Brickley v. Scantech Identification Beams Sys., LLC, Case No: 5:13–cv–834–RCL

• Citation: 566 B.R. 815
• Decision Date: 02 March 2017
• Docket Number: Case No: 5:13–cv–834–RCL
• Parties: Douglas J. BRICKLEY, Trustee FOR the CRYPTOMETRICS, INC. CREDITOR S' TRUST, Plaintiffs, v. SCANTECH IDENTIFICATION BEAMS SYSTEMS, LLC, et al., Defendants.
• Court: United States District Courts. 5th Circuit. Western District of Texas

566 B.R. 815

Douglas J. BRICKLEY, Trustee FOR the CRYPTOMETRICS, INC. CREDITOR S' TRUST, Plaintiffs,

v.SCANTECH IDENTIFICATION BEAMS SYSTEMS, LLC, et al., Defendants.

Case No: 5:13–cv–834–RCL

United States District Court, W.D. Texas.

Signed March 2, 2017

David L. Curry, Jr. Pearland, TX, James W. Bartlett, Jr., Norman W. Peters, Jr., Paul J. Zoeller, Thomas Peter Ludwig Kasowitz, Benson, Torres & Friedman L.L.P. Houston, TX, for Plaintiff.

Lamont Alan Jefferson, Haynes & Boone, L.L.P., San Antonio, TX, J. Iris Gibson, Haynes and Boone, L.L.P., Austin, TX, John W. Mills, Thomas J. Gallo, Barnes & Thornburg LLP, Atlanta, GA, Mark Curtis Taylor, Eric J. Taube, Hohmann, Taube & Summers, L.L.P., Austin, TX, Barnet B. Skelton, Jr., Barnet B. Skelton Jr., PC, Houston, TX, Edward Griffin Warren, Voute Lohrfink Magro & McAndrew, LLP, White Plains, NY, Diane K. Kanca, McDonough Law, LLP, New Rochelle, NY, Davor Rukavina, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, Georgia Schley Ritchie, Parker, Hudson, Rainer & Dobbs, LLP, J. Christopher Fox, John L. Watkins, Michael V. Coleman, John W. Mills, Thomas J. Gallo, Thompson Hine LLP, Atlanta, GA, for Defendant.

Joel F. Shaw, Canada, Pro Se.

Mike Yaqub, San Francisco, CA, Pro Se.

Suzan Z. Yaqub, San Francisco, CA, Pro Se.

MEMORANDUM OPINION

Royce C. Lamberth, United States District Judge

I. INTRODUCTION

This case comes before this Court from the United States Bankruptcy Court for the Western District of Texas after withdrawal of the reference. In 2011, the Bankruptcy Court confirmed the debtor's (CryptoMetrics) Second Amended Chapter 11 Plan, after which a creditors' trust and shareholders' trust were established for the benefit of creditors and non-insider equity interest holders. Douglas J. Brickley is the trustee of these trusts and is the sole management of the post-confirmation debtor. On September 17, 2012, Mr. Brickley filed a Complaint against the defendants here, initiating an adversary proceeding, and on February 22, 2013, filed his First Amended Complaint. The following defendants have moved to dismiss: Michael Stolzar and Karlen & Stolzar (the "Stolzar defendants"); ScanTech Security, LLC f/k/a Identification Beam Systems, LLC ("ScanTech IBS") and ScanTech Holdings, LLC (collectively, the "ScanTech defendants"); ScanTech Identification Beam Systems, LLC ("SIBS"); and Robert Barra, Susan Barra, and Michael Vitale.

The defendants have raised numerous grounds for dismissal. For the following reasons, the Court finds that it has subject matter jurisdiction over the claims asserted in this case, and that the trustee has standing to assert the claims for avoidance and recovery of fraudulent conveyances asserted in Counts I–V, the breach of fiduciary duty claims in Counts VI, VII, and XIV, and the RICO claims in Counts IX–XI, but not the unjust enrichment, legal malpractice, or civil conspiracy claims in Counts XII, XIII, or VIII. Counts XII, XIII, and Counts VIII will be dismissed. The Court finds it has personal jurisdiction over defendant SIBS.

The Court also finds that the Wagoner rule does not defeat standing to assert the RICO claim against the Stolzar defendants in Count IX, and the breach of fiduciary duty claim asserted against the Stolzar defendants in Count XIV, but that the in pari delicto defense bars the RICO claim and most of the breach of fiduciary duty claims. Count IX will be dismissed against the Stolzar defendants, and three of the claims in Count XIV will be dismissed against the Stolzar defendants.

Finally, the Court finds that the trustee has sufficiently met the pleading standards and stated the claims in Counts I–VII and IX–XI, although the trustee does not have standing to allege bank fraud as a predicate RICO offense in Count IX. Therefore Paragraph 336 will be stricken from the Complaint.

II. BACKGROUND

A. Events Leading up to the Bankruptcy of CryptoMetrics

This case began with the Chapter 11 bankruptcy of CryptoMetrics, Inc., which was declared on September, 17, 2010. CryptoMetrics was a biometric security company founded in 2000 by defendants Robert Barra and Michael Vitale who served as co-CEOs. Defendant Joel Shaw held the title of Chief Strategy Officer. CryptoMetrics' business revolved around the development and sale of a biometric fingerprint authentication system, and it later acquired BioDentity Systems Corporation (subsequently renamed CryptoMetrics Canada, Inc. ("CCI")), along with reportedly highly marketable facial recognition technology. According to the trustee, however, CCI was on the edge of bankruptcy when acquired and had no commercially viable products. Thereafter, CryptoMetrics operated in perpetual insolvency and never fully emerged from the start-up phase. Thus, in order to attract investors, CryptoMetrics alluded to an imminent "liquidity event." This event materialized in the form of an attempted merger with JAG Media, which was eventually abandoned after the expenditure of hundreds of thousands of dollars over four years.

In addition, the trustee alleges that beginning in 2004, CryptoMetrics focused on obtaining contracts with foreign countries, utilizing foreign agents who were tasked with identifying targets for a series of illegal payoffs in the hopes of securing a contract. Allegedly, Barra and Shaw oversaw and directed this illegal payment program using agents of defendants ScanTech Holdings and ScanTech IBS in the Middle East, as well as other agents in India, to facilitate the payment of bribes to foreign officials and businesspeople. Furthermore, the scheme was structured and implemented under the guidance, counsel and advice of defendant Michael Stolzar, CryptoMetrics' attorney and a partner in the law firm of defendant Karlen & Stolzar, who also allegedly drafted highly relevant documents as part of the scheme. The trustee describes various bribery schemes, under which CryptoMetrics made payments, but never secured lucrative contacts in return, including attempts to bribe Air India and bribery and kickback schemes in the Middle East. The trustee alleges that defendant SIBS, which was formed in 2011 after the relevant actions of ScanTech IBS and after commencement of the bankruptcy proceedings in this case, is liable for the actions of ScanTech IBS because it was formed to continue the business of ScanTech IBS, but to avoid its liabilities.

The trustee also alleges that Barra, Vitale, and Shaw misappropriated CryptoMetrics assets for their personal use, a problem that was exacerbated when Barra hired his wife, defendant Susan Barra, as bookkeeper despite her lack of financial or accounting background. The trustee includes a detailed listing of fraudulent transfers made to the Barras and to Vitale.

Finally, the trustee alleges that, with knowledge of the poor financial status of CryptoMetrics and its lack of commercial prospects, Barra and Vitale fraudulently concealed or misrepresented the state of the company's finances in order to obtain funding. He also alleges that Stolzar, with full knowledge of CryptoMetrics' financial problems, corroborated Barra's and Vitale's fraudulent statements and made further fraudulent statements to investors and lenders. In late 2008, they began attempting to obtain a loan from MBRO Capital for $2 million. However, the Loan Agreement and Opinion Letters written by Stolzar contained numerous false statements and warranties, known to be false, which were never corrected. CryptoMetrics eventually defaulted on the loan, failed, and declared bankruptcy.

B. The Bankruptcy Plan

On May 27, 2011, the Bankruptcy Court approved and confirmed the debtor's Second Amended Chapter 11 Plan for the resolution of outstanding claims against equity interests in the debtor. See Debtor's Second Amended Chapter 11 Plan, Bankruptcy Case No. 10–53622, ECF No. 126 (Bankr. W.D. Tex. April 6, 2011) (hereinafter "Plan"). Confirmation of the Plan formed both a Creditors' Trust and a Shareholders' Trust, and appointed Douglas J. Brickley as trustee. Id. §§ 6.2–6.3, 6.8. Section 6.15 of the Plan covers the assignment and Prosecution of Causes of Action. It states that "all Causes of Action shall be, and hereby are reserved, retained, and vested in the Creditors' Trust for the benefit of holders of Allowed Claims and Allowed Equity Interests pursuant to the terms of this Plan." Id. § 6.15. It "specifically reserves the Causes of Action and, by setting forth notice to each currently known potential target of such a Cause of Action, expressly reserves such rights to survive beyond Confirmation, the finality of Confirmation, and all other legal effects of such Confirmation." Id. § 6.15(b). "Cause of Action" is defined as "any claim or cause of action, legal or equitable, now owned or hereafter acquired by the Debtor, Liquidating Debtor or Trustee, whether arising under any contract or federal or state law, including but not limited to any avoidance, recovery, subordination or other action of the Debtor, the Liquidating Debtor or the Trustee, (b) any right of action, including an objection or other challenge to a Claim or any objection or other challenge to an Interest." Id. § 1.15.

In addition, the Plan provides "Notice to Prosecutable Targets," stating that the trustee "intends to prosecute all Causes of Action, including, but not limited to those Causes of Action against the referenced target(s) listed on the List of Causes of Action attached to the Disclosure Statement as Exhibit D." Id. § 6.15(a). Exhibit D includes a table of potential claims against several of the defendants here.

Finally, the Disclosure Statement states that "significant sums of money were paid out to agents and others persons around the world that appear at least to have been wasted funds and perhaps subsidized illegal activities," and that such payments were the subject of criminal investigations. See Second Amended Disclosure Statement for the Debtor's Second Amended Chapter 11 Plan at 5, Bankruptcy Case No. 10–53622, ECF No. 123 (Bankr. W.D. Tex. ...