Quick v. Formula Telecom Inc
| Decision Date | 15 February 2011 |
| Docket Number | Case No. 4:10CV01699 JCH |
| Parties | GORDON QUICK, WILLIAM MCCAUSLAND, and JOHN TRECKER, Plaintiffs, v. FORMULA TELECOM, INC., MICHAEL HUBER, and QUADRANGLE GROUP, LLC, Defendants. |
| Court | U.S. District Court — Eastern District of Missouri |
This matter is before the Court on Defendant Formula Telecom, Inc.'s Motion to Dismiss Counts I, IV, and VII (Doc. No. 2) and the Motion to Dismiss of Defendants Michael Huber and Quadrangle Group (Doc. No. 19). These matters are briefed and ready for disposition.
On December 5, 2005, Formula Telecom, Inc. ("FTS") executed a stock purchase agreement whereby it purchased the outstanding stock of Viziqor Solutions, Inc. from Woodmont Holdings, Inc. f/k/a Viziqor Holdings, Inc. f/k/a Daleen Holdings, Inc. ("Holdings") for a purchase price of $2.0 million. (Settlement Agreement By and Between the Chapter 7 Trustee, Formula Telecom Solutions, Ltd. and Viziqor Solutions, Inc. n/k/a Formula Solutions, Inc. ("Settlement Agreement"), Doc. No. 11-1, p. 1; Plaintiffs' Memorandum in Opposition to Defendant Formula Telecom, Inc.'s Motion to Dismiss ("Response"), Doc. No. 11, pp. 2, 4). The stock purchase agreement provided that $1.0 million of the purchase price was to be placed in an escrow account to be used by Holdings to indemnify FTS or Viziqor Solutions, Inc. for certain agreed liabilities, losses and expenses. (Id., pp. 1-2). Holdings, filed for bankruptcy protection under Chapter 7 of the Bankruptcy Act on March 13, 2006, in the District Court of Delaware.1 Neither FTS nor Solutions filed for bankruptcy protection.
Plaintiffs Gordon Quick, William McCausland, and John Trecker (collectively, "Plaintiffs") filed a three count Petition in the Circuit Court of St. Louis County ("state lawsuit") on March 3, 2006, against Viziqor Solutions n/k/a FTS, Woodmont Holdings, Inc. f/k/a/ Viziqor Holdings, Inc., Michael Huber, and the Quadrangle Group, LLC ("Quadrangle"). In their Petition, Plaintiffs assert claims for breach of their employment contracts against Viziqor Solutions, Inc. ("Solutions") and alleged that Solutions was the alter ego of Viziqor Holdings, Inc.2 On or around April 6, 2006, the bankruptcy trustee filed a Suggestion of Bankruptcy and Notice of Automatic Stay in connection with the Holdings bankruptcy, and Plaintiffs dismissed Holdings from the state lawsuit, without prejudice, on or about April 12, 2006. On April 14, 2006, defendants Huber and Quadrangle removed the state lawsuit to federal court.3 FTS filed a Motion to Dismiss on May 3, 2006. On February 12, 2007, the District Court denied FTS's motion to dismiss but transferred the case to the Delaware Bankruptcy Court.4 On November 4, 2009, Plaintiffs dismissed their claims in the adversary proceeding (the original state lawsuit claims). On August 17, 2010, the Holdings bankruptcy case was closed. On September 13, 2010, Plaintiff filed the current action.
In the current action, Counts I, IV and VII are breach of contract claims of each Plaintiff against FTS as the alter ego of Holdings. Counts II, V and VIII are breach of contract claims against Quadrangle. Counts III, VI and IX are fraud claims against Huber and Quadrangle.
Once a bankruptcy case is filed "all legal or equitable interests of the debtor in property as of the commencement of the case" become the property of the bankruptcy estate. 11 U.S.C. §541(a)(1). The bankruptcy trustee is the successor to the debtor's interests included as property of the estate. 11 U.S.C. §541. "The Bankruptcy Act vests in the bankruptcy trustee broad power to manage the affairs of the debtor." Citibank, N.A. v. Andros, 666 F.2d 1192, 1195 (8th Cir. 1981).
All of Plaintiffs' claims relate to employee agreements or retention bonuses executed between Plaintiffs and Holdings. Plaintiffs' theory of liability against FTS is that FTS is the alter ego of Viziqor Holdings (n/k/a Woodmont Holdings, which filed for bankruptcy). (Compl., ¶¶ 14, 28, 46, 47, 65, 66). FTS claims that it is entitled to dismissal for several reasons. FTS claims that as a result of Plaintiffs' claim that Solutions n/k/a FTS is the alter ego of Holdings which recently emerged from bankruptcy, this Court lacks subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1). FTS also asserts that Plaintiffs fail to state a claim upon which relief can be granted under Fed.R.Civ.P. 12(b)(6). Finally, FTS claims that the trustee is an indispensable party and this case cannot continue without him pursuant to Fed.R.Civ.P. 12(b)(7). FTS asserts that the bankruptcy trustee is a required party under Fed.R.Civ.P. 19(a)(1).5 "The proponent of a motion to dismiss under Fed.R.Civ.P. 12(b)(7) hasthe burden of producing evidence showing the nature of the interest possessed by an absent party and that the protection of that interest will be impaired by the absence." De Wit v. Firstar Corp., 879 F.Supp. 947, 992 (N.D. Iowa 1995)(citations omitted).
Specifically, FTS asserts that Plaintiffs' claims cannot be litigated outside of the bankruptcy proceedings. (Defendant Formula Telecom, Inc.'s Reply to Plaintiffs' Opposition to Motion to Dismiss ("FTS Reply"), Doc. No. 16, p. 5). The bankruptcy trustee, not the defendants, was charged with collecting assets and creating an estate for payments of claims against Holdings. (Defendant Formula Telecom, Inc.'s Memorandum in Support of Motion to Dismiss ("FTS Memorandum"), Doc. No. 3, pp. 3-4). Likewise, only the bankruptcy trustee could pursue Plaintiffs' claim against FTS under the alter ego theory. (FTS Reply, p. 5). Accordingly, the bankruptcy trustee, which stands in the shoes of Holdings, must be a party to any claim against Holdings.
In response, Plaintiffs assert that the bankruptcy trustee made the settlement payment to FTS in consideration for FTS's liability for the claims of Holdings, such as Plaintiffs' lawsuit. Plaintiffs assert that, pursuant to the bankruptcy action, FTS was a creditor of Holdings, seeking to be paid to indemnify FTS against Plaintiffs' claims. (Response, p. 3). The bankruptcy trustee, Holdings and FTS entered into the settlement agreement that provided that FTS would receive $822,000 of the escrow.6
(Id., pp. 3-4). Plaintiffs assert that FTS took on the liability for Plaintiffs' claims in consideration for receiving $822,000. (Id).
The Court finds that Plaintiffs' claims fail as a matter of law because they did not include the bankruptcy trustee in the litigation. Plaintiffs' claims against Holdings existed prior to Holdings filing its petition in bankruptcy. Upon Holdings filing its petition in bankruptcy, Plaintiffs' claims became property of the bankrupt estate. See 11 U.S.C. §541(a)(1). FTS also included Plaintiffs' state lawsuit as one of the claims it may be liable for on behalf of Holdings. (Response, pp. 3, 6). Likewise, Plaintiffs filed claims in bankruptcy for the exact claims asserted herein. (Response, p. 4; FTS Reply, p. 6). Plaintiffs even received payment for their claims from the bankruptcy estate, but Plaintiffs assert that these distributions "were substantially less than the total amount of their claims." (Id.). In this lawsuit, Plaintiffs seek further payment for their claims from FTS as an alter ego of Holdings. (Response, p. 4). Holdings, however, has been replaced by the trustee in bankruptcy. See Steyhr Daimler Puch of Amer. v. Pappas, 35 B.R. 1001, 1004 (E.D. Va. 1983).7 If this Court were to find that FTS is an alter ego of Holdings, then the Court would also have to find that FTS's assets are indistinguishable from the assets of Holdings. Li, at 1003. This litigation cannot proceed without the participation of the bankruptcy trustee and outside the bankruptcy court. See 11 U.S.C. § 727(a)(1) (). This Court cannot adequately adjudicate this claim without the participation of Holdings/the bankruptcy trustee and dismisses Plaintiffs' claim for failure to join an indispensable party. The Courtalso denies Plaintiffs' Motion for an Asset Freezing Preliminary Injunction to Prohibit Removal of Formula Telecom's Assets from the United States (Doc. No. 17) as moot.
Pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), Defendants Michael Huber ("Huber") and Quadrangle Group, LLC ("Quadrangle") move this Court to dismiss Plaintiffs' claims against them for breach of contract and common law fraud (Counts II, III, V, VI, VIII and IX). Plaintiffs allege breach of contract claims against Quadrangle (Counts II, V and VIII) and common law fraud claims against Huber and Quadrangle (Counts III, VI and IX).
Plaintiff Quick entered into an Employment Agreement with Daleen Holdings, Inc. (Doc. No. 1-4, p. 1). Daleen Holdings became Viziqor Holdings, Inc. ("Holdings"). (Memorandum in Support of Motion to Dismiss of Defendants Michael Huber and Quadrangle Group, LLC ("Memorandum"), Doc. No. 20, p. 2). Plaintiffs McCausland and Trecker entered into written Employment Agreements with Holdings. (Compl., ¶¶ 12-13).8 Plaintiffs entered into a written Retention Bonus Agreement with Holdings whereby Plaintiffs were to continue their employment while Solutions was sold and Plaintiffs were to receive a bonus "out of the gross proceeds of the sale of Solutions." (Compl., ¶¶ 16-19). Plaintiffs allege claims for breach of contract against Quadrangle and for fraud against Quadrangle and Huber. These claims seek benefits due under the Employment Agreement and retention bonuses under the Retention Bonus Agreements.
Plaintiffs allege that Quadrangle breached a verbal agreement to guarantee the obligations of their employer, Holdings, and a subsidiary of Holdings, Viziqor Solutions, Inc. ("Solutions"). Quadrangle asserts that the claims for breach of a...
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