In Re Ellipso Inc.

• Decision Date: 07 February 2011
• Docket Number: Case No. 09-00148
• Parties: In re ELLIPSO, INC., Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

In re ELLIPSO, INC., Debtor.

Case No. 09-00148

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

FILED: February 7, 2011

MEMORANDUM DECISION RE OBJECTIONS TO THE CLAIM OF DAVID CASTIEL

S. Martin Teel, Jr. U.S. Bankruptcy Judge

This addresses the objections of John H. Page, Mann Technologies, LLC, John Mann, and Robert Patterson to the claim of David Castiel and represents the court's findings of facts and conclusions of law. For the reasons that follow, I will uphold in part and overrule in part the objections.

I

On February 25, 2009, the debtor commenced the above-captioned case under Chapter 11 of the Bankruptcy Code, and on July 13, 2009, David Castiel, the debtor's president and CEO, filed an initial proof of claim seeking $3,227, 000.84 in deferred compensation, bonuses, and unreimbursed expenses. Thereafter, creditor John Page and creditors John Mann, Robert Patterson, and Mann Technologies filed objections to Castiel's proof of claim.

Castiel subsequently amended his proof of claim and the court held hearings on the objections for several days in March and April of 2010. During the course of the hearings Castiel filed a third amended proof of claim seeking $3,238, 654.54. At the hearing on the objections the evidence was as follows.

In the early 1990's David Castiel formed MCHI, the debtor's predecessor, for the purpose of creating a satellite telephone system, ultimately raising tens of millions of dollars and beginning construction on satellites to place into orbit. As founder of the company, Castiel has been employed pursuant to an employment contract with MCHI and/or its related entities since their inception as president and CEO, earning various salaries throughout his tenure. In the spring of 1998, Castiel established Ellipso, the debtor, for the purpose of acquiring MCHI and retaining it as a subsidiary. Pursuant to that transaction, Ellipso assumed MCHI's obligations, including Castiel's employment contract.¹ MCHI, however, continued to pay Castiel's salary through 2003.

In 2001, after 10 years as a growing, successful enterprise, Ellipso began to experience financial problems as a result of ageneral shift in the telecommunications industry from satellite-based telephone systems to cellular systems. This shift resulted in cash flow issues for the debtor, and at a March 2001 Board meeting, Castiel informed Ellipso's Board that the company had only enough money for 2 more months of expenditures. Castiel Ex. D. In order to help the company through these difficult times, certain employees, including Castiel, agreed to defer their salaries. Castiel Ex. D. As a reward to those employees agreeing to defer their salary, Castiel recommended that the Board grant those employees a bonus, "provided the Corporation's finances improved sufficiently." The minutes, however, do not reflect that the Board acted upon Castiel's recommendation at that time. Ellipso continued to experience cash flow problems through the remainder of 2001, and into 2002 and 2003, with employees, including Castiel, continuing to defer portions of their salaries and with Castiel receiving no salary for 2003. Castiel Ex. V.

In late 2003, after the debtor's prospects for launching a satellite telephone system into orbit appeared dim, Ellipso began to shift the focus of its business towards the sale of vanity phone numbers and 1-800-type service under two digits it had been assigned under the 881 country code by the International Telecommunications Union for its anticipated satellite system. Towards this end, Robert Patterson, an Ellipso consultant, introduced Castiel to John Mann, a former MCI engineer, and they decided to enter into two business arrangements. Under the first, John Mann agreed to lend Ellipso $90,000 through a company he formed named Mann Technologies, LLC. Ellipso and Mann Tech memorialized this understanding, executing a non-recourse loan agreement and providing Mann Tech with 492, 611 shares of ICO Global Communications Holding Ltd. stock as collateral for the loan. Under the second arrangement, Castiel and Mann agreed to develop an 881 vanity phone number service with The Registry Solutions Company (TRSC), another Mann-formed enterprise, working to locate purchasers for the numbers and developing the 881 registry.

In December 2003, in anticipation of future revenues stemming from the 881 service, the Ellipso Board adopted a "Commission/Bonus Pay from 881 Revenues." Castiel Ex. E. The key terms of that compensation plan were as follows: (1) upon receiving sufficient proceeds from the 881 service all salaries were to resume at the current rate; (2) all bonuses due to employees per past Board resolutions were to be paid in full, including stock bonuses and stock options; and (3) a commission structure was established providing for a certain percentage of 881 revenues to go into a commission pool and a certain percentage of that commission pool to be used to (x) "reward employees who deferred salaries in proportion of the amountdeferred since October 2002, date of the active beginning of the 881 project" and (y) to pay employees "in direct proportion of the salaries paid to employees in the 881 project... In approving the 881 compensation plan, however, the Board resolved that 881 revenues had to be "first allocated to paying company's obligations, including on-going operational expenditures necessary to support the 881 service." This limitation was echoed in the compensation plan itself which provided that "the commission shall be distributed monthly, funds permitting: i.e., after all obligations, debt, reserves and other liabilities of the Company having been met...

Eventually, the relationship between Mann and Castiel soured and litigation related to both business arrangements ensued. First, relating to the loan, Ellipso defaulted under the loan agreement with Mann Tech, and Mann Tech foreclosed on the ICO shares. Ellipso then brought suit against Mann, Mann Tech, and Robert Patterson, seeking to recover the foreclosed stock on the basis that Robert Patterson, who had arranged the financing between Ellipso and Mann Technologies, had failed to disclose an ownership interest he held in Mann Tech. Ultimately, after extensive litigation in the District Court, Mann Tech prevailed on the action and retained possession of the foreclosed shares. After receiving judgment in its favor, Mann Tech then moved the District Court for attorney's fees under theories of bad faithand a fee shifting provision in the loan agreement. In a memorandum opinion dated January 29, 2009, Chief Judge Lamberth awarded Mann Tech $201,314.04 in attorney's fees based on both grounds. Second, litigation also ensued between Ellipso and TRSC under the 881 business arrangement when Ellipso filed suit in the District Court against TRSC seeking to void the December 2003 agreement between them based on TRSC's alleged failure to pay certain fees over to Ellipso and failure to disclose Patterson's interest in the company. The case was ultimately referred to arbitration and TRSC was awarded $162,335.45 in damages.

Also while Ellipso was developing its 881 business, there were ongoing activities in Mobile Communications Holdings, Inc. (MCHI), an Ellipso subsidiary. On July 12, 2002, Ellipso entered into a stock purchase agreement with ICO Global Communications for the sale of ESBH, Inc., a newly formed entity wholly owned by MCHI. Page Ex. 26. Pursuant to that agreement, ICO was to pay $425,000 in cash to Ellipso Private Holdings, a company holding Ellipso shares, and transfer 1, 571, 547 of ICO Class A Common Stock and 46, 500 shares of ICO Class B Common Stock to MCHI in exchange for shares of ESBH held by MCHI. Page Ex. 26. MCHI ended up subsequently declaring bankruptcy in this court but did not include among its scheduled assets the ICO shares. At the hearing, Castiel, who signed the MCHI schedules, testified that the shares were not scheduled because ICO had erroneously issuedthe shares to MCHI rather than Ellipso Private Holdings/Ellipso. Accordingly, they were not listed as assets of MCHI and in 2004 Ellipso had ICO execute a pro forma transfer of the shares from MCHI to Ellipso.

II

In objecting to Castiel's proof of claim, the creditors have raised several bases for denying Castiel's claim in its entirety and as well as several objections to specific portions of his claim. Before reaching the arguments for denying the claim in its entirety, I will first evaluate Castiel's claim on the basis of the documentation he presented and the creditors' objections to specific portions of his claim. After having arrived at a baseline figure for the claim, I will then address the creditors' arguments for denying the claim in its entirety to decide what if any adjustment to the baseline claim is appropriate.

A

In his proof of claim, Castiel claims $3,238, 654.54, which consists of $1,431, 782 in unpaid salary, $1,803, 706 in deferral bonus, and $3,166 in unreimbursed expenses/advances. I will address each part of the claim in turn.

For the unpaid salary portion of his claim, Castiel started from a base salary of $480,000 per year and subtracted from that amount the salary he actually received. The first issue to address, then, is whether $480,000 was in fact Castiel's baseline salary.

Under Federal Rule of Bankruptcy Procedure 3001(f), "A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." A party in interest objecting to the claim, however, can overcome the prima facie validity of the claim by introducing some evidence that calls into question the viability of the claim, at which point the creditor filing the proof of claim must carry the ultimate burden of proving its entitlement to the claim. See In re Stancil, 2005 WL 3036647, at *43 (Bankr. D.D.C. Nov. 7, 2005). Moreover, when the claimant is an insider, he must further demonstrate the reasonableness of the...