (5th Cir. Unit A Jan. 1981). The attorney assumed that Eskenazi was acting as the agent of the other two defendants and did not inform them of his termination, and neither did Eskenazi. Id. at 399. When the attorney moved to withdraw from the case, the district court ordered him to personally appear and to mail notice to the other defendants; the attorney did not appear and was not relieved as counsel of record, and his mailings to the other defendants were sent to the wrong address and not returned. Id. When the case was called for trial, neither the attorney nor any of the defendants appeared; the court entered judgment against them, and denied the other defendants' motion to set it aside after they learned of the judgment a year later. Id.
The Fifth Circuit reversed and, although it did not expressly determine that the district court's ruling was a default judgment, noted that "under Bass, a default judgment entered upon the failure of the appellants or their attorney to appear at trial might well be found to have been erroneously entered as a matter of law under Fed.R.Civ.P. 55." Id. at 400 n. 2. Nevertheless, the holding in Seven Elves turned on the lack of actual notice afforded the other defendants due to the failure of Eskenazi and their attorney to inform them of what was happening, not on the idea that default is improper for a defendant's mere failure to appear at trial. As the Fifth Circuit explained:
Id. at 403.
Unlike Bass and Seven Elves, there are no due process concerns here because the Defendants had actual notice of the trial. The trial date was scheduled nine months in advance, and McCallan and his attorneys at that time would have received electronic notice of it through CM/ECF. Moreover, the Court personally informed McCallan at a July hearing of the November trial date, and reminded McAlpine of the trial date when it denied the motion to recuse. Neither the Defendants nor McAlpine have ever offered any explanation of why they failed to appear, nor have they requested a new trial. Moreover, they have not responded to Hamm's proposed findings of fact and conclusions of law.
This case is also distinguishable from Gulf Coast Fans. In that case, the Eleventh Circuit reversed the district court's denial of the defendant's Rule 60(b) motion to vacate a default judgment in which the defendant did not appear at trial. Gulf Coast Fans, 740 F.2d at 1512. Although the Eleventh Circuit noted that the defendant's "erratic behavior" and failure to appear at trial would have normally warranted an entry of default, it was concerned that such a ruling would be incongruous with a jury's finding in a related case that the plaintiff had breached the same contract that was at issue in the defendant's case.
Admittedly, Hamm in this case is nominally a representative of Allegro, and Allegro was a complicit tool in McCallan's fraudulent debt settlement scheme. However, a ruling in favor of Hamm will not benefit Allegro, but rather Allegro's creditors — i.e., its victims. There is no internal inconsistency within this case or external inconsistency with the related Nelms case
Default judgment under Rule 55 is appropriate in this case. Although Fifth and Eleventh Circuit precedent limits the applicable scope of Rule 55, that precedent is distinguishable from this case because it revolved around lack of due process due to lack of actual notice, or because it was inconsistent with factual findings from a related proceeding, none of which is present here. There is nothing inadvertent about the Defendants' conduct in litigating this case or in their refusal to appear at trial. The Defendants had their day in court, and must shoulder the consequences of their decision not to exercise it.
The Plaintiff offered a mountain of evidence in support of his claim that the
This case came before the Court for trial on April 28, 2014. The Plaintiff, Chase Bank, seeks a determination that the debt is excepted from the bankruptcy discharge of Keith Nelms pursuant to 11 U.S.C. § 523. For the reasons set forth below, judgment is entered in favor of the Plaintiff.
On February 22, 2010, Keith Anderson Nelms filed a voluntary Chapter 7 petition with this Court, initiating Case No. 10-30430. At the time of his filing, Nelms was the sole owner and operator of Allegro Law, LLC, and Allegro Financial Services, LLC, operating out of Prattville, Alabama. Through his Allegro entities, Nelms purported to offer legal and financial services targeted at consumers in search of debt relief, through debt settlement and debt management schemes. Chase Bank filed a proof of claim for $39 million. (Case No. 10-30430, Claim 2-1).
On June 1, 2010, Chase bank initiated this adversary proceeding by way of a complaint alleging nondischargeability of debt owed to it by Nelms pursuant to 11 § U.S.C. 523. Chase Bank alleged four claims for relief, seeking that their debt be excepted to discharge under § 523(a)(2)(A) for fraud, § 523(a)(4) for fraud in a fiduciary capacity, § 523(a)(4) for embezzlement, and § 523(a)(6) for willful and malicious injury. Chase pled facts alleging that Nelms, through Allegro Law, LLC, operated a fraudulent debt settlement scheme under which he discouraged consumers from paying monthly minimums to Chase on the promise that he would negotiate a reduction in the debt or settle the debt in full. In exchange, Chase alleged, Nelms collected millions of dollars in fees, and made no attempts to actually settle or pay the consumers' debts. As a result, Chase customers "faced increased interest rates, late fees, further damage to their credit ratings, and additional and increased collection activities by their creditors." (Adversary Proc. No. 10-3042, Doc 1). Chase alleged that, as a result of Nelms's fraudulent scheme, "Chase cardmembers responsible for more than 5000 accounts have ceased making payments on at least $39 million in credit card balances owed to Chase." Id. The case came before the Court for trial on April 28, 2014.
In 2007, a Florida law firm known as Hess-Kennedy began running a debt settlement scheme in the state of Florida.
In order to make this scheme work, Hess-Kennedy encouraged the consumers not to pay their debts, but to instead dispute the billings under the Fair Credit Billing Act, 15 U.S.C. §§ 1666 et seq., and Hess-Kennedy would send legal form letters advising the creditor that they were performing a financial evaluation of the consumer's account. These form letters bore the letterhead of either Hess-Kennedy or one of their related entities, such as Campos Chartered Law Firm or Consumer Protection Law Center. The letters were often signed by Jeffrey Campos, an attorney affiliated with Hess-Kennedy. The accounting, clerical work, mailings and the like were handled by a back-office processor, Americorp, Inc., which was headed by Timothy McCallan. Chase proved at trial that between 2007 and April 2008, they received approximately 8,000 such letters from Hess-Kennedy related outfits.
In mid-2008, Hess-Kennedy ran afoul of the Florida Attorney General's Office, who brought legal action alleging an "unscrupulous scheme to divert funds" from consumers and to instead "divert[] millions of dollars to themselves and a coterie of family and associates who were not creditors of consumers." See Office of the Attorney General v. Laura Hess, Esquire, et al., No. 08-007686-08, at p. 15-16 (Cir. Ct. Broward County, Fla. Jul. 17, 2008). On July 18, 2008, the circuit court of Broward County, Florida appointed a receiver to take over Hess-Kennedy, and Hess-Kennedy was permanently enjoined from operating its scheme on November 25, 2008. This ended Hess-Kennedy's debt settlement activities. Representatives of Americorp approached Nelms in 2008, with the proposition that he take over the function previously handled by Hess-Kennedy. Thus, the Allegro entities were born.
Prior to opening Allegro Law, Nelms was familiar with and involved in the workings of Hess-Kennedy. At trial, Nelms detailed his initial introduction to debt settlement programs and Hess-Kennedy, recalling working with one of Hess-Kennedy's principals, Edward Cherry (also known at one time as Edward Kennedy), several years prior to Allegro taking over in 2008. Nelms was approached by Cherry to build an attorney network for Hess-Kennedy, and testified that he was paid approximately $15,000 for the service, a service that he says he was hired to do several times. Nelms's involvement with Hess-Kennedy became so entwined that upon Hess-Kennedy's assignment into the Florida receivership, the receiver running Hess-Kennedy hired Nelms to represent the entity.
On April 30, 2007, Allegro Law was incorporated as a law firm. Nelms was the sole owner and operator of Allegro Law, and at trial he testified that he was the sole attorney working for Allegro and that he approved every settlement that came through the enterprise. Nelms testified that Allegro Law had at least 15,000 clients, though he thought the number perhaps exceeded 19,000, with each client having an average of five creditors.
In beginning the operation of Allegro Law, Nelms testified that he employed the same personnel and debt settlement tactics as Hess-Kennedy. Nelms admitted to using the identical Hess-Kennedy marketers, back-office processors, phone call center, and the same form letters. The marketers used by Hess-Kennedy simply switched to marketing for Allegro, with one marketer stating that upon switching to Allegro, "the flow kept going. Like nothing changed." Tr. 101:10-21. Nelms hired McCallan and Americorp to handle the back-office processing for Allegro. This included processing of the form letters, manning the call centers, and all the accounting for thousands of customer payments, essentially handling the servicing of all client accounts.
One of the more telling pieces of evidence shown at trial to prove Nelms's continuation of the Hess-Kennedy debt settlement scheme were the form letters sent to Chase throughout 2007 and 2008. The letters essentially track the progression of the scheme originally operated as Hess-Kennedy under Campos to one operated as Allegro Law under Nelms. The letters sent beginning in late 2007 through early 2008 are headed under a variety of Hess-Kennedy related outfits: Hess-Kennedy
Tr. Ex. 3.
Beginning in April 2008, following Hess-Kennedy's initial legal troubles with the state of Florida, Chase Bank began receiving more form letters disputing debts and purporting to settle the debts; letters identical to those received from Hess-Kennedy, only now under the letterhead of Allegro Law. While these letters were initially signed still by Jeffrey Campos, they soon began, in May 2008, appearing with the signature of Keith Anderson Nelms. During Allegro's period of operation, roughly May 2008 thorough May 2009, Chase tracked 5,453 such letters as having come from Allegro. As a collections manager for Chase testified, "as Hess-Kennedy was ramping down, Allegro started ramping up." Tr. Transcript 34:12-18.
The Court heard testimony from three former Allegro customers who had credit accounts with Chase. Each testified as to their involvement with Allegro, the tactics used to ensnare them in the debt scheme, and the destructive results the Allegro experience had on each of their lives. The experiences were largely similar, and each Allegro customer the Court heard from exited the program in remarkably worse financial, and often even personal, shape than when they entered into business with Nelms and Allegro. The Court found that their testimonies were credible and compelling, and offered a telling insight into the scheme Nelms ran under the name Allegro Law.
Darlene Richardson, a hospital employee from Philadelphia, Pennsylvania, testified to becoming involved with Allegro Law after hearing a radio advertisement purporting to be lawyers that could fix her credit. Richardson called Allegro, and was told that she would pay in a fixed monthly amount to Allegro, who would
Overall, during her fifteen-month involvement with Allegro, Richardson paid in approximately $6,000. Allegro settled one debt for her for around $500. Richardson testified that in November 2008, she received a letter from Chase Bank offering to settle the debt directly with her, outside of the Allegro program. She recalled that the offer from Chase was to settle the debt one of two ways, either through an immediate payment of $503.72, or through two payments of $453.35. Believing Allegro was working on her behalf to achieve these settlements, she forwarded the letter to Allegro, wanting the account to be settled with money she had paid into the program. At this point, having paid $457 per month since March 2008 would have meant Richardson had paid roughly $3,000 into her Allegro account. Upon receipt of the settlement offer from Chase, Allegro informed Richardson that there was not enough money in her escrow account, informing her, "that money, of course, has to be — go to them first to be paid before any creditors could be paid off." Darlene Richardson Dep. Transcript 19:7-10. Richardson was unable to settle the debt with Chase.
Israel Rubinfeld, a small business owner from New Jersey, also entered the Allegro Law program in 2008, after hearing a radio advertisement promising to settle debts. At the time, Rubinfeld had nearly $33,000 in debt, owing around $2,500 to Chase Bank. Rubinfeld explained his dealings with Allegro:
Israel Rubinfeld Dep. Transcript 11:5-24-12:1-5. Rubinfeld stated that he continued to pay Allegro through the end of 2009, and that he did not pay his creditors, upon the advice of Allegro. Throughout his involved with Allegro, Rubinfeld paid them $6,442. Only $660.90 was accrued in his escrow account, and none of Rubinfeld's debts were settled.
The court also heard testimony from Melinda Lawley, a retired schoolteacher from Chelsea, Alabama. Ms. Lawley testified to becoming aware of Allegro Law in 2008 through a television advertisement,
Ultimately, from April 2008 through May 2009, Lawley paid $5,170 into Allegro Law. Tr. Ex. 9. Allegro's records show that only $80.70 was on hand in her escrow account to be used for settlements. Put another way, after a year of paying into Allegro Law in hopes to pay off debt, only $80.70 did not go towards Nelms and Allegro in the form of fees. None of Lawley's debts were settled, and no money was paid to her creditors. Before entering the Allegro program, Lawley testified she and her husband had a credit score close to 700. After her involvement with Allegro, it fell to around 500.
Allegro Law charged their customers a fee comprised of 16% percent of the client's total debt load. The fee was designed to be front-loaded; that is, as monthly payments arrived, the money was first applied to pay the 16% fee before any money was placed into the client's escrow account to pay off debts. In addition, Allegro charged a $25 initial fee, and an administrative fee each month. For example, Ms. Lawley's account showed a recurring monthly charge of $59.99 marked as "Monthly Set Up Fees." Tr. Ex. 9. Of this administrative monthly fee, Nelms collected $6.00 per customer. He also collected a portion of the 16% front-loaded fee. Each customer testified to being unaware of the extent of the fee structure, and that the front-loaded nature of the fee was never explained to them by Allegro representatives. Ms. Lawley testified:
Tr. Transcript 78:15-25. Nelms reported an income of $50,000 in 2007, which skyrocketed to $200,000 in 2008, the year he did business as Allegro.
After consideration of the accounts told by these customers, a pattern of misrepresentations is clear: Nelms, through Allegro, consistently misrepresented that Allegro Law would settle consumer debts. Nelms induced participation in the programs through misrepresentations that Allegro was a law firm. Further, Nelms misrepresented Allegro's fee structure.
Allegro's very promise to settle any consumer debts with Chase was itself a misrepresentation as Chase had a standing policy of not negotiating settlements with Allegro Law. Over the life of Allegro Law,
Despite the repeated communications from Chase, Allegro continued to represent to consumers that they could settle Chase debts. Each of the Allegro customers that the Court heard testimony from were Chase cardholders to whom Allegro had represented the ability to settle Chase debts. None of them were informed that Allegro could not settle with Chase, and Allegro continued to collect monthly fees and payments from them under the guise of attempting to settle the debts. Ms. Richardson was promised her $5,000 debt to Chase could be settled through Allegro. Richardson was an Allegro customer for 15 months beginning in March 2008, and was never informed by Allegro of the Chase policy, otherwise, she testified, she would not have enrolled in the program. The same was true for Mr. Rubinfeld, who owed $2,500 to Chase, and was never informed during his 16 months in the program of the Chase policy. Again, Ms. Lawley, who owed $10,000 to Chase, was promised this debt would be settled and in her year with Allegro was never informed that it could not be done. When asked why he continued to promise existing Chase customers that he could settle their debts, Nelms stated, "I didn't have a reason to tell customers I couldn't settle debts with Chase." Tr. Transcript 146:12-18.
Nelms's continued representation of Chase customers, despite awareness of the Chase policy, led to alarming delinquency rates among Allegro-affected Chase account holders. Melanie Cerminara, Chase's operations manager in collections at the time of Allegro's activity, testified that, based on Chase's records, seventy-four percent of the Chase customers associated with Allegro were either current or in early stages of delinquency.
In 2009, Nelms ran into trouble with the State of Alabama. The Alabama Attorney General's Office began its prosecution of Nelms and Allegro after receiving several consumer complaints in March and May of 2009 of customers who had been ensnared by the debt settlement scheme. The Alabama State Bar also became involved in the matter, and on June 25, 2009, entered an Order On Conditional Guilty Plea, under which Nelms pled guilty for violating numerous ethics rules. In the Plea, Nelms admitted to holding himself and Allegro out as legal service providers in debt management and debt settlement, and also admitted to collecting fees prior to the performance of services and without those fees being earned. The Alabama Bar suspended Nelms from practicing law for three years, and he was ordered to cease and desist from providing any legal services through Allegro Law. On June 30, 2009, the State of Alabama filed a complaint against Nelms in Autauga County Circuit Court seeking a temporary restraining order, which was granted on July 9, 2009. On the same date, the state court appointed Louis Colley as receiver to oversee Allegro. On February 11, 2010, the state court issued a permanent injunction and permanently appointed Colley as receiver. Allegro Law filed a Chapter 7 petition for bankruptcy on March, 12, 2010. (Case No. 10-30631).
Chase seeks to have the debt owed to it by Nelms excepted from his bankruptcy discharge. Chase alleges that Nelms incurred the debt through fraud, making it nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Chase also alleges that Nelms committed the fraud and embezzlement while in a fiduciary capacity, making the debt nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Finally, Chase also seeks an exception to discharge under 11 U.S.C. § 523(a)(6) for willful and malicious injury by Nelms. The Court finds that Chase has proven its case under § 523(a)(2)(A), showing that Nelms perpetrated a massive fraud on thousands of Chase cardholders and diverted millions of dollars due to Chase. While there is a failure to show a sufficient fiduciary relationship under § 523(a)(4), and the Court finds a discussion of § 523(a)(6) unnecessary, the § 523(a)(2)(A) fraud claim provides ample basis for an exception to Nelms's discharge
Section 523 provides for exceptions to certain debts from a debtor's discharge. At issue in this case is a debt that Chase alleges should be nondischargeable due to false pretense, false representation, and fraud. The court strictly construes exceptions
When a creditor can prove the debtor's agent committed fraud, the nondischargeability of the debt incurred through that fraud may be imputed to the debtor. Strang v. Bradner, 114 U.S. 555, 561, 5 S.Ct. 1038, 29 L.Ed. 248 (1885). After Strang, the majority of courts have followed the Supreme Court's holding to mean that an innocent debtor's liability for an agent's wrongdoing is nondischargeable under § 523(a)(2)(A). Indeed under this Circuit's precedent it is recognized that, "[a] debt may be excepted from discharge when the debtor personally commits actual, positive fraud, and also when such actual fraud is imputed to the debtor under agency principles." Hoffend v. Villa (In re Villa), 261 F.3d 1148, 1151 (11th Cir. 2001) (though choosing not to extend the imputation of fraud to § 20(a) of the Securities Exchange Act) (citing Strang). The bankruptcy courts of this district have followed suit, recognizing the imputation of an agent's fraud to the principal for non-dischargeability purposes in a commercial or business context. See In re Gordon, 293 B.R. 817, 822 (Bankr.M.D.Ga.2003) (collecting cases).
Proving fraud liability for a principal through the actions of one's agent for purposes of § 523 nondischargeability has taken the form of two tests. The majority of courts have taken the approach that "an innocent debtor's liability for her agent's wrongdoing is nondischargeable under § 523(a)(2) regardless of the debtor's knowledge or participation." In re Heinz, 501 B.R. 746, 761 (Bankr.N.D.Ala.2013) (citing Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314 (5th Cir.2005)). This test presents the idea that "the culpability of the indebted partner is irrelevant," even when "the partner is innocent of wrongdoing, and had no knowledge or reason to know of the fraud ...." Quinlivan, 434 F.3d at 319. Applied to the present case, if Americorp employees, acting as agents for Nelms, committed fraud in incurring the debt to Chase, then Nelms's debt to Chase is not dischargeable under § 523(a)(2)(A). Under this test, the mere presence of an agency relationship combined with fraud by the agent is all that the court examines.
Other courts have required more than the simple presence of an agency relationship to impute an agent's fraud onto the principal. These courts, in the minority, have turned to a "`reckless standard, requiring that the debtor knew or should have known of the agent's fraud in order to impute intent.'" Heinz, 501 B.R. at 762 (citing Treadwell v. Glenstone Lodge (In re Treadwell), 637 F.3d 855 (8th Cir.2011). While not requiring active participation by the debtor-principal in the fraud, the debtor-principal "cannot be held innocent for the fraud of his agent if, had he paid minimal attention, he would have been alerted to the fraud." Matter of Walker, 726 F.2d 452, 454 (8th Cir.1984) (citing In re Savarese, 209 F. 830 (2d Cir.1913) and David v. Annapolis Banking & Trust Co., 209 F.2d 343, 344 (4th Cir.1953)).
Courts within our Circuit have contemplated whether the Circuit would apply the majority or the reckless standard approach.
The facts proven at trial show that Nelms was certainly aware of the fraud being perpetrated by Americorp in their dealings with Allegro customers. He testified to working very hard to hire the former marketers of the Hess-Kennedy fraud once that operation was ended. Nelms was clearly aware of the fraud being perpetrated by Hess-Kennedy; he, in fact, participated in the fraud himself as an agent of Hess-Kennedy. Further, there is no real dispute as to whether Americorp and its employees operated as agents for Nelms. Americorp and its marketers were hired by Nelms to induce customers into signing up for Allegro, and to act on Nelms's behalf. He hired Americorp with full knowledge of how they had executed fraud for Hess-Kennedy, and it was clear from his testimony at trial that the experience in debt settlement fraud that Americorp possessed was valued by Nelms in his pursuit of them and in his rote use of their letters that he sent verbatim to Chase. Nelms testified that he had been interested in working with Americorp to accomplish his own business purposes when he saw how effective they had been at executing the Hess-Kennedy scheme. Once Hess-Kennedy collapsed, he quickly hired Americorp to effectuate the same fraud for his operation. Nelms testified at trial to being aware of the misrepresentations Americorp marketers were making on behalf of Allegro Law. Under the majority test, which imputes the fraud of an agent regardless of the debtor-principal's knowledge, the fraud committed by Americorp employees is imputed to Nelms. Under the minority reckless standard test, because he did actually know of the fraud being committed, the fraud committed by Americorp employees is imputed to Nelms. Through the vehicle of Allegro Law, and the services of Americorp, Nelms committed a massive fraud on thousands of Chase cardholders.
Debts incurred as a result of fraud are excepted from discharge under § 523(a)(2)(A), which provides, in part:
11 U.S.C. § 523(a)(2)(A). "Courts have generally interpreted § 523(a)(2)(A) to require the traditional elements of common law fraud." Sec. and Exch. Comm'n v. Bilzerian (In re Bilzerian), 153 F.3d 1278, 1282 (11th Cir.1998). Accordingly, there are four elements of a fraud claim that the plaintiff must prove by a preponderance of the evidence:
Id. at 1281. Section 523(a)(2)(A) captures the Code's competing purpose with giving the debtor a fresh start. That is, while we generally assume the bankruptcy code's protections to be aimed at providing a fresh start for the debtor, § 523(a)(2)(A)'s purpose is to protect the victim of fraud. see Cohen v. de la Cruz, 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998); see also Grogan, 498 U.S. at 286-287, 111 S.Ct. 654 (explaining the limits on Congress's policy of a fresh start for a debtor under the Code, confining "the opportunity for a completely unencumbered new beginning to the honest but unfortunate debtor.") (citations omitted).
The misrepresentations of material facts made by Nelms and Allegro to Chase cardholders are vast and have been well documented in Section I(B)(3), supra, of this Memorandum. For purposes of thoroughness, however, it is worth noting that virtually each piece of the Allegro operation functioned on the customer being misinformed and kept in the dark as to what they were paying for and how their debts were being handled. The most basic promise of Allegro made to customers, that Nelms and Allegro could and would settle the customers' debt, was a blatant misrepresentation. Each Allegro customer from which the Court heard testimony was promised that all of their debts would be settled; this was their primary motivation for entering and paying into the Allegro scheme. Allegro did not fulfill this promise, and the evidence at trial showed that Nelms and Allegro had no intention of settling debts and did not in fact settle customer debts. Nelms and Allegro misrepresented their ability to settle debts with Chase, despite awareness that Chase had a policy of not settling with Allegro. Nelms and Allegro misrepresented their status as a law firm and ability to provide legal services to customers. Further, Nelms and Allegro misrepresented the fee structure of the program, and never informed customers that of their monthly payments, large portions, if not all, would instead go to massive fees to Nelms, Allegro, and Americorp.
Allegro promised to pay off Chase cardholder debts through settlements with the intent to deceive Chase cardholders. Had Chase cardholders known these debts could not be negotiated through Allegro, they would not have paid into the scheme. Indeed, each Allegro-affected Chase customer that provided testimony at trial said they would never have paid into Allegro if they had known their Chase debts could not be settled. Nelms's fee structure made it functionally impossible to settle debts, and he misrepresented the fees in order to deceive customers to continue paying into the scheme so he could collect massive fees without paying off any of their debts. Each of the Allegro customers that testified at trial told that they would never have signed onto the Allegro scheme had they been told the truth about the fee structure. In short, Nelms's deception through Allegro and Americorp purposely induced Chase cardholders into a fraudulent scheme designed to make himself rich.
The damages incurred by Chase as a result of Nelms's fraud were well documented at trial. Susan Coniglio, Chase's business operations director overseeing collections, performed a damages estimate that sought to capture the more nuanced damage Chase incurred from the Allegro scheme, rather than simply the base dollar amount of debt not paid by Allegro-affected cardholders. The total debt owed to Chase by the 5,453 Allegro-affected cardholders is in the neighborhood of $38 million. Chase readily admits, however, that it would be unreasonable to assume every cardholder would have paid every dollar they owed to Chase had they not become involved with Allegro. The more accurate approach, and the one presented by Coniglio, is one that seeks to put a dollar amount on the total that Chase reasonably could have expected to have been paid absent the Allegro fraud.
The first step in Coniglio's process is adjusting the accounts downward to get a more realistic view of which customers may have paid. This means taking off any customer who was in the later stages of delinquency and was not likely to pay (1,197 customers), any customer with whom Chase settled as of December 2012 (649 customers)
Coniglio's next step was to determine the actual likely payment stream from those 3,327 customers by looking for population of Chase customers who were similar to the Chase customers in the Allegero scheme-essentially a blend of customers looking to self-cure and those already in collection.
The evidence and testimony at trial showed that Nelms and Allegro proximately caused this damage to Chase. It was largely undisputed at trial that the basic operation of Allegro was premised on the fact that the creditor would pay money into Allegro rather than to their creditors. In fact, it was shown that Allegro discouraged their customers from paying creditors like Chase as a matter of basic policy. In that sense, Allegro collected money from Chase cardholders that otherwise could have been paid over to Chase directly. Nelms and Allegro misled their customers into thinking this money would be paid to Chase, while failing to inform the customers that Chase's internal policy would not allow settlements with Allegro. Therefore, money otherwise due to Chase was diverted by Nelms and Allegro into a fraudulent scheme, and was instead used by Nelms and Allegro for millions of dollars of profit.
Section 523(a)(4) provides that a debtor cannot discharge a debt incurred through "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C § 524(a)(4). A debt is nondischargeable based on defalcation if the creditor proves three elements: (1) the debtor stood in a fiduciary relationship with the creditor; (2) the fiduciary relationship existed prior to the creation of the debt; and (3) the debt resulted from an act of defalcation. Quaif v. Johnson, 4 F.3d 950, 953-55 (11th Cir.1993). The creditor seeking to except the debt on grounds of § 523(a)(4) bears the burden of proving "the existence of an express or technical trust and not merely the existence and breach of a fiduciary duty." In re Lucas, 477 B.R. 236, 242 (Bankr.M.D.Ala.2012). Once a fiduciary relationship in the context of a trust is established, the creditor must show a defalcation by the debtor. The Supreme Court has recently examined § 523(a)(4) to discern the meaning of defalcation, finding it to require an intentional wrong, or when "actual knowledge of wrongdoing is lacking, .... if the fiduciary consciously disregards (or is willfully blind to) a substantial and unjustifiable risk that his conduct will turn out to violate a fiduciary duty." Bullock v. BankChampaign, N.A., ___ U.S. ___, 133 S.Ct. 1754, 1759, 185 L.Ed.2d 922 (2013).
Chase seeks to establish a fiduciary relationship with Nelms with which to base nondischargeability upon the fact that Allegro had its customers authorize limited powers of attorney. There are two problems with Chase's approach. First, the power of attorney does not create the fiduciary duty necessary to give rise to an action under § 523(a)(4). "`As a rule, the general fiduciary duty created by a power of attorney gives rise to an agency relationship, but does not give rise to the fiduciary capacity required by section 523(a)(4).'" In re Scott, 481 B.R. 119, 190 (Bankr.N.D.Ala.2012) (quoting Pioneer Bank & Trust v. Cameron (In re Cameron), 2008 WL 5169513 (Bankr.D.S.D. Oct. 17, 2008)). Further, even if it could be shown that some elevated level of fiduciary duty existed giving rise to a nondischargeability action, that fiduciary duty would extend only to Nelms and Allegro and the
On the eve of the trial, Nelms filed a motion to dismiss alleging that Chase's complaint should be dismissed based on the grounds that Chase's complaint was barred by the statute of limitations under 11 U.S.C. § 727(e). (Doc. 128). Nelms's motion is without merit for two reasons. First, Chase timely filed its complaint. Second, Nelms waived his statute of limitations argument because he failed to raise it as an affirmative defense in his answer.
Nelms filed his Chapter 7 petition on February 22, 2010, and notice of commencement of the case was given to parties in interest, as well as notice of meeting of creditors, which was scheduled for March 31, 2010. (10-30430, Doc. 5). The deadline to file actions pursuant to 11 U.S.C. § 523(c), was June 1, 2010. Id., see also, Rule 4007(c), Fed. R. Bankr. P. Chase timely filed its complaint on June 1, 2010. (Doc. 1).
Nelms filed his answer on June 29, 2010. (Doc. 10). While he denied a number of the allegations of the complaint and raises several defenses, he did not raise the statute of limitations, or the bar of Rule 4007(c), in his answer. Rule 8(c), Fed. R. Civ. P., states that "[i]n responding to a pleading, a party must affirmatively state any avoidance or affirmative defense, including:... statute of limitations." (Made applicable to these proceedings pursuant to Rule 7008, Fed. R. Bankr. P.). As Nelms failed to plead the statute of limitations in his answer, he has waived it. Id.; Day v. Liberty National Life Ins. Co., 122 F.3d 1012, 1015 (11th Cir.1997).
Nelms was granted a discharge by this Court on January 23, 2012. (10-30430, Doc. 107). It is important to note that all Chase seeks here is a declaration from this Court, that Nelms's debt to it Chase excepted from that discharge under § 523(a)(2). That is, Chase is not opposing the grant of a discharge to Nelms pursuant to 11 U.S.C. § 727. If Nelms did not receive a discharge pursuant to 11 U.S.C. § 727, it would not be necessary to determine whether Chase's debt was excepted from it. The entry of a discharge in favor of a debtor is a necessary precondition for the efficacy of an exception, rather than — as Nelms alleges — a bar.
Nelms also argues that Chase should have prosecuted its dischargeability action in the context of a civil action in the Eastern District of New York in 2002. See Chase Bank, USA v. Allegro Law, LLC, et. al., Case No. 08-CV-4039. This Court has jurisdiction to hear this action pursuant to 28 U.S.C. § 1334(b). Nelms cites no authority for the proposition that the action should have been prosecuted in the Eastern District of New York rather than here, and this Court is aware of none. Moreover, it appears that the only court in which venue would have been proper is this Court. 28 U.S.C. § 1409(a).
Four days prior to the start of trial, Nelms filed a Motion to Recuse. (Doc. 124). Nelms contends that the Bankruptcy Judge was biased against him because he wrote a letter to the Alabama State Bar opposing the reinstatement of Nelms's law license. Before addressing the merits of Nelms's claim, a brief review of the context in which this letter was written would be informative.
On June 25, 2009, the Alabama State Bar suspended Nelms's law license, for a period of three years, for his unethical conduct in connection with the Allegro debt settlement scheme. (Pl.Ex. 13). After serving his suspension, Nelms petitioned the State Bar to reinstate his law license. Dianne Gray, an Investigator for the State Bar sent a copy of Nelms's petition to the Bankruptcy Judge with a request for comments.
Nelms alleges that the October 17 letter shows that there is an appearance of impropriety or bias and, for that reason, the undersigned should recuse, citing Ex Parte Rollins, 495 So.2d 636 (1986). In Rollins, the Alabama Supreme Court granted a writ of mandamus, requiring a trial judge to recuse from a case where the judge had "intense negative feelings" against one of the lawyers. It should first be noted that the "intense negative feelings" arose from prior dealings between the lawyer in question and the trial judge, issues that had forced the trial judge to recuse himself in two prior matters. The judge made a complaint against the lawyer with the bar, however, the bar did not sanction the lawyer.
Nelms misreads the decision in Rollins. It is not a blanket rule that a trial judge must always recuse if he has made a bar complaint against any lawyer, or party, in a case. The judge's bar complaint in Rollins was a symptom of the "intense negative feelings," bourne out of extrajudicial animus, and not the bar complaint itself that triggered the need to recuse. The October 17 letter written by the undersigned Bankruptcy Judge was not a formal bar complaint, but instead was in response to a request for information from the bar, based on evidence heard by the Bankruptcy
Recusal is governed by 28 U.S.C. § 455(a) which states that "any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonable be questioned." Ginsberg. v. Evergreen Security, Ltd., (In re Evergreen Security, Ltd.), 570 F.3d 1257, 1263 (11th Cir.2009). "Opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible. Thus, judicial remarks during the course of a trial that are critical or disapproving of, or even hostile to, counsel, the parties, or their cases, ordinarily do not support a bias or partiality challenge." Liteky v. United States, 510 U.S. 540, 555, 114 S.Ct. 1147, 1157, 127 L.Ed.2d 474 (1994); see also, Mantiply v. Horne, 2014 WL 1370151 (S.D.Ala. April 8, 2014). The facts which came to the attention of the undersigned Bankruptcy Judge, which underlie the October 17 letter to the State Bar, all came to his attention through the course of the Allegro and Nelms bankruptcy cases and related Adversary Proceedings. Nelms does not allege any extrajudicial source for the matters he complains of. Nelms's claim of bias is without merit.
Chase has provided a thorough account of the massive fraud committed by Nelms through Allegro Law on thousands of Chase account holders. Through misleading advertisements and fraudulent promises to solve debt problems for consumers, Nelms orchestrated a scheme that induced thousands to halt payments to their creditors and instead divert the money to him. Millions of dollars otherwise due to Chase were instead collected by Nelms and his agents in the form of costly fees, causing alarming financial harm to consumers in the process. The Court heard ample testimony of the reliance consumers placed on Nelms's misrepresentations, and of the damage caused to Chase as a result. Accordingly, judgment is due to be entered in favor of Plaintiff Chase Bank, and the debt of $9,979,229.52 owed by Nelms is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). A separate order to this effect will be entered.
Done this 24th day of July, 2014.
The Defendants collected, held, and purportedly processed $127,370,765.89 in payments received from Allegro customers by Allegro Law. (PX 88, Tab DM2 ("Receipts") and PX 89, Tab DS1/part 2 ("Total Payments Received")). Since the February 22, 2010 filing of the Chapter 7 Voluntary Petition for Keith Nelms, (Case No. 10-30430, Doc. No. 1)
Allegro Law was simply another iteration of the same scam that Defendants have been perpetrating for years. Defendants processed and mailed the same letters on behalf of Allegro Law that they did for Hess Kennedy, Consumer Protection Law Center, and Campos Chartered Law Firm. (PX 128). Defendant Americorp's customer service representatives answered the phone on behalf of Allegro, Hess Kennedy, Campos Chartered Law Firm, and Consumer Protection Law Center all in the same day. (PX 336C; Transcript, page 77, lines 5-6). When one entity was shut down by regulators, the Defendants
In an email dated February 23, 2008, Defendant Timothy McCallan and a man named Joel Carlsen exchanged correspondence evidencing their plans to abandon Hess Kennedy and Consumer Protection Law Center and carry on with Allegro:
(PX 337B-2). In a letter dated March 21, 2008, Defendant Timothy McCallan made the transition to Allegro official when he wrote:
(PX 125). Many Allegro customers indicated in correspondence with the customer service department that they were formerly customers of Hess Kennedy. (PX 201 and PX 351).
After the Allegro Law debt elimination program
During the Receivership — and while they were still being paid large sums of money by the Receiver — Defendants purportedly continued to perform their "back office processing" work. Indeed, Defendants were elated that they were going to continue to make money despite Allegro's Receivership. An email from Vanessa Vinicombe, Americorp's Chief Financial Officer, to Defendant Tim McCallan and others, dated days after the initial appointment of the Allegro Receiver, stated:
(PX 108; email dated July 16, 2009) (unconventional capitalization in original).
On July 6, 2010, while the Defendants' businesses remained operational, this Court entered an Order on the Receiver's Motion for Allowance of An Administrative Expense Claim Pursuant to 11 U.S.C. 503(B)(3)(E) and 543(C), which sought payments from the bankruptcy estate for "services" provided by Defendants Americorp, Seton, and The Achievable. (PX 1). In that July 2010 Order, the Court made clear that it would not approve administrative claims for the Defendants until answers to some fundamental questions were provided:
(PX 4) (emphasis added). More than three years have passed since this Court entered that Order.
On September 23, 2010, the Trustee wrote a letter to Americorp's attorneys requesting much of the same information that the Court requested in its July 6, 2010 Order:
(PX 5).
On September 27, 2010, the Trustee wrote a letter to Americorp's attorneys requesting that the Defendants preserve all evidence related to the underlying bankruptcy:
(PX 6). Thus, long before the Defendants ceased operations, they were fully aware of how critical their data was to cases that were currently pending before this Court and they were fully aware of this Court's demand for that data.
On February 15, 2011, Plaintiff filed the Complaint in this case (11-3007, Doc. No. 1). Plaintiff filed an Amended Complaint on March 2, 2011 (PX 7). Defendant Timothy McCallan, CEO and owner of both Americorp and Seton, testified at a February 2013 evidentiary hearing that when he was served with the Complaint in this matter, he read it. (PX 346, page 111, line 25; page 112, lines 1-2). He further testified:
(PX 346, page 112, lines 3-10).
On March 10, 2011, Defendants Americorp, Inc., Seton, Corp., and Timothy McCallan were served with Plaintiff's First Request for Production and Plaintiff's First Interrogatories (PX 8, PX 9, and PX 10). Among the many discovery requests included in those pleadings was Request for Production No. 11, which asked for all documents relating to:
Clearly, Request No. 11 was designed to obtain documents that answered the fundamental questions that were at the heart of the underlying bankruptcy proceeding as well as this adversary proceeding:
Only three weeks after they were served with these discovery requests, both Americorp and Seton ceased operations. (PX 35, Affidavit of Timothy McCallan, at ¶ 7).
On May 5, 2011, Defendants responded to Plaintiff's First Request for Production and Plaintiff's First Interrogatories. (PX 15, PX 16, and PX 74). At the beginning of their Request for Production, Defendants stated that the "... [f]iles being made available via DVDs are provided, with limited exceptions,
In Defendants' first response to Request No. 11, they produced 2 folders of documents, one named "All Active Clients" and one named "All Inactive Clients," and stated that additional documents "may be found in other DVD folders," which Defendants did not identify. (PX 16). The contents of those folders were introduced into evidence at the trial as PX 17, PX 18, PX 19, and PX 20. A brief review of the 4 spreadsheets produced in those 2 folders demonstrates that those spreadsheets did not come anywhere close to containing all of the information asked for in Request for Production No. 11.
On June 16, 2011, at a hearing conducted by this Court, the Defendants described their May 2011 document production as follows:
(PX 26, Transcript of June 16, 2011 Hearing, page 20, lines 2-19; page 21, lines 13-16). This was untrue. The Defendants later turned over at least 800,000 additional documents, a huge second database that contained information relating to thousands of additional customers, and a variety of Excel spreadsheets, none of which were included in the May 2011 production. (PX 346, Transcript of February 21, 2013 Hearing, page 35, lines 23-25; page 36, lines 1-5). Moreover, less than 4 months before trial and after the entry of more than half a dozen Court Orders, Defendants revealed even more information — including multiple additional servers, 250,000 audio recordings, and approximately 20 file boxes containing paper documents relating to Allegro Law. (Transcript of November 4, 2013 Trial, page 24, lines 10-13).
On August 2, 2011, pursuant to Bankruptcy Rule 7037 and Rule 37 of the Federal Rules of Civil Procedure, Plaintiff sent Defendants a 22-page letter outlining in great detail the numerous deficiencies in Defendants' discovery responses. (11-3007, Doc. No. 155-9). In that letter, Plaintiff specifically addressed, among other things, the complete inadequacy of Defendants' response to Request No. 11 and inquired about accessing a file that Plaintiff had found
On August 16, 2011, Defendants responded to Plaintiff's Rule 7037 letter. (11-3007 Doc. No. 155-10; PX 346, page 38, referencing Exhibit 29 introduced in that hearing). In that letter, Defendants indicated for the
In their August 16, 2011 letter, Defendants reassured Plaintiff that he now had
(11-3007, Doc. No. 155-10; PX 346). Thus, by August 2011, Defendants had again represented both to the Plaintiff and to this Court that they had produced
On August 18, 2011, this Court held a hearing on Defendants' request to stay the adversary proceeding pending the resolution of their appeals of this Court's denial of their motions to compel arbitration. During that hearing, the issue of Plaintiff's access to the database was discussed. Counsel for Defendants assured the Court that: "if one had access to
Shortly thereafter, on August 22, 2011, this Court entered its first Order in this
(11-3007, Doc. No. 103) (emphasis added).
A conference call between Plaintiff's IT consultant and Defendants' IT consultant was held on August 24, 2011. (PX 45, page 23, lines 10-13). However, the IT consultant that Defendants chose to participate in the call, David Torre, was not helpful in any way. (PX 45, page 23, lines 14-22). This is particularly interesting now, given that the Defendants identified Mr. Torre more than a year later as their "former IT director" and described him as "highly skilled." (Doc. No. 208, filed October 8, 2012); see also PX 56, March 19, 2012 Letter from Thomas Mancuso to Steve Olen, page 4). Notably, Defendants did not offer Mr. Torre as a witness to testify about issues regarding access to the database at the evidentiary hearing that was conducted by this Court a year and a half later on February 21 and 22, 2013. (PX 346).
Plaintiff filed a Motion To Compel on September 9, 2011 (11-3007, Doc. No. 112). On September 13, 2011, Plaintiff filed his Third Interrogatories and Requests for Production to Defendants. (PX 33). In those discovery requests, the Plaintiff again attempted to obtain an accounting of the money that was paid into the Allegro program, which the Court, by that time, had been demanding for over a year:
(PX 33). A request for production included in that filing also requested "any and all documents that Defendants used, referred to, consulted, reviewed, relied on or considered in answering any part of Interrogatory No. 1." (PX 33). On October 12, 2011, Defendants responded with a lengthy objection and more misrepresentations:
(PX 38). This interrogatory response was signed under oath by Defendant Timothy McCallan, individually and as the corporate representative for Defendants Americorp and Seton. (PX 38). The representations Mr. McCallan made in this interrogatory response were untrue.
On October 11, 2011, Defendants responded to Plaintiff's Motion To Compel (11-3007, Doc. No. 123). Defendants, both in their August 16, 2011 response to Plaintiff's
In their August 16, 2011 response to Plaintiff's Rule 7037 letter, Defendants stated:
In their Opposition to Plaintiff's Motion to Compel, Defendants stated:
(Doc. 123, pages 2, 3, 5, and 6) (emphasis added). Moreover, in a sworn affidavit, Defendant Timothy McCallan stated:
(PX 35, at ¶ 8). Despite all of these unequivocal representations to the Court, at this point in time (October 2011), Defendants still had not disclosed that there was actually a
On the same date that Defendants filed their Opposition to Plaintiff's Motion To
Because, according to Defendants, the copying and loading of the software had to be done by an outside consultant, Plaintiff did not receive the software until October 25, 2011. (PX 45, page 27, lines 4-7). Defendants then sent the Plaintiff custom built software without an "installer" (an installation program — including drivers, plugins, etc. — that installs software onto a computer and configures it so that it is compatible with the system). (PX 45, page 26, lines 420). Therefore, all installation of the custom built software would have to be done manually. General IT experience will only help so much when dealing with custom built software designed for a specific client and a specific purpose. (PX 45, page 25, lines 13-25; page 26, lines 1-20).
Even worse, the instructions provided with the software (which Defendants obviously knew Plaintiff needed) stated in their entirety:
(PX 45, page 26, line 21 through page 30, line 14). The second set of instructions read as follows (errors and typos in original):
(PX 45, page 30, line 15 through page 32, line 11). Plaintiff had no idea what these instructions meant and the so-called instructions certainly did not constitute step-by-step directions on how to set up the software in Server 2008 and SQL 2008 environments — both of which were necessary to make the information in the first database accessible. (PX 45, pages 26 through 30).
On October 27, 2011, this Court entered a second Order regarding access to the database in this case:
(PX 43). In response to this Order, the Defendants submitted the following:
(PX 44) (emphasis added). This direct representation to this Court also turned out to be false. Defendants later described the first database and the software that was necessary to access it as follows:
(PX 58) (emphasis added). Of course, at this point, the Defendants were still concealing the fact that there were actually 2 databases, as described below.
On November 14, 2011, the Court held a hearing on Plaintiff's Motion To Compel. (PX 45). The testimony in that hearing established that at one point in time the Defendants had both the database
Robert Link, an attorney for the Defendants, testified that "when operations were ceased on or about April 1st [2011] and things were wound down ...
(PX 46) (emphasis added).
On December 1, 2011, Defendants responded that "Plaintiff may access the server and the data, and perform the other actions specified in the Order, during regular business hours on December 14 and 15, 2011, at the offices of Jason B. Wells and Jackson Thornton Technologies, LLC, 200 Commerce Street, Montgomery, AL 36101." (PX 47).
As a result, Plaintiff filed a Motion for Sanctions on January 25, 2012 (Doc. No. 155). On February 14, 2012, defense counsel filed motions to withdraw, explaining: "Despite repeated email and voice mail messages, I have had no communications with Defendants regarding the substance of the case since January 25, 2012." (PX 51, Affidavit of Julian Spirer, at ¶ 4).
On February 15, 2012, this Court entered a fourth Order:
(PX 52) (emphasis added). A few days later, on February 22, 2012, this Court entered a fifth Order, which granted, in part and deferred in part, Plaintiff's Motion for Sanctions. (PX 53). In addition, the Court stated as follows:
(PX 53) (emphasis added).
On March 5, 2012, a warrant was issued for the arrest of Defendant Timothy McCallan. (PX 54). A little over a week later, the Court noted that "McCallan appeared with new counsel, who admitted that they could not produce the database, as called for by the November 15, 2011 Order." (PX 55). This Court set another hearing for April 9, 2012 and gave Defendant McCallan an opportunity to purge himself of contempt. (PX 55).
Incredibly, the Defendants blamed the Bankruptcy Court (and others) for their own discovery abuse:
(PX 56) (emphasis added).
On March 28, 2012, the Plaintiff — yet again — asked the Defendants for basic information about what happened to the $127,370,765.89 that was paid into the Allegro Law program. This information was still critical to the Plaintiff's causes of action for turnover, accounting, and fraudulent transfers. This time, the Plaintiff submitted the following questions to the second set of attorneys who entered appearances on behalf of the Defendants on March 14, 2012 and April 6, 2012 (11-3007, Doc. Nos. 186, 187, and 191):
(PX 59).
On April 6, 2012, Defendants filed Notice of Compliance With Court Order Dated March 15, 2012 Regarding Production of Database and Motion to Remove Sanctions. (PX 58). In that filing, Defendants "assert[ed] emphatically" that "since the entry of the Order, the Defendants, the Defendants' counsel, newly engaged consultants and their staff have expended substantial resources and time and made every effort to comply with the Plaintiff's requests for production of documents as well as the Order." (PX 58). For the first time in a pleading filed with this Court, Defendants admitted that there were actually
(PX 58). The Defendants went on to say that they were "committed henceforth to speedily and thoroughly complying with the rules of discovery" and concluded by saying that they "hereby tender to this Court and to the Plaintiff the database requested by the Plaintiff in a format which
Based on these representations by the Defendants, on April 13, 2012, this Court purged Defendant Timothy McCallan of contempt. (PX 60). This Court discovered much later that the representations made in the Notice of Compliance were also false. For example, Oscar Nunez, the Defendants' IT director, testified almost a year later that he
(PX 346, page 191, lines 16-24). Thus, Defendants' representations to this Court in their Notice of Compliance that an "understandable" version of the database had been produced simply were not true.
On April 23, 2012, the Defendants produced a series of spreadsheets that provided summary information related to 7 questions that the Plaintiff had submitted to the Defendants in March (PX 59, PX 88, and PX 89), which purported to include answers to three additional (and related) questions. On the same date, the District Court entered its ruling on the Defendants' appeal of this Court's denial of their Motion To Compel Arbitration. (Doc. No. 195). The District Court took note of the Defendants' discovery abuses in this case, observing:
(11-3007, Doc. No. 195) (emphasis added).
As ordered by this Court, on May 7, 2012, the Plaintiff filed his Third Report on the Status of Discovery, explaining, in part, that: "Plaintiff has very little documentary evidence (e.g., actual letters to and from specific creditors evidencing negotiation and/or settlement of a debt owed) to verify the accuracy of the data input into the various databases by Defendants' employees." (PX 62). On the same day, Plaintiff also sent the Defendants another Rule 7037 letter requesting that the documentary evidence responsive to Request No. 11 be produced. (PX 62). On May 16, 2012, Defendants filed a response to Plaintiff's Third Report on the Status of Discovery, but said nothing about the lack of documentary evidence discussed in the Plaintiff's report. (PX 64).
On May 18, 2012, Defendants wrote to Plaintiff that they were "making every effort... to complete our review as soon as possible and file a further response as we deem appropriate," citing "significant geographic issue[s] in coordinating efforts on behalf of our Client in order to properly respond to [Plaintiff's] requests." (PX 65).
On June 4, 2012, Defendants sent additional correspondence to the Plaintiff stating in part as follows: "The majority of the alleged `deficiencies' in your May 7 letter are included in Defendants' electronic production and it is just a matter of you or your expert locating where on the system the information is stored." (PX 66). Defendants offered to participate in a conference call in order to demonstrate where the information Plaintiff requested was located. (PX 66).
On June 18, 2012, the parties participated in a conference call related to determining the exact location of all the actual documents pertaining to each individual customer of Allegro for whom the Defendants purportedly engaged in debt management and debt settlement negotiations.
(11-3007, Doc. No. 203-D).
On September 24, 2012, Plaintiff filed a Motion To Amend Scheduling Order and Produce Documents in a Usable Format. (11-3007, Doc. No. 203). Plaintiff was unable to access most of the actual documents relating directly to the customers of Allegro Law. The links between the software that Defendants produced and the document repository to which they were formerly connected were all broken. (PX 346, page 59, lines 7-23). According to testimony at the February 2013 hearing, the
With the benefit of hindsight and the admissions regarding the inoperable links in the front-end applications, this Court now better understands Defendants' witness Bob Link's very carefully chosen words at the November 14, 2011 hearing. Mr. Link admitted that what was sent to Montgomery for the Plaintiff to clone was
(PX 45, Transcript of November 14, 2011 Hearing, page 70, lines 15-25; page 71, lines 1-4) (emphasis added). This Court concludes that the data's backup file and the software programs were restored to the virtual server in Montgomery. However, during that process, the document repository that was also loaded onto the virtual server was no longer in the same electronic location where the front-end applications were programmed to find it. During the database rebuild in Montgomery, Defendants failed to redirect the front-end applications to find the documents on the local server by specifying the new location of the document repository. Incredibly, Defendants
The Defendants' misrepresentations did not end there. In their October 8, 2012 Response To Plaintiff's Motion to Produce Documents in a Usable Format, Defendants again asserted — as, by this time, they had asserted many times before — that they had met their burden under Rule 34 because they had now produced the documents as they were kept in the usual course of business: "Defendants have cloned [their] servers and replicated [their] database for Plaintiff, with the requested information being stored and kept in the
Defendants claimed that the virtual server they produced "allows Plaintiff's computer to function as if their computer was the Defendants' computer (and server)
(Doc. No. 208, page 11) (emphasis added). Their own IT director, Oscar Nunez, later testified:
(PX 346, page 196, lines 17-21). Thus, the Defendants did not produce the documents as they were kept in the usual course of business — i.e., with functional links for quick retrieval of all documents by customer.
On October 4, 2012, the Court entered a seventh Order, which required the parties to meet one last time and attempt to resolve this discovery dispute. (PX 70). In the event the parties were unable to resolve their differences, the Court set an evidentiary hearing for November 5, 2012. (PX 70).
On October 22, 2012, the parties participated in a "meet and confer" telephone conference. Defendants insisted on transcribing the call. When Plaintiff objected, one of the attorneys for Defendants explained on the record why the Defendants insisted on the presence of a court reporter:
Transcript of Meet and Confer, October 22, 2012, page 7, lines 3-9, 18-23; page 8, lines 1-4 (113007, Doc. No. 239-1). This Court notes that the Defendants' description of the September 27, 2012 telephonic hearing is totally inaccurate.
On the October 22, 2012 call with Plaintiff, Defendants asserted that they simply could not restore their networks and provide functionality to the system as Plaintiff requested:
Transcript of Meet and Confer, October 22, 2012, page 32, lines 16-23; page 33, line 1 and lines 5-8 (emphasis added) (Doc. No. 239-1). Despite these emphatic protestations by Defendants, their own IT Director, who was responsible for making these links work, testified under oath just a few months later that the functionality of the links at issue was simply a matter of "want to have" versus "need to have":
(PX 346, page 186, lines 7-14). Mr. Nunez's testimony further evidences how completely contemptuous the Defendants were about this Court's orders in this litigation, which, as far back as November 2011, included specific instructions that "[t]he database shall be produced in its original form and shall not be altered, deleted, or modified." (PX 46).
Instead of agreeing to restore the links to the actual documents in their production as Plaintiff requested, Defendants offered these alternatives during the October 2012 "meet and confer":
Restoring the functionality of the links on the hard drive that was produced by Defendants in April 2012 was
On October 29, 2012 — only one week before the upcoming evidentiary hearing as to whether the database had been produced in a useable format — Defendants filed an emergency Motion To Continue on the grounds that: (1) Hurricane Sandy would impede their ability to communicate
Then, on November 26, 2012 —
On January 23, 2013, Plaintiff filed another Motion for Sanctions, describing at length the Defendants' conduct in this case. (11-3007, Doc. No. 224). The next day, the Defendants filed an Emergency Motion for Protective Order and for Briefing Schedule on Plaintiff's Motion for Sanctions. (11-3007, Doc. No. 227). On January 25, 2013, this Court scheduled a hearing for Plaintiff's Motion for Sanctions for February 21, 2013. (11-3007, Doc. No. 236).
In their response to Plaintiff's Motion for Sanctions, Defendants unequivocally stated to this Court that "[t]he November 2012 Hard Drive did not contain any new or additional information or documents." (11-3007, Doc. No. 239). However, at the February 2013 hearing, this Court learned that there was, in fact, additional information in the November 2012 production that was not included in the production of April 2012, the production for which Mr. McCallan was purged of contempt. (PX 346, page 64, lines 8-25; page 65, lines 1-25; page 66, lines 1-25; page 67, lines 1-8). In fact, it was not until this February 2013 hearing that Defendants first revealed that there were also multiple servers in Florida that were responsive to Plaintiff's discovery requests that had not been turned over. Defendant McCallan testified:
(PX 346, page 138, lines 5-13). Defendant McCallan further testified:
(PX 346, page 141, lines 5-17; page 142, lines 5-7). Moreover, Vanessa Vinicome, the Defendants' former CFO, testified under oath at that same February 2013 hearing:
(PX 346, page 269, lines 24-25; page 270, lines 1-3). Both Defendant McCallan's testimony and Vanessa Vinicombe's testimony was false. On July 2, 2013, Defendant McCallan sent an email to Ms. Vinicombe and one of his counsel stating that all of the following relevant documents were in a storage facility in Florida and were not part of the database that Defendants had previously produced:
(PX 337B-1).
On June 6, 2013, Defendants' second set of attorneys filed Motions to Withdraw. (11-3007, Doc. Nos. 277 and 278). This Court set a hearing on the Motions to Withdraw for July 22, 2013 and stated at the end of its Order: "If the Plaintiff has been given access to the Defendant's servers since the February 21-22 hearings, the parties should be prepared to update the Court." (Doc. No. 279). Under the threat of additional sanctions, and with a hearing fast approaching on Plaintiff's Second Motion for Sanctions, Defendants finally made additional Allegro-related servers and documents not previously produced available to the Plaintiff in mid-July, a process that was completed only 5 days before defense counsels' motions to withdraw were to be heard. (PX 108; Transcript of November 4, 2013 Trial, page 24, lines 10-13).
On July 29 and 30, 2013, Defendant Timothy McCallan sat for a deposition in Mobile,
As demonstrated above, from the very beginning of this case, the Defendants made a deliberate decision to do everything in their power to avoid producing any documents or answering any questions related to what the Defendants did with the $127,370,765.89 in payments made by Allegro customers to Allegro Law, LLC. When Defendants were finally forced to produce documents, they refused to help educate either the Plaintiff or this Court as to what those documents meant or how they should be interpreted. Every single thing that the Defendants have done in this case has been designed to thwart the Plaintiff's efforts with respect to his claims of turnover, accounting and fraudulent transfers. The trial was no exception.
A trial in this matter was held on November 4, 2013.
After more than 2 ½ years of very aggressive litigation, neither the Defendants nor their counsel showed up for trial. Neither the Defendants nor their counsel informed this Court or Plaintiff of that decision ahead of time. This Court concludes that the decision not to attend the trial was a calculated, deliberate decision to avoid having to do what Defendants should have done all along: come forward and account for the $127,370,765.89 received by the Defendants in connection with the Allegro debt elimination program and related services.
The Plaintiff in this case has brought claims for, among other things, turnover of estate property, accounting, and fraudulent transfers.
In order to establish entitlement to an accounting, equitable jurisdiction must first be established. Worley v. Worley, 388 So.2d 502, 506 (Ala.1980). Equitable jurisdiction with respect to a claim for accounting exists on at least three grounds: "the complicated character of the accounts, the need of a discovery, and
This Court concludes that Americorp and Seton acted as fiduciaries with respect to all of the money flowing through Allegro Law accounts. The Alabama Supreme Court has defined a fiduciary relationship as one in which:
Univ. Fed. Credit Union v. Grayson, 878 So.2d 280, 291 (Ala.2003). Defendant Seton
(PX 336B (emphasis added).
Americorp had over 264 employees between January 2008 and March 2010. (PX 74B). It had offices in New York and Florida. Deposition of Timothy McCallan, page 55, lines 16-22. Seton had 21 employees during the same time period with offices in New York. (PX 74B); Deposition of Timothy McCallan, page 56, lines 18-20. Allegro Law had a single office located in Prattville, Alabama, which had a single point of contact with Defendants — Keith Anderson Nelms. Deposition of Timothy McCallan, page 52, lines 6-13; (PX 11). According to their contract with Allegro Law, Americorp and Seton had responsibilities touching every aspect of the Allegro debt eliminations programs, including:
(PX 11). Additionally, the Defendants were responsible for:
(PX 11). The fiduciary capacities in which Americorp and Seton operated are further evidenced by their control of Allegro's bank accounts. Allegro's bank accounts were set up under the name "Allegro Law, LLC c/o Americorp, Inc." and the address on file with the bank belonged to Americorp, not Allegro. (PX 104, PX 105, and PX 106). Americorp had access to and conducted nearly all of the withdrawals and deposits as to each of Allegro's accounts:
Deposition of Vanessa Vinicombe, Americorp CFO, page 123, lines 14-17.
Deposition of Vanessa Vinicombe, page 116, lines 22-25; page 117, lines 1-20. Similar processing occurred on the debt management side:
Deposition of Vanessa Vinicombe, page 185, line 1; page 186, lines 1-13; page 183, lines 14-25; page 184; lines 1-3.
Given this extraordinary access to all of the financial accounts associated with Allegro Law, and the overwhelming evidence demonstrating that Americorp and Seton were responsible for the complete, accurate, and timely collection and disbursement of the money flowing through the Allegro Law debt elimination programs, this Court concludes that Americorp and Seton had a fiduciary relationship with Allegro Law, which invokes the equitable jurisdiction of this Court with respect to Plaintiff's claim for accounting.
Eichengrun, Joel, Remedying the Remedy of Accounting, 60 Ind. L.J. 463, 469-70 (1985). In Bynum, the Fifth Circuit Court of Appeals, relying on "broad equitable principles," explained that "having the obligation to account, one whose accounts are demonstrated to be defective and inadequate must shoulder a substantial obligation diligently to make a correct account." Bynum v. Baggett Transp. Co., 228 F.2d 566, 573 (5th Cir.1956)
Bynum v. Baggett Transp. Co., 228 F.2d 566, 573 fn. 14 (5th Cir.1956) (other citations omitted). Moreover, the Fifth Circuit held that "one obliged to account does not fulfill his duty by supplying only that which the beneficiary requests, that which is conveniently accessible, or remaining silent in the face of the beneficiary's inevitable difficulty in trying to construct or reconstruct accounts which ought to have been kept and available." Id. at 574.
Plaintiff introduced summary spreadsheets produced by the Defendants in April 2012, which show a total of $127,370,765.89 paid by consumers into the Allegro debt elimination programs. (PX 88, Tab DM2 ("Receipts") and PX 89, Tab DS1/part 2 ("Total Payments Received")).
After Plaintiff demonstrated through testimony and evidence at trial, including admissions from the Defendants, that $127,370,765.89 was paid into the Allegro Law debt elimination programs, the burden shifts to the Defendants to establish the amount by which that total should be reduced, which requires accounting for how that money was appropriated. Notably, the Defendants must "present an itemized statement, showing the details of expenditures,
The evidence at trial included a summary statement of the manner in which the money that Defendants received was purportedly appropriated (PX 88, PX 89). The summary spreadsheets produced by the Defendants suggest that some of the money was paid to creditors ($71,240,476.53)
The Defendants refused to do so. In fact, when asked, Americorp's Chief Financial Officer, Vanessa Vinicome, testified that the she did nothing to validate any of the initial figures provided by referral agencies on behalf of customers, claimed she had no idea how the customers' monthly payments were calculated, and stated that it was not important to her to know how the fees were calculated. Deposition of Vanessa Vincombe, page 53, lines 8-15, 20-22; page 51, lines 15-19; page 52, lines 6-15; page 72, lines 8-14. In fact, Ms. Vinicombe testified that, as CFO of Americorp, she never once conducted any kind of evaluation or audit to determine whether or not the amount that customers paid in fees was even justifiable. Deposition of Vanessa Vinicombe, page 92, lines 12-23.
Defendants did not introduce into evidence any vouchers, receipts, or other documentation to support their contentions as
With respect to amounts that Defendants claimed were "escrowed" on behalf of Allegro debt settlement customers, the testimony and evidence introduced at trial made clear that those amounts have simply disappeared. For example, money reflected in the "Accumulated Funds" tab of the database (PX 342) evidenced the amount of money that a customer had in escrow at the end of his or her participation in the Allegro debt settlement program. Deposition of Vanessa Vinicombe, page 63, lines 17-20 ("Accumulated funds is what the client had in escrow."). If a total appeared in the "Accumulated Funds" tab of the Defendants' database, there was
(November 14, 2013 Trial Transcript, page 74, lines 1-7). The database itself evidences this fact as well. When customers did receive a refund of the amount that remained in escrow at the time they ended their participation in the debt settlement program, there was evidence of that refund in their file. (PX 161-30, showing a signed refund check of $300, and PX 342, showing $0.00 in "Accumulated Funds" for the same customer). Thus, for any customer who had money reflected in the "Accumulated Funds" tab of PX 342, that money is entirely unaccounted for and, given the Defendants' lack of accounting at the trial, presumed misappropriated. This amount totals $11,220,668.37 (PX 342).
Because Defendants admitted the total amount of money paid into the Allegro Law debt elimination programs, but have refused to account for how that money was disbursed or whether it was ever disbursed, this Court concludes that Defendants should be held liable for the entire amount that remains unaccounted for: $95,140,576.67 (total amount paid into the debt elimination programs [$127,370,765.89, PX 88 and PX 89] less the fees paid to Defendants themselves [$15,372,894.58, PX 88 and PX 89], which are addressed separately below as part of the claim for turnover, and less the amount turned over to the trustee from accounts previously controlled by Defendants [$16,857,294.64, see Doc. No. 307-1, Estate Cash Receipts and Disbursement Record]).
As part of the Allegro debt elimination program, Seton was paid $9,994,580.25 in fees, Americorp was paid $2,622,610.60 in fees, and The Achievable was paid $2,755,703.73 in fees. (PX 88 and PX 89 [Tabs DM3a, DS3a]; PX 59).
The evidence in this case overwhelmingly demonstrates that the Defendants accepted fees for services they did not and, in some cases, could not perform.
Among many other things, Defendants Americorp and Seton were responsible for "[c]ommunicating on Allegro's behalf with consumers' creditors and collectors," and "[n]egotiating with each consumer's creditors and attempting to reach a mutually agreeable settlement approved by each client." (PX 11). Americorp's customer service representatives promised Allegro consumers that debts would be settled and that they would receive settlement in full letters upon the conclusion of the program:
(PX 336A; PX 74B) (emphasis added). None of this turned out to be true. Allegro customers wrote to the Defendants and said so themselves. For example, one customer wrote: "I would like to cancel my account and get a complete refund for any fees paid, since I received no services from you." (PX 156-27). Another wrote: "It doesn't look like anything is being done with our account. I hope I am not dealing with crooks. How long will this go on[?] The bill is increasing." (PX 192-16). Another complained: "It is sad when someone has questions and needs to speak to someone, no one can be reached. The number I was provided is 800-295-6025 and no one picks up." (PX 192-45). Another wrote: "Your program has not worked. I have four current judgments against me pending and one Court ordered wage garnishment in effect." (PX 194-42).
On the debt settlement side, it is clear to this Court that customers paid enormous amounts of money into the program, the majority of which went toward exorbitant up-front fees paid to the Defendants, and the balance of which accumulated so slowly that customers were more likely to be sent to collections, sued in court, or forced into bankruptcy than they were to complete the program. (PX 102, PX 344; PX 138-PX 235; PX 342; PX 340). For example, Mr. Ray Hammons, an Allegro debt settlement customer, paid $5,269 into the program, 46% of which was taken as fees. Mr. Hammons never received a single settlement with any of his 5 creditors. (PX 342, PX 114, PX 102). With respect to his Capital One account ending 7256, Mr. Hammons had the following experience in the debt settlement program:
The debt management side was no better. Those customers, too, paid enormous amounts of money into the program, a large portion of which was absorbed as fees, and the balance of which Defendants repeatedly refused to account for. (PX 237, PX 115, PX 236-PX 335; PX 339). For example, Wendy Andrews paid $2,218 into the debt management program, 37% of which was taken out as fees, and received no binding agreements with her creditors. (PX 342 and PX 327). Instead, the Defendants claimed to have paid one of her creditors, Landmark Credit Union, 9 months worth of payments that were less than the required monthly minimum in the absence of an agreement with that creditor. (PX 342, PX 237, and PX 115).
Plaintiff called Dr. Jim McClave, President and CEO of InfoTech, Inc., to testify at trial. Based on his training, education, and experience, this Court finds that Dr. McClave is an expert in the fields of statistics and econometrics (the application of the science of statistics to business and economic issues). (PX 343; Transcript, page 95, lines 6 through page 98, line 9). Dr. McClave testified that the 100 debt settlement customers and 100 debt management customers identified on PX 340 and PX 339, respectively, were each statistically valid random samples of the entire populations of those customers found in PX 88 and PX 89. (PX 343; Transcript, page 100, lines 7-22; page 101, lines 8-25). The entire files for each of those 200 representative customers, which the Plaintiff compiled from four different locations within the Defendants' database, are PX 102, PX 344, PX 138-PX 235 (debt settlement), and PX 236-PX 335 (debt management). (PX 342; Transcript, page 28, lines 3-22).
The testimony and evidence at trial established that, of the 18,884 customers enrolled in the Allegro debt settlement program, 59% made payments into the program. (PX 340; PX 89; Transcript, page 102, lines 18-22). The testimony also established that, with a 95% confidence interval, between 95% and 100% of the individuals in the Allegro debt settlement population who actually paid money into the program do not have a single settlement in full letter in their file. (Transcript, page 103, lines 21-25; page 104, lines 1-19). Given that each customer had an average of 5 creditors (Deposition of Timothy McCallan, page 42, lines 22-25), and given a 59% payer rate, this Court concludes that with respect to over 50,000 of the 50,700 accounts enrolled in the Allegro debt settlement program, no legally enforceable settlements were obtained by Defendants.
Similarly, on the debt management side, the testimony and evidence established that, of the 21,623 customers enrolled in the Allegro debt management program, 81% made payments into the program. (PX 339, PX 88; Transcript, page 108, lines 15-19). Of the 81% of customers who actually paid money into the program, the testimony was that at least 63% and as many as 83% did not have an agreed upon proposal in their file. (Transcript, page 109, lines 21-25; page 110, lines 1-9). However, this testimony assumed that the "proposals" contained in the files of the representative debt management customers were worth the paper on which they were written. (PX 342B). This Court has reviewed those proposals and concludes that they are not. None of these proposals are accompanied by any proof that the person who purportedly signed
It is both shocking and appalling to this Court that Allegro debt settlement customers paid an average of at least 56% of their total payments in fees and that debt management customers paid an average of at least 21% of their total payments in fees for "services" that they never received. (Transcript, page 105, lines 22-25; page 106, lines 1-10; page 111, lines 12-19).
Even worse, in both the debt settlement and debt management programs, the Defendants claimed to perform services that they knew they could never perform.
On the debt settlement side, Defendant Timothy McCallan testified that as of August 2008, the Defendants knew that Chase Bank was not accepting any settlements with customers of Allegro Law. (Deposition of Timothy McCallan, page 61, lines 3-8; page 95, line 21 through page 96, line 1; PX 11; page 450, line 6 through 451, line 11 and PX 129). Nevertheless, the Defendants collected fees from Chase cardholders who signed up for the Allegro Law debt settlement program
On the debt management side, Defendant Timothy McCallan, as the 30(b)(6) representative for both Americorp and Seton, testified that those corporations did not have the requisite approval to negotiate on behalf of Allegro debt management customers:
(Deposition of Timothy McCallan, page 34, lines 11-16). This is confirmed by the fact that not a single purported "proposal" with creditors is signed or received by Americorp or Seton. (PX 342B; PX 342; PX 339 (showing the "servicer" for every single debt management customer in the representative sample is either FCDC or The Achievable)).
Based on all of the foregoing, this Court concludes that the money paid in fees by Allegro to the Defendants is rightfully the
Plaintiff also filed a cause of action for the avoidance of fraudulent transfers under 11 U.S.C. § 548. "The purpose of avoiding fraudulent transfers is to prevent the debtor from diminishing funds that are generally available for distribution to creditors. Consequently, there is a presumption that `any funds under the control of the debtor, regardless of the source,' are the debtor's property, `and any transfers that diminish that property are subject to avoidance.'" In re McMillin, 482 Fed. Appx. 454 (11th Cir.2012) (other citations omitted).
A trustee may void fraudulent transfers that meet the requirements of Section 548:
11 U.S.C. § 548.
Allegro's bankruptcy petition was filed on March 12, 2010, meaning that all fraudulent transfers that took place after March 12, 2008 fall within the time frame for avoidance permitted by § 548. Given that Allegro's operations began at the end of March 2008, the two-year time period allowed by statute covers the entire period in which Allegro was operational. (PX 125, letter from Defendant Timothy McCallan indicating that Allegro's operations would begin on March 26, 2008).
This Court finds that transfers totaling $110,513,471.25 made to Defendants Americorp and Seton may be voided under either § 548(a)(1)(A) or § 548(a)(1)(B), as described in more detail below, and may therefore be recovered by the trustee under § 550. This amount is derived by taking the total payments made into the Allegro program [$127,370,765.89, PX 88 and PX 89], and subtracting the amount turned over to the trustee from accounts previously controlled by Defendants [$16,857,294.64, see Doc. No. 307-1, Estate Cash Receipts and Disbursement Record]. Of that total, $107,757,767.52 may be recovered from Defendants Americorp and Seton as initial transferees, 11 U.S.C. § 550(a)(1), and $2,755,703.73 (the amount Defendants admit The Achievable received in fees) may be recovered from Defendant The Achievable, Inc. as an immediate transferee. 11 U.S.C. § 550(a)(2).
"Actual intent to hinder, delay, or defraud creditors is ordinarily established by circumstantial evidence." In re Vista Bella, Inc., 2013 WL 2422703, *14-15 (Bkrtcy. S.D.Ala.2013) (J. Mahoney) (citing In re XYZ Options, Inc., 154 F.3d 1262, 1271 (11th Cir.1998)). "That evidence is typically gathered by a court's consideration of certain badges of fraud." Id. These "badges of fraud" are enumerated in Ala. Code § 8-9A-4(b), to which the courts look for guidance with respect to the factors to consider in making the determination as to whether an actual intent to hinder, delay, or defraud creditors exists:
154 F.3d at 1272. "No specific combination of badges is necessary for a finding of actual intent and the presence of any of the badges of fraud does not compel such a finding." In re Vista Bella, Inc., 2013 WL 2422703, *15 (Bkrtcy.S.D.Ala.2013) (citing In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 10 n. 13 (S.D.N.Y.2007)). "The badges merely highlight circumstances that suggest that a transfer was made with fraudulent intent." Id. "Although the presence of one specific `badge' will not be sufficient to establish fraudulent intent, the
The evidence in the present case establishes that factors 1, 3, 4, 5, 8, and 9 are all present:
Given how many of the enumerated factors are present in this case, this Court finds that there is conclusive evidence that the transfers from Allegro to Defendants Americorp and Seton totaling $110,513,471.25 were made with actual intent to defraud. Therefore, these transfers can be voided by the trustee under § 548(a)(1)(A).
Alternatively, a trustee can void a transfer for which the debtor did not receive reasonably equivalent value and that meets any one of four other enumerated conditions. 11 U.S.C. § 548(a)(1)(B)(i)-(ii). This Court finds that Allegro received less than reasonably equivalent value in exchange for the transfers it made to Defendants Americorp and Seton and that Allegro became insolvent as a result of these transfers.
In re Vista Bella, Inc., 2013 WL 2422703, *16 (Bkrtcy.S.D.Ala.2013) (J. Mahoney).
As described at length in Section V(A)-(B), it is clear that Allegro received no value for the $110,513,471.25 that passed from Allegro to Defendants Americorp and Seton. Neither Americorp nor Seton had the credentialing necessary to conduct the debt management negotiations for which they were responsible, there is no evidence that creditors of Allegro customers were actually paid by Americorp and Seton, and there was overwhelming evidence that those Defendants took exorbitant up-front fees for programs that, by design, were destined to fail.
Moreover, Allegro became insolvent as a result of the transfers to Americorp and Seton. The term "insolvent" means "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of — (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title." 11 U.S.C. § 101(32)(A). With each transfer of money made to Americorp and Seton instead of to the creditors of the customers of Allegro Law — $95,140,576.67 of which remains unaccounted for and $15,372,894.58 of which was paid to Defendants in fees — Allegro sank deeper into insolvency. Each transfer made it impossible to pay debts that Allegro agreed to pay or to refund money to its customers in the event that their debts were not paid. On March 12, 2010, Allegro filed a Chapter 7 bankruptcy petition.
For all of the reasons stated, this Court concludes that the $110,513,471.25 that passed from Allegro to Defendants Americorp and Seton (which includes the fees taken by the Defendants as well as the amount that remains unaccounted for) was not exchanged for anything of reasonably equivalent value and that Allegro became insolvent as a result of the transfers. Therefore, the transfers at issue can be
Once the Court determines that transfers are avoidable under 11 U.S.C. § 548, it must then determine from whom they can be recovered under 11 U.S.C. § 550(a), which provides:
11 U.S.C. § 550(a).
The terms "immediate" and "mediate" transferee are not defined in the Bankruptcy Code. In re Palisades at West Paces Imaging Center, LLC, 501 B.R. 896, 916-917 (Bkrtcy.N.D.Ga.2013). "However, `[a]s a general rule, § 550(a) imposes liability on all recipients in a chain of transfers of fraudulently-conveyed property.'" Id. (citing In re Bauer, 318 B.R. 697, 700 (Bankr.D.Minn.2005) (other citations omitted). "An immediate or mediate transferee is `one who takes in a later transfer down the chain of title or possession.'" Id. (citing In re Knippen, 355 B.R. 710, 728 (Bankr.N.D.Ill.2006) (other citations omitted), aff'd Knippen v. Grochocinski, 2007 WL 1498906 (N.D.Ill.2007)). "The immediate transferee is the one who receives a transfer from the initial transferee and all other recipients are mediate transferees." Id. (citing In re Appleseed's Intermediate Holdings, LLC, 470 B.R. 289, 301 (D.Del.2012) (citation omitted)).
In the present case, this Court concludes that $107,757,767.52 is recoverable from Defendants Americorp and Seton as the initial transferees under § 550(a)(1). This Court also concludes that $2,755,703.73 is recoverable from The Achievable, Inc. as an immediate transferee under § 550(a)(2). The Defendants admit that $2,755,703.73 was transferred to The Achieveable (PX 88 and PX 89 [Tabs DM3a, DS3a]; PX 59) by Americorp. Deposition of Vanessa Vinicombe, page 116, lines 22-25; page 117, lines 1-20; page 185, line 1; page 186, lines 1-13; page 183, lines 14-25; page 184; lines 1-3.
The transfers to The Achievable, however, require additional analysis. Section 550(b) makes clear that the Trustee may not recover from "any immediate or mediate transferee of such initial transferee" if such subsequent transferee "takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided." 11 U.S.C. § 550(b)(1). As this Court has previously explained:
In re Terry Mfg. Co., Inc., 363 B.R. 233, 237 (Bkrtcy.M.D.Ala.2007) (J. Sawyer). The Achievable failed to raise any defense pursuant to § 550(b) or present any evidence at trial in support of such a defense. Therefore, this Court concludes that The Achievable did not take the transfers at issue for value, in good faith, and without knowledge of the voidability of the transfer avoided. As a result, the amount of $2,755,703.73 may be recovered from The Achievable as the immediate transferee. 11 U.S.C. § 550(a)(2).
As a general matter, under the "internal affairs doctrine," courts in Alabama "look to a corporation's state of incorporation as the source of substantive law governing claims regarding that corporation's internal affairs." Scrushy v. Tucker, 70 So.3d 289, 298 (Ala.2011) (emphasis in original). Americorp and Seton were both incorporated in the state of New York. (PX 74B, folder titled "Corporate Docs"). "Under New York law, the corporate veil can be pierced where there has been, inter alia, a failure to adhere to corporate formalities, inadequate capitalization, use of corporate funds for personal purpose, overlap in ownership and directorship, or common use of office space and equipment." Forum Ins. Co. v. Texarkoma Transp. Co., 229 A.D.2d 341, 342, 645 N.Y.S.2d 786, 787-88 (N.Y.A.D.1996) (other citations omitted).
Based on the testimony presented and the evidence introduced at trial, the Court concludes that Defendants Timothy McCallan, Americorp, and Seton are all alter egos of one another. Vanessa Vinicombe, Americorp's Chief Financial Officer, was unable to explain or articulate any meaningful difference between Americorp and Seton:
Deposition of Vanessa Vinicombe, page 195, lines 14-25; page 196, lines 1, 20-25. Americorp and Seton had the same sole owner, the same sole director, and the same sole officer. (PX 27). The Defendants introduced no evidence at trial that either of these companies observed the corporate form.
This Court also concludes that Timothy McCallan should be held personally liable for the wrongdoing of Americorp and Seton based on the principle of piercing the corporate veil. Timothy McCallan is the sole shareholder, director, and the President of Americorp, Inc. and Seton Corp. In that capacity, he is "ultimately responsible for the operations" of both companies. (PX 27). McCallan served as the President, Vice President, Secretary, and Treasurer of Americorp. (PX 27). He served as the President and Secretary of Seton — the only officer positions that existed. (PX 27). McCallan holds 100% of the outstanding stock of both Americorp and Seton. (PX 27).
Timothy McCallan admitted at his deposition that he
Deposition of Timothy McCallan, page 182, lines 2-15. McCallan admitted that he signed rental contracts and real estate agreements on behalf of Americorp and Seton; that he had the authority to, and, in fact, did make the decision when to hire legal counsel and who to hire; and that he decided whether or not Americorp and Seton would enter into large and lucrative contracts. Deposition of Timothy McCallan, page 200, lines 22-25; page 201, lines 1-17.
Although McCallan answered untruthfully about it in his sworn interrogatory answers, the uncontroverted evidence at trial was that he did receive distributions from both Americorp and Seton. (PX 27, claiming McCallan received no compensation from Americorp or Seton; PX 338B, in which Americorp's CFO confirms he did receive distributions). Although they were requested in discovery by Plaintiff (see PX 27), the Defendants produced no annual reports, no minutes of any board meetings, and no corporate resolutions. (PX 27, stating
Vanessa Vinicombe testified at the February 2013 hearing that she worked as a consultant for Americorp. (PX 346, page 238, lines 20-22). She also testified that she was paid to do this consulting work on behalf of Americorp by Defendant Timothy McCallan with the use of his personal funds:
(PX 346, page 242, lines 9-15). Thus, in addition to exercising complete control over Americorp, McCallan paid its corporate debts with personal money.
For all of the foregoing reasons, it is therefore ordered and adjudged by this Court that a final judgment in favor of Plaintiff, Daniel Hamm, as Trustee for Debtors Allegro Law, LLC and Allegro Financial Services, LLC, and against Defendants Americorp, Inc., Seton, Corp., The Achievable, Inc., and Timothy McCallan as follows:
Americorp, Inc., Seton, Corp., and McCallan in the amount of: $107,757,767.52
The Achievable, Inc. in the amount of: $2,755,703.73
The same is hereby entered together with costs taxed in favor of the Plaintiff, Daniel Hamm, as Trustee for Debtors Allegro Law, LLC and Allegro Financial Services, LLC, and against Defendants Americorp, Inc., Seton Corp., The Achievable, Inc., and Timothy McCallan, for the recovery of which let execution issue in accordance with Rule 62(a) of the Federal Rules of Civil Procedure, made applicable in adversary proceedings pursuant to Fed. R. Bankr. P. Rule 7062.
I hereby certify that on this the 3rd day of December, 2013, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to all counsel of record.
FED. R. CIV. P. 34(b)(2)(E) (as incorporated by FED. R. BANKR. P. 7034) (emphasis added).
Nelms: No. I paid Americorp to do it. Tr. Transcript 165:13-17.
Nelms further testified that "[b]etween May and maybe early December [2008] they were — those monies being taken directly by Americorp from the consumer" and put into approximately 15 to 16 bank accounts. Tr. Transcript 162:1-163:17
(PX 346, page 144, lines 16-21; page 182, lines 13-19).
Under the "law of the case" doctrine, "an issue decided at one stage of a case is binding at later stages of the same case." KTK Min. of Virginia, LLC, v. City of Selma, Ala., 984 F.Supp.2d 1209, 1218 (S.D.Ala.2013). However, in this matter, upon remand to the bankruptcy court, the parties moved forward and litigated by implied consent the Plaintiff's claims of turnover and accounting. Fed. R. Civ. P. 15(b); Fed. R. Bankr. P. Rule 7015 (stating that Fed. R. Civ. P. 15 applies in adversary proceedings). Nothing in the District Court's order prohibited trying claims for turnover and accounting, Defendants never moved to strike or dismiss these causes of action from Plaintiff's amended complaint, and Defendants never objected to the introduction of certain specific evidence and testimony at the trial that would only be relevant in actions for turnover or accounting.
Moreover, even if the "law of the case" doctrine applies, there are three principal exceptions to it: "when (1) a subsequent trial produces substantially different evidence (2) controlling authority has since made a contrary decision of law applicable to that issue
A subsequent trial on this matter has produced substantially different evidence that was not present before the district court when it considered the Defendants' appeal of the denial of their motions to compel arbitration. The evidence presented at the trial of this matter, including the Defendants' admission that the books and records at issue belong to and are owned by Allegro, demonstrates that the first cause of action is, in fact, one for turnover rather than breach of contract. Deposition of Timothy McCallan, pages 23, lines 12-25; page 24, lines 1-8. Moreover, the trial revealed that there was, in fact, a fiduciary relationship between the Defendants and Allegro Law, that Defendants had a duty to account for the money paid into the Allegro Law program, and that Defendants utterly failed in their responsibility for doing so. See Section V(A).
Deposition of Timothy McCallan, pages 23, lines 12-25; page 24, lines 1-8 (emphasis added).
