Options Unlimited, Inc. v. McCann (In re McCann)

• Decision Date: 31 August 2021
• Docket Number: ADV. PRO. NO. 19-05012 (JAM),CASE NO. 18-51319 (JAM)
• Citation: 634 B.R. 207
• Parties: IN RE: James E. MCCANN, Debtor. Options Unlimited, Inc., Plaintiff, v. James E. McCann, Defendant.
• Court: U.S. Bankruptcy Court — District of Connecticut

634 B.R. 207

IN RE: James E. MCCANN, Debtor.

Options Unlimited, Inc., Plaintiff,

v.James E. McCann, Defendant.

CASE NO. 18-51319 (JAM)

ADV. PRO. NO. 19-05012 (JAM)

United States Bankruptcy Court, D. Connecticut.

Signed August 31, 2021

Aaron Romney, John L. Cesaroni, Zeisler & Zeisler, P.C., 10 Middle Street, 15th Floor, Bridgeport, Connecticut 06604, Attorneys for the Plaintiff.

Peter L. Lawrence, Lawrence & Jurkiewicz, LLC, 60 East Main Street, Avon, Connecticut 06001, Attorney for the Defendant.

MEMORANDUM OF DECISION AND ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

ECF NO. 26

Julie A. Manning, Chief United States Bankruptcy Judge

I. INTRODUCTION

On October 12, 2018, James E. McCann (the "Defendant") filed a voluntary Chapter 7 petition. On May 16, 2019, Options Unlimited, Inc. (the "Plaintiff") commenced this adversary proceeding against the Defendant seeking a determination that the debt owed to the Plaintiff by the Defendant is non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6). On January 12, 2021, the Plaintiff filed a Motion for Summary Judgment (the "Motion for Summary Judgment," ECF No. 26). The deadline to oppose the Motion for Summary Judgment passed without the Defendant filing a response. For the reasons that follow, the Motion for Summary Judgment is granted.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant proceeding pursuant to 28 U.S.C. § 1334(b). The Bankruptcy Court derives its authority to hear and determine this matter pursuant to 28 U.S.C. §§ 157(a) and (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(I).

III. UNDISPUTED FACTS

Local Rule 56 of the United States District Court for the District of Connecticut requires that a party moving for summary judgment file a Local Rule 56(a)(1) Statement of Undisputed Material Facts. See D. Conn. L. R. 56(a)(1). A party opposing a motion for summary judgment must file a Local Rule 56(a)(2) Statement of Facts in Opposition to Summary Judgment. See D. Conn. L. R. 56(a)(2). Each material fact set forth in a movant's Statement of Undisputed Material Facts and supported by the evidence "will be deemed to be admitted (solely for the purposes of the motion) unless such fact is controverted by the Local Rule 56(a)(2) Statement required to be filed and served by the opposing party in accordance with this Local Rule." See D. Conn. L. R. 56(a)(1); see also Parris v. Delaney (In re Delaney) , 504 B.R. 738, 746-747 (Bankr. D. Conn. 2014). Here, the Plaintiff filed its Local Rule 56(a)(1) Statement (the "Plaintiff's Rule 56(a)(1) Statement"). However, the Defendant did not file a response to the Motion for Summary Judgment or a Local Rule 56(a)(2) Statement. Therefore, the material facts set forth in the Plaintiff's Rule 56(a)(1) Statement are deemed admitted.

The Court finds the following undisputed material facts:¹

1. The Plaintiff is a non-profit Connecticut corporation founded by the Defendant in 1994 to provide residential support services to individuals with intellectual and/or developmental disabilities. Ex. A. at 3.

2. The Defendant served as the Plaintiff's president and chief executive officer (CEO) from 1994 through July 2006. The Defendant also served as the Plaintiff's "de facto" president and CEO from July 2006 through June 2010. The Defendant was responsible for managing the Plaintiff's business and financial affairs. Id.

3. On May 24, 2006, while still working for the Plaintiff, the Defendant incorporated Residential Support Services, Inc. ("RSS"), a for profit corporation. The Defendant simultaneously served as president and CEO of the Plaintiff and RSS. In addition, the Defendant's wife served as vice-president of RSS while simultaneously employed as the Plaintiff's director of administration and development. Id. at 3.

4. While the Defendant was serving as de facto president and CEO of the Plaintiff, the Plaintiff entered into four "management/consulting" agreements with RSS which entitled the Defendant to annual compensation of $300,000 per year under the first agreement, $300,000 per year under the second agreement, $97,500 per year under the third agreement, and $87,500 per year under the fourth agreement. See id. at 6, 9, 11, 13. The management/consulting agreements provided that RSS would be acting in a fiduciary capacity to the Plaintiff. Id. at 6, 9.

5. During all relevant times, the Plaintiff's operating income came through funding from the Connecticut Department of Social Services ("DSS") and Department of Developmental Services ("DDS"). Id. at 4. Connecticut law capped the Defendant's salary at $75,000 through 2006 and at $100,000 through 2010. Id. Connecticut law allowed the Defendant to receive a higher salary from the Plaintiff if the Plaintiff paid him using revenue streams from sources other than DSS and DDS. Id.

6. In 2012, DDS began a review of the second management/consulting agreement and related payments to RSS for the fiscal year 2011. Id. at 18.

7. On February 25, 2013, DDS completed its review of the second management/consulting agreement between the Plaintiff and the Defendant and determined that the July 1, 2010 contract with RSS was a "related party transaction." Id. at 19. The classification of a transaction as a "related party transaction" is significant because a related party transaction requires ethical preapproval from DDS’ Ethics Committee. See id. at 16-18. DDS regulations and the Plaintiff's bylaws also require at least two other comparing bids to approve related party transactions. Id. at 17.

8. DDS found the transaction between the Plaintiff and RSS was a "related party transaction" based on the Defendant's potential or ability to exercise influence or control over the parties, that [the] Plaintiff had failed to obtain DDS approval for it, and that the $75 hourly rate in the contract for RSS’ services was too high "as many of these duties would not necessitate the administrative skill set required of a typical Executive Director's position, for [RSS]." Id. at 19.

9. On August 13, 2014, DDS notified the Plaintiff that RSS had overbilled the Plaintiff for 1083 hours. DDS found that of the 1300 hours billed by RSS, only 217 hours were accounted for. Thereafter, DDS disallowed 1083 hours billed, totaling $81,225, as being undocumented and attempted to recoup those funds from the Plaintiff. Id. at 19-20.

10. On August 14, 2014, the Plaintiff filed a nine-count complaint in the Connecticut Superior Court against the Defendant and other defendants alleging the Defendant committed fraud, breach of fiduciary duty, breach of contract, misrepresentation, and negligence (the "State Court Action"). See Options Unlimited, Inc. v. James E McCann et al , Doc. No. LLI-CV-14-6011051-S and Residential Support Services, Inc. v. Options Unlimited, Inc. , Doc. No. LLI-CV-15-6012963-S.

11. A trial was held in the State Court Action over eight days during which the Plaintiff and the Defendant appeared, testified, presented lay witnesses, expert testimony, and submitted 147 documents into evidence. Ex. A at 3.

12. By Memorandum of Decision dated August 17, 2020, a Judgment entered in the State Court Action in favor of the Plaintiff against the Defendant in the amount of $1,055,540.15. Id. at 53.

13. The Judgment held the Defendant liable for common law fraud, finding he "knowingly misrepresented the work that he and his wife completed for the Plaintiff by overbilling it and also misrepresented their allowable compensation." Id. at 30. The Judgment also held the Defendant liable for breach of fiduciary duty to the Plaintiff both personally while the Defendant was the Plaintiff's president and CEO, and contractually while the Defendant was the president and CEO of RSS. Id. at 34.

14. The Judgment found that:

(i) The Defendant's misrepresentations were intentional to circumvent the state-imposed salary limitations and the Defendant himself had acknowledged that he had overbilled the Plaintiff. Id.

(ii) The Defendant's testimony that he tried to accurately bill the Plaintiff was not credible. Id.

(iii) The testimony of the Defendant, the Plaintiff's lay witnesses, and the Plaintiff's expert witness established that the monthly 100 to 115 hours of work the Defendant claimed to perform should have taken only approximately twenty hours each month to complete and could have been completed by the Plaintiff's personnel at a far lesser rate of pay. Id.

(iv) The Defendant knowingly misrepresented the work he completed for the Plaintiff personally and as an officer of RSS. Id.

(v) The Defendant's misrepresentations were made to induce the Plaintiff to pay the Defendant his requested sums, which the Plaintiff did pay to the Defendant. Id.

(vi) The Plaintiff established by a preponderance of the evidence that the Defendant had breached his fiduciary duty. Id.

(vii) Knowing that the Plaintiff's Board relied on his expertise, experience, and knowledge in the field of operating a non-profit agency, the Defendant pursued contracts through the Plaintiff that benefitted both himself and his wife individually at the Plaintiff's expense. Id.

(viii) The Defendant knowingly submitted materially false billing statements to the Plaintiff and allowed the approval of the materially false billing statements while still acting as the actual or "de facto" president and CEO of the Plaintiff. Id.

IV. SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(a) is made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056. Rule 56 directs that "[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." Fed. R. Civ. P. 56(a) ; Fed. R. Bankr. P. 7056. The "mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly...