Wilkins v. AmeriCorp Inc. (In re Allegro Law LLC)

• Decision Date: 16 February 2016
• Docket Number: Case No. 10–30631–WRS,Adv. Pro. No. 11–3007–WRS
• Parties: In re Allegro Law LLC, Debtor Carly B. Wilkins, Trustee, Plaintiff v. AmeriCorp Inc., Seton Inc., and Timothy McCallan, Defendants
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Alabama

545 B.R. 675

In re Allegro Law LLC, DebtorCarly B. Wilkins, Trustee, Plaintiff

v.AmeriCorp Inc., Seton Inc., and Timothy McCallan, Defendants

Case No. 10–30631–WRS

Adv. Pro. No. 11–3007–WRS

United States Bankruptcy Court, M.D. Alabama.

Signed February 16, 2016

Steve Olen, Attorney for Plaintiff

Lucy E. Tufts, Attorney for Plaintiff

Thomas R. McAlpine, Attorney for Defendants

Carly B. Wilkins, Plaintiff/Trustee

MEMORANDUM DECISION

William R. Sawyer, United States Bankruptcy Judge

This Adversary Proceeding was called for trial on November 4, 2013. Plaintiff Daniel G. Hamm¹ was present in person and by counsel Steve Olen and Lucy Tufts. Neither the Defendants nor their counsel, Thomas McAlpine, appeared. For the reasons set forth below, the Court enters judgment by default in favor of Plaintiff Carly B. Wilkins and against Defendants Timothy McCallan, AmeriCorp, Inc., and Seton Corp., in the amount of $102,949,220.72. The Court will enter judgment by way of a separate document.

I. FACTS & PROCEDURAL HISTORY

A. Overview

This is an extraordinary case of fraud on a massive scale that was perpetrated by Defendant Timothy McCallan ("McCallan") on thousands of victims. McCallan masterminded a debt settlement scheme in which customers were enticed into handing their money to entities controlled by McCallan with a promise that their debts would be either paid or settled. Thousands of customers signed up for debt settlement services offered by McCallan and paid him more than $100,000,000. Almost none of the money was paid to creditors of the customers as promised by McCallan. Instead McCallan, and those in league with him, siphoned off the money into a vast array of companies controlled by or closely associated with him. Among these entities were McCallan's co-defendants: AmeriCorp, Inc. ("AmeriCorp") and Seton Corp. ("Seton").

McCallan used attorneys as a "front" to perpetuate his scheme and to provide it an air of legitimacy. McCallan's scheme was most recently fronted by Keith Nelms ("Nelms"), an Alabama attorney whose license has since been suspended for his many unethical activities.² Allegro Financial and Allegro Law (collectively "Allegro") were instrumentalities controlled by McCallan and fronted by Nelms as a law firm. Prior to Nelms, McCallan's front was Laura Hess, a Florida attorney who was disbarred for actions she took while fronting a previous iteration of McCallan's debt settlement scheme, a law firm called Hess–Kennedy.

From the viewpoint of the customer, or victim, McCallan's scheme began with mass media advertising—television, radio, billboards, etc.—designed to appeal to those in financial distress. The potential customer could call a toll-free number and speak with a representative who would then sign the customer up, promising him that his financial worries would be over. The representative would promise the customer that they would deal directly with his creditors, that all the customer would have to do is pay his money to them instead of his creditors, and that they would take care of the rest. Instead, the customer's money would be siphoned off under the guise of hidden fees and costs, the customer would be that much poorer, and he would default on his debts because his creditors would go unpaid. As the District Court has aptly noted, the effect of McCallan's debt settlement scheme on its victims was "personal economic suicide[.]" McCallan v. Hamm, 2012 WL 1392960, *1, 2012 U.S. Dist. LEXIS 56097, *3 (M.D.Ala. Apr. 23, 2012). This adversary proceeding is an attempt by the Trustee in bankruptcy to recover the money that McCallan defrauded from these victims.

B. The Allegro Bankruptcies

Nelms originally started Allegro in 2007 as a small solo practice law firm. Chase Bank v. Nelms (In re Nelms), 2014 WL 3700511, *3, 2014 Bankr. LEXIS 3158, *7 (Bankr.M.D.Ala. Jul. 24, 2014). At that time, McCallan was perpetrating his debt settlement scheme through the Hess–Kennedy law firm in Florida and was introduced to Nelms through that firm. Nelms, 2014 WL 3700511 at *1–2, 2014 Bankr. LEXIS 3158 at *4–7. After the State of Florida moved against Hess–Kennedy in mid–2008, McCallan tabbed Nelms and Allegro to continue his debt settlement scheme in Alabama. Nelms, 2014 WL 3700511 at *3, 2014 Bankr. LEXIS 3158 at *8.

Nelms ostensibly "hired" McCallan and his entities, AmeriCorp and Seton, to handle back-office processing for Allegro; however, McCallan was effectively running Allegro. Nelms, 2014 WL 3700511 at *3–4, 2014 Bankr. LEXIS 3158 at *8. Allegro's marketing, form letters, and call centers were provided by McCallan's entities, and payments from Allegro's customers were controlled by McCallan's entities, though the paperwork listed Nelms as the customers' attorney. Through this setup, McCallan charged Allegro's customers massive up-front hidden fees for merely holding their money, sent a portion of the collected fees to Nelms, and pocketed the rest.

When the State of Alabama learned of the nature of Allegro's activities and fee structure with its clients, it placed Allegro in receivership under the control of Louis Colley ("Colley") in July 2009. Cut off from the wellspring of his ill-gotten gains, Nelms filed Chapter 7 bankruptcy on February 22, 2010. (Case No. 10–30430, Doc. 1). Daniel G. Hamm ("Hamm") was appointed as the Trustee in the Nelms bankruptcy and, upon learning of the nature of Nelms's involvement in Allegro, pulled its components (Allegro Financial and Allegro Law) into Chapter 7 bankruptcy as well. (Case Nos. 10–30630 and 10–30631). Hamm was also appointed Trustee in the Allegro bankruptcies.³

On May 20, 2010, Colley filed a motion for administrative expenses for the payment of almost $400,000 in invoices sent by AmeriCorp and Seton. (Case No. 10–30631, Doc. 74). The Court issued a Memorandum Decision in July 2010 in which it deferred payment, expressed its concerns about the value of the services allegedly rendered, and asked the following questions:

1. How much money was taken from Allegro clients?

2. How much of that money was taken by Nelms?

3. How much was paid to AmeriCorp, Seton and other third parties?

4. How much was paid to creditors of the Allegro clients?

(Case No. 10–30631, Doc. 105, p. 15).

To answer these questions, one must have the records of the Allegro companies. Yet, Allegro did not keep its own records and it did not own or control the data that its business activities generated. Nelms was incapable of answering these questions because he did not keep his own records. Instead, almost all of the business records of the Allegro companies were kept by AmeriCorp. Therefore, the key to understanding what happened to the money of the victims (creditors in the Allegro bankruptcies) was to get these records from AmeriCorp, which was controlled by McCallan.

As the Court will discuss below, it has taken years of litigation to learn the answers to these questions. However, a review of the Allegro claims register reveals that 5,214 claims have been filed by Allegro's creditors for a total amount of $102,949,220.72. (Case No. 10–30631). The evidence will support a range of figures both as to the numbers of victims and the amount by which they were defrauded. The Court has heard figures as high as 30,000 victims and $160,000,000.00. As a result of the duplicity of McCallan, Nelms, and those in league with them, the true figures will never be known. The Court will limit its judgment here to the 5,214 claimants in the amount of $102,949,220.72. The undersigned, having spent five years and several thousand hours on this case, is of the view that this number of claimants and this amount of claims are reasonable. The true figures are certainly higher.

C. The Adversary Proceeding

1. Initial Pleadings, Arbitration Motions, and Appeal

In his capacity as Trustee of the Allegro bankruptcies, Hamm filed suit against McCallan, AmeriCorp, and Seton on February 15, 2011. (Doc. 1). In his amended complaint, Hamm asserted that the Defendants served as the alter ego of Allegro, and sought turnover of property of the estate (Count I), avoidance of preferential transactions (Count II), avoidance of post-petition transfers (Count III), avoidance of fraudulent transfers (Count IV), and an accounting of the fees the Defendants collected (Count V). (Doc. 6).

McCallan moved to dismiss (Docs. 28 & 29), while AmeriCorp and Seton moved to compel arbitration (Docs. 31 & 33). The Court denied both motions on July 8, 2011. (Doc. 66). AmeriCorp and Seton appealed the denial of their motion to compel arbitration and moved to stay proceedings pending appeal (Docs. 70 & 74), and McCallan likewise moved to compel arbitration (Doc. 72). The Court denied McCallan's motion to compel arbitration and he appealed. (Docs. 98 & 104). The Court also denied AmeriCorp's and Seton's motions to stay proceedings and ordered the parties to commence discovery. (Doc. 99). The Court subsequently issued a report and recommendation for the benefit of the District Court, to which the Defendants objected. (Docs. 140 & 147). The District Court ultimately affirmed this Court's denial of the Defendants' motion to compel arbitration. McCallan v. Hamm, Case No. 2:11–cv–784–MEF, 2012 WL 1392960, *7, 2012 U.S. Dist. LEXIS 56097, *22 (M.D.Ala. Apr. 23, 2012)(Docs. 194 & 195).

2. Discovery Proceedings: The Allegro Database

a. First Discovery Order

Hamm learned early in the Allegro bankruptcy proceedings that Nelms and Allegro did not keep and maintain their own business records. He was told by Nelms, McCallan, and others that the Allegro records were kept by AmeriCorp in an electronic form on AmeriCorp's computer servers. Hamm asked McCallan for access to the Allegro records (Docs. 7 & 8) but was refused.

The first discovery hearing in this litigation took place on August 18, 2011, where the Court first discussed production of the Allegro database. As a result of discussions had at the August 18, 2011 hearing, the Court entered its first discovery order on August 22, 2011 ("First...