Expansion Capital Grp., LLC v. Patterson

Decision Date22 January 2021
Docket Number4:18-CV-04135-RAL
Citation514 F.Supp.3d 1095
CourtU.S. District Court — District of South Dakota
Parties EXPANSION CAPITAL GROUP, LLC, Plaintiff, v. Matt PATTERSON, Defendant.

Amy Heinrich Arndt, Daniel R. Fritz, II, Ballard Spahr LLP Sioux Falls Office, Sioux Falls, SD, Andrew J. Petrie, Pro Hac Vice, Rachel R. Mentz, Pro Hac Vice, Ballard Spahr LLP, Denver, CO, for Plaintiff.

Kent R. Cutler, Jonathan A. Heber, Meredith A. Moore, Samuel A. Krystosek, Cutler Law Firm, LLP, Sioux Falls, SD, Brian M. Grossman, Pro Hac Vice, Tesser Grossman LLP, Los Angeles, CA, for Defendant.

OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

ROBERTO A. LANGE, CHIEF JUDGE

Plaintiff Expansion Capital Group, LLC (ECG) sued Defendant Matt Patterson (Patterson) for breach of fiduciary duty, breach of contract or implied contract, and tortious interference with business relationship. Doc. 1. Patterson filed a motion for summary judgment or, in the alternative, partial summary judgment, Doc. 101, which ECG opposes. ECG filed its own motion for partial summary judgment, Doc. 128, which Patterson opposes. For the reasons explained herein, this Court grants only limited portions of the cross motions for summary judgment.

I. Material Facts

Cross motions for summary judgment present a court with a challenge in summarizing the material facts. This Court is obliged to view the facts most favorably to ECG when ruling on Patterson's motion for summary judgment, but to view the facts in the light most favorable to Patterson when ruling on ECG's partial motion for summary judgment. This Court draws the material facts principally from those portions of the statement of undisputed material facts filed by the parties, Docs. 103, 130, to which the opposing party does not object in the responses, Docs. 113, 144, supplemented by documents in the record to which there can be no genuine dispute of material fact. This Court of course is making no factual findings. Where the parties have substantially different views of the facts, this Court summarizes those differences.

A. Factual Overview

ECG is a Delaware limited liability company. Doc. 144 at ¶ 1. ECG's principal place of business throughout its existence has been in Sioux Falls, South Dakota. Patterson and Jay Larson founded ECG in 2013. Doc. 144 at ¶ 4. Patterson invested $100,000 in ECG and earned "sweat equity"1 in ECG through his work as its chief executive officer (CEO). Doc. 104 at ¶¶ 3–4. Patterson is a citizen and resident of Idaho. Doc. 1 at ¶ 22; Doc. 11 at ¶ 1. This Court has diversity jurisdiction over the case under 28 U.S.C. § 1332. Doc. 1 at ¶ 23; Doc. 11 at ¶ 5.

ECG provides small business financing through business loans, merchant cash advances, and factoring-type agreements. Doc. 144 at ¶ 2. The original two members of ECG were Jay Larson personally and Kirkcaldy Group, LLC (Kirkcaldy). Doc. 144 at ¶ 6. Kirkcaldy ostensibly is a manager-managed LLC with Somphone Soukhaseum as its manager, but Patterson effectively controls Kirkcaldy.2 Doc. 144 at ¶ 7. Although Larson originally held his interest in ECG individually, he transferred it to a single-member LLC called Grass Creek Investments, LLC (Grass Creek), in which he was the manager and sole member. Doc. 144 at ¶ 8. Patterson served as the CEO of ECG, while Larson served as the chief operating officer of ECG.

Seco Ventures, Ltd., (Seco) invested $1 million in ECG in exchange for which ECG issued Seco a convertible promissory note dated December 31, 2013. Doc. 144 at ¶ 9. Vincent Ney (Ney) is the manager of Seco. Doc. 144 at ¶ 10. At the time of Seco's investment in ECG in 2013, Patterson and Larson had little prior experience in merchant cash advances for commercial lending. Doc. 144 at ¶ 23.

On March 31, 2014, American Dream, LLC (American Dream) purchased membership units in ECG. Doc. 144 at ¶ 11. James Frauenberg, Jr. is the manager of American Dream. Doc. 144 at ¶ 12.

At least since December of 2014, with the signing of the Second Amended Operating Agreement, ECG has been governed by a board of managers. Doc. 1-4;3 Doc. 144 at ¶¶ 13–14. Patterson's interest in ECG was represented on the Board by his company Kirkcaldy. Doc, 104 at ¶ 5. Although Patterson's friend Soukhaseum was Kirkcaldy's designee to the Board, in practice Patterson participated in the Board meetings for Kirkcaldy. Doc. 104 at ¶ 6. The Second Amended Operating Agreement delineated that the board consisted of one representative of Kirkcaldy, one representative of Grass Creek, one representative of American Dream, and two representatives of Seco (in its capacity at that time as the holder of debt with the right to convert that debt to equity). Doc. 144 at ¶ 14; Doc. 1-4 at ¶ 4.01(a).

Effective October 30, 2015, with the signing of the Third Amended Operating Agreement, ECG and Seco agreed to convert Seco's debt to equity, and Seco became the fourth member of ECG. Doc. 144 at ¶ 15; Doc. 1-5 at 2, 21. Kirkcaldy (the entity controlled by Patterson) executed the Second Amended Operating Agreement and the Third Amended Operating Agreement, but Kirkcaldy did not sign the Fourth Amended Operating Agreement or the Fifth Amended Operating Agreement. Doc. 1-6; Doc. 114-7. Accordingly, and because most of the dispute centers on events during the time of the Third Amended Operating Agreement, this Court refers to the Third Amended Operating Agreement for the material terms governing the relationships.

ECG was a financial success. According to Patterson's affidavit, ECG went from two employees to 70 in less than three years and went from no revenue to $15 million in revenue within two to three years. Doc. 104 at ¶ 30.

Under Section 4.01(c) of the Third Amended and Restated Operating Agreement:

The Board shall have the sole and exclusive authority for control, management, direction, and operation of the Company's affairs and exclusive powers to bind the Company with any legally binding agreement, including ... to incur debt, transfer assets or engage in other transactions.

Doc. 1-5 at § 4.01(c); Doc. 144 at ¶ 19. Section 4.01(d) of the Third Amended and Restated Operating Agreement requires unanimous approval for, among other action:

(i) incurring debt in a single transaction or a series of related transactions of more than $100,000; ... (v) any capital expenditures in excess of $50,000; (vi) entering into a contract or other agreement that obligates the Company to spend, transfer or convey assets of more than $50,000 ....

Doc. 1-5 at § 4.01(d); Doc. 144 at ¶ 20. Under that same Section 4.01(d) of the Third Amended and Restated Operating Agreement, any such Board approval must "be taken at a meeting or via written or electronic correspondence." Doc. 1-5 at ¶ 4.01(d); Doc. 144 at ¶ 21.

B. Facts Relating to Count I

ECG in Count I of its complaint claims that Patterson as CEO of ECG breached fiduciary duties owed to ECG by: (a) overpaying an ECG investor named Dan Pham approximately $123,933; (b) failing to collect approximately $265,000 in management fees owed to ECG by entities owned by Justin and Jason Abernathy; (c) forming a participation fund to compete against ECG; (d) misusing confidential information of ECG to benefit his other companies; and (e) using his position of trust and confidence with ECG to further his own private interest and harm ECG. Doc. 1 at ¶¶ 95–99. Patterson seeks summary judgment on this claim in its entirety. ECG's motion for partial summary judgment seeks summary judgment on the claims relating to the Pham and Abernathy dealings, as well as claims related to expenditures exceeding $50,000 not approved by the Board. The parties have very different views on the Pham and Abernathy dealings and the expenditures exceeding $50,000.

1. Dealings with Dan Pham

Patterson, as CEO of ECG, negotiated a loan participation agreement with an entity owned by Dan Pham in 2015. Doc. 144 at ¶ 69. Under this agreement, Pham acquired a stake in loans ECG extended to certain borrowers and was to receive a share of the principal and fees those borrowers agreed to pay to ECG, in exchange for Pham's monetary participation in the loans. Doc. 144 at ¶ 70. Patterson claims that he received the requisite votes from Board members to support the Pham participation agreement, but ECG contests that. Doc. 144 at ¶ 71; Doc. 132 at ¶¶ 8–9.

In December of 2015, Patterson caused ECG to wire Pham approximately $123,993 after ECG terminated the participation agreement with Pham. Doc. 144 at ¶¶ 73, 74. Patterson asserts that ECG agreed to pay Pham under three Termination of Participation Agreements dated November 22, 2015. Doc. 104 at ¶ 19; Doc. 104-10; Doc. 104-13; Doc. 104-12; Doc. 144 at ¶ 75. ECG claims that $123,993 was not due and owing to Pham under the participation agreement with ECG, and that regardless Patterson did not receive Board approval to terminate the participation agreement or make that $123,993 payment. Doc. 144 at ¶¶ 75–76; Doc. 132 at ¶¶ 12–15. Patterson counters that he received the approval of Ney (beneficial owner of Seco and in control of two positions on the ECG Board)4 before terminating the participation agreement with Pham and making payment to Pham. DOC. 105-26 at 8–9; Doc. 144 at ¶ 76. Patterson explains that, as written, the participation agreement with Pham precluded Pham from making a positive return on his investment. Doc. 113 at ¶ 9. Thus, to preserve ECG's business relationship with Pham and encourage Pham to loan money to ECG in the future, Patterson had ECG pay Pham a greater return than what was required under the participation agreement. Doc. 113 at ¶ 11. Larson, the CEO of ECG at the time, backs up Patterson's assertion. Doc. 113 at ¶ 9.

However, ECG believes that Pham's participation agreement would have yielded him a net profit, and even if the amount of the return was an issue with Pham, that did not merit ECG paying him monies not owed under the participation agreement. Doc. 113 at ¶¶ 9–11.

In 2016, Pham loaned ECG $1.5 million and "rep...

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