Team Marketing Group Inc et al v. Hyde et al

RESPONSE to Motion re MOTION for Partial Summary Judgment

W.D. La.March 11, 2019

1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA TEAM MARKETING GROUP, INC., et al., ] ] Plaintiffs, ] ] v. ] No. 5:17‐cv‐01389 ] Judge Doughty ROBERT DANIEL HYDE, et al. ] Mag. Judge Hornsby ] Defendants. ] RESPONSE TO MOTION FOR SUMMARY JUDGMENT Pursuant to Federal Rule of Civil Procedure 56, Plaintiffs, TEAM Marketing Group, Inc. and World Class Marketing Services, LLC, submit the following response to Defendants’ Motion for Partial Summary Judgment. Table of Contents Table of Authorities 1 Introduction 3 Statement of Facts 3 Summary Judgment Standard 14 Argument 15 Conclusion 23 Table of Authorities F.R.C.P. 56…………………………………………………………………………… 1, 14, 15 La. Civ. Code Art. 24………………………………………………………………. 16 Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 1 of 24 PageID #: 1265 2 La. Civ. Code Art. 24; LSA‐R.S. 12:93(B)………………………………………………………. 16 LSA‐R.S. 12:95……………………………………………………………………………………………. 16 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)……………………………………………………………………………………………………………………… 14 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)……………………………………………………………………………………. 14 Forsyth v. Barr, 19 F.3d 1527 (5th Cir. 1994)……………………………………………….. 14 Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)………………………………………. 15 Riggins v. Dixie Shoring Co., Inc, 590 So. 2d 1164 (La. 1992) ………………………… 16 Jones v. Briley, 593 So.2d 391, 394 (La. App. 1st Cir. 1991) …………………………. 16 Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 2011–2254 (La. App. 1 Cir. 7/10/12), 97 So.3d 595, 598……………………………………………………………………………………. 16 L.L. Ridgway Co., Inc. v. Marks, supra; Altex Ready‐Mixed Concrete Corp. v. Employers Commercial Union Ins. Co., 308 So.2d 889 (La.App. 1st Cir.1975), writ den., 312 So.2d 872 (La.1975)………………………………………………………………………………………………………………….. 17 Chin v. Roussel, 456 So.2d 673, 678 (La. App. 5th Cir.), writ denied, 459 So.2d 540 (La. 1984)……………………………………………………………………………………………………………………….. 17 McDonough Marine Serv. v. Doucet, 95–2087 (La.App. 1 Cir. 6/28/96), 694 So.2d 305, 309–10 ……………………………………………………………………………………………………………………… 17 Dishon v. Ponthie, 2005–659 (La.App. 3 Cir. 12/30/05), 918 So.2d 1132, 1135 writ denied, 2006–0599 (La. 5/5/06), 927 So.2d 317………………………………………………………... 17 Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 2 of 24 PageID #: 1266 3 Dutton & Vaughan, Inc. v. Spurney, 600 So.2d 693, 697 (La.App. 4th Cir.1992) (citing Tahoe Corp. v. P & G Gathering Sys., Inc., 506 So.2d 1336 (La.App.2d Cir.1987)…………… 17 Introduction This is an action for breach of contract and fraud arising from Defendants’ promises to pay residual commissions to Plaintiffs for marketing cellular telephone service through Lifeline, a government‐subsidized plan that provides eligible individuals with access to cellular telephone service. Plaintiffs initially engaged in marketing efforts on behalf of Defendants based on written contracts with Budget Prepay, Inc. The terms of those original agreements were orally modified over time. Plaintiffs were induced to terminate their agreements with Budget and to sign new agreements with a newly‐created company, Arrow Marketing Group, LLC on the strength of promises by Defendants Budget and Hyde that they would be paid six months of residual commissions at then existing commission rates. After making partial residual commission payments to Plaintiffs, Defendants arbitrarily and in bad faith stopped making payments in breach of their agreement. Plaintiffs assert, in the alternative, that they were fraudulently induced to end their contractual relationship with Budget and sign on with Arrow through false promises of future residual commissions. Statement of Facts TEAM is an “experiential marketing company” that engages primarily in face‐to‐face marketing on behalf of its clients. [Kornblit Dep., p. 9, l. 12]. World Class provides similar services. [Rogers Dep., p. 15, l. 17]. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 3 of 24 PageID #: 1267 4 Budget was an “ETC”; an ETC is a vendor of Lifeline services approved by the FCC or USAC.1 [Kornblit Dep., p. 16, l. 12]. Lifeline is a government‐subsidized plan that provides eligible individuals (generally those enrolled in various assistance programs) with access to cellular telephone service. [Kornblit Dep., p. 15, l. 6; Second Amended Compl. ¶¶ 1, 2]. Hyde is Budget’s president; he was one of several people who incorporated Budget in 1996. [Hyde Dep., p. 5, l. 17; p. 6, l. 7]. He currently has an ownership interest in the corporation with his brother and father. [Id. at p. 6, l. 22]. At 46.5% Hyde is the majority shareholder. [Id. at p. 7, l. 1]. Budget has not conducted any business or earned any profits since the first quarter of 2017. [Id. at p. 8, ll. 11 through 23]. Hyde does not know if Budget currently has any assets. [Id. at p. 8, l. 25]. Between 2014 and 2016, Plaintiffs provided face‐to‐face marketing services for Budget as part of the Lifeline program.2 [Rogers Dep., p. 16, l. 16]. Plaintiffs “street team[s]” consisted of agents who were deployed in various areas around the country to promote the Lifeline services. [Kornblit Dep., p. 17, l. 3; Rogers Dep. p. 22, l. 13]. The agents would take applications using electronic devices (for example, an iPad) and confirm that applicants were qualified to participate in the program. [Id., p. 17, l. 9 through p. 18, l. 14]. TEAM’s first written agreement with Budget for the NLAD states was executed on March 14, 20143. [Kornblit Dep., p. 22, l. 16; Exh. 1]. The first California contract between TEAM and Budget was executed on March 12, 2014. [Id., p. 23, l. 15; Exh. 2]. TEAM and Budget entered into a second California agreement on August 31, 2015. [Id., p. 24, l. 23; Exh. 3]. 1 ETC stands for “eligible telecommunication carrier” authorized to sell Lifeline products and services. [Hyde Dep., p. 16, l. 20]. 2 There are two entity defendants, Budget Mobile, LLC and Budget Prepaid, Inc. 3 The NLAD states are every state except California. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 4 of 24 PageID #: 1268 5 World Class executed it’s first contract with Budget for the NLAD states on April 28, 2014. [Rogers Dep., p. 26, l. 13; Exh. 10]. It’s first agreement covering California was signed on June 16, 2014. [Id. at p. 27, l. 18; Exh. 11]. World Class entered into a second California agreement with Budget on September 4, 2015. [Id. at p. 29, l. 11; Exh. 12]. The parties did not follow the written agreements.4 For example, TEAM’s August 31, 2015 California contract called for no residual payments for an active customer base of 0 to 50,000 users, $0.25 per customer for an active base of 50,001 to 100,000 customers, and $.50 per customer for an active base over 100,000 customers.5 [Kornblit Dep., p. 29, l. 3 through p. 30, l. 14]. On February 29, 2016, without amending the writing, Budget increased the residuals to $0.50 per customer if the base was between 50,001 and 100,000 and $1.00 per customer once the base exceeded 100,000.6 [Id. at p. 32, ll. 7‐8; Rogers Dep., p. 36, l. 4, Pls. Joint Written Discovery Reps., App. 2]. According to Mr. Kornblit, “it changed quickly thereafter.” [Kornblit Dep., p. 32, ll. 7‐8]. The NLAD agreements provided for no residuals at all, but Budget eventually began paying them. [Id. at p. 35, ll. 10‐14; Rogers Dep., p. 39, l. 4]. Mr. Kornblit confirmed that there were numerous modifications with respect to all the contracts. [Kornblit Dep., p. 37, l. 24]. He explained: “Some decisions [regarding changes to the agreements] were arbitrarily made by Danny or Budget, and 4 Additional examples of unilateral agreement changes are listed in ¶ 30 of the Second Amended Complaint including unilateral changes to its policy on switching service providers, an announced derogation from the contracts based on possible division of sales territories, unilateral changes to Budget payment policies, and multiple changes in compensation rates. 5 A residual payment was made for each Lifeline user who remained activated for the preceding thirty‐day period. Accordingly, the more activated users, the greater the monthly residual owed. 6 Plaintiffs’ NLAD contracts had no minimum continuing user count and paid a flat $1.00 per user residual. [Rogers Dep., p. 42, l. 9]. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 5 of 24 PageID #: 1269 6 certain points of the contract were mutually agreed upon ‐‐ orally, in person, or on the phone.”7 [Id. at p. 38, l. 4]. The World Class contracts were also routinely ignored; for example, even though the second California contract called for no residual to be paid for the months when there were fewer than 50,000 active customers, World Class sometimes received them when the count was only 45,000.00 [Rogers Dep., p. 34, l. 17]. Modifications were made both to operating procedures and compensation rate. [See, e.g., Pls. Joint Written Discovery Reps., App. 3]. In 2016, Budget made other changes to incentivize Plaintiffs to amass as many customers as possible in anticipation of selling those users to a third party. [Pls. Joint Written Discovery Reps., App. 2]. As Rogers stated: “So, we had worked all that time to build accounts. We were encouraged to build, build, build. But now, looking back, I see it was so he could sell all the accounts.” [Rogers Dep., p. 60, l. 11]. Rogers testified that, in general, “they didn’t always stick to [the contracts].” [Rogers Dep., p. 35, l. 14]. In September of 2016, Hyde advised Kornblit that Budget was selling its California customers to TracFone. [Kornblit Dep., p. 44, l. 13]. Rogers had been told the same in May of 2016. [Rogers Dep., p. 46, l. 20]. Hyde stated that he was creating a separate entity, Arrow Sales Group, LLC, to be a TracFone vendor; TEAM compensation would eventually increase overall although there would be no further payment of residuals. [Kornblit Dep., p. 44, l. 13].8 Hyde also promised to pay TEAM six‐months of residuals “to kinda moonlight over to the new Arrow.” [Id.] Kornblit described what Hyde explained to him during a telephone conversation: 7 TEAM relied on Budget’s accounts tracking for the determination of residuals. It had no way to monitor whether the information as to continuing activation was accurate. [Kornblit Dep., p. 44, l. 21]. 8 See also Kornblit Dep. p. 49, l. 16. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 6 of 24 PageID #: 1270 7 Specifically that the residuals are not being paid from TracFone, and so Budget was just going to pay us six months more of the residuals and then we would move over to arrow and be paid $21 dollars instead of the $16 dollars. That was part of the give‐and‐take of no longer receiving residuals. You'll receive six months and then you will just get paid at a higher compensation per activated customer on the flip side from Arrow. [Id. at p. 51, l. 8]. With respect to the continuing residuals, Kornblit paraphrased the conversation with Hyde. "I know the residuals were important to you, and essentially they're no longer there. Once you transition over to TracFone, but we're gonna continue those for six months on the Budget side." [Id. at p. 52, l. 2]. Other Budget representatives told Kornblit this was a “big opportunity”.9 [Id. at p. 53, l. 1]. Rogers was made the same promise of the payment of six months of residuals “based upon the accounts online at whatever time we stopped”. [Rogers Dep., p. 47, l. 13]. She described the May 2016 discussion with Greg Hough and Keith Hall as follows: They told me that they knew I wasn’t going to be happy with what they were gonna tell me, that they knew we had worked very hard to build the account base to what it was. And they told me that Danny was going to be selling accounts. I'm not sure if they told me to who at the time. It was 9 Residuals were paid based on existing customers. Because Arrow was a new company, it had no customers. Accordingly, residual payments due under the Arrow contract would have been zero. As noted in the following paragraph, the amounts accrued while working for Budget were substantial, and thus the promise of continued residuals was an important inducement since the increased commissions touted by Hyde and other Budget representatives would accrue over time. [See generally Kornblit Dep., p. 59, l. 12]. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 7 of 24 PageID #: 1271 8 never discussed how many, either ‐‐ how many accounts were being sold. That Danny was going to continue to be the one who paid us through a new company, and that we'd be getting an increase to, I believe it was $21 dollars per sale at the time, and that we were going to be getting residuals for six months from the time we stopped doing sales. And it would be based upon our total accounts online. [Id. at p. 49, l. 9]. The promise of the six additional months of residuals was made to Rogers on multiple occasions, including pursuant to her request that it be put in writing. [Id. at p. 53, l. 10]. Rogers also asked Hyde for a $200,000.00 advance on the six‐month residual payments and he refused. [Id. at p. 56, l. 3]. Budget representatives made clear to Rogers that her continued participation in their business relationship was contingent on her signing the Arrow agreement. [Id. at p. 57, l. 19]. Rogers received a text from Budget’s Keith Hall on July 22, 2016 advising her that if she did not execute the Arrow agreement she would be excluded from the program. [Pls. Joint Written Discovery Reps., App. 4]. Rogers asked that the provision regarding the six‐months residuals be put in writing and Hall promised to do so. [Id.] He always said the residual was coming from Danny because he wanted to do this for us. Keith promised to me that we would be receiving 6 months of residuals on all our sales on the books from the last date of our sales. He promised to send me an email verifying that. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 8 of 24 PageID #: 1272 9 [Id.]. Kornblit was also told that TEAM could only continue to work for Budget and collect the residuals which had also been promised by Hyde if they signed new agreements with Arrow.10 [Kornblit Dep., p. 49, l. 5] For his part, Hyde denies ever promising either Kornblit or Rogers the six months of continuing residuals. [Hyde Dep., p. 30, ll. 22, 24; p. 31, ll.4, 12, 15]. Hyde further testified that he never authorized anyone at Budget to make that offer. [Id. at p. 31, l. 22]. Both Plaintiffs ultimately signed the Arrow contracts. [Rogers Dep., p. 77, l. 23]. Meanwhile, TEAM’s August 2016 residual payment under the still‐in‐effect Budget agreements exceeded $100,000.00. [Kornblit Dep., p. 45, l. 18]. At a meeting the following month in Miami, Florida, multiple Budget representatives told Kornblit that Hyde and his brother, Stephen, stated unequivocally that payments in that amount “were going to end.” [Id. at pp. 45‐ 46, ll. 24 through 5 (following page)]. Kornblit testified that the high residual paid to TEAM “raised eyebrows”. [Id. at p. 45, l. 12]. During that meeting, TEAM was also advised that they were to be doing “business as usual” one day with Budget and the next with Arrow. [Id. at pp.47‐48, ll. 25 through 1 (following page)]. Rogers also testified that the $100,000.00 residual payment to TEAM was not well‐ received by Hyde, as described to her by Keith Hall during a telephone conversation: “He told me he was really sorry, but when Danny had to pay out the first or second $100,000 dollar, he said it never would happen again. And he apologized. Greg apologized. They told me this wasn’t like Danny to do this, and they frankly were horrified.” [Rogers Dep., p. 57, l. 13]. 10 Other Budget principals, including Greg Hough and Keith Hall, echoed the promise to pay six‐months of continuing residuals to ease the transition. [Kornblit Dep., p. 57, l. 4]. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 9 of 24 PageID #: 1273 10 Throughout the winter and spring of 2016, as Budget representatives repeatedly represented the new Arrow arrangement to be an outstanding opportunity for Plaintiffs, Budget’s owners, and particularly Hyde, had a very different perception of the economic realities of the Lifeline business. As Hyde testified: In '16, the federal government passed a modernization form where they were trying to migrate the mobile business ‐‐ the voice business to broadband, and they were forcing ‐‐ A, they were going to drop the revenue from nine twenty‐five to five twenty‐five over a period of time if you didn't offer broadband. Well, broadband was very expensive, and the economics of it didn't make sense. [Hyde Dep., p. 10, l. 8]. Accordingly, in February of 2016, Hyde and his fellow owners decided to “wind down Budget and ride out the base.” [Id. at p. 14, l. 10]. The extent of the Lifeline program’s endemic problems was discussed at a special meeting of Budget shareholders on April 15, 2016. [Hyde Dep., p. 37, l. 6]. One concern was a $51 million fine levied by the FCC against another ETC, Total Call Mobile, LLC. [Id. at p. 38, l. 10]. Hyde stated “we were concerned about the FCC's actions towards lifeline providers.” [Id. at p. 38, l. 18]. ETC’s could be fined millions for the bad acts of agents in the field over whom management often had minimal control. [Id. at p. 41, l. 7; p. 42, l. 14]. The program was also transitioning such that it would no longer be profitable for Budget to participate. The FCC was transitioning from voice to broadband, and the expense of the latter priced Budget out of business. [Id. at p. 38, l. 25; p. 45, l. 24]. Hyde testified “they [the FCC] were reducing the reimbursement [to the ETC per activated user] from nine twenty‐five down to five twenty‐five, and if it was voice only, eventually I believe it was zero.” [Id. at p. 46, l. 8]. The FCC Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 10 of 24 PageID #: 1274 11 was going to begin requiring ETC’s to offer broadband as early as December of 2016. [Id. at p. 53, l. 5]. As a result, at the April meeting, the shareholders decided that effective May 16, 2016, Budget would switch to a web‐only model and remove the agents provided by vendors like Plaintiffs from the street. [Id. at p. 47, l. 25]. The plan was described by Hyde as follows: Q. The next sentence of that paragraph is, the plan is to harvest the ‐‐ I'm sorry. The plan is to harvest cash out of Budget while trying to beat customer churn through the Web site. What does that mean? A. Ride out the base of customers, just let them churn out eventually and target the profitable areas with the Web site. [Id. at p. 48, l. 19]. He explained that “harvest cash out of Budget” meant “[w]e would continue to serve the customers that we had online each month and make a profit off those customers.” [Id. at p. 49, l. 21]. The long‐term viability of the business model remained ephemeral even with these adjustments. [Q.] You felt that ‐‐ that under the current FCC order that it was sustainable for 36 months; correct? A. Yes. Q. Okay. Was it your intention, then, at that point in time, to start looking for ways long term maybe, say, over five years or whatever, to get out of lifeline service providing altogether? A. Yes. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 11 of 24 PageID #: 1275 12 [Id. at p. 51, l. 8]. Hyde did not personally advise either Kornblit or Rogers of this decision. [Id. at p. 53, ll. 10, 13]. He maintained at his deposition that providing services for Arrow would have been equally or more profitable for Plaintiffs. [Id. at p. 55, l. 7]. However, despite Budget’s decision to abandon the Lifeline program, on May 16, 2016, Arrow signed an agreement with TracFone wherein the former would act as the latter’s primary distributor; providing the same services that Plaintiff’s had been doing for Budget. [Def. Reps. to Reqs. for Production, Bates No. 368]. The contract called for TracFone to pay Arrow $30.00 per approved registration and provided for no residual. [Id. at pp. 392‐398]. Meanwhile, to speed up Budget’s exit from the Lifeline service, that company started selling its customers. [Id. at p. 63, l. 20]. On May 5, 2016, Budget sold a chunk of its customers (some 688,000) to TracFone Wireless. [Id. at p. 60, l. 7; p. 62, l. 10]. The remaining users were later sold to Ready Wireless. [Id. at p. 62, l. 18]. Hyde testified that after Budget sold its customers the residuals set forth in the its agreements with Plaintiffs were no longer payable because the users were no longer Budget customers. [Id. at p. 64, l. 22; p. 70, l. 17]. However, Budget was paid a residual on active users from TracFone and Ready Wireless. [Id. at p. 65, l. 10]. Ironically, those residual payments were required for six months. [Id. at p. 68, l. 10]. Hyde testified that even though Budget wasn’t required to pass that residual on to either TEAM or World Class, “we paid some commission on those customers”, not because of any contractual obligations to Plaintiffs, but “[w]e just paid them anyway”. [Id. at p. 69, l. 16]. Hyde gave no reason why. [Id. at p. 69, l. 22]. He first stated that “I wasn’t involved in the day‐to‐day commission payments” then – in the next sentence – stated he “was probably asked” and said, “go ahead and pay her.” [Id. at pp. 69‐70, ll. 24 through Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 12 of 24 PageID #: 1276 13 5]. Hyde then stated that he had no idea what those payments represented, or the amounts remitted. [Id. at p. 71, ll. 6, 9, 22]. Arrow was a Lifeline distributor for Safelink.11 [Id. at p. 16, l. 5]. Unlike Budget, it was not an ETC but simply a handset distributor. [Id. at p. 17, l. 4]. Hyde gave conflicting testimony with respect to his role with Arrow. He was a 60% owner but stated “I wasn’t involved with Arrow”. [Id. at p. 15, ll. 17, 25]. However, Hyde and his brother procured a line of credit for the entity. [Id. at p. 20, l. 17]. Hyde signed the May 16, 2016 contract between Arrow and Safelink. [Id. at p. 19, l. 3]. For the most part, the residuals Hyde promised to Plaintiffs were never paid. [Second Amended Compl. ¶ 35]. A payment due in September of 2016 was made in October; based on numbers provided by Budget, TEAM’s customer base dropped by some 50,000 users and the reimbursement rate was also arbitrarily halved.12 [Kornblit Dep., p. 60, l. 5]. None of the written World Class agreements were terminated pursuant to their provisions. [Rogers Dep., p. 46m l. 8; Hyde Dep., p. 33, l. 14]. Hyde acknowledged that any residuals due under the Budget agreements remained payable even after the Arrow agreements were executed; he also claimed that they had been paid. [Hyde Dep., p. 33, ll. 18, 20]. On January 18, 2017, Kornblit met with Hyde in Shreveport, Louisiana. [Kornblit Dep., p. 55, l. 13; p. 56, l. 2]. Claiming that he was involved in multiple lawsuits, Hyde told Kornblit that “basically, [i]f you want [the promised residuals], you're gonna have to get the lawyers involved, 11 Safelink was an ETC. [Hyde Dep., p. 16, l. 8] 12 The number associated with the sudden drop in customers and reimbursement rate were for California, but also occurred under the NLAD contract. [Kornblit Dep., p. 62, l. 17]. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 13 of 24 PageID #: 1277 14 because I have to stick with what the contract says." [Id. at p. 55, l. 1]. Hyde remembered that meeting differently: I remember Todd Kornblit coming to Shreveport for a meeting and him sitting across from me and him saying, I know you do not owe me these commissions, but you should pay me out of loyalty. And then he said, don't take this personal. And I walked out. Because I told him to have his attorney call my attorney, and anything I contractually owe him, I will pay. [Hyde Dep., p. 72, l. 9]. According to Kornblit, at the time of the transition from Budget to Arrow, “in my eyes or anyone that worked with Team, Arrow was essentially just the new de facto Budget as a vendor for TracFone.” [Id. at p. 66, l. 6] The distinction was also unclear to TracFone which continued to refer to the Arrow entity as Budget. [Id. at p. 67, l. 1]. Summary Judgment Standard Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. Proc. 56(a). "[A] dispute about a material fact is `genuine'. . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986), Forsyth v. Barr, 19 F.3d 1527 (5th Cir. 1994). If the movant demonstrates the absence of an issue of material fact, the non‐movant must identify specific evidence in the summary judgment record demonstrating that there is a material fact issue concerning the essential elements of its case for Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 14 of 24 PageID #: 1278 15 which it will bear the burden of proof at trial. Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). Argument I. Plaintiff acknowledges that certain claims that were viable under Tennessee law are not sustainable in Louisiana. This lawsuit was initially filed in the United States District Court for the Middle District of Tennessee and included causes of action cognizable under that jurisdiction’s laws but not viable under Louisiana law. Accordingly, Plaintiffs will voluntarily dismiss the claims for punitive damages, equitable relief, and conversion. II. Budget Mobile, LLC Hyde testified that Budget Mobile, LLC was formed but never used. [Hyde Dep., p. 13, ll. 11 and 22]. It never had any assets or bank accounts. [Id. at p. 13, ll. 22 and 25]. According to Defendants’ written discovery responses: Budget Mobile, LLC was organized on or about October 4, 2011. John Frazier was, and remains, the sole member of Budget Mobile, LLC. Since its organization, Budget Mobile has never had any assets and has never engaged in any business, whatsoever, anywhere. Budget Mobile LLC was not a named party to any of the contract between Plaintiffs and Budget PrePay, Inc. Rather, Budget PrePay, Inc. sometimes used the trade name Budget Mobile. Accordingly, Budget Mobile, LLC has no relationship to the parties in this case or to the claims and allegations contained in Plaintiffs Second Amended Complaint and further, has no documents responsive to any of Plaintiffs Requests for Production. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 15 of 24 PageID #: 1279 16 [Defendants’ Written Discovery Reps., p. 1]. Based on these sworn answers and the 2015 revocation of the LLC’s authorization to do business, while the existence of the entity may have evidentiary significance, there is currently no factual basis on which to maintain a cause of action against it. Accordingly, Plaintiffs do not object to its dismissal as a party to these proceedings. III. There are materials issues of fact with respect to the fraud claim making it inappropriate for summary judgment. A. Legal Standard for Piercing the Corporate Veil Corporations and limited liability companies are generally distinct legal entities, separate from the individuals who own them, and shareholders and members are not liable for their debts. See, e.g., Riggins v. Dixie Shoring Co., Inc, 590 So. 2d 1164 (La. 1992). La. Civ. Code Art. 24; Jones v. Briley, 593 So.2d 391, 394 (La. App. 1st Cir. 1991); Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 2011–2254 (La. App. 1 Cir. 7/10/12), 97 So.3d 595, 598. As recognized juridical persons, Louisiana courts are reluctant to pierce the corporate veil in the absence of fraud, malfeasance, or criminal wrongdoing. La. Civ. Code Art. 24; LSA‐R.S. 12:93(B). The Louisiana Supreme Court recognizes that personal liability can be imposed on an LLC member in certain situations. Ogea v. Merritt, 2013–1085 (La. 12/10/13), 130 So.3d 888, 895. The propriety of piercing the corporate veil depends on the totality of the circumstances. The court may consider: (1) commingling of corporate and shareholder funds; (2) failure to follow statutory formalities for incorporating and transacting corporate activities; (3) under‐ capitalization; (4) failure to provide separate bank accounts and bookkeeping records; and (5) failure to hold regular shareholder and director meetings. Chin v. Roussel, 456 So.2d 673, 678 (La. App. 5th Cir.), writ denied, 459 So.2d 540 (La. 1984). The initial burden is on the shareholders to Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 16 of 24 PageID #: 1280 17 show the existence of a corporation; it then shifts to the challenger to show the exceptional circumstances that must exist to warrant disregard of the corporation’s separate identity. Jones, 593 So.2d at 394. Whether an LLC is an alter ego and individuals liable for entity obligations is a fact question subject to the manifest‐error standard of review. McDonough Marine Serv. v. Doucet, 95–2087 (La.App. 1 Cir. 6/28/96), 694 So.2d 305, 309–10; Dishon v. Ponthie, 2005–659 (La.App. 3 Cir. 12/30/05), 918 So.2d 1132, 1135 writ denied, 2006–0599 (La. 5/5/06), 927 So.2d 317. A claim against an entity owner for breach of duty to creditors requires proof of (1) a breach of a fiduciary duty owed to creditors by the corporation, and (2) personal liability under an “alter ego” or “piercing of the corporate veil” theory. Dutton & Vaughan, Inc. v. Spurney, 600 So.2d 693, 697 (La.App. 4th Cir.1992) (citing Tahoe Corp. v. P & G Gathering Sys., Inc., 506 So.2d 1336 (La.App.2d Cir.1987). An officer or director may become legally responsible for an obligation if, acting through the corporation, he defrauds or deceives a third party. LSA‐R.S. 12:95; L.L. Ridgway Co., Inc. v. Marks, supra; Altex Ready‐Mixed Concrete Corp. v. Employers Commercial Union Ins. Co., 308 So.2d 889 (La.App. 1st Cir.1975), writ den., 312 So.2d 872 (La.1975). B. There is sufficient evidence that Arrow was formed as part of a scheme by Hyde to defraud Plaintiffs such that summary judgment is inappropriate. Defendants contend that Arrow could not have been a sham entity because it had some of the trappings of an independent business and was eventually sold to a third‐party. They further maintain that there is no evidence that Hyde perpetrated a fraud. With respect to the first issue, the question is not whether Arrow eventually engaged in some legitimate business and ultimately came to be treated as a bona fide limited liability company. Rather, it is whether, from its Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 17 of 24 PageID #: 1281 18 organization on March 31, 2016 until it was sold by the Hyde brothers eleven months later, and especially during the summer of 2016, this hastily‐created limited liability company was used to defraud Plaintiffs. There is ample evidence of Arrow’s being used to manipulate Plaintiffs into purportedly forfeiting their rights under the Budget agreements. As for the second issue, there is enough proof of Hyde’s fraud to defeat summary judgment. The real issue is when and to what extent Arrow, held by Hyde and his brother for less than a year before they sold it for $1.4 million dollars and kept all of the proceeds for themselves, started operating as an entity distinct from Budget.13 Based on the Declaration of Brad Albritton, the former may have had some infrastructure in place. However, that it filed tax returns, maintained financial statements, and had a bank account and insurance policies does not preclude it from being used in the summer of 2016 to wrongfully induce Plaintiffs into entering agreements with which Hyde, the driving force behind both Budget and Arrow, had no intention of complying. It also does shield Hyde from personal liability for his own fraudulent conduct. Arrow was never meant by Hyde to be long‐term venture. He clearly wanted out of the Lifeline business. The government program’s budget was being cut, payouts were dropping, a switch from voice to broadband (which Budget could not offer at a profit) was imminent, the FCC favored working with major providers like AT&T and Verizon, and Congress was considering increased anti‐fraud measures. [Def. Reps. to Reqs. for Production, Bates No. D‐91]. Hyde stated at the April 15, 2016 special meeting of shareholders that Budget could not remain sustainable and continue to provide Lifeline services after 2017. [Id. at 94]. Even a web‐based model would only be profitable for 36 months. [Id.] Less than a month after the special meeting, Hyde signed 13 See supra. for citations to the record. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 18 of 24 PageID #: 1282 19 an agreement selling some two‐thirds of Budget’s customers to TracFone.14 [Def. Reps. to Reqs. for Production, Bates No. D‐8; Hyde Dep. p. 60, l. 7; p. 62, l. 10]. Under that contract, Budget received a six‐month residual from TracFone on continuing activations. [Def. Reps. to Reqs. for Production, Bates No. D‐11]. But in May of 2016, even as Hyde was winding Budget down because the LifeLine program wasn’t economically viable, Arrow entered into a contract with TracFone – the same company to which Budget’s accounts were sold – to serve as a LifeLine distribution service and TracFone’s major marketing partner. [Def. Reps. to Reqs. for Production, Bates No. D‐366]. This contract did not provide for a residual payment. Hyde, Keith Hall, and Greg Hough repeatedly told Plaintiffs’ representatives that Arrow wasn’t receiving a residual, which was true; what was omitted was the Budget would still be receiving residual payments from a different transaction with the same company. Part of that money should have been paid to Plaintiffs. Why create a second company to transact business with TracFone, especially in an industry in which Hyde expressed repeatedly his doubts concerning long‐term viability? Given that Hyde wanted out of the Lifeline industry, Arrow had to be a short‐term endeavor. The only significant differentiator between Arrow and Budget in the spring of 2016 was that Budget was receiving residuals from TracFone (and later from Ready Wireless) and Arrow was not. Prior to selling them, Budget needed as many customers as possible to maximize the amount in residuals it received from TracFone. It accordingly incentivized Plaintiffs by increasing their residual compensation for driving more users to Budget; however, this simultaneously pushed up Budget’s continuing 14 It’s difficult to believe that this sale hadn’t been in the works well in advance of the March 31, 2016 creation of Arrow. Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 19 of 24 PageID #: 1283 20 monetary obligation to TEAM and World Class. Once users were sold from Budget to TracFone, Hyde didn’t want to have to share the residual Budget received from TracFone with Plaintiffs. By migrating Plaintiffs to Arrow and abrogating their Budget agreements, Hyde thought he could avoid the future payments. To encourage the move, in the spring of 2016 he voluntarily promised to continue paying residuals for six months. He may never have intended to pay it, or he might initially have been amenable to sharing the proceeds because the amount TracFone was paying Budget was significantly more than Budget was obligated to pay Plaintiffs. In either case, when Hyde realized that the residual obligations were considerably more than anticipated – hence his dismay at paying the $100,000.00 to TEAM in August of 2016 – he reneged altogether (after announcing his intention to do so to multiple employees). In sum, reasonable jurors could conclude that Hyde briefly transitioned to Arrow – and induced Plaintiffs to abrogate the agreements with Budget – to insulate and shield the residuals so he would no longer have to share them with his vendors. Arrow’s creation and subsequent sale were simply part of “harvesting the cash out of Budget” and trying to avoid payment of residuals to Plaintiffs. Why else have two companies doing deals with TracFone? Hyde’s fraud is based largely on his concealing and intentionally misrepresenting the nature of the deal between Budget and TracFone and misrepresenting the reason for which Arrow was created. According to Hyde, sale of the customers to TracFone entitled Budget to pocket all the continuing residuals without having to make payments to Plaintiffs. Hyde testified: [Q.] Did the ‐‐ when Budget ‐‐ so what you're saying basically is that Budget went to TracFone ‐‐ when TracFone had those customers, Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 20 of 24 PageID #: 1284 21 technically Budget wasn't required to pay TEAM or World Class anything because they weren't Budget customers anymore; is that correct? A. That's correct. [Hyde Dep., p. 70, l. 11]. However, the Agreements between Budget and World Class and Budget and TEAM were never terminated and the provisions with respect to those residual payment do not make them contingent upon the active users being Budget customers. [Def. Reps. to Reqs. for Production, Bates No. 65]. Plaintiffs were accordingly still entitled to receive residuals on the customers procured that Budget transferred to TracFone. Both Kornblit and Rogers stated that they knew of the sale of the accounts but not the terms. Kornblit testified that Hyde told him TracFone was not paying a residual. [Kornblit Dep., p. 51, l. 8]. Plaintiffs respective presidents were kept in the dark, and in Kornblit’s case intentionally misled, as to the economically realities of the situation. They didn’t need Hyde’s promise of continued residuals to establish legal entitlement to payment. Migration to Arrow wasn’t necessary. Reasonable jurors could conclude based on this evidence alone that Hyde induced Plaintiffs to sign the Arrow contracts by exploiting Kornblit and Roger’s ignorance with respect to the TracFone terms and simply promising them what they were entitled to anyway under the existing deals, i.e. their respective contractual shares of the residuals paid by TracFone to Budget. What Hyde held out as a perk of signing of with Arrow – his commitment to make the deal work with everyone – was nothing more than money already due. That Hyde no intention of following through on this promise is established by the fact that these sums were never paid. Having already concluded by the April 15, 2016 meeting that it was time to get out of the LifeLine business, the Hyde brothers sold Arrow to a third party for $1.4 million on February 1, Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 21 of 24 PageID #: 1285 22 2017 (less than a year after it was formed). [Def. Reps. to Reqs. for Production, Bates No. D‐136; Hyde Dep., p. 24, l. 13]. All the proceeds were distributed to the two owners. [Id. at p. 24, l. 18]. Hyde could not recall any other distributions to creditors and there was no closing statement. [Id. at p. 24, l.24; p. 27, l. 3]. The buyer made payments in installments; there is no documentation or testimony showing how those funds were used to pay taxes, payables, or business creditors. [Def. Reps. to Reqs. for Production, Bates No. D‐151]. It appears that the Hyde brothers simply pocketed the money. Hyde was the key mover, the president of Budget and, based on the April 2016 special meeting minutes, clearly its key decision‐maker. He oversaw the creation of Arrow and owned 60% of it. Hyde and his brother decided to use separate companies to transact with TracFone. Hyde lied to Kornblit about TracFone not paying residuals and actively concealed the terms by which TracFone was paying for Budget customers. Regardless of whose version of events is believed, when the issue concerning unpaid monies came to a head it was ultimately addressed to Hyde. Hyde stated that he approved the payment of a small portion of the claimed residuals that he also claimed were never owed. Budget representatives told Plaintiffs representatives that “Danny”, not Arrow, would be paying the six months of residuals (emphasis added). Hyde received a salary and was paid dividends from Budget for 2016. [Hyde Dep., p. 22, l. 5]. The same year, he received no salary from Arrow but was paid a dividend. [Id. at p. 22, l. 18]. Arrow’s books and records were overseen by Brad Albritton, Budget’s Chief Financial Officer. [Id. at p. 24, l. 20]. When Arrow was sold for $1.4 million, the proceeds were divided between the owners, Hyde and his brother Stephen. [Id. at p. 24, ll. 14 and 18]. Hyde testified that he and his brother received Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 22 of 24 PageID #: 1286 23 the funds, and there is no record of anyone other than the Hyde brothers receiving monies from the closing. [Id. at pp. 26‐27, ll. 23 through 3]. In sum, reasonable jurors could conclude that Hyde only kept one promise, the one reflected in the minutes of the April 15, 2016 special meeting of shareholders: Harvesting the cash out of Budget. On that issue he kept his word. Conclusion Accordingly, except as to those causes of action acknowledged to be not applicable under Louisiana law, Plaintiffs respectfully request that the motion is denied. /s/ Trippe Steven Fried Trippe Steven Fried 954 Lexington Avenue Number 1051 New York, NY 10021 917‐382‐9302 sfried@oliverclarity.com /s/ James McMichael McMichael, Medlin, D'Anna, Wedgeworth & Lafargue, LLC 400 Texas St Ste 1150 Shreveport, LA 71101 318‐221‐1004 jmcmichael@mmw‐law.com Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 23 of 24 PageID #: 1287 24 COPY served on opposing counsel via CM/ECF on March 11, 2019. /s/ Trippe Steven Fried Case 5:17-cv-01389-TAD-MLH Document 91 Filed 03/11/19 Page 24 of 24 PageID #: 1288