Fort v. Tryon Clear View Grp., LLC (In re Audithead, LLC)

• Decision Date: 29 September 2020
• Docket Number: Adv. Pro. No. 19-80017-HB, Adv. Pro. No. 19-80018-hb,C/A No. 17-02989-HB
• Citation: 624 B.R. 134
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: IN RE, AUDITHEAD, LLC, Debtor(s). John K. Fort, as Chapter 7 Trustee, Plaintiff(s), v. Tryon Clear View Group, LLC, Laura Maryanne Terranova, Defendant(s).

624 B.R. 134

IN RE, AUDITHEAD, LLC, Debtor(s).

John K. Fort, as Chapter 7 Trustee, Plaintiff(s),

v.Tryon Clear View Group, LLC, Laura Maryanne Terranova, Defendant(s).

C/A No. 17-02989-HB

Adv. Pro. No. 19-80017-HB¹

Adv. Pro. No. 19-80018-hb

United States Bankruptcy Court, D. South Carolina.

Signed September 29, 2020

Randy A. Skinner, Randy A. Skinner, Skinner Law Firm, LLC, Greenville, SC, for Debtor.

Kristin Burnett, Shane Rogers, Shane W Rogers, Barber Johnson Smith Hibbard & Wildman Law Firm, Spartanburg, SC, for Plaintiff.

Tryon Clear View Group, LLC, pro se.

Laura Maryanne Terranova, pro se.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

THIS MATTER is before the Court for consideration of the Motion for Summary Judgment filed by Plaintiff John K. Fort, Chapter 7 Trustee, and the Motion for Summary Judgment filed by Defendants Tryon Clear View Group, LLC ("TCVG") and Laura Maryanne Terranova.² Each party objected to the opposing Motion.³

SUMMARY OF FACTS

John Taylor and Terranova have been married since 1987. In 2002, Taylor formed AuditHead, LLC and served as its President. The company was initially formed as a South Carolina limited liability company because it operated out of Taylor's South Carolina residence. When its operations moved to a leased location in Tryon, a North Carolina limited liability company was formed. For purposes of this proceeding, the entities are treated as one and collectively referred to as "AuditHead."

AuditHead provided cost-reduction services via audits of its clients' operational expenses in the telecommunications and utilities service areas. Its clients included hospitals, long-term care facilities, clinics, and colleges. AuditHead employed sales representatives who reported to Taylor and were a combination of employees and independent contractors, and auditors who were independent contractors.

Creditor Catherine Rotruck began working for AuditHead in 2003. Rotruck claims she realized in November 2007 that AuditHead underpaid her in both wages and unpaid commissions. Rotruck remained employed by AuditHead despite this. In June 2008, Rotruck and Taylor began a personal relationship. When Rotruck refused to continue this relationship, she claims Taylor harassed her, which caused a hostile work environment and forced Rotruck to resign in October 2009. When Rotruck resigned, Terranova joined AuditHead in administrative, marketing, and sales roles.

In 2010, Rotruck filed a lawsuit against AuditHead and Taylor in the Court of Common Pleas for Spartanburg County.⁴ Terranova and TCVG were not named as defendants in that action. The lawsuit asserted causes of action for sexual harassment and sex discrimination under Title VII, violation of the Wage Payment Act of South Carolina, S.C. Code Ann. § 41-1-10 et seq. , promissory estoppel/detrimental reliance, breach of contract, and fraud and misrepresentation. She also asserted a claim for intentional infliction of emotion distress/outrage against only Taylor.⁵

Correspondence from the North Carolina Department of Labor to Rotruck dated October 28, 2011 states it completed an investigation of AuditHead regarding Rotruck's wage claim and determined AuditHead owes her $52,841.00 in back wages. AuditHead refused to voluntarily pay this amount and the Department of Labor did not to pursue legal action on Rotruck's behalf.⁶

In late 2011, AuditHead ceased operations by no longer offering new services or soliciting new clients. At that time, there were pending audits that took approximately four or five years for auditors to complete and generate a report. Taylor's role was limited to ensuring these pending audits were completed and billed to clients and to collecting receivables for prior work performed. Collected funds were deposited into AuditHead's bank account, which was eventually closed in 2017.

Using her experience at AuditHead and having discovered businesses certified as woman-owned have certain advantages, Terranova left AuditHead in 2011 to form TCVG. TCVG is a North Carolina limited liability company. Terranova is the sole member and serves as its Chief Executive Officer. TCVG began operations in November 2011 and there was no delay between when AuditHead ceased new business and TCVG began. Terranova was aware of Rotruck's lawsuit against AuditHead and Taylor prior to forming TCVG.

Terranova personally funded TCVG's startup costs and operating expenses. However, TCVG's sales representatives and auditors initially used AuditHead's office equipment and computers. This equipment was purchased by TCVG in December 2011 for $5,225.00, and the proceeds were deposited into AuditHead's bank account. TCVG also operated out of AuditHead's office location in Tryon for several months while AuditHead continued to pay the rent. There was no sublease between AuditHead and TCVG. TCVG moved to a new location in 2012. There is nothing in the record to indicate TCVG and/or Terranova did not keep adequate corporate books and records or otherwise adhere to corporate formalities.

Taylor joined TCVG shortly after it was formed. One year later he began serving the role of President of TCVG. Taylor is involved in TCVG's sales and operations. TCVG contracted with all of AuditHead's prior sales representatives and auditors. Thus, there appears to be a period when auditors were contracted by TCVG and working on completing pending audits for AuditHead. TCVG's sales representatives and auditors are independent contractors and paid according to the same compensation structure used at AuditHead. All sales representatives and auditors report to Taylor. Thus, Taylor serves in managerial and leadership capacities for TCVG, similar to those he held at AuditHead, and appears to be involved in both day-to-day operations as well as upper-level decision-making.

TCVG offers the same audit services that AuditHead offered, but to different clientele because TCVG is a certified woman-owned small business. With this certification, TCVG markets itself to businesses in need of diversity vendors pursuant to internal or governmental requirements. Although TCVG provides services to some of AuditHead's former clients, AuditHead and TCVG did not compete for business. TCVG's clients include hospitals, health systems, companies, and government entities. TCVG hired auditors from AuditHead to perform audits for the telecommunications service area, which comprises 80-95% of TCVG's business. TCVG also hired new auditors for its additional service areas of waste, managed print, document storage, mailing equipment, equipment maintenance, credit card fees, and staffing.

AuditHead filed a voluntary petition for Chapter 7 relief in June 2017. Rotruck filed the only proof of claim, in the amount of $1,677,841.00, claiming back wages and other damages asserted in her lawsuit. The statement attached to Rotruck's proof of claim categorizes her claim as follows: $52,841.00 for back wages owed; $115,000.00 for commissions owed prior to termination as an employee of AuditHead; $1,500,000.00 for commissions owed after termination by AuditHead ($300,000.00 per year for 5 years); and $10,000.00 for stress-related medical expenses.

In this action, the Trustee asserts TCVG was created by Terranova for the sole purpose of continuing AuditHead's business while avoiding Rotruck's claim. The Complaint cites 11 U.S.C. §§ 548 and 550, the Federal Uniform Declaratory Judgment Act, 28 U.S.C. § 2201, et seq. , and the South Carolina Uniform Declaratory Judgment Act, S.C. Code Ann. § 15-53-10, et seq. However, it asserts only the following causes of action: successor liability, alter ego, piercing the corporate veil, and substantive consolidation.⁷ The Complaint does not discern whether each cause of action is asserted against TCVG, Terranova, or both Defendants. Taylor is not a party to this lawsuit.

DISCUSSION

This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157, and Local Civ. Rule 83.IX.01 (D.S.C.). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O) and the parties have consented to this Court's entry of a final order.

Defendants assert North Carolina law applies here, whereas the Trustee asserts South Carolina law is appropriate. As set forth in detail below, the result would be the same regardless of which states' laws govern this action.

I. STANDARD OF REVIEW

Fed. R. Civ. P. 56(a)⁸ provides "[t]he court shall grant summary judgment 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 burden of demonstrating the absence of a genuine issue of material fact rests on the party seeking summary judgment. Though the moving party bears this initial burden, the non-moving party must then produce "specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A genuine dispute of material fact exists "if the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "When faced with cross-motions for summary judgment, the court must review each motion separately on its own merits ‘to determine whether either of the parties deserves judgment as a matter of law.’ " Rossignol v. Voorhaar , 316 F.3d 516, 523 (4th Cir. 2003) (quoting Philip Morris Inc. v. Harshbarger , 122 F.3d 58, 62 n.4 (1st Cir. 1997) ).

II. SUCCESSOR LIABILITY

In North and South Carolina, as in most states, a successor corporation is generally not liable for the debts and liabilities of its predecessor. See Nationwide Mut. Ins. Co. v. Eagle Window & Door, Inc. , 424 S.C. 256, 818 S.E.2d 447, 451 (2018) ("[C]orporate law generally favors the free transfer of assets and disfavors successor liability."). However, as relevant here, exceptions to this rule include if "the successor company was...