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Schott v. Massengale

United States District Court, M.D. Louisiana

September 27, 2019

MARTIN A. SCHOTT, Chapter 7 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 or in the alternative a motion for a more definite statement filed by C-Squared Management, LLC, and Shelley Massengale, both individually and as legal representative for her minor children (“Defendants”), entitled Motion to Dismiss Complaint or, Alternatively, for a More Definite Statement (“Motion”).[1] (Doc. 16.) Plaintiff, Martin A. Schott (“Schott” or “Trustee”), filed an Opposition to Defendants’ Motion to Dismiss. (Doc. 30.) In reply, Defendants filed Reply Memorandum in Support of Motion to Dismiss Complaint or, Alternatively, for a More Definite Statement. (Doc. 35.) 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. The Court will grant in part the alternative relief requested and require Trustee to provide a more definite statement regarding when the alleged breaches of fiduciary duties occurred.

         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 as to the elements of the claim for conversion. 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. 17-10579), 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 filed a motion to withdraw the reference. (Doc. 25, in Adversary Pro. No. 18-1025; Doc. 1 in 18-cv-759.) (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 Shelley Massengale, individually and as representative of her minor children, and C-Squared Management, LLC. (Id. at ¶¶ 1-2.)

         Richard Massengale was the President and Chief Executive Officer (“CEO”) of InforMD. (Id. at ¶ 7.) Richard Massengale also served as a managing member of InforMD. (Id. at ¶ 8.) In the spring of 2011, Richard Massengale owned a 30% membership interest of InforMD. (Id. at ¶ 9.) Before December 31, 2013, Richard Massengale’s ownership interest was increased to 40%, without any company resolution or documentation. (Id. at ¶ 11.) In 2015, Richard Massengale transferred his ownership interest in InforMD to his wholly owned LLC, named C-Squared, LLC (“C-Squared”). (Id. at ¶ 14). As of May 15, 2015, C-Squared and thereby Richard Massengale continued to own a 40% membership interest. (Id. at ¶ 15.)

         Shelley Massengale was married to Richard Massengale until his unexpected death on July 22, 2016. (Id. at ¶¶ 17 & 48.) After Richard Massengale’s death, Shelley Massengale was appointed to take his place as co-managing member of InforMD and as sole member/manager of and agent for service of process for C-Squared, which was still the majority member of InforMD. (Id. at ¶ 48.) Richard Massengale died intestate and his estate was apportioned between the Massengales’ minor children and Shelley Massengale. (Id. at ¶¶ 51-54.)

         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 between Pogosyan and Richard Massengale. (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 other members’ ownership interests in InforMD. (Id. at ¶ 39.) The Buyer was InforMD, represented in part by C-Squared. (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.)

         Richard Massengale threatened Ruth Bass that if she did not sign the agreement, she would 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 agreement and the equity purchase price has not been paid. (Id. at ¶¶ 44 and 88.)

         At the meeting of creditors convened pursuant to 11 U.S.C. § 341, Brian Juban, Massengales’ 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 because buying its own ownership interest transferred nothing to InforMD. (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.)

         In 2016, InforMD was also a defendant in a suit filed Louisiana state court as Trey Greene v. inforMD, No. 642, 430. (Id. at ¶ 49.) Counsel for InforMD was allowed to withdraw for lack of payment and no counsel of record appeared on behalf of InforMD following that withdrawal. (Id.) Shelley Massengale did not appear pro se on behalf of InforMD. (Id. at ¶ 50.) Trey Greene’s unopposed summary judgment was granted in the amount of $1, 076, 095.34 on May 1, 2017 (Id. at ¶ 50.) Greene was also awarded $13, 402.00 for sanctions against InforMD for failing to respond to discovery. (Id.)

         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: Rick Massengale/Shelley Massengale/the Massengale Heirs/C-Squared, $13, 711, 929.67. (Id. at ¶¶ 25 & 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, Richard Massengale 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.) One payment from PNA “was sent to [I]nforMD in ‘error’ and Massengale immediately requested its return to PNA for the check to be reissued.” (Id.) Defendants knew that the payments received belonged to InforMD. (Id. at ¶ 80.)

         Defendants also received payments from Pogosyan entities through Origin Healthcare Advisors, LLC (“OHA”) which was formed in December 2014. (Id. at ¶ 27.) Richard Massengale owned a 18.40% membership interests in OHA. (Id.) Richard Massengale also held a 9.29% interest in a related entity, OHA Management, LLC. OHA Management, LLC in turn, held a 48.80% interest in OHA. (Id.) InforMD’s minority members were never informed of the existence of OHA and the relationship between OHA and the Pogosyan entities. (Id.)

         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.)

         Richard Massengale testified in a deposition for the DocRX case that the payments from the Pogosyan entities to C-Squared was for “work organizing and managing sales efforts to promote the sale of compounding medications from Pogosyan-owned pharmacies, and later, to promote the sale of bulk/raw ingredients used to make compounds by other pharmacies.” (Id. at ¶ 26.) Richard Massengale further 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.) Richard Massengale also admitted that InforMD “sales representatives performed these services for the very same Pogosyan companies.” (Id. at ¶ 26.) There is no evidence that Richard Massengale, or any other defendants directly performed any services for PNA or CCP in that timeframe or that they employed anyone to do so. (Id.) Defendants through OHA got the lion’s share of the commissions from the Pogosyan entities, while leaving the overhead and other operational expenses (i.e., commissions to the actual salesmen) to InforMD. (Id. at ¶ 28.)

         In accepting the payments from 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.

         Rule 12(e) provides that “a party may move for a more definite statement of a pleading to which a responsive pleading is allowed but which is so vague or ambiguous that the party cannot reasonably prepare a response.” Fed.R.Civ.P. 12(e); see also Beanel v. Freeport–McCoran, Inc., 197 F.3d 161, 164 (5th Cir. 1999) (“If a complaint is ambiguous or does not contain sufficient information to allow a responsive pleading to be framed, the proper remedy is a motion for a more definite statement under Rule 12(e)”). The complaint must “give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002). A Rule 12(e) motion may be appropriate “if a pleading fails to specify the allegations in a manner that provides sufficient notice.” Id. at 514.

         When evaluating a motion for a more definite statement, the Court must assess the complaint in light of the minimal pleading requirements of Rule 8. Babcock & Wilcox Co. v. McGriff, Seibels & Williams, Inc., 235 F.R.D. 632, 633 (E.D. La. 2006); see Fed. R. Civ. P. 8(a)(2) (requiring a “short and plain statement of the claim showing that the pleader is entitled to relief”). Given the liberal pleading standard set forth in Rule 8(a), Rule 12(e) motions are disfavored. Adams v. Southland Trace, 2012 WL 12986191, at *5 (M.D. La. Feb. 29, 2012). The trial judge is given considerable discretion in deciding whether to grant a Rule 12(e) motion. Id. Finally, a Rule 12(e) motion is not a substitute for the discovery process. Ford v. Cain, 2016 WL 447617, at *2 (M.D. La. Feb. 4, 2016).

         DISCUSSION

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

         As to Count I, Breaches of Duty of Care and Loyalty, the Court will deny the Motion because the Complaint alleges sufficient facts to show a plausible claim that 1) Defendants had a fiduciary relationship with InforMD and the minority members of InforMD; (2) Defendants had fiduciary duties to InforMD; and (3) Defendants intentionally breached their fiduciary duties by accepting payments for work done by InforMD’s sales staff and failing to disclose those payments. In addition, the Court will not dismiss Count I because of prescription or preemption because on the face of the Complaint it is not clear that the claim for breach of fiduciary duties is prescribed or perempted by Louisiana Revised Statutes 12:1502. The Court will grant in part the alternative relief requested and require Trustee to provide a more definite statement regarding when the alleged breaches of fiduciary duties occurred.

         1. Parties&rs ...


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