Anderson v. Cordell (In re Infinity Bus. Grp., Inc.)

• Citation: 628 B.R. 213
• Decision Date: 31 March 2021
• Docket Number: Civil Action No. 3:19-cv-03096-JMC
• Court: U.S. District Court — District of South Carolina
• Parties: IN RE: INFINITY BUSINESS GROUP, INC., Debtor. Robert F. Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc., Appellant, 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, L.L.C.; 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; Defendants, Of whom Morgan Keegan & Company, Inc. and Keith E. Meyers are, Appellees.

628 B.R. 213

IN RE: INFINITY BUSINESS GROUP, INC., Debtor.Robert F. Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc., Appellant,

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, L.L.C.; 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; Defendants,Of whom Morgan Keegan & Company, Inc. and Keith E. Meyers are, Appellees.

Civil Action No. 3:19-cv-03096-JMC

United States District Court, D. South Carolina, Columbia Division.

Signed March 31, 2021

Elizabeth Zeck, Mitchell Myron Willoughby, Willoughby and Hoefer PA, Columbia, SC, Robert Walker Humphrey, II, Pro Hac Vice, Willoughby and Hoefer, Charleston, SC, for Appellees.

Olga Greenberg, Pro Hac Vice, S. Lawrence Polk, Pro Hac Vice, Eversheds Sutherland US LLP, Atlanta, GA, Robert C. Byrd, Alyson Smith Podris, Parker Poe Adams and Bernstein LLP, Charleston, SC, for Appellant

ORDER AND OPINION

J. Michelle Childs, United States District Judge

This matter is before the court by way of an appeal by Appellant Robert F. Anderson ("Trustee"), as the Chapter 7 Trustee for Infinity Business Group, Inc. ("IBG"), from an order and judgment filed on October 15, 2019, by the United States Bankruptcy Court for the District of South Carolina ("Bankruptcy Court"). (CV ECF No. 1 at 1.)¹ For the reasons set forth below, the court AFFIRMS the Bankruptcy Court's order and judgment.

I. RELEVANT BACKGROUND

To support its findings, the Bankruptcy Court set forth detailed findings of fact. (AD ECF No. 1058 at 5-70.) This court will not set aside the Bankruptcy Court's factual findings unless clearly erroneous and will only reference herein factual findings by the Bankruptcy Court that are pertinent to the analysis of the issues on appeal.

The Trustee's claims arise from the collapse of IBG, a payment processing company that specialized in collecting bad checks. (Id. at 5, 6, 13.) IBG would collect checks with insufficient funds when first presented for collection ("NSF Checks") then obtain state-mandated recovery fees ("Service Charges") upon the successful collection of the check. (Id. at 6.)

IBG offered two (2) programs for collecting NSF Checks: the Guaranteed Program and the Non-Guaranteed Program. (Id. ) Under the Guaranteed Program, IBG would become the owner of the NSF Check by paying its customer the face value of the check. (Id. ) Upon any collection, IBG would receive both the face value of the check and the applicable Service Charge. (Id. ) In contrast, ownership of the NSF Check remained with the customer under the Non-Guaranteed Program. (Id. ) Accordingly, upon collection of an NSF Check under the Non-Guaranteed Program, IBG would retain the applicable Service Charge and deliver the face value of the check to its customer. (Id. )

Throughout its operations, IBG was managed by a Board of Directors ("Board") and several key officers, including the following individuals who are relevant to this matter:

• Bryon Sturgill ("Sturgill"): Sturgill was IBG's Chief Executive Officer ("CEO") and a member of its Board from its founding until July 19, 2010. As part of Sturgill's duties from 2003 to September 2006, he reviewed and prepared the company's financial statements and effectively served as IBG's Chief Financial Officer ("CFO"). During that period, he was also responsible for providing the Board with all financial information and hiring IBG's outside accounting firm, Grafton & Company, PLLC ("Grafton"). On the company's website, Sturgill represented that he was a certified public accountant ("CPA") when he in fact never passed the CPA exam.

• Wade B. Cordell ("Wade Cordell"): Wade Cordell was IBG's President and Chairman of the Board from 2004 until August 15, 2009. Wade Cordell oversaw IBG's operations and sales, met with prospective customers, and raised capital from individual investors.

• O. Brad Cordell ("Brad Cordell"): Brad Cordell was IBG's Chief Operating Officer ("COO") and a Board member from 2004 until August 15, 2009. Brad Cordell was responsible for managing IBG's daily operations and achieving IBG's financial targets. In addition, he assisted with IBG's capital raises from individual investors.

• Haines Hargrett ("Hargrett"): Hargrett, a CPA, served as IBG's CFO from September 2006 to July 2010. Hargrett was not a member of the Board, but he reported to the Board and frequently attended Board meetings.

• John Blevins ("Blevins"): Blevins served as IBG's general counsel and as a member of the Board from 2004 until August 15, 2009. He was in charge of compliance for IBG and was responsible for all legal issues affecting IBG, including contract review and negotiation as well as providing advice and counsel to IBG's Board, President, and CEO. Blevins also retained and interacted with outside counsel.

• Thomas Handy ("Handy"): Handy served as a member of IBG's Board from June 24, 2008 until March 31, 2010.

• Michael Potter ("Potter"): Potter served as a member of IBG's Board from May 2003 until the Annual Meeting in November 2007 and rejoined the Board in August 2009 until his resignation in August 2010.

• Bill Van Hoeven ("Van Hoeven"): Van Hoeven served on the Board from 2004 until August 31, 2010, when IBG filed its bankruptcy petition. Van Hoeven managed IBG's Processing Center in Jacksonville, Florida until September 2006. He subsequently served as IBG's Director of Information and Technology and assisted with IBG's capital raises from individual investors.

(Id. at 7-8.) The Bankruptcy Court's order refers to Sturgill, Wade Cordell, Brad Cordell, Hargrett, and Blevins as the "Management Defendants" because they were defendants in the adversary proceeding. (Id. at 9.) In contrast, the Bankruptcy Court's order refers to Handy, Potter, and Van Hoeven as the "Non-Defendant Directors" because they were not named as defendants in the adversary proceeding. (Id. )

Despite Sturgill's and Hargrett's accounting experience, IBG retained Grafton as its auditor. Grafton served as IBG's auditor from 2003 to 2009 and issued audited financials for each of those years. (Id. at 10.)

Following its incorporation in 2003, IBG's business and customer base grew rapidly. (Id. at 3, 5.) IBG's success attracted numerous individual investors, most of whom were family and friends of IBG's founders and key members. (Id. at 3.) As a result of its rapid growth, IBG and its shareholders aspired to increase the value of the company by attracting a purchaser, merging with another company, or pursuing an initial public offering ("IPO"). (Id. ) To improve IBG's investment prospects, IBG began using an accounting practice that created the appearance that IBG was in a better financial position than it was by incorrectly stating the composition and collectability of its accounts receivable ("Accounting Practice"). (Id. ) Although Generally Accepted Accounting Principles ("GAAP") only allow receivables to be reported after they are earned, the Accounting Practice counted Service Charges as receivables before IBG collected the checks associated with the fees. (Id. at 107.)

IBG's success eventually became a double-edged sword. IBG's rapid business growth and expansion improved IBG's investment prospects, but it also created a constant need for cash. (Id. at 3.) Unable to attract sufficient investment to fuel its development, IBG regularly used its customer's funds (the customer's share of the checks collected) to cover IBG's costs and operating expenses with the intention of repaying its customers with other funds that IBG later received. (Id. at 62.) At any point in time, the deficit in client accounts ranged from $200,000 to $2.9 million. (Id. )

On March 16, 2006, IBG entered into an engagement agreement ("2006 Contract") with Morgan Keegan & Company, Inc. ("Morgan Keegan"), a brokerage and investment banking firm. (Id. at 15.) The 2006 Contract provided that Morgan Keegan would serve for a period of one (1) year as IBG's exclusive placement agent in exchange for a six (6) percent commission on all gross proceeds raised on behalf of IBG from a private equity placement. (Id. )

After a potential investor withdrew its proposal, IBG and Morgan Keegan terminated the 2006 Contract on October 31, 2006. (Id. at 33.) Morgan Keegan discontinued its efforts to find institutional investors interested in investing in IBG after the 2006 Contract ended but IBG's managers, officers, employees, and Board members continued to sell securities to investors directly. (Id. at 33, 43.) After the 2006 Contract concluded, Keith E. Meyers ("Meyers"), a Vice President at Morgan Keegan who led the firm's efforts to find an institutional investor for IBG, continued to occasionally correspond with IBG's management and personally invested $25,000 in IBG on November 20, 2006. (Id. at 35.)

On April 24, 2008, IBG and Morgan Keegan entered into a second contract ("2008 Contract"), in which Morgan Keegan agreed to be IBG's exclusive financial advisor with respect to a possible mezzanine debt financing in exchange for a contingent placement fee equal to three (3) percent of the gross proceeds Morgan Keegan raised on IBG's behalf. (Id. at 44-45.) The 2008 Contract concluded on October 24, 2008 by its terms, ending Morgan Keegan's service to IBG. (Id. at 57.)

At some point in 2009, certain IBG shareholders alleged that Wade Cordell, Brad Cordell, and Blevins caused IBG's misappropriation of funds from the customer accounts and organized an effort to remove them ("Initial Ouster"). (Id. at 63.) Wade Cordell, Brad Cordell, and Blevins were purportedly removed from the Board and terminated from their officer positions on August 17, 2009.² (Id. ) Thereafter, IBG's Board expanded to nine (9) members. (Id. at 64.) Sturgill, Handy, and Van Hoeven remained from the former Board and Potter, ...