Data Mountain Solutions, Inc. v. Giordano (In re Giordano)

• Citation: 472 B.R. 313
• Decision Date: 30 March 2012
• Docket Number: Adversary No. 10–01263.,Bankruptcy No. 10–12456–BFK.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re Gregg Samuel GIORDANO, Debtor. Data Mountain Solutions, Inc., et al., Plaintiffs v. Gregg Samuel Giordano, Defendant.

472 B.R. 313

In re Gregg Samuel GIORDANO, Debtor.

Data Mountain Solutions, Inc., et al., Plaintiffs

v.Gregg Samuel Giordano, Defendant.

Bankruptcy No. 10–12456–BFK.

Adversary No. 10–01263.

United States Bankruptcy Court,

E.D. Virginia,

Alexandria Division.

March 30, 2012.

Dawn C. Stewart, Esquire, The Stewart Law Firm, PLLC, Washington, DC, for Plaintiffs.

Christopher L. Rogan, Esquire, Rogan Law Firm, PLLC, Leesburg, VA, for Defendant.

MEMORANDUM OPINION

BRIAN F. KENNEY, Bankruptcy Judge.

This matter came before the Court on the Complaint of Data Mountain Solutions, Inc. (“DMS”) and Derek McUmber to determine the dischargeability of certain debts owed to them by the Debtor, Mr. Giordano, as of the date of the filing of Mr. Giordano's bankruptcy petition. For the reasons stated below, the Court holds that: (a) $5,000 is non-dischargeable, pursuant to 11 U.S.C. §§ 523(a)(4) and (a)(6); (b) the amounts of $166,957 payable to DMS, plus interest at 6% from July 2008, and $120,083 payable to Mr. McUmber, plus interest at 6% from July 2008, are non-dischargeable pursuant to 11 U.S.C. § 523(a)(4) and (a)(6); (c) any additional damages accruing after July 2008 have not been proven, and hence, are dischargeable; and (d) the Plaintiffs' claim for their post-arbitration award of attorney's fees are dischargeable.

The case was tried over the course of five days in November, December 2011 and January 2012. This Memorandum Opinion constitutes the Court's findings of facts and conclusions of law under Bankruptcy Rule 7052.

Findings of Fact

1. Data Mountain Solutions, Inc. (“DMS”) is a West Virginia corporation, originally organized by Mr. Hill and Mr. Watson.

2. In June 2003, Mr. McUmber was employed by a company known as Web Putty. Web Putty was in danger of running out of money, and Mr. McUmber was looking for employment and other business opportunities. He was introduced to Mr. Giordano. On June 2, 2003, Mr. McUmber became a shareholder of DMS.

The DMS Shareholders Agreement

3. On June 2, 2003, the four shareholders of DMS—Mr. McUmber, Mr. Giordano, Mr. Watson, and Mr. Hill—entered into a Shareholders Agreement. Plaintiffs' Exh. 2. Each shareholder initially owned 22,500 shares in the company. Further, the parties agreed that Mr. Watson and Mr. Hill would hold officer positions within the company, as follows:

President: Frederick S. Hill, Jr.

Vice President: Anthony Watson

Secretary: Anthony Watson

Treasurer: Frederick S. Hill, Jr.

Defendant's Exhibit P.

4. The company's June 2, 2003, Organizing Resolution also acknowledged that Mr. Watson had loaned $28,406 to the company. Defendant's Exh. P.

5. The parties agreed that each shareholder would be a Director. Defendant's Exh. M, Shareholders Agreement, ¶ 1(a). Collectively, the four individuals constituted the company's Board of Directors. Id. Furthermore, under the company's Bylaws, the Chairman had the ability to cast the deciding vote in order to break any tie votes of the Board. Defendant's Exh. N, § 2.12.

6. Under the Bylaws, each Director would continue to serve until his successor was elected and qualified. Id. at § 2.3. However, the same provision does not appear in Section 2.5 relating to the position of Chairman. Accordingly, it was the view of the company's counsel, Mr. Thompson, that, by the Board Meeting of May 25, 2006 (discussed below), there was no Chairman to break a deadlock of the Board.

7. Further, under the Shareholders Agreement, each Director would remain a Director as long as the Director was a shareholder of the company, even if the shareholder owned only one share (a fact which would come to have significance as the shareholders grew more distant and mistrustful of each other). Defendant's Exh. M, § 1(b).

The Blue Pages and Dot Gov Contracts

8. In 2003 and 2004, DMS did not have the ability to contract directly with the Government Services Administration (GSA) because it lacked what is known as a GSA Schedule. Accordingly, DMS teamed up with a company known as Native Technology, Inc. (“NTI”), which not only had a GSA Schedule, but had the further advantage of being a Section 8(a) minority-owned business enterprise, which enabled NTI to obtain contracts from GSA without competitive bidding.

9. NTI had a contract with GSA for what was known as the Blue Pages contract, which was essentially an online telephone directory for government agencies. There were two task orders under the Blue Pages contract, Blue Pages I and Blue Pages II.

10. On or about January 13, 2003, Mr. Giordano, acting on behalf of a company that he called “Wave Interface/DMS,” entered into a Teaming Agreement with NTI. Defendant's Exh. A, Teaming Agreement. The Teaming Agreement has an “Exhibit A” attached to it, which purports to allocate 47 1/2% of the Blue Pages (and any other, future contracts) to “Wave/DMS” (for our purposes, DMS) for the provision of technical services, and 47 1/2% to Mr. Giordano for Project Management. Id. at Exhibit A to Defendant's Exh. A, Teaming Agreement.

11. Mr. Giordano maintains that he disclosed the Teaming Agreement to the other DMS shareholders, and that they were aware of its terms. However, there is no evidence (e.g., e-mails or correspondence) to support the purported disclosure of the Teaming Agreement to the other shareholders, and shareholders Hill and McUmber maintain that they did not see the Teaming Agreement until the parties were engaged in arbitration proceedings and it was produced in discovery. The Court finds that Teaming Agreement was never disclosed to the other shareholders of DMS, was never presented to the DMS Board for approval, and was not known to the other shareholders of DMS until it was produced in discovery when the parties later became litigants in arbitration against each other.

12. In May 2004, the GSA awarded NTI a contract known as the Dot Gov contract. In essence, this contract was for the management and routing of all e-mail traffic under the “.gov” top level domain for the U.S. government, as well as for State and local governments that used the .gov domain. The Contract was initially for a two-year period, with 3 one-year option periods. It was set to expire at the end of 2009, but was extended through February 2011.

13. NTI did not have the ability to perform the requirements of the Dot Gov contract, so it teamed up with DMS for this purpose. Under the Teaming Agreement between NTI and DMS, NTI was to receive 5% of the revenue from the contract, and DMS was to receive 95% of the revenue. Defendant's Exh. A. The parties further agreed that Mr. McUmber and Mr. Giordano would act as contract employees for NTI, and that Mr. McUmber and Mr. Giordano would receive 1099 income tax statements from NTI. Plaintiffs' Exhs. 8–9 (McUmber and Giordano 1099s). Under this arrangement, Mr. McUmber and Mr. Giordano would each receive 23% of the revenue of the contract, after the payment of expenses, and DMS would receive 49%. The revenue was consistently divided among the three parties on that basis (with the exception of the first two Dot Gov Contract payments) from the inception of the Contract through June 2006. Plaintiffs' Exhs. 4–9.¹

14. For purposes of the Dot Gov contract, Mr. McUmber acted as the technical manager, with day-to-day responsibility for keeping the system up and running, answering help desk calls, and trouble shooting. Mr. Giordano acted as the project manager, interfacing in meetings with NTI and GSA, picking up the checks from NTI on a monthly basis, depositing the checks into the company's bank account, and distributing the money to DMS, Mr. McUmber and himself in the agreed-upon percentages,49%, 23% and 23% respectively. The parties—DMS and Mr. McUmber—entrusted Mr. Giordano with the responsibility of picking up the checks and distributing the funds in the agreed-upon amounts.

DMS Re–Acquires Mr. Hill's Shares

15. On May 1, 2004, DMS reacquired 11,250 of Mr. Hill's shares in the company. Defendant's Exh. Q, p. 1.

16. On May 10, 2005, DMS reacquired an additional 3,756 of Mr. Hill's shares in the company. Id. at p. 4.

17. The net effect of these two transactions was that Mr. Hill was left with 7,494 shares in DMS.

18. Throughout this period, Mr. Hill became interested in business opportunities unrelated to DMS. By July 2004, he had resigned as an officer of the corporation. However, he remained a director of DMS.

Mr. Giordano's Attempt to Gain Control of DMS, and The May 25, 2006, Board Meeting

19. Beginning in early (February or March) 2006, Mr. McUmber and Mr. Hill began to grow dissatisfied with Mr. Giordano's management of DMS's finances. Specifically, Mr. McUmber and Mr. Hill grew concerned that: (a) it appeared that critical vendors (Zone Edit and Navisite) were not being paid, and if they terminated their agreements with DMS, the system could not function; (b) Mr. McUmber noticed that certain payments, totaling $6,000, were apparently made to family members of Mr. Giordano; (c) Mr. Hill was concerned that the company was not current in its tax obligations; and (d) Mr. Hill and Mr. McUmber were both concerned that the monthly payments from NTI weren't being deposited into the company bank account at United Bank.

20. Moreover, the shareholders had discussed, but had never concluded, an agreement for the purchase of Mr. Watson's shares in DMS. Mr. Watson was embarking on a course of study at Harvard University, and did not have time to devote to the affairs of DMS. Mr. Watson wanted the company to repurchase his shares. He also wanted control of the intellectual property known as Securecabinet, which was owned by DMS, and to which he had devoted his efforts while at DMS.

21. On May 22, 2006, Mr. Hill sent out a proposed Agenda for a Board meeting scheduled for May 25th. Defendant's Exh. A–Q. The proposed Agenda prompted a number of e-mails among the shareholders as to what was to be discussed at the meeting. The reacquisition of Mr. Watson's shares in the company was on the Agenda, as was...