In re Fund
| Decision Date | 28 August 2017 |
| Docket Number | Case No. 13–16150–MLB |
| Citation | 574 B.R. 193 |
| Court | U.S. Bankruptcy Court — Western District of Washington |
| Parties | IN RE: BREAST CANCER PREVENTION FUND, Debtor. |
Breast Cancer Prevention Fund, pro se.
Alan J. Wenokur, Wenokur Riordan PLLC, Seattle, WA, for Debtor.
Manish Borde, Williams Kastner, Rory C. Livesey, Livesey Law Firm, Seattle, WA, for Trustee.
William L. Courshon, Seattle, WA, for U.S. Trustee.
These matters came before me for hearing on April 20, 2017 on the Motion to Allow Claim In Part / For Partial Summary Judgment Regarding Breach of Fiduciary Duties (the "Motion Regarding Breach of Fiduciary Duties," Dkt. No. 196) by Nancy L. James, Chapter 7 Trustee (the "Trustee ") for the bankruptcy estate of the Breast Cancer Prevention Fund ("BCPF "); and on June 8, 2017 on the Motion for Partial Summary Judgment Regarding Pledge Cards, Joint Cost Accounting, and Scripts (the "Motion Regarding Violation of the CSA and CPA," Dkt. No. 227) by the State of Washington (the "State ").1
The Trustee was represented by Scott Henrie and Manish Borde and Williams, Kastner & Gibbs, PLLC. The State was represented by the Office of the Attorney General (the "AG ") and Tad Guy Robinson O'Neill. Legacy Telemarketing Corporation ("Legacy ") and James C. Paton ("Paton ") were represented by Aric Bomsztyk and Barokas Martin &Tomlinson. Clark Nuber, P.S. ("Clark Nuber ") was represented by Justin Bolser and Lori O'Tool and Preg O'Donnell & Gillett PLLC.
Following oral arguments, I took the matters under advisement. On July 26, 2017, I granted the parties limited permission to supplement the summary judgment record. (See Dkt. No. 282). Given the significant overlap of parties, claims, defenses, and underlying facts, I considered the matters together.
Now, having fully considered the matters and being fully advised, I partially grant the Trustee's Motion Regarding Breach of Fiduciary Duties and partially grant the AG's Motion Regarding Violation of the CSA and CPA.
I have subject matter jurisdiction over the AG's claim pursuant to 28 U.S.C. §§ 157(b)(2)(B) and 1334.2
Paton founded Legacy in 1992 as a telemarketing company serving both for profit companies and nonprofit charities. (Dkt. No. 198–1 at 46; Dkt No. 204 at 6).3 In 2005 Paton retired from the day-to-day management of Legacy. (Dkt. No. 204 at 6 n.4). Around 2006, Jeff Cunningham ("Cunningham ") became Legacy's President. (Dkt. No. 236–1 at 5). However, from 2005–2012 Cunningham consistently reported to Paton such that Paton effectively continued to control Legacy. (Dkt. No. 228 at 38–39). Paton reviewed Legacy's requests for proposals and assisted in drafting the scripts Legacy telemarketers used in providing telemarketing services. (Dkt. No. 228 at 40–41). Paton also reviewed and gave input on Legacy's contracts. (Dkt. No. 228 at 42). Paton also at least occasionally reviewed Legacy employee evaluations. (Dkt. No. 228 at 44).
Paton formed BCPF in 2004. (See Dkt. No. 152 at 1; Dkt No. 202 at 22). He asserts he was inspired to start BCPF after several experiences in which breast cancer indirectly touched his life. (See Dkt. No. 204 at 7–9). He also asserts he had become frustrated with the inefficacy of another breast cancer charity with which Legacy had worked. (See Id. ).
Paton asserts he founded BCPF with a tax exempt purpose to (1) remind women to regularly perform self-check exams and provide educational materials; (2) inform uninsured women that they could get a mammogram for free or little cost; (3) refer uninsured women to clinics that provide free or low cost mammograms, (4) offer and mail breast exam self-check shower cards at no charge; and (5) fundraise. (Dkt. No. 152 at 1). The AG asserts that Paton formed BCPF to create a client for Legacy, and that Paton intended for a significant portion of donations raised on behalf of BCPF to flow back to himself, through Legacy. Paton denies this allegation. (Dkt. No. 204 at 7, 10).
BCPF's articles of incorporation provided in relevant part:
The purpose for which the corporation is formed is: promoting prevention and early detection of breast cancer, encouraging breast-self exams, providing funds to pay for mammograms for uninsured women, raise awareness and educate the general public about breast cancer, and providing funding for breast cancer research.
(Dkt. No. 198–1 at 87). BCPF's bylaws provided in relevant part: "[t]he specific objectives and purposes of this corporation shall be: Public Benefit Corporation—(charitable purpose)." (Dkt. No. 198 1 at 15).
BCPF's board of directors (the "Board ") was comprised of Paton and other individuals, including, but not limited to, Joyce Bottenberg ("Bottenberg "), Greg Sheffield ("Sheffield "), and James Sheehan ("Sheehan "). (See e.g. , Dkt. Nos. 202 at 6–7, 14, 17, 19, 24; Dkt No. 152 at 1–2). BCPF's stated mission in its Annual Reports for 2006–2009 was "to save women's lives by promoting prevention and early detection of breast cancer through awareness and education, and providing funds to pay for mammograms for uninsured women." (See Dkt. Nos. 202 at 12, 15, 18, 22).
BCPF's Board decided to use telemarketing to accomplish its stated mission. (See Dkt. No. 152 at 4, Dkt. No. 204 at 2, 11). BCPF sent out a request for proposal to all registered professional fundraisers in Washington, including Legacy. (Dkt. No. 152 at 4–5; 152–6 at 36). Paton asserts that he disclosed to BCPF's Board that he had an ownership interest in Legacy and then recused himself from any decision to hire Legacy. (Dkt. No. 152 at 5, Dkt. No. 204 at 2). For example, the minutes from that meeting state that:
RESOLVED, that Legacy was the only qualified firm that responded to the RFP. James C. Paton while an owner of Legacy is not directly involved in the day to day management and has previously stepped down as corporate President, excused himself from further discussion on this matter.
(Dkt. No. 152–6 at 36). BCPF hired Legacy in October 2005. (Dkt. No. 152 at 5, Dkt. No. 204 at 7; Dkt. No. 239–1 at 2–6). Paton asserts that the Board chose to hire Legacy in large part due to a "stop loss" provision so that BCPF would always be guaranteed funds for working capital. (Dkt. No. 152 at 5). The BCPF–Legacy contract (the "BCPF–Legacy Contract ") was approved by the BCPF Board, and it does not appear based on the evidence submitted that the rates charged under the BCPF–Legacy Contract were outside of market norms. (Dkt. No. 152 at 5, Dkt. No. 204 at 2).
The Trustee argues that Paton always enjoyed 100% of Legacy Telemarketing's profits and was its sole shareholder. Paton asserts that at some point he entered into a stock option agreement with Cunningham, and believed this granted Cunningham an ownership interest in Legacy, leaving Paton with a 92% ownership interest. (Dkt. No. 204 at 6 n.4; 15 n.7). It does not appear from the record that Cunningham ever held any ownership interest in Legacy but, regardless, Paton owned all or substantially all of Legacy at all relevant times. (See 198–1 at 46).
Between 2006 and 2011, BCPF constituted 91% (2006), 96% (2007), 97% (2008), 99% (2009), 99% (2010), and 98% (2011) of Legacy's revenues. (Dkt. No. 198–6 at 102–103).
Legacy telemarketers made solicitation calls to consumers on behalf of BCPF. Each call lasted an average of less than a minute. (See Dkt. No. 202 at 27–42). Legacy contacted consumers in Washington, California, Texas, Florida, Georgia, and Pennsylvania. (Dkt. No. 152 at 2).
Legacy telemarketers followed telephone scripts during their calls with consumers. Multiple versions of scripts were used over the years, and numerous samples appear in the record. (See e.g., Dkt. No. 228 at 7–33 (). Also, at times, even the "approved" scripts were modified on the floor to test consumer's responses to the script variations. (See e.g., Dkt. No. 201 at 12, 31–33). Although the scripts varied over the years, the scripts consistently (1) inquired as to whether women in the household were up-to-date on mammograms, (2) inquired as to whether those women had insurance covering mammograms, (3) inquired as to whether the consumer would like to receive a shower card on conducting breast self-exams, and (4) requested a donation.
For example, a 2007 script that was identified as having been approved by Paton provided as follows:
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