Michael E. Wheatley for the Estate v. McCarty (In re CC Operations, LLC)
| Decision Date | 23 April 2020 |
| Docket Number | Adv. No. 19-03034-thf,Case No. 17-33389-thf |
| Parties | IN RE: CC OPERATIONS, LLC d/b/a eCHECKit, Debtor Michael E. Wheatley as Trustee For The Estate of CC Operations, LLC, Plaintiff v. Chris McCarty and Louis Pomerance, Defendants |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Kentucky |
Peter M. Gannott, Louisville, KY, for Plaintiff.
Lea Pauley Goff, Stoll Keenon Ogden PLLC, Louisville, KY, Daniel E. Hitchcock, Lexington, KY, for Defendants.
This matter comes before the Court on Defendant Chris McCarty's Motion to Dismiss, and on Defendant Louis Pomerance's Partial Motion to Dismiss,1 the complaint filed against them by Michael E. Wheatley, as Trustee of the Estate of CC Operations, LLC, pursuant to Federal Rule of Civil Procedure 12(b)(6) as adopted by Federal Rule of Bankruptcy Procedure 7012(b), on grounds the Trustee has failed to state a claim upon which relief may be granted. The Trustee's complaint generally contends that, due to alleged mismanagement and poor business decisions by McCarty and Pomerance (together, "Defendants"), who were part-owners and members of the now-defunct check processing company CC Operations, LLC ("CC Operations" or "Debtor"), Defendants should be held financially liable for failing to adequately capitalize the LLC and failing to otherwise prevent or minimize the LLC's losses. Trustee also contends Defendants received voidable preferential transfers and fraudulent conveyances.
Defendants' motions to dismiss counterargue that: (1) the LLC was structured to be manager-managed, but Defendants were only minority members of the LLC with no fiduciary duties or obligations to contribute capital; (2) the terms of the operating agreement expressly waived liability for LLC members; and (3) because the alleged misconduct dates back to 2007, and the bankruptcy petition was filed in 2017, the five-year statute of limitations for Trustee's breach of fiduciary duty claims has expired. As for the preferential transfer claim (Count V), McCarty notes that the body of that claim solely pertains to Pomerance, where it seeks to avoid a single $16,945.60 distribution received by Pomerance (who does not seek to dismiss Count V). Regarding the fraudulent conveyance claims, Defendants contend that Trustee fails to identify any fraudulent transfers they received from CC Operations.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334(a) and (e). This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (E), (F), (H), and (O). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. For reasons set forth below, the Court finds that the Trustee's complaint fails to state a cause of action against McCarty, and with the sole exception of the preferential transfer allegation in Count V, fails to state a cause of action against Pomerance. For reasons discussed more fully below, the Court will grant McCarty's motion to dismiss and Pomerance's partial motion to dismiss the Trustee's complaint against them.
In 2002, Chris McCarty and Louis Pomerance, along with an entity named La-Le, LLC, purchased a check processing business. The business was a franchisor for a network of franchisees that provided check guarantees, verification, and collection services to customers (e.g. merchants that accepted check payments and paid fees to protect against dishonored checks). McCarty and Pomerance formed Checkcare Enterprises, LLC ("Enterprises") to acquire and operate this check processing business, and in 2003, Enterprises hired Cindy Schneider to lead sales and strategic planning. See Complaint , [R. 1 at ¶¶ 24–28, 34].
On April 17, 2007, Defendants formed the debtor company CC Operations, LLC (d/b/a "eCKECKit"), a stand-alone check-processing franchisee business, under the laws of Kentucky. [R. 1 at ¶ 13–15]. CC Operations assumed Defendants' debts to La-Le, LLC, and assumed certain liabilities of Enterprises, Defendants' other entity, including certain debts owed by Enterprises to McCarty and Pomerance. [Id. at ¶¶ 40–42]. McCarty and Pomerance were both part owners, board members and officers of CC Operations from its inception until July of 2016, each owning 40% of the company and Cindy Schneider owning the remaining 20%. [Id. ]. Defendants contributed $184,400.88 each, in software and other intangible property, to finance the LLC's operations. [Id. at ¶ 46–47].
CC Operations' corporate affairs were to be governed by the Operating Agreement dated November 21, 2007, and later amended via an Amended and Restated Operating Agreement dated July 1, 2016.2 [R. 1 at ¶¶ 18–24]. The Operating Agreement included, among other provisions, liability waivers for LLC members and an obligation to indemnify members for all liabilities incurred. Section 10.2 of the Operating Agreement specifically provides as follows:
10.2 Limitation of Liability. Members of the Company will not be liable to the Company or the other Members for monetary damages for conduct as Members except to the extent that the [LLC Act] ... prohibits elimination or limitation of member liability.
See Trustee Response, [R. 31 at 12]. This waiver of fiduciary duties was also embodied in the company's Amended and Restated Operating Agreement: "To the maximum extent permitted by the [LLC Act], any common law or default statutory duties generally owed by members of a limited liability company are hereby disclaimed and shall not be applicable to the Member." [R. 7-2 at 13]. The 2016 Amended and Restated Operating Agreement further provided that CC Operations was a manager-managed LLC and appointed Ms. Jessica Benzakein as manager of the company's business and affairs. See Trustee Sur-Reply, [R. 38 at 2].
Prior to CC Operations' inception in 2007, however, a dispute had arisen between Enterprises and some of its franchisees in late 2003, spawning litigation in Georgia which did not resolve until 2008. [R. 1 at ¶¶ 35–37, 41–43]. In April of 2008, Enterprises and the franchisees finalized a Settlement and Asset Purchase Agreement, which resulted in the sale of Enterprises to the franchisees. [Id. at ¶ 55]. The franchisees formed a new entity, Checkcare Group, LLC ("Group"), and Group purchased Enterprises' payment processing business and assets. [Id. ].
Following the franchisees' settlement and asset purchase agreement in 2008, CC Operations continued processing payments as a licensee of the new licensor/franchisor Group, with monthly license fees payable to Group. CC Operations also bought a 9% membership interest in Group, with the former franchisees owning the remaining 91%. [R. 1 at ¶¶ 56–57]. Pursuant to the terms of the Franchisee Settlement, from 2008 to 2010, CC Operations made payments to Group in the amount of $376,546, and Group made payments to Enterprises in the amount of nearly $380,000 (payments Group agreed to make to acquire Enterprises' payment processing business). [Id. at ¶¶ 57–61]. Also between 2008 and 2010, Enterprises made payments of $446,315.88 to McCarty and Pomerance (and an entity owned by Pomerance). [Id. at ¶ 60].
* * * * *
The Trustee's underlying complaint asserts numerous claims against McCarty and Pomerance including but not limited to breach of fiduciary duty, fraudulent transfers, voidable preference payments, and other bankruptcy and state law claims related to their alleged failures to prevent or mitigate various financial harms CC Operations suffered since the company's inception in 2007. The series of mostly unrelated events which hindered the LLC's operations and caused financial problems over the years can be briefly summarized as follows:
(a) DEBTOR'S ASSUMPTION OF CHECKCARE ENTERPRISES' LIABILITIES: As explained above, in 2007, CC Operations assumed certain liabilities of Checkcare Enterprises, LLC, an entity owned and/or controlled by Pomerance and McCarty, including certain debts owed to the Defendants. [R. 1 at ¶¶ 39–42].
(b) SETTLEMENT WITH FRANCHISEES AND CREATION OF CHECKCARE GROUP: As explained above, to settle litigation filed by multiple franchisees of Enterprises, the franchisees created an entity called the CheckCare Group, LLC, and Group purchased Enterprises' assets. [Id. at ¶¶ 35–37, 43, 55].
(c) TRANSFERS FROM CHECKCARE GROUP, TO CHECKCARE ENTERPRISES, TO THE DEFENDANTS: As explained above, between 2008 and 2010, following Group's acquisition of Enterprises, CC Operations made payments to Group in the combined amount of $376,546.00, Group made payments to Enterprises of nearly $380,000.00, and Enterprises paid Defendants $446,315.88 total. [Id. at ¶¶ 56–60].
(d) GOVERNMENT SEIZURE OF FUNDS: In June of 2010, CC Operations' bank account was frozen and $218,307.52 was seized by the U.S. government due to the Food and Drug Administration's claim that certain tobacco companies operated by Native American tribes, which were using CC Operations for their check processing, had failed to pay sales tax on online tobacco sales. Although $130,984.51 was eventually refunded, the government seizure resulted in a loss of $87,323.01 to CC Operations. [Id. at ¶¶ 63–65].
(e) EMBEZZLEMENT BY FORMER OWNER; NEW MANAGER NAMED: In July of 2010, CC Operations' president and former owner, Cynthia Schneider, embezzled $1,370,415.36 from CC Operations.3 After Ms. Schneider's departure in 2010, Jessica Benzakein (who was already working for CC Operations at the time) and Defendants entered into the Amended and Restated Operating Agreement4 (effective July 1, 2016) which gave Ms. Benzakein a 50% ownership interest in CC Operations (McCarty and Pomerance each retaining 25% membership interests), and designated Ms. Benzakein manager of CC Operations. [Id. at ¶¶ 68–70].
(f) CLIENT'S ACCOUNT TAMPERING: Between 2016 and 2017, CC Operations' client, Staffease, Inc., allegedly "secretly" logged into the Debtor's system and improperly altered their account by manipulating data...
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