DeGiacomo v. Tobin & Assocs., P.C. (In re Inofin Inc.)

Decision Date08 November 2012
Docket NumberAdv. P. No. 12-1091,Case No. 11-11010-JNF
CourtU.S. Bankruptcy Court — District of Massachusetts

Chapter 7


The matters before the Court are the Motion of the Defendants, Tobin & Associates, P.C. and Richard Tobin (collectively, the "Defendants," or "Tobin") to Dismiss Counts I and II of the four-count Complaint filed against them by Mark G. DeGiacomo, the Chapter 7 trustee (the "Trustee") of the estate of Inofin Incorporated ("Inofin" or the "Debtor");1 andthe Chapter 7 Trustee's Objection to the Motion to Dismiss. The Court heard the matters on August 14, 2012 and took them under advisement. The issues presented include whether the Defendants can prevail on their in pari delicto defense at this stage in the proceeding; whether the statute of limitations bars the Trustee's claims; and whether the Trustee has standing to assert the claims set forth in Counts I and II.


On February 9, 2011, numerous investors in the Debtor filed an involuntary Chapter 7 petition against it (the "Petition Date"). On February 16, 2011, this Court entered an Order for Relief under Chapter 7. On February 16, 2011, Mark G. DeGiacomo was appointed the Chapter 7 Trustee of the bankruptcy estate of the Debtor.

On April 14, 2011, the Securities and Exchange Commission ("SEC") filed an enforcement action in the United States District Court for the District of Massachusetts against Inofin, several of its principals and agents, including Michael J. Cuomo ("Cuomo"), the Debtor's President, Kevin J. Mann ("Mann"), the Debtor's Chief Executive Officer, and Melissa George ("George"), the Debtor's Chief Operating Officer and Chief Financial Officer, alleging that they violated, among other laws, the anti-fraud provisions of federal securities laws, namely Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934, see 15 U.S.C. §§77q(a) and 78j(b). The Defendants attached to their Memorandum in Support of the Motion to Dismiss the complaint filed by the SEC in the United States District Court for the District of Massachusetts.2

At the hearing held on August 14, 2012, the parties submitted a copy of a "Consent" executed by Cuomo, a copy of a "Consent" executed by Mann, as well as copies of Final Judgments pursuant to which Cuomo agreed to the entry of a judgment "for disgorgement of $1,272,914.57, representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $440,181.42 for a total of $1,713.095.90 and a civil penalty in the amount of $150,000. . .;" and Mann agreed to the entry of a judgment "for disgorgement of $733,944.00, representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $170,762.00 for a total of $904,706.00 and a civil penalty in the amount of $150,000. . . ." The Consents executed by both Cuomo and Mann provided that they consented to the entry of final judgment "[w]ithout admitting or denying the allegations of the complaint. . . ." Nevertheless, the Consents each provided the following:

Defendant understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceeding." 17 C.F.R. § 202.5 In compliance with this policy, Defendant agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis; and (ii) that upon the filing of this Consent, Defendant hereby withdraws any papers filed in this action to the extent that they deny any allegation in the complaint. If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant's: (i) testimonial obligations; or (ii) right to take legal or factual positions in

litigation or other legal proceedings in which the Commission is not a party.3

A. Introduction

The Trustee filed his four-count Complaint on April 19, 2012. In his Complaint, he alleged facts which the Court must accept as true for purposes of the Defendants' Motion to Dismiss. See Sanchez ex rel. D.R.-S v. U.S., 671 F.3d 86, 107 (1st Cir. 2012), petition for cert. filed, 81 U.S.L.W. 3130 (Sept. 13, 2012). The Court has set forth the allegations of the Trustee's Complaint verbatim or paraphrased them below. The Court also has noted those portions of the Trustee's Complaint that track allegations set forth in the SEC's complaint.

B. The Defendants

Defendant Tobin & Associates, P.C. is a Massachusetts professional corporation with a principal place of business in Taunton, Massachusetts. Richard J. Tobin is the president of Tobin & Associates (individually or collectively, "Tobin"). Richard J. Tobin is a certified public accountant ("CPA") licensed by the Commonwealth of Massachusetts since approximately 1968.

C. The Debtor's Business Model

By way of background, the Trustee described the Debtor's business model and affiliated business entities and operations. The Debtor is a privately owned Massachusetts corporation that was incorporated in 1994. It maintained a principal place of business in Rockland, Massachusetts. The majority of the shares of the Debtor were owned by Cuomo and Mann.

The Debtor primarily was engaged in the business of purchasing and servicing sub-prime used car loans. Typically, the Debtor and certain used car dealerships would sign an agreement establishing the Debtor as a sub-prime lending source for the dealerships' customers and establishing the terms pursuant to which the Debtor would purchase retail installment sales contracts. See SEC complaint at ¶ 23. To purchase a car under the Debtor's indirect lending program, the purchasing consumer signed a retail installment sales contract generated by the Debtor (the "Installment Sales Contract"). See Id. at ¶ 24. After the Installment Sales Contract was signed by the consumer, the dealer and the Debtor would sign a Partial Purchase and Assignment Agreement pursuant to which the dealer would assign a portion of the payment stream in the Installment Sales Contract to the Debtor.

Inofin's lending capital came from investors who loaned it money for a term of three years in exchange for a fixed rate of interest, ranging from nine percent to over fifteen percent per year. In exchange for investor money, Inofin gave its investors a loan agreement and a promissory note. Id. at ¶ 34. With the exception of a small number of preferredinvestors, the majority of the Debtor's investors did not obtain security for their loans. As of the Petition Date, there were approximately 275 investors with outstanding loans to the Debtor.

D. The Debtor's Affiliated Business Entities and Operations

During 2004, Inofin and its principals began using investor money for lending activities other than sub-prime auto loan financing. Id. at ¶ 39. Specifically, in the summer of 2004, Cuomo and Mann established four corporations, three in Massachusetts and one in Rhode Island, for the purpose of owning and running four separate used car dealerships. As established, Cuomo and Mann were the stockholders, officers and directors of those entities. They called these entities the "Drive USA stores" (collectively, the "Drive entities"). Id.

At around the same time, Cuomo and Mann also established three limited liability companies, two in Massachusetts and one in Rhode Island, for the purpose of purchasing real estate and developing the commercial dealership facilities. As established, Cuomo and Mann were the managers and members of those entities. See Id. at ¶ 40. Finally, in February 2004, Cuomo and Mann formed Prime Real Estate Associates, LLC, a Massachusetts limited liability company, for the purpose of acquiring and developing residential real estate. The real estate entities were collectively referred to as the "Prime entities." See Id. at ¶¶ 41-46.

Cuomo and Mann funded the establishment of their new businesses entirely with Inofin investor money. By the end of 2005, Inofin had lent the Drive and Prime entitiesapproximately $12.2 million of investor money. At the time, those Inofin receivables represented approximately one third of Inofin's total assets. See Id. at ¶ 50.

By the end of 2008, Inofin had lent the Drive and Prime entities approximately $17 million, which represented twenty seven percent of Inofin's total assets. See Id. at ¶ 51. By the end of 2009, the Drive and Prime entities owed Inofin approximately $25.5 million, which represented forty four percent of Inofin's total assets. Id.

E. The Debtor's License to Operate from the Massachusetts Division of Banks

To operate its motor vehicle financing business, Inofin was required to be licensed by the states in which it made sub-prime auto loans. Id. at ¶ 32. The primary licensing authority for Inofin was the Massachusetts Division of Banks (the "Division of Banks"). Id. Without a license from the Commonwealth of Massachusetts, Inofin would have had no legal basis to continue operating in Massachusetts as a motor vehicle finance company.

To maintain a motor vehicle finance company license in the Commonwealth of Massachusetts, the Division of Banks required Inofin to maintain a positive net worth of at least $20,000. Additionally, to maintain the license, the Division of Banks required Inofin, among other things, to file a License Renewal Application annually in September. The regulations of the Division of Banks required that the application...

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