Direct Benefits, LLC v. TAC Fin.

• Decision Date: 16 April 2020
• Docket Number: Civil Case No. SAG-13-1185
• Parties: DIRECT BENEFITS, LLC, et al., Plaintiffs, v. TAC FINANCIAL, INC., et al., Defendants.
• Court: U.S. District Court — District of Maryland

DIRECT BENEFITS, LLC, et al., Plaintiffs, v. TAC FINANCIAL, INC., et al., Defendants.

Civil Case No. SAG-13-1185

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

April 16, 2020

MEMORANDUM OPINION

Plaintiffs Direct Benefits, LLC ("Direct Benefits") and Andrew C. Gellene ("Gellene") (together, "Plaintiffs") filed a Third Amended Complaint against Defendants TAC Financial, Inc. ("TAC Financial") and Roy Eder ("Eder"), TAC Financial's former CEO (together, "Defendants"), on June 20, 2014.¹ ECF 77. Specifically, Count III seeks a damages award from TAC Financial and Eder, pursuant to an alleged sale of unregistered securities in violation of the Maryland Securities Act. Id. ¶¶ 91-96.

On October 31, 2014, Plaintiffs filed a Motion for Partial Summary Judgment on Count III of the Third Amended Complaint, ECF 98, and an accompanying Memorandum of Law, ECF 98-1 (collectively, "the Motion"). Defendants filed a Cross-Motion for Partial Summary Judgment on Count III on December 1, 2014, ECF 104, along with a Memorandum of Law in support thereof and in opposition to Plaintiffs' Motion, ECF 104-1 (collectively, "the Cross-Motion"). However, after TAC Financial filed a Suggestion of Bankruptcy, the Court administratively closed this case on January 25, 2015. ECF 120, 122. The Court reopened thecase more than four years later, on March 12, 2019, ECF 129, and reinstated the Motion and Cross-Motion on October 28, 2019, ECF 185. The Court has reviewed those Motions, and the associated Oppositions and Replies thereto. See ECF 98, 104, 109, 118. No hearing is necessary. See Loc. R. 105.6 (D. Md. 2018). For the reasons that follow, Plaintiffs' Motion will be denied, and Defendants' Cross-Motion will be granted.

I. FACTUAL BACKGROUND

In 2010, both Direct Benefits and TAC Financial were operating prepaid debit card businesses. ECF 98-2 at 74-75 (Eder Dep.); id. at 1, ¶¶ 1-2 (Gellene Aff.). By the end of December, 2010, Direct Benefits was experiencing a cash shortage, and one of its major business partners advised that it would not be renewing its contract. ECF 104-2 at 4-7 (Direct Benefits internal update from December 31, 2010). To address this situation, Andrew Gellene, the Managing Member of Direct Benefits, began engaging in conversations with Roy Eder, TAC Financial's CEO and Chairman of its Board of Directors, to consider the potential for TAC Financial to purchase Direct Benefits's assets. ECF 98-2 at 17 (December 28, 2010 email from Gellene to Eder); id. at 69, 75 (Eder Dep.); id. at 1-2, ¶ 2 (Gellene Aff.). Shortly after negotiations began, on April 14, 2011, Direct Benefits and TAC Financial executed an Asset Purchase Agreement ("the APA"). ECF 98-2 at 6, ¶ 14 (Gellene Aff.); ECF 104-2 at 68 (the APA). TAC Financial's Board of Directors did not ratify the APA until May 20, 2011. ECF 98-2 at 161 (TAC Financial Board of Directors Meeting Minutes from May 20, 2011).

Under the APA's terms, Direct Benefits agreed to transfer to TAC Financial: all of Direct Benefits's intellectual property, permits, and licenses; all of Direct Benefits's "know-how, good will, and going concern value associated" with its business; and all of the rights Direct Benefits had under its contracts with holders of its Money Manager Cards ("the MMCs"), DirectBenefits's brand of prepaid debit cards.² ECF 104-2 at 45-46 (APA § 2.1). In exchange, Direct Benefits would receive two forms of consideration from TAC Financial: (1) a cash payment of $50,000; and (2) an unenumerated number of shares of TAC Financial common stock, valued at $1.10 per share, based upon the number of MMCs Direct Benefits transferred to TAC Financial. Id. at 47 (APA § 2.4). The parties agreed that the total purchase price would roughly equate to $819,000, but that number was subject to recalculation, because the price was based on "an assumption" that Direct Benefits would transfer 7,000 MMCs. Id.

To complete the transfer of the MMCs to TAC Financial, TAC Financial would need to reissue its own prepaid debit cards to Direct Benefits's MMC customers. ECF 98-2 at 7-9, ¶¶ 17-18, 24-25 (Gellene Aff.). This process would take time and coordination with third parties. Id. at 9-11, ¶¶ 24-29. Accordingly, the APA provided for a 150-day period under which this card transfer process would occur. ECF 104-2 at 47-48 (APA § 2.5(a)). Upon the expiration of that period, TAC Financial would calculate the precise number of cards transferred (referred to as "New MMCs"). Id. The beginning of the 150-day period, however, was not precisely identified in the APA. Id. at 42 (APA Art. I, defining "Card Order Ready Date"); id. at 47 (APA § 2.5(a)). Once the proper calculation of New MMCs occurred, the APA called for Direct Benefits to receive 100 shares of TAC Financial common stock, valued at $1.10, per New MMC. Id. at 47, 64 (APA § 2.4(b) & Ex. A); ECF 98-2 at 8, ¶¶ 18-20 (Gellene Aff.).

The APA also called for Gellene to become a TAC Financial employee. ECF 104-2 at 48, 70-71 (APA § 2.6(b) & Ex. D). Exhibit D to the APA set forth Gellene's Employment Agreement, which indicated that Gellene would "become a full-time employee of TACFinancial" effective upon the APA's execution. Id. at 70. Under the arrangement, Gellene would receive an annual salary of $125,000 from TAC Financial, as well as "a grant for options to purchase 140,000 shares of TAC Common Stock," which would vest "equally over four years with a one-year cliff." Id. at 70-71. After the APA's execution, Gellene worked, as a TAC Financial employee, to facilitate the transfer of Direct Benefits MMCs to TAC Financial. ECF 98-2 at 9-11, ¶¶ 24-29. Throughout 2011 and into 2012, Gellene also worked on projects and assignments unrelated to the MMC transfer, including training new TAC Financial hires on its card ordering and funding process, as well as creating a new system design for one of TAC Financial's new clients. Id. at 12-13, ¶¶ 35-39.

From the end of 2011 through all of 2012, Direct Benefits and TAC Financial worked to compute an accurate count of New MMCs, in order to finalize the stock transfer to Direct Benefits. ECF 98-2 at 10-12, ¶¶ 28-34. Eder worked with Gellene and Tom Loftus, the Chairman of Direct Benefits, on this issue. Id.; ECF 98-3 at 1-2, ¶¶ 2-3. On August 1, 2012, Eder sent a final New MMC and share transfer count estimate to Gellene and Loftus, indicating that there had been a total of 9,733 New MMCs transferred. ECF 98-2 at 174. Because this amount was higher than the 7,000 MMCs originally estimated, Direct Benefits would receive a grand total of 989,783 shares of TAC Financial common stock, valued at $1,088,761 ($1.10 per share). Id. Loftus disagreed with this calculus, however, because it failed to take into account a certain Direct Benefits client that had yet to be transferred to TAC Financial. ECF 98-3 at 2, ¶ 3; id. at 8 (August 9, 2012 email from Loftus to Eder expressing these concerns). According to Eder, TAC Financial ultimately decided to give Gellene and Direct Benefits "the benefit of the doubt," and awarded an extra 30,000 shares of stock "as a sign of good faith." ECF 109-1 at 16 (Eder Dep.). This, in turn, brought the total number of shares to 1,019,783.

In addition to working with Eder to finalize the New MMC count, from sometime in April, 2012 through the end of the year, Loftus also sought to work with Eder to amend the APA to "minimize[e] the tax burden on [Direct Benefits] members." ECF 98-3 at 2, ¶ 4 (Loftus Aff.). Loftus, Eder, and TAC Financial's counsel exchanged various proposed amendments aimed at achieving this goal, but the parties could not agree on a mutually beneficial amendment. Id. at 2, ¶¶ 4-5; id. at 9-10 (August 25, 2012 email between Loftus and Eder regarding proposed amendment to Ex. A of the APA).

Eventually, by March, 2013, Gellene became concerned about the financial status and well-being of TAC Financial. ECF 98-2 at 14-15, ¶¶ 41-45 (Gellene Aff.). Thus, on March 26, 2013, after Gellene consulted with other Direct Benefits members, Direct Benefits decided that it "should not complete the transaction." Id. at 15, ¶ 46. Direct Benefits, through counsel, sent a demand letter to TAC Financial demanding that it consent to the APA being unwound. ECF 98-2 at 184-89 (March 26, 2013 Direct Benefits Demand Letter). TAC Financial, also through counsel, responded three days later. Id. at 190-93 (March 29, 2013 TAC Financial Response Letter). In that letter, TAC Financial admitted that the common stock shares had not yet been transferred to Direct Benefits, but asserted it was because of Direct Benefits's repeated attempts to restructure the APA to diminish its tax liability. Id. at 190-91. TAC Financial stated that it would "no longer cooperate" in this effort, that it would "now print Direct Benefits' stock certificates, dated 2012 on the day Roy [Eder] and Andrew [Gellene] agreed upon the number of shares," and that it would report the stock issuance to the IRS as it was "legally required to do." Id. at 191. In discovery, Direct Benefits and Gellene obtained a certificate indicating a transfer of 1,019,783 shares TAC Financial common stock to Direct Benefits on July 20, 2012, ECF 98-2 at 194, which Gellene avers neither Plaintiff had received before this lawsuit, id. at 16, ¶ 47(Gellene Aff.). Direct Benefits and Gellene together initiated the instant suit on April 22, 2013. ECF 1.

II. LEGAL STANDARD

Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is appropriate only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The moving party bears the burden of showing that there is no genuine dispute of material facts. See Casey v. Geek Squad, 823 F. Supp. 2d 334, 348 (D. Md. 2011) (citing Pulliam Inv. Co. v. Cameo Props., 810 F.2d 1282, 1286 (4th Cir. 1987)). If the moving party establishes that there is no evidence to support the non-moving party's case, the burden then shifts...