Griffin v. Jones

170 F.Supp.3d 956

David Griffin, Plaintiff

v.Charles Jones, et al., Defendant

CIVIL ACTION NO. 5:12-CV-00163-TBR

United States District Court, W.D. Kentucky, Paducah Division.

Signed March 21, 2016

Bridget M. Bush, Landrum & Shouse, LLP, Charles M. Pritchett, Jr., Frost Brown Todd LLC, Louisville, KY, Jeffrey A. Greene, Franklin, TN, Joseph Allen Kelly, William L. Campbell, Frost Brown Todd LLC, Nashville, TN, Tonya J. Austin, Frost Brown Todd LLC, Florence, KY, for Plaintiff.

Kent Wicker, Nicole S. Elver, Dressman Benzinger LaVelle PSC, Louisville, KY, Christopher B. Markus, Dressman Benzinger LaVelle PSC, Crestview Hills, KY, James L. Deckard, Hurt, Deckard & May PLLC, Lexington, KY, for Defendant.

R. Kent Westberry, Landrum & Shouse, LLP, Louisville, KY.

MEMORANDUM OPINION AND ORDER

Thomas B. Russell, Senior Judge, United States District Court

This matter is before the Court on competing motions for summary judgment. Plaintiff David Griffin has filed a motion for summary judgment on all of Defendant Charles Jones's remaining counterclaims. (DN 154). Jones has also filed a motion for summary judgment on these counterclaims. (DN 161). The parties have completed briefing. (DN 168, 170, 172). For the following reasons, Griffin's motion for summary judgment (DN 154) will be GRANTED and Jones's motion for summary judgment (DN 161) will be DENIED.

BACKGROUND

This action arises from a soured business relationship between Charles Jones and David Griffin. As with most failed relationships the parties have differing views as to who is at fault. The task for this Court is to decide whether, as a matter of law, Jones's counterclaims may proceed to trial.

Jones is a businessman from Murray, Kentucky who has spent his career in the education market. Jones founded his first business, Integrated Computer Solutions, Inc. (“ICS”) in 1993. ICS sold computers and information technology services to schools. (DN 161).

In February, 2008, Jones met David Griffin, a wealthy cotton farmer, at the Peabody Hotel in Memphis, Tennessee. (DN 149). The pair discussed several business ideas, ultimately agreeing to start a venture to buy and sell college textbooks. (DN 160). Jones would provide day-to-day management. Griffin would supply financing, initially investing $100,000.¹ (DN 18).

They formed a new entity, Blackrock Investments, LLC (“Blackrock”), in March, 2008. Jones and Griffin each owned 50% of Blackrock.

Blackrock created a subsidiary, SE Book Company, LLC (“SE Book”)² which was used to purchase a “long-standing textbook wholesaler based in Murray with established customer relationships and distribution channels” and “established sources for textbooks, including bi-annual book buybacks from college students.” (DN 160). Among SE Book's customers were companies which rented, rather than sold, textbooks to college students. These companies were tapping a new market: college students shopping online. Jones observed that these companies “enjoyed substantial demand” but “faced difficulties obtaining supply.” (DN 160). “Textbook publishers guarded their distribution channels” and were reluctant to sell to rental companies, who they viewed as competitors. (DN 160). Jones recognized that SE Book had a “competitive advantage” over these companies because it had an established supply source for textbooks. Jones approached Griffin about moving into the textbook rental market. In March, 2009, the pair formed College Book Rental Company, LLC (“College Book Rental”).³ Also in 2009, Griffin purchased a 50% share of ICS from a third party for $2 million. (DN 18, 160).

Shortly after both SE Book and College Book Rental were formed they signed a management agreement with CA Jones Management. (DN 160–4). CA Jones Management provided “accounting, banking, human resources, computer and legal services” for the companies. All employees who worked at SE Book and College Book Rental were actually employed by CA Jones Management and “leased” to SE Book and College Book Rental. (DN 160). CA Jones Management charged SE Book and College Book Rental a monthly management fee for its services. While Griffin and Jones co-owned SE Book and College Book Rental, Jones was the sole owner of CA Jones Management.

College Book Rental was “very successful in a short period of time,” with gross profit of $6.3 million in 2010 and $19.4 million in 2011. (DN 160). In September, 2011, John Farris of Commonwealth Economics prepared a valuation of SE Book and College Book Rental that valued the companies between $191 million and $319 million. (DN 160).

Despite this apparent success, Griffin and Jones had an escalating dispute over the health and management of the businesses. Griffin claims that Jones regularly informed him that the companies would soon be profitable but needed immediate financing to pay operating expenses and purchase inventory. From 2009 to 2011 Griffin made over 100 transfers of money totaling over $28 million dollars. (DN 18). Griffin alleges that, unbeknownst to him, Jones was using the management agreement between CA Jones Management and the co-owned companies to siphon money out of the co-owned companies. When Jones presented profit forecasts for the companies, he did not include the management fees that CA Jones Management intended to charge. When Commonwealth Economics evaluated the companies, Jones limited the financial information available to them. When Commonwealth Economics made recommendations for reducing operating expenses, Jones instead increased management expenses. For instance, in 2009 SE Book paid approximately $2.4 million in management fees to CA Jones Management, “which exceeded SEB's net earnings before interest and tax.” (DN 18). In 2010, SE Book paid $4.3 million in management fees, again in excess of SE Book's net income. Similarly, College Book Rental and ICS paid management fees to CA Jones Management that exceeded net income. Griffin claims he invested approximately $28 million in reliance upon Jones's representations that the companies would become profitable. Griffin also guaranteed various bank loans, later paying $19.5 million to satisfy these debts. Griffin also paid $20 million to settle a claim from a vendor, Baker & Taylor. (DN 18). In total, Griffin claims he has lost approximately $75 million as a result of his business relationship with Jones. (DN 145).

Conversely, Jones alleges that beginning in 2010 “Griffin began demanding that he be given an increased ownership interest” in SE Book and College Book Rental because of his additional investments. (DN 160). “In response, I reminded him of our agreement, reached years earlier, that I was responsible for operating the businesses and he was responsible for providing the necessary financial support to operate the businesses.” (DN 160). Jones alleges that Griffin demanded and received $1.7 million in September 2011 and $1.07 million in December, 2011. Transferring this money to Griffin “substantially impaired operations and expansion efforts.” (DN 160). Jones also claims Griffin “forced Jones to agree to give up half of his interest in CBR for no consideration” but later revoked this agreement. (DN 44). Jones further contends that in July 2012, Griffin persuaded Security Bank to declare its loan to CBR in default, with Griffin paying the loan personally in exchange for the Bank's cooperation in urging Jones to resign his management position with CBR. (DN 44). Griffin also allegedly convinced Planters Bank to withdraw from an agreement restructuring SE Book's loans to pressure the company into bankruptcy. (DN 44). Jones claims SE Book and College Book Rental would have been worth $1 billion were in not for Griffin's actions.

In February, 2012, Griffin filed a lawsuit against Jones in this Court seeking the appointment of a receiver for the companies. In August, 2012, the parties agreed upon the appointment of Myles MacDonald of KraftCPAs Turnaround & Restructuring Group, PLLC. Griffin then dismissed that lawsuit without prejudice. Griffin v. Jones , 5:12-CV-00033 (W.D. Ky. 2012). Griffin alleges that MacDonald immediately “discovered substantial, unjustified transfers of funds” among the companies and to entities solely owned by Jones. MacDonald also found that ICS had not collected more than $5 million in accounts receivables because Jones instructed customers to instead pay a Jones-controlled company. Jones also “secretly established and controlled additional companies which were in direct competition” with the jointly owned companies, including a new business which sold textbooks online. (DN 18). MacDonald also “discovered massive discrepancies in the inventory records” with thousands of textbooks missing. (DN 18).

The mystery of the missing textbooks was solved in September, 2012, when McGraw Hill and other publishers filed a lawsuit claiming that Jones, College Book Rental, SE Book, and a web of other entities related to Jones had engaged in a massive “textbook chop shop” scheme. The McGraw – Hill Companies Inc. v. Jones , No. 5:14–CV–00042, 2012 WL 10716406 (W.D.Ky.2012). The companies purchased “steeply discounted U.S. Edition textbooks, specially priced for distribution in developing companies” and “International Edition” textbooks from “nontraditional suppliers.”

McGraw – Hill Glob. Educ., LLC v. Griffin , No. 5:14–CV–00042–TBR, 2014 WL 5500505, at *1 (W.D.Ky. Oct. 30, 2014). Employees were instructed to remove copyright pages, replace ISBN numbers, and remove any markings indicating the textbooks were non-standard with hot irons, dremels, and slicers. Id. at *1. As the scheme matured Jones toured a book-printing factory. Jones then purchased a printing business to create high quality look-alike textbook covers. To provide a front for their claim that books were being distributed internationally, Jones formed four entities in the Dominican Republic. Id. at *2. Jones admitted to copyright infringement and Jones, along with the entities he controlled, settled for $900,000. (DN...