Jarvis v. TaylorChandler, LLC

480 F.Supp.3d 1339

Christopher JARVIS, Plaintiff,

v.TAYLORCHANDLER, LLC, T. Britt Taylor, Norman Chandler, and James R. Johnson, Defendants.

Case No. 2:17-cv-396-ALB

United States District Court, M.D. Alabama, Northern Division.

Signed August 19, 2020

Kevin Terrazas, Pro Hac Vice, Timothy Alan Cleveland, Pro Hac Vice, Cleveland Terrazas PLLC, Austin, TX, Marcus Monte' Maples, Baker Donelson Bearman Caldwell & Berkowitz, PC, Birmingham, AL, for Plaintiff.

Leslie Hopkins Pitman, Christopher L. Richard, Gilpin Givhan PC, Royal C. Dumas, John Evans Bailey, Morgan Eason Chappell, Dennis Ray Bailey, Rushton, Stakely, Johnston & Garrett, P.A., Montgomery, AL, for Defendants.

MEMORANDUM OPINION

ANDREW L. BRASHER, UNITED STATES CIRCUIT JUDGE

This case is a contract dispute between sophisticated businessmen. It has IRS bulletins, complicated life insurance plans, and more accountants than a golf course on April 16th. The Court held a multi-day bench trial at which the key players and various experts testified. This opinion resolves the parties’ claims.

The parties were in the "captive insurance business." A captive insurance company is a subsidiary set up by a corporation to insure its risk. It is "captive" in the sense that it serves as the insurer for only one insured—its parent. Section 831(b) of the tax code allows individuals to do the same through privately held corporations and LLCs. The upshot is that wealthy individuals can assuredly pay themselves to insure themselves, thereby ensuring that a portion of their income and investment gains are subject to lower taxes. Until recently, the mechanism could also be used to avoid the estate tax by moving money between insurance companies owned by a grandparent and grandchild.

Because creating and managing an insurance company is hard work with regulatory, accounting, and other complications, there are "captive insurance management" companies that form and manage these insurance companies for initial and quarterly fees. In this case, both Defendants and Plaintiff owned firms that formed and managed captives. But that is where their similarities ended. Plaintiff Christopher Jarvis saw captive insurance as merely one way to solve a client's immediate tax avoidance, estate planning, and cash-flow needs. Defendants Britt Taylor, Norman Chandler, and Johnny Johnson saw a captive insurance company as a stable, tax-advantaged way to help clients fulfill their small business's insurance needs over decades. Jarvis is a risk-taker; Defendants are conservative. Jarvis self-publishes books on financial planning and pitches doctors at medical conferences; Defendants run an accounting firm.

When Defendants agreed to buy Plaintiff's business and hire him as an employee, the resulting deal was doomed before the ink was dry. It fell apart less than a year after closing. Plaintiff filed this lawsuit alleging breach of contract, and Defendants responded by filing a counter-claim alleging a wide array of business-related misconduct.

PROCEDURAL HISTORY

This action was originally filed by Plaintiff on June 19, 2017. After two years, four Judges, and scores of filings, the case was reassigned to the undersigned on May 14, 2019. A second amended complaint was filed on July 15 and a second amended counterclaim on July 31.

On November 12, 2019, Plaintiff filed a motion for summary judgment, see Doc. 147, and Defendants filed a motion for partial summary judgment, see Doc. 141. Plaintiff's summary judgment motion was denied, and Defendants’ motion was mooted by Plaintiff's voluntarily dismissal of certain claims. See Doc. 182.

The case went to trial between February 18 and February 21, 2020, concluding, after a brief hiatus caused by witness unavailability, on February 26. Plaintiff Christopher Jarvis and Defendants Britt Taylor, Norman Chandler, and Johnny Johnson all testified at trial. The Court also received live testimony from expert witnesses Richard Avery, John Mastin, and Gary Bowers. The Court received deposition excerpts from Ved Aggarwal, Paul Playfair, Nick Burkett, Jason Plummer, and Julia Stuart. Additional video deposition material of Julia Stuart was submitted to the Court on March 16.

STANDARD

As this case involves no federal law, the relevant subject matter jurisdiction is diversity jurisdiction. Defendants are citizens of Alabama; Plaintiff is a citizen of Texas. When sitting in diversity, the appropriate role for a federal court is to apply substantive state law. See Bielski v. Alfred Saliba Corp. , 984 F. Supp. 2d 1170, 1176 (M.D. Ala. 2013). The Supreme Court has held that the standard of proof is a substantive aspect of a claim. See Medtronic, Inc. v. Mirowski Family Ventures, LLC , 571 U.S. 191, 192, 134 S.Ct. 843, 187 L.Ed.2d 703 (2014). Because Alabama law provides the substantive law that applies to the parties’ dealings, Alabama law also provides the burden of persuasion. In a civil case in Alabama, the factfinder is "authorized to find that a controverted fact has been established if a preponderance of the evidence reasonably satisfies [him] of its truth." Battles v. Tallman , 96 Ala. 403, 406, 11 So. 247, 249 (Ala. 1892).

GENERAL FINDINGS OF FACT

I. The parties and other important players.

Plaintiff Christopher Jarvis is the proverbial man with the plan; the sort of financial fixer that one sees in movies and television shows. He has written multiple books about the concept of "success." He holds an MBA from UCLA. He founded Jade Risk with a partner to pitch wealthy small business owners on financial planning services, including captive insurance.

Defendants Chandler, Johnson, and Taylor are successful Alabama businessmen. Johnny Johnson spent twenty-five years with the Alabama Department of Insurance before retiring as Deputy Commissioner of the Property and Casualty Division. Britt Taylor is the former vice president of Colonial Bank. Norman Chandler is a captive insurance prodigy who co-founded a captive management firm fresh out of school. These three co-own the Montgomery-based accounting firm TaylorChandler LLC. Defendants sought to merge Jarvis's Jade Risk with Arsenal Insurance, a wholly owned subsidiary of TaylorChandler.

Two administrative employees play a pronounced role in this litigation as well. Stephanie Matlock worked for Jarvis before becoming an employee of the Defendants after the acquisition. A military veteran, Matlock's strictly no-nonsense attitude led her to clash with Jarvis from time to time. Julia Stuart, a longtime administrator for various financial institutions, was hired by Jarvis after the acquisition and the two got along swimmingly to the end.

II. The Deal

Christopher Jarvis started Jade Risk, a captive insurance management business, in 2011. A captive insurance management business generally involves three tasks: (1) finding companies or high net worth individuals or families that could benefit by establishing a wholly-owned captive insurance company, (2) performing the accounting and regulatory tasks to create the captive insurance company, and (3) ensuring ongoing compliance with state insurance regulations and IRS tax regulations. Jarvis was talented at number 1, but he outsourced numbers 2 and 3 to outside lawyers and accountants. By 2015, Jade Risk was spending over $800,000 annually on outside legal and accounting services for the captives it was managing.

Jarvis eventually decided to sell Jade Risk. He had grown tired of paying so much money to third parties, and a fellow investor in Jade Risk wanted out. Norman Chandler offered Jarvis a solution. Chandler's accounting firm had the manpower to perform regulatory and administrative tasks entirely in-house, and Chandler himself was a specialist in the tax and risk-pooling benefits of captive insurance companies. By selling Jade Risk and its book of business to Chandler's accounting firm, Jarvis could focus on the part of his job he enjoyed: interacting with people and solving their financial problems. By buying Jade Risk, Chandler's own captive management company, Arsenal, a subsidiary of TaylorChandler, would get a book of business with ongoing regulatory and accounting needs that it could add to its preexisting client base. It would also get Jarvis as an employee.

Thus began a lengthy negotiation process between Jarvis and the constituent partners of TaylorChandler. By the end of 2015, the parties had agreed to a purchase price of $3,000,000 for Jade Risk. They then sought to close the deal.

TaylorChandler applied to borrow money from Synovus Bank to complete the purchase. Part of the money for the loan came from the Small Business Administration and with it came an important limitation: if a loan from the SBA is used to buy a business, the seller may not remain employed with that business for longer than a year after the purchase. In tension with this requirement was the desire of the bank (and Jarvis) that Jarvis stay on in some capacity. The parties developed a work around. Although Jarvis could not be an employee of Arsenal, as its imminent merger with Jade Risk would cause such an arrangement to violate the SBA regulation, he could become an employee of TaylorChandler itself to satisfy the bank.

Throughout 2016 Jarvis kept TaylorChandler apprised of changes to Jade Risk's book of business and conducted a new company valuation as late as July. To assure TaylorChandler of Jade's financial health, Jarvis sent an email on July 10, 2016 detailing prospective clients that could not move forward until the merger went through. On August 9, Stephanie Matlock, Jarvis's assistant, sent another email to Chandler. This email represented that Jade Risk had 35 active captives and that at least six of those captive clients would imminently surrender or dissolve.

Matlock emailed again on August 23 to detail the surrender or dissolution of a further six captives. This brought the list of stable captives managed by Jade Risk down to 23. The deal closed four weeks later without a change in terms or...