Lefoldt v. Brandon-COPsync, LLC (In re COPsync, Inc.), CASE NO. 17-12625

619 B.R. 872

IN RE: COPSYNC, INC., Debtor

H. Kenneth Lefoldt, Jr., Trustee of the COPsync, Inc. Liquidation Trust

v.Brandon-COPsync, LLC, Brandon Flanagan and Donald Flanagan

CASE NO. 17-12625

ADV.P. NO. 19-1004

United States Bankruptcy Court, E.D. Louisiana.

Signed August 28, 2020

Greta M. Brouphy, Tristan E. Manthey, Heller, Draper Patrick Horn & Manthey LLC, James H. Gilbert, Patrick M. Shelby, Phelps Dunbar LLP, Andrew T. Lilly, Lilly PLLC, New Orleans, LA, Anissa Davidson, Chavous Intellectual Property Law, North Andover, MA, for Defendants.

Jan Marie Hayden, Benjamin West Janke, Baker Donelson, et al., New Orleans, LA, Christopher M. Vitenas, Baker Donelson, et al., Baton Rouge, LA, for Plaintiff.

SECTION "B"

MEMORANDUM OPINION

Jerry A. Brown, U.S. Bankruptcy Judge

This matter came before the court on July 20-23, 2020 as a trial on the complaint of H. Kenneth Lefoldt, Jr., in his capacity as the Trustee of the COPsync, Inc. Liquidation Trust (the "Trustee"), against defendants Brandon-COPsync, LLC ("BCS"), Brandon Flanagan, and Donald Flanagan. For the reasons set forth below, the court finds that the Trustee has proved his breach of contract claim and the turnover claim against the defendants, and the court awards damages in the amount of $155,184 jointly and severally against both Brandon and Donald Flanagan. The court also awards $32,500 against all defendants jointly and severally as reasonable attorney's fees for abuses of the discovery process.

I. Background Facts

The debtor, COPsync, Inc., ("COPsync" or the "debtor") and BCS were parties to a distribution agreement that was entered into on June 2, 2010 and renewed or renegotiated several times thereafter. The debtor was founded in 2005, and it created a software for a service platform for law enforcement to share real-time information amongst counties, agencies and departments. The software was sold and/or licensed under both the COPSYNC and COPSYNC911 trademark. The agreement between the debtor and BCS granted BCS a non-exclusive license to sell the software and related goods and services in a limited geographic area in the northeastern United States. The agreement was structured such that BCS collected all the fees from its sales and was then obligated to remit to the debtor a certain portion of the fees. This did not always happen as it should have. On September 29, 2017 when the debtor filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code¹ , it was owed significant sums by BCS for the debtor's share of software sales that BCS failed to remit to the debtor. Further complicating this was the failure of both BCS and the debtor to adequately keep track of sales and invoiced amounts, so it was unclear to the debtor how much BCS actually owed the debtor.

Prior to the trial in this matter, on May 6, 2020, the court granted a judgment on the pleadings in favor of the Trustee against BCS "in the amount of $661,705.75 for the accounts receivable owed to Copsync, Inc. (the "debtor") as of December 18, 2017, plus interest at the federal rate from the date this adversary proceeding was filed." (R.Doc. 106). The court also rendered judgment for an additional $69,534.00, which represented the amount BCS "collected for the sale and/or license of the debtor's software after the debtor's bankruptcy filing." These numbers were arrived at by using the Trustee's calculations in the motion for judgment on the pleadings. The Trustee in his post-trial brief now asks the court to enter judgment against the Flanagans² in the amount of $386,760.00 plus an additional $117,932.69 in attorneys' fees and costs incurred by the Trustee in attempts to obtain discovery from the Flanagans. The Trustee states in his post-trial brief that the $69,534.00 awarded by the court against BCS in the judgment on the pleadings is duplicative of the $386,760.00 he now seeks against the Flanagans, but he argues that the court should award judgment of this amount against the Flanagans anyway.

II. Legal Analysis

a. Did the debtor's plan of reorganization properly retain causes of action against the Flanagans?

The Flanagans argue that the claims against them as individual defendants were not retained in the plan as required by United Operating, 540 F.3d 351 (5th Cir. 2008). Although United Operating and SI Restructuring, 714 F.3d 860 (5th Cir. 2013) both hold that post-confirmation causes of action belonging to the estate must be specifically identified and reserved in the plan, they do not require that individual defendants must be named. Here, the plan reserved "any and all rights, claims, causes and rights of action... related to the Brandon COPsync receivable." The court finds that this is broad enough to cover the claims the Trustee has brought against BCS and the individual defendants, because the claims against them are related to and arise out of the Brandon COPSync receivables, which were collected by the defendants, but not paid to the debtor. Further, Texas Wyoming Drilling, Inc., 647 F.3d 547 (5th Cir. 2011) holds that the defendants need not be specifically named in the plan, citing to Ice Cream Liquidation, 319 B.R. 324 (Bankr.D.Conn. 2005).

b. The Breach of Contract Claim

The distribution agreement was first entered into on June 2, 2010. It was amended several times.³ The first amendment was entered into on September 30, 2012.⁴ This first amendment set forth the process whereby BCS would sell the software, bill for it, and then remit 50% of the sale or renewal fee to COPsync. Although COPsync set up the customer account, it sent its invoices to BCS, which as then responsible for collecting the fee and paying COPsync its share of the revenue. The second amendment to the distribution agreement was entered into on January 15, 2014. Although there was not a lot of testimony at trial about this second amendment, it states that it is related to sales of a product called VidTac. The third amendment to the distribution agreement was dated August 3, 2015. This agreement included a, "Settlement Agreement and Mutual Release." The settlement agreement is between COPsync and BCS and is a settlement of disputes that the parties refer to as the Massachusetts Litigation. It provides releases for both parties from any and all claims, etc., arising prior to the effective date of the agreement, which is August 3, 2015. This also appears to be where problems with payment of the invoices became an issue because the third amendment contains a provision at paragraph 2.2(ii) that requires BCS to make monthly payments of $2,000 to pay down a list of invoices contained in Exhibit A to the third amendment. It also contains deadlines for payments of new invoices. Finally, a fourth amendment was entered into on November 1, 2016. The fourth amendment changed the percentages of the revenue sharing from a 50%-50% split between BCS and COPsync to a 60%-40% split with the 60% going to BCS. This change in the revenue split was contingent upon BCS making two payments of $50,000 each to COPsync by certain dates. The fourth amendment also provided that BCS was to commence making monthly payments of $8,000 to COPsync.

BCS made the first $50,000 payment on time. It paid $25,000 on the date the second payment was due, and then it paid the remainder a few months later.⁵ When the last payment was made, BCS asked COPsync to confirm that receipt of the payment would, "satisfy in full the 4^th Amendment solidifying the term extension and the revised revenue share." COPsync did confirm this, so the court finds that under the fourth amendment the revenue sharing agreement changed to a 60%-40% split in favor of BCS.⁶ BCS made one of the monthly payments of $8,000, but it made no further monthly payments.⁷ On June 2, 2017, COPsync sent a notice of default to BCS.⁸ According to the Trustee, the distribution agreement terminated on June 15, 2017.⁹

The evidence in the record and the testimony of the witnesses established that despite these problems, the parties continued to work together after the notice of default. They also discussed a potential merger. There were many emails back and forth discussing the possibility of a merger. The Trustee put on a witness, Jan Roe, who worked for COPsync at the time, and she testified that COPsync had no intention of merging with BCS. Rather, she testified that COPsync was using the merger discussion to try to get information about BCS's financial condition. The CEO of COPsync, Ron Bienvenu testified, however, that he considered the possibility of a merger with BCS to be a viable potential solution to COPsync's financial problems. He testified that he was brought in to try to restructure COPsync after its previous management had been removed. He further testified that there were hard feelings about BCS by many of the people who had been employed with the debtor before he became the CEO. As late as September and October of 2017, Brandon and Donald Flanagan were negotiating for a role in the ongoing computer software business of COPsync.¹⁰

The defendants also put forth evidence and testimony to show that COPsync was experiencing significant problems of its own. In 2017, leading up to the bankruptcy filing,¹¹ COPsync had reduced staffing and experienced problems with supporting its software. The Trustee countered this with his own evidence showing that many of the problems that were brought to COPsync's attention, such as resetting customer passwords, was the responsibility of BCS under the agreement.

The court finds that BCS, through the Flanagans, and Ron Bienvenu of COPsync were discussing the possibility of a merger or other way of combining operations, and that the parties continued to work together to make sales of software after the notice of default.¹² The court also finds, however, that BCS did not make any payments to COPsync after the above-mentioned payments totaling $108,000 related to the fourth amendment to the distribution agreement. The court finds that as to the...