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Schott v. Massengale

United States District Court, M.D. Louisiana

September 27, 2019

MARTIN A. SCHOTT, Trustee for the bankruptcy estate of InforMD, LLC,
v.
SHELLEY S. MASSENGALE, et al.

          RULING AND ORDER

          JOHN W. deGRAVELLES UNITED STATES DISTRICT JUDGE.

         This matter is before the Court on a motion to dismiss and in the alternative a motion for a more definite statement filed by Matthew Skellan and Skellan Medical, LLC (“Defendants”) entitled, Motion to Dismiss Claims against Matthew Skellan and Skellan Medical, L.L.C. (“Motion”). (Doc. 22.)[1] Plaintiff, Martin A. Schott (“Schott” or “Trustee”), filed an Opposition to Defendants’ Motion to Dismiss (“Response”). (Doc. 30.) Defendants filed a reply, entitled Reply Memorandum to InforMD’s Opposition to Motion to Dismiss of Defendants. (Doc. 36.) Oral argument is not necessary. Having carefully considered the law, allegations in the Complaint for Damages (“Complaint”), and arguments of the parties, Defendants’ Motion is granted in part and denied in part as follows:

         As to Count I, Breaches of Duty of Care and Loyalty, the Court will deny the Motion because the Complaint alleges sufficient facts to state a plausible claim that (1) Defendants had a fiduciary relationship with InforMD and the minority members of InforMD; and (2) Defendants had fiduciary duties to InforMD and its members; and (3) Defendants intentionally breached their fiduciary duties. In addition, the Court will not dismiss Count I because of prescription or peremption because on the face of the Complaint it is not clear that the claim for breach of fiduciary duties is barred by Louisiana Revised Statutes 12:1502.

         As to Count II, Fraud and Conspiracy to Commit Fraud, the Court will grant the Motion because the Complaint fails to plead fraud and/or fraud by omission with particularity as required by Federal Rule of Civil Procedure 9(b). In addition, the Court recognizes that, under Louisiana law, conspiracy to commit fraud is not an independent cause of action but depends on the underlying fraud. Therefore, the Court will dismiss the claim for conspiracy to commit fraud because Plaintiff has not adequately pled the claim for fraud.

         As to Count III, the Court grants the Motion in part and will dismiss the claim for receipt of payment not due based on Trustee’s concession that the claim, as alleged, does not meet the elements of the statute. As to the claim for unjust enrichment, the Court denies the Motion and will not dismiss based on the arguments relating to the “no other remedy available at law” element.

         As to Count IV, Conversion, the Motion is denied. The Court will not dismiss Trustee’s claim for conversion because the Complaint alleges sufficient facts to state a claim. In addition, the Court will apply Louisiana Revised Statutes 12:1502(D)’s two-year prescriptive period to the claim of conversion and will not dismiss Count IV based on prescription at this time.

         As to Count V, Fraudulent Conveyance, the Motion is denied because the Complaint alleges sufficient facts as to the elements of a claim for constructive fraud.

         The Court will allow Trustee twenty-eight days to file an amended complaint as contemplated by Federal Rule of Civil Procedure 15(a).

         RELEVANT PROCEDURAL BACKGROUND

         Plaintiff, as Chapter 7 Trustee of the InforMD bankruptcy case (No. 17-10759), initiated Adversary Proceeding No. 18-1025 by filing the Complaint in the United States Bankruptcy Court for the Middle District of Louisiana. (Complaint, Doc. 1 in Adversary Pro. No. 18-1025.) Defendants Shelley S. Massengale and C-Squared Management, LLC filed a motion to withdraw the reference. (Motion to Withdraw Reference, Doc. 25 in Adversary Pro. No. 18-1025; Doc. 1 in 18-cv-759.) On August 10, 2018, the Court entered an order granting the motion to withdraw reference and the civil action was brought before this Court. (Order on Motion to Withdraw Reference, Doc. 4 in 18-cv-759.)

         FACTUAL ALLEGATIONS IN THE COMPLAINT

         For the purpose of ruling on the Motion, the Court accepts as true the following facts pled in the Complaint. See Thompson v. City of Waco, Tex., 764 F.3d 500, 502–03 (5th Cir. 2014).

         InforMD is a Louisiana limited liability company that was formed on December 8, 2010 and ceased operations on October 31, 2016. (Complaint, Doc. 1 in Adversary Pro. 18-1025 at ¶ 7.) InforMD filed a Chapter 7 bankruptcy case on June 16, 2017.[2] The Plaintiff, Martin A. Schott, was appointed as Chapter 7 Trustee of InforMD’s bankruptcy estate and brought this case on behalf of the bankruptcy estate against multiple defendants including but not limited to Skellan and Skellan Medical, LLC. (Id. at ¶¶ 1-2.)

         On March 11, 2014, Skellan signed an Executive Employee Contract and was given a 3% ownership interest in InforMD. (Id. at ¶ 12.) Skellan served as Vice-President of Sales. (Id.) Under InforMD’s Operating Agreement, the managing members were able to delegate day to day management responsibilities of their duties as fiduciaries to appointed officers, such as Skellan. (Id. at ¶ 13.) As of May 15, 2015, Skellan owned 3% of InforMD. (Id. at ¶ 15.) On December 15, 2015, Skellan resigned as an officer of InforMD and also resigned as an employee of InforMD. (Id. at ¶ 16). He retained his 3% ownership interest in InforMD. (Id.)

         InforMD’s business pursuits included medication sales, prescription dispensing, medical monitoring, toxicology, compound pharmacy sales, pharmacy sourcing, and specialty pharmacy services. (Id. at ¶ 7.) InforMD’s sales staff worked with physicians to encourage them to dispense prescription drugs directly from their clinics and sometimes the sales staff acted as a purchasing agent between the physician and prescription drug manufacturers. (Id. at ¶ 18.) The costs and expenses of this line of business resulted in meager net income (Id.)

         InforMD began its mail-order compound medication business late in the fall of 2012 working with Chris Pogosyan who owned compounding pharmacies and pharmaceutical manufacturing companies (“Pogosyan”). (Id. at ¶ 19.) Pogosyan and InforMD did not have a written contract setting out their business relationship but instead operated on a verbal understanding. (Id.)

         InforMD/Pogosyan’s mail-order business model for compound prescriptions operated as follows:

(1) InforMD’s sales staff enlisted physicians to prescribe compound topical lotions and creams that were primarily produced by Pogosyan’s pharmacies, such as Cornerstone Compounding Pharmacy (“CCP”);
(2) Physicians faxed prescriptions to Pogosyan’s pharmacies;
(3) Pogosyan’s pharmacies shipped the compound prescriptions directly to the patient;
(4) InforMD’s staff made follow-up calls to patients receiving the compound prescriptions to confirm receipt and satisfaction. (Id.)

         In return for InforMD’s staffs’ work, InforMD received 50-70% of the insurance reimbursements paid to the Pogosyan pharmacies. (Id.) Compound prescriptions were reimbursed at an astronomically high rate from 2012 to 2015, making this business model lucrative. (Id.) Because of the compound prescription sales, InforMD’s gross revenue increased from $301, 719.61 to its peak at $24, 221, 593.12 in 2014. (Id. at ¶ 20.) In 2015, when CMS reduced the reimbursement rates for compound prescriptions, the mail order business for compound prescriptions dried up. (Id.) In 2015, InforMD’s gross revenue totaled $21, 371, 189.60. (Id.)

         After the change in reimbursement rates, InforMD and Pogosyan turned to other lines of business. (Id. at ¶ 21.) One line of business involved InforMD’s sales staff selling Pogosyan’s raw pharmaceutical components to pharmacies that would make the compounds. (Id.) InforMD worked with Pharmaceutica North America (“PNA”) for these raw pharmaceutical sales. (Id.) InforMD also started a “specialty pharmacy business” that marketed Pogosyan’s non-compounded topical medications to pharmacies and physicians. (Id. at ¶ 22.) The revenue from these lines of business did not bolster InforMD’s revenue to its 2014 levels after the change in reimbursement rates for compound prescriptions. (Id. at ¶ 36.)

         In 2016, a “Purchase and Sale of Membership Interest in [I]nforMD, LLC” (“Buy-Out Agreement”) was drafted to be a buy-out of Skellan’s and other members’ ownership interests in InforMD. (Id. at ¶ 39.) The Buyer was InforMD. (Id.) The Buy-Out Agreement included the following terms:

(1) InforMD was to pay $848, 000.00 for the selling members combined interests. (Id.)
(2) InforMD was to pay $711, 652.00 for unpaid salaries and reimbursements. (Id. at ¶ 40.)
(3) The selling members were to receive a full release from any and all obligations to pay their respective shares of the still climbing $400, 000.00 legal fees owed by the selling members in the InforMD, LLC v. DocRX[3] case.[4] (Id.)
(4) The selling members would divest their membership units in InforMD. (Id. at ¶ 86.)

         One of InforMD’s minority non-managing members, who was also employed as InforMD’s Controller, Ruth Bass (“Bass”), raised objections to the Buy-Out Agreement because:

(1) InforMD’s 2015 year-end loss was $458, 585.00. (Id. at ¶ 41.);
(2) The 2016 forecast was not optimistic. (Id.);
(3) Bass did not believe the membership interest should be valued at $1, 600/unit. (Id.);
(4) The Buy-Out Agreement needlessly burdened InforMD with $1.6 million in debt. (Id.)
Bass was threatened to sign the agreement or forfeit her 2% interest and her $20, 000.00 investment. (Id.)

         The Buy-Out Agreement was signed by all parties in February 2016. (Id. at ¶ 39.) InforMD made small initial payments totaling approximately $116, 000 on the Buy-Out Agreement but has not paid the selling members according to the pay schedule in the Buy-Out Agreement, and the equity purchase price has never been paid. (Id. at ¶¶ 44 and 88.)

         At the meeting of creditors convened pursuant to 11 U.S.C. § 341, Brian Juban, an InforMD member’s attorney, testified that the Buy-Out Agreement was intended to drain InforMD’s capital to get the money out of InforMD. (Id. at ¶ 45.) InforMD received nothing in exchange for the approximately $116, 000 it paid. (Id. at ¶¶ 89-91.) InforMD was insolvent on the date the transfer was made or became insolvent as a result of the transfer. (Id. at ¶ 92.)

         While preparing for a deposition scheduled for February 20, 2016 in the DocRX case, Bass reviewed depositions of the other members and noticed references to payments made to those members. (Id. at ¶ 55.) At that point, Bass thought the other members misunderstood the commission and payment structure. (Id.) In December 2016-January 2017, while preparing to respond to a federal subpoena in another case, Bass discovered never-before-seen documents and emails revealing various diversions of revenue that should have been received by InforMD and an apparent conspiracy to divert these sums due to InforMD. (Id.) At that time, Bass further investigated the records, correspondence files, and emails and concluded that since 2014 Defendants had been diverting payments away from InforMD in the following amount: Matt Skellan/Skellan Medical, $1, 078, 431.19. (Id. at ¶ 56.)

         The payments diverted from the Pogosyan-entities to Defendants were made without InforMD’s knowledge and without the knowledge of InforMD’s minority members. (Id. at ¶ 23.) Individually and as a collective group, Defendants did not tell the disinterested minority members of InforMD about the decision to accept payments from the Pogosyan entities for work done by InforMD’s sales personnel. (Id. ¶ 68.)

         Starting in 2014, Skellan along with the other defendants, received direct payments from Pogosyan’s compounding pharmacies, primarily CCP, as well as payments from Pogosyan’s pharmaceutical distribution/manufacturing entity, PNA. (Id. at ¶ 23.) The payments from the Pogosyan entities were the result of work performed by InforMD’s sales force. (Id.) Defendants knew that the payments they received belonged to InforMD. (Id. at ¶ 80.) One payment from PNA “was sent to [I]nforMD in ‘error’ and [a managing member] immediately requested its return to PNA for the check to be reissued.” (Id.)

         Defendants also received payments from Pogosyan entities through Origin Healthcare Advisors, LLC (“OHA”) which was formed in December 2014. (Id. at ¶ 27.) Skellan owned a 2.5% membership interests in OHA. (Id.) Skellan enjoyed payments from OHA based on InforMD’s work. (Id.) InforMD’s minority members were never informed of the existence of OHA and the relationship between OHA and Pogosyan. (Id.) Skellan accepted payments from OHA and the Pogosyan entities in the name of Skellan Medical. (Id. at ¶ 33.)

         OHA was used to facilitate and conceal the skimming of PNA and CCP commissions from InforMD and to make new partnerships without InforMD and its minority members. (Id. at ¶ 28.) From June 2014 to October 2015, OHA received approximately $25 million from two Pogosyan companies, PNA and CCP. (Id. at ¶ 29.) There is no evidence that Skellan, or any other defendant directly performed any services for PNA or CCP in that timeframe. (Id.) However, in responding to questions during the DocRX case, a defendant explained that the receipt of separate payments was because a team of certain InforMD members did the same thing done inside InforMD as work for PNA. (Id. at ¶ 35.) Defendants through OHA got the lion’s share of the commissions from Pogosyan entities, while leaving the overhead and other operational expenses (i.e., commissions to the actual salesmen) to InforMD. (Id. at ¶ 28.)

         Skellan testified during a deposition in the DocRX case that pharmacy management fees for services performed by InforMD were funneled through OHA. (Id. at ¶ 34.) He also testified that OHA did not perform services for PNA, as OHA plans for other services “never came to fruition.” (Id.) Likewise, Skellan admitted during his deposition that in forming his Health LOGIC Partners, LLC that he needed no seed capital because a majority of the business was moved from InforMD. (Id. at ¶ 38.)

         In accepting the payments from the Pogosyan entities, Defendants intentionally repeatedly acted in their own self-interest. (Id. at ¶ 63.) The minority members of InforMD made a demand for an accounting of funds believed to have been diverted by Defendants and for the return of at least a portion of these funds. (Id. at ¶ 81.) Defendants declined to give an accounting and further declined to return any of the funds. (Id.)

         APPLICABLE STANDARD

         In Johnson v. City of Shelby, Miss., 135 S.Ct. 346 (2014), the Supreme Court explained “Federal pleading rules call for a ‘short and plain statement of the claim showing that the pleader is entitled to relief, ’ Fed.R.Civ.P. 8(a)(2); they do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.” 135 S.Ct. at 346-47 (citation omitted).

         Interpreting Rule 8(a) of the Federal Rules of Civil Procedure, the Fifth Circuit explained:

The complaint (1) on its face (2) must contain enough factual matter (taken as true) (3) to raise a reasonable hope or expectation (4) that discovery will reveal relevant evidence of each element of a claim. “Asking for [such] plausible grounds to infer [the element of a claim] does not impose a probability requirement at the pleading stage; it simply calls for enough facts to raise a reasonable expectation that discovery will reveal [that the elements of the claim existed].”

Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 257 (5th Cir. 2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 1965 (2007)).

         Applying the above case law, the Western District of Louisiana stated:

Therefore, while the court is not to give the “assumption of truth” to conclusions, factual allegations remain so entitled. Once those factual allegations are identified, drawing on the court's judicial experience and common sense, the analysis is whether those facts, which need not be detailed or specific, allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” [Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009)]; Twombly, 55[0] U.S. at 556. This analysis is not substantively different from that set forth in Lormand, supra, nor does this jurisprudence foreclose the option that discovery must be undertaken in order to raise relevant information to support an element of the claim. The standard, under the specific language of Fed.R.Civ.P. 8(a)(2), remains that the defendant be given adequate notice of the claim and the grounds upon which it is based. The standard is met by the “reasonable inference” the court must make that, with or without discovery, the facts set forth a plausible claim for relief under a particular theory of law provided that there is a “reasonable expectation” that “discovery will reveal relevant evidence of each element of the claim.” Lormand, 565 F.3d at 257; Twombly, 55[0] U.S. at 556.

Diamond Servs. Corp. v. Oceanografia, S.A. De C.V., No. 10-00177, 2011 WL 938785, at *3 (W.D. La. Feb. 9, 2011) (citation omitted).

         The Fifth Circuit further explained that all well-pleaded facts are taken as true and viewed in the light most favorable to the plaintiff. Thompson v. City of Waco, Tex., 764 F.3d 500, 502–03 (5th Cir. 2014). The task of the Court is not to decide if the plaintiff will eventually be successful, but to determine if a “legally cognizable claim” has been asserted.” Id. at 503.

         CONSIDERATION OF EXHIBITS

         In general, pursuant to Rule 12(d), “[i]f, on a motion under Rule 12(b)(6)[, ]…matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56.” Fed.R.Civ.P. 12(d); United States v. Rogers Cartage Co., 794 F.3d 854, 861 (7th Cir. 2015). There are some exceptions to this ostensibly ironclad standard. On a motion to dismiss, the court may consider “the complaint, its proper attachments, ‘documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.’ ” Innova Hosp. San Antonio, Ltd. P’ship v. Blue Cross and Blue Shield of Georgia, Inc., No. 14-11300, 2018 WL 2943339, at *3 (5th Cir. 2018) (citing Wolcott v. Sebelius, 635 F.3d 757, 763 (5th Cir. 2011) (quoting Dorsey, 540 F.3d at 338) (citations and internal quotation marks omitted)).

         As the Fifth Circuit has explained, “[i]f the district court does not rely on materials in the record, such as affidavits, it need not convert a motion to dismiss into one for summary judgment.” U.S. ex rel. Long v. GSDMIdea City, L.L.C., 798 F.3d 265, 275 (5th Cir. 2015) (citing Davis v. Bayless, 70 F.3d 367, 372 n.3 (5th Cir. 1995)). “[T]he mere submission [or service] of extraneous materials does not by itself convert a Rule 12(b)(6) [or 12(c) ] motion into a motion for summary judgment.” Id. (quoting Finley Lines Joint Protective Bd. v. Norfolk S. Corp., 109 F.3d 993, 996 (4th Cir. 1997) (internal quotation marks omitted) (second alteration in original)). A district court, moreover, enjoys broad discretion in deciding whether to treat a motion to dismiss as a motion for summary judgment. See St. Paul Ins. Co. v. AFIA Worldwide Ins. Co., 937 F.2d 274, 280 n.6 (5th Cir. 1991).

         The Fifth Circuit has recognized a limited exception to the general rules under Federal Rule of Civil Procedure 12(d) and related jurisprudence. The Fifth Circuit has approved district courts’ consideration of documents attached to a motion to dismiss, when such documents are referred to in the plaintiff’s complaint and are central to the plaintiff’s claim. See Werner v. Dept. of Homeland Sec., 441 Fed. App’x. 246, 248 (5th Cir. 2011); Scanlan v. Texas A & M Univ., 343 F.3d 533, 536 (5th Cir. 2003); Collins, 224 F.3d at 498-99.

         In this case, Defendant request the Court consider the Employee Agreement, the Amended Operating Agreement, the Release, the Buy-Out Agreement, and the Restricted Class B Common Units Agreement. Defendants argue that each exhibit is referenced in the Complaint and central to Trustee’s claims. The Court agrees that Amended Operating Agreement, and the Buy-Out Agreement are central to Trustee’s claims and will consider the exhibits as necessary when ruling on the Motion. The Court will not consider the remaining exhibits when ruling on the Motion.

         DISCUSSION[5]

         a. Count I: Breaches of Duty of Care and Loyalty

         The Court will deny the Motion as it pertains to Count I, because the Complaint alleges sufficient facts to show a plausible claim that (1) Skellan had a fiduciary relationship with InforMD and the minority members of InforMD; (2) Skellan owed fiduciary duties to InforMD and its minority members; and (2) intentionally breached those fiduciary duties by accepting payments for work done by InforMD’s sales staff and failing to disclose those payments to InforMD and its minority members. In addition, on the face of the Complaint it is not clear that the claim for breach of fiduciary duties is prescribed by Louisiana Revised Statutes 12:1502. Therefore, the Court will not dismiss the Count based on prescription at this time.

         1. Parties Arguments

         Defendants assert that the Complaint fails to state a claim for breach of fiduciary duty because Skellan was never a manager of InforMD. Defendants that the claim fails because (1) Skellan’s position as the Vice President of Sales did not make him an officer under the Amended Operating Agreement; and (2) there are no allegations that the managers delegated management responsibilities to Skellan. (Doc. 22-1 at 10.)

         Defendants assert that Louisiana Revised Statutes 12:1320 “specifies that the liability of members, managers, employees or agents of an LLC is determined solely and exclusively under the provisions of Louisiana LLC law.” Doc. 22-1 at 9.) They argue that under Louisiana law, only a manager or a managing member owes a fiduciary duty to the LLC that can be limited by the operating agreement. (Doc. 22-1 at 10.) ...


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