Anderson v. Cordell (In re Infinity Bus. Grp., Inc.)
| Citation | 497 B.R. 794 |
| Decision Date | 01 January 2013 |
| Docket Number | Adv. Pro. No. 12–80208–JW,C/A No. 10–06335–JW |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina |
| Parties | In re Infinity Business Group, Inc., Debtor(s). Robert F. Anderson, as Chapter 7 Trustee, for Infinity Business Group, Inc., Plaintiff(s), v. Wade Cordell; O. Bradshaw Cordell; Cordell L.L.C.; The Cordell Group L.L.C.; Gibson Commons L.L.C.; Bryon K. Sturgill; Sturgill & Associates Inc., John F Blevins; Law Offices of John F. Blevins, LLC; Golden Ghost, Inc.; Haines H. Hargrett; Donald Brent Grafton; D. Larry Grafton; Grafton and Company, P.L.L.C.; Morgan Keegan & Company, Inc.; and Keith E. Meyers, Defendant(s). |
OPINION TEXT STARTS HERE
G. William McCarthy, Jr., 1517 Laurel Street (29201), PO Box 11332, Columbia, SC 29211–1332, (803) 771–8836, 803–753–6960 (fax), bmccarthy @mccarthy-lawfirm.com, for Debtor.
ORDER DENYING MORGAN KEEGAN & COMPANY, INC. AND KEITH E. MEYERS'S MOTION TO DISMISS IN PART ON IN PARI DELICTO GROUNDS
This matter comes before the Court on the Motion to Dismiss filed by Defendants Morgan Keegan & Company, Inc. (“MK”) and Keith E. Meyers (“Meyers”) (collectively, “MK Defendants”). The Plaintiff, Robert F. Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc. (“Trustee”), filed an Objection to the Motion to Dismiss and a memorandum in support of the Objection. After a hearing, the Court makes the following findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52, which is made applicable to this proceeding by Fed. R. Bankr.P. 7052.
1. Infinity Business Group, Inc. (the “Debtor”) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on September 1, 2010. On that same date, Robert F. Anderson was appointed as Trustee.
2. On August 31, 2012, the Trustee commenced this adversary proceeding by filing the Complaint, which includes the following causes of action against the MK Defendants: Constructive Fraud; Federal Securities Fraud; Malpractice; Common Law Fraud; Aiding and Abetting Fraud; Breach of Contract; Breach of Fiduciary Duty; Aiding and Abetting Breach of Fiduciary Duty; and Unjust Enrichment.
3. The Complaint alleges that the Debtor is a corporation organized and existing pursuant to the laws of the State of Nevada. Prior to filing bankruptcy, the Debtor was in the business of collecting dishonored checks for entities that had received those checks as payment from third party payors through electronic check recovery.
4. According to the Complaint, the Debtor maintained offices in Lexington, South Carolina; Jacksonville, Florida; Pikeville, Kentucky; and Barbourville, Kentucky. The Lexington, South Carolina office housed the offices of the President, Vice President, and Chief Operating Officer of the Debtor.
5. During the relevant time period, Wade B. Cordell (“Wade Cordell”) served as President and Chairman of the Board of Directors of the Debtor; O. Bradshaw Cordell (“Brad Cordell”) served as Chief Operating Officer and as a member of the Board of Directors of the Debtor; John F. Blevins (“Blevins”) served as Vice President and a member of the Board of Directors of the Debtor; and Bryon K. Sturgill (“Sturgill”), a Kentucky citizen, served as the Chief Executive Officer and as a member of the Board of Directors of the Debtor. Haines H. Hargrett (“Hargrett”) served as Chief Financial Officer of the Debtor beginning September 19, 2006. Sturgill, Wade Cordell, Brad Cordell, Blevins and Hargrett are collectively referred to herein as “the Management Defendants.”
6. Other members of the Debtor's Board of Directors include Michael Potter (“Potter”), William Van Hoeven (“Van Hoeven”), and Thomas Handy (“Handy”) (collectively, “Innocent Directors”). Potter served on the Board of Directors from May of 2003 until November 2007 and again from September 2009 until August of 2010. Potter served as President from May of 2003 until May of 2005. Van Hoeven was a director from September of 2004 through 2010, and served as Secretary from May of 2004 until October of 2006. Van Hoeven also served as Vice President of Electronic Processing, from October of 2006 forward. Handy was elected to the Board of Directors on June 24, 2008 and served until March of 2010.
7. The Complaint alleges that the Management Defendants engaged in a scheme to make the Debtor appear more profitable than it was, when in fact it was operating at a loss throughout most of its existence due to the excessive salaries, unwarranted compensation, and looting by the Management Defendants.
8. In order to facilitate this scheme, the Complaint alleges that the Management Defendants used financial statements for the years 2004, 2005, 2006, 2007 and 2008 (“Grafton Audited Financials”), which were prepared by Brent Grafton, Larry Grafton and Grafton and Company, P.L.L.C. (“Grafton Defendants”). The Grafton Audited Financials included an Independent Auditors' Report attesting that the auditing methods comported with Generally Accepted Accounting Principles (“GAAP”). The Complaint alleges that the Grafton Audited Financials were deficient, false, and misleading, because the stated revenue included sums not yet earned by the Debtor, the accounts receivable were overestimated, and the accounts payable were underestimated. For example, the Trustee alleges that these financials included the statutory collection fee for a dishonored check as income at the time such dishonored check was submitted by the customer to the Debtor for its recovery services instead of properly recognizing this income when the Debtor actually received the collection fee. In addition, the Trustee alleges that the face amounts of the checks submitted to the Debtor for recovery were also improperly recorded as accounts receivable when received by the Debtor. The accounts receivable are also alleged to have been inflated by the accrual of historic figures on account of potentially collectible checks when a large portion of these checks were no longer collectible.
9. The Complaint alleges that the Grafton Audited Financials were used to make it appear that the Debtor was creditworthy and profitable when it was not, thereby attracting potential investors and enabling the Debtor to obtain loans, which allowed the Management Defendants to keep the Debtor afloat for the purpose of continuing to loot it.
10. In late 2009, the Management Defendants' alleged scheme was uncovered, and due to its losses as a result of the scheme, the Debtor was unable to service its outstanding debt and pay its creditors, and ultimately sought bankruptcy protection.
11. With regard to the MK Defendants, the Complaint alleges certain facts, which are summarized as follows: 1
a) In September of 2005, Wade Cordell, Brad Cordell, Blevins and Sturgill consulted with the MK Defendants to facilitate sales of the Debtor's securities to raise capital for the Debtor.
b) In March of 2006, the Debtor entered into an engagement agreement contract with MK (the “2006 MK Contract”), whereby MK agreed to act as the exclusive placement agent for the Debtor's stock issuance. The 2006 MK Contract provided that MK would receive a fee equal to 6% of the gross proceeds raised on behalf of the Debtor in its security sales pursuant to a private placement of securities. Under the 2006 MK Contract, MK was also to serve as a broker in soliciting investments in the Debtor.
c) In order to assist MK in performing its duties to the Debtor, Sturgill provided multiple versions of financial reports for 2003, 2004, 2005, and 2006 to the MK Defendants. The financial reports provided to the MK Defendants are alleged to have been deficient, false, and misleading because they overstated revenue, net income, and accounts receivable.
d) MK is alleged to have known that the financial reports were false, because they included accounts receivable that were no longer collectible, but nevertheless used the fraudulent financial figures in preparing a Confidential Investor's Memorandum in 2006 (“2006 CIM”). The 2006 CIM is alleged to contain many misleading statements and material omissions, and was directed by the MK Defendants toward acquiring institutional, strategic investors for the Debtor as well as demonstrating to the Innocent Directors that procuring such investments was in the Debtor's best interests.
e) The MK Defendants allegedly conspired with the Management Defendants to conceal the Debtor's true financial condition by assisting Sturgill in constructing believable figures, which were ultimately used in the Grafton Audited Financials.
f) The MK Defendants are also alleged to have failed to communicate accurate information regarding the Debtor's financial condition to the Innocent Directors. The Trustee further alleges that the MK Defendants knew of or should have detected the wrongdoings of the Management Defendants, including the looting, inaccurate and misleading accounting, detrimental insider transactions, incomplete shareholder ledgers, and improper use of the face accounts.2
g) On August 29, 2006, the Debtor entered into a Referral Agreement with MK (“2006 Referral Agreement”), which provided for MK to endorse and recommend the Debtor to financial institutions, credit card processing companies, and merchant customers as a potential provider of transaction processing services; to promote and actively cause these entities to enter into services agreements with the Debtor by referrals and marketing; and referring to the Debtor all current and future financial institutions, credit card processing companies and merchant customers seeking services similar to those offered by the Debtor. The term of the 2006 Referral Agreement was three years from the date of execution and was renewable upon agreement.
h) The Trustee alleges, upon information and belief, that MK received sales commissions for referring banks to the Debtor pursuant to the 2008 MK Contract.
i) The MK Defendants are alleged to have assisted the Debtor with...
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...as creditors of Debtor, South Carolina law controls because Debtor is incorporated in this State. SeeIn re Infinity Bus. Grp., Inc., 497 B.R. 794, 804 (Bankr.D.S.C.2013) (“[C]laims concerning fiduciary duties of corporate officers [are] governed by the state of incorporation.”); see alsoRes......
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