Localbizusa, Inc. v. Freund (In re Localbizusa, Inc.)

In Re: LOCALBIZUSA, INC., Debtor.

LOCALBIZUSA, INC., by and through JOHN W. HARGRAVE, Chapter 7 Trustee, Plaintiff, v. THOMAS J. FREUND, et al., Defendants.

CASE NO. 09-20654 (JNP)

ADV. NO. 14-1454 (JNP)

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

Entered: November 8, 2016

November 7, 2016

NOT FOR PUBLICATION

CHAPTER 7

JUDGE: JERROLD N. POSLUSNY, JR.

OPINION

APPEARANCES:

Edmond M. George, Esq.

Obermayer, Rebmann, Maxwell & Hippel LLP

200 Lake Drive East, Suite 110

Cherry Hill, NJ 08002

Attorney for Plaintiff John W. Hargrave, Chapter 7 Trustee

Christopher J. Stanchina, Esq.

Christopher J. Stanchina, Esq., LLC

222 New Road, Suite 206

Linwood, NJ 08221

Attorney for Defendant Thomas J. Freund

Francis J. Ballak, Esq.

Goldenberg, Mackler, Sayegh, Mintz, Pfeffer, Bonchi & Gill

666 New Road, Suite 1-A

Northfield, NJ 08225

Attorney for Defendant Louis Freedman

Chryssa Yaccarino, Esq.

Kelly & Brennan, P.C.

1011 Highway 71, Suite 200

Spring Lake, NJ 07762

Attorney for Defendants Jeffrey Rosenberg & Unique Billing Solutions, LLC

JERROLD N. POSLUSNY, JR., U.S. Bankruptcy Judge

INTRODUCTION

Before the Court are the following motions: (1) the Trustee's Motion to Further Amend Complaint and for Related Relief (the "Motion to Further Amend"); (2) Thomas J. Freund's Motion to Dismiss Pursuant to the Affidavit of Merit Statute (the "Motion to Dismiss"); and (3) the Trustee's Motion for Entry of Default Judgment against NAMT (the "Motion for Default"). For the reasons detailed below, all three Motions are DENIED.

FACTS & BACKGROUND

Creditors filed an involuntary Chapter 7 petition against LocalBizUSA, Inc. (the "Debtor") in Camden, New Jersey on April 28, 2009. The Debtor filed a voluntary Chapter 11 petition in Newark, New Jersey about one month later. The cases were eventually consolidated into one Chapter 11 case in Camden.

In November 2009, the Debtor entered into a Settlement Agreement with multiple creditors. Three of these creditors ultimately became defendants in this matter: Unique Billing Solutions LLC ("UBS"), North American Marketing Tours, Inc. ("NAMT"), and Intermediate Consulting and Management Group LLC ("ICMG") (collectively, the "Corporate Defendants"). The relevant principals of these entities are: (1) Patrick Giglio, the Debtor's president; (2) Jeffrey Rosenberg, a principal of UBS; (3) Louis Freedman, a principal of both NAMT and ICMG; (4) Frank Cahill, a principal of UBS; and (5) Freund, the CFO of the Debtor and a principal of bothNAMT and ICMG (Cahill, Freedman, Freund, Giglio, and Rosenberg, collectively, the "Individual Defendants").

A plan of reorganization (the "Plan") that incorporated the Settlement Agreement was eventually confirmed. Under the Plan, the Debtor assumed all of its obligations under the Settlement Agreement and "in the event of a conflict between the terms of [the] Plan and the terms of the Settlement Agreement, the terms of the Settlement Agreement shall control." The Disbursing Agent under the plan was NAMT—a role in which Freund was involved by virtue of being the CFO of NAMT (collectively, the "Disbursing Agents"). The Debtor did not complete its Plan obligations and the case was converted to Chapter 7 on October 9, 2012.

The issues before the Court stem from alleged overpayments made under the Plan by the Disbursing Agents to the Corporate Defendants. The Plan required the Corporate Defendants to continue to attract a specific amount of new customers to the Debtor each week, and in return the Corporate Defendants would receive weekly payments from the Disbursing Agent (funded by the Debtor). The payments were made pursuant to Section 3.1 of the Settlement Agreement, which provides:

[The Debtor] shall remain unconditionally liable to pay the Budgeted Expenses, including without limitation to [NAMT/ICMG] weekly in the amount of $37,500 and to UBS weekly in the amount of $22,500 in accordance with the Cash Collateral Orders and under their respective marketing, sales, and/or service contracts.

Because the Debtor was "unconditionally liable," the Disbursing Agents made these weekly payments regardless of whether the Corporate Defendants were meeting their customer quotas. The Trustee asserts that the Settlement Agreement, when read in conjunction with prior cash collateral orders that were incorporated into the Settlement Agreement, only permitted payment to the Corporate Defendants to the extent they reached their customer quotas.

The Trustee avers that the Corporate Defendants failed to meet their quotas. The Trustee calculates that total amount paid to ICMG and NAMT was approximately $2,400,000 and the total amount paid to UBS was approximately $2,000,000. Based on the approximate number of customers presented, the Trustee calculates that NAMT and ICMG were overpaid by approximately $365,000 and UBS was overpaid by approximately $485,000.

On May 6, 2014, the Trustee filed the Complaint asserting that the Defendants either conspired to defraud the Debtor and its creditors or, alternatively, breached their contractual or fiduciary duties by making and concealing overpayments. The Trustee's general arguments were that the Defendants were fiduciaries at all relevant times, the Debtor was insolvent at all relevant times, and the Defendants actively concealed the existence of the alleged overpayments from parties in interest by failing to file required financial reports. The six counts alleged in the original Complaint were as follows: (Count I) Recovery of Post-petition Transfers under § 549 of the Bankruptcy Code; (Count II) Conspiracy; (Count III) Breach of Fiduciary Duty; (Count IV) Fraudulent Conveyance Under New Jersey's Fraudulent Transfer Act, N.J.S.A. 25:2-25; (Count V) Common Law Fraud; and (Count VI) Breach of Contract.

After Freund moved to dismiss the Complaint, then-Chief Judge Gloria Burns directed the Trustee to re-plead the conspiracy and fraud counts. After one brief extension of time, the Trustee filed an Amended Complaint that included the following Counts: (Count I) Conspiracy against all Defendants; (Count II) Breach of Fiduciary Duties against NAMT, Cahill, Rosenberg, Giglio, Freedman and Freund; (Count III) Recovery under the New Jersey Fraudulent Conveyance Statute against NAMT, ICMG, and UBS; (Count IV) Common Law Fraud against all Defendants; (Count V) Breach of Contract against NAMT, ICMG, and UBS; and, finally, (Count VI) Negligence against NAMT and Freund.

Freund, Freedman, UBS, and Rosenberg filed motions to dismiss the First Amended Complaint and Judge Burns issued a written decision¹ on May 14, 2015 which was followed by an order dismissing Counts I, III, and IV entirely and dismissing Count II with respect to all Defendants except NAMT and Freund. After the Court's order, the remaining Counts were: (Count II) Breach of Fiduciary Duty against NAMT and Freund; (Count V) Breach of Contract against NAMT, ICMG, and UBS; and (Count VI) Negligence against NAMT and Freund.

The Trustee appealed. The District Court remanded the case because the Bankruptcy Court did not explain why giving the Trustee leave to amend the Amended Complaint would be futile. Upon remand, the Trustee filed the Motion to Further Amend along with a Second Amended Complaint, which includes an additional Defendant, Frank Cahill, as well as new facts and counts. The Second Amended Complaint asserts: (Count I) Conspiracy against all Defendants; (Count II) Breach of Fiduciary Duties against NAMT, Cahill, Rosenberg, Giglio, Freedman, and Freund; (Count III) Recovery Under the New Jersey Fraudulent Conveyance Statue, N.J.S.A. 25:2-25, et seq., against NAMT, ICMG, and UBS; (Count IV) Common Law Fraud against all Defendants; (Count V) Breach of Contract against NAMT, ICMG, and UBS; (Count VI) Negligence against NAMT and Freund; (Count VII) Conversion against all Defendants except Gigilio; (Count VIII) Piercing the Corporate Veil against NAMT, UBS, and ICMG; and (Count IX) Racketeering Influence and Corrupt Organizations ("RICO") violations under 18 U.S.C. § 1961, against all Defendants.

Many of the factual amendments contained in the Second Amended Complaint—similar to the previous versions of the Complaint—are mere conclusions, such as "the Individual Defendants collectively fomented an alleged ambiguity in order to attempt to find some legal justification for their gouging the Debtor and removing all of its revenue." See Proposed SecondAmended Complaint (the "Second Amended Complaint") attached to the Motion to Further Amend as Ex. "D" ¶ 70. Again, the Trustee avers that the Individual Defendants intentionally delayed filing required reports in order to conceal facts from the Debtor's creditors.

That said, the Trustee has alleged relevant new facts. For example, the Trustee has alleged that Cahill and Giglio were signatories on the Debtor's bank accounts and that ICMG was the owner of one of the Debtor's escrow accounts.

The Trustee provided more details regarding deficient quarterly summary reports filed by the Debtor from April 2010 through December 2011, noting that supporting financial documents were not attached to some of these reports. The Trustee added that no reports were provided from January 2012 through the date of conversion in October 2012. During this time, John Kaskey, who represents other creditors in the case, began directly contacting Freund regarding missing and deficient reports. Freund apparently explained that he had not "gotten around to" filing the reports, and the Trustee alleges the factual conclusion that this was a lie designed to conceal the fact that Freund was intentionally withholding information to unjustly enrich the Defendants. See Second Amended Complaint ¶¶ 113-19.

The Trustee avers that the Defendants consulted legal counsel regarding the interpretation of the Settlement Agreement and Plan but, despite knowing of a potential issue, never brought the issue to the Bankruptcy Court. Though no basis is provided for these assertions, the Trustee concludes that the Defendants...