In re: Leary et al
Filing
37
Opinion and Order Closing Case with Notice of Entry 8016(b). Signed by Judge Kenneth A. Marra on 3/11/2013. (ir)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 12-21339-CIV-MARRA
(APPEAL FROM BANKRUPTCY CASE NO. 10-26423-BKC-AJC)
PRIEUR J. LEARY, III and
PRONTOCOM, INC.,
Appellants,
v.
INFOLINK GLOBAL CORPORATION,
Reorganized Debtor
Appellee.
_____________________________________/
OPINION AND ORDER
Appellant Prontocom, Inc. filed this bankruptcy appeal challenging the Order Confirming
Second Amended Chapter 11 Plan of Reorganization for Debtors, Infolink Group, Inc. and Infolink
Information Services, Inc., Proposed by Creditor James C. Kurzweg and Infolink Equity Group in
Bankruptcy Case No. 10-26423-AJC. The parties have fully briefed the issues. For the reasons that
follow, the Court affirms the Bankruptcy Court’s order.
I. Jurisdiction
District courts have jurisdiction to review appeals from final bankruptcy court judgments,
orders, and decrees. 28 U.S.C. § 158(a). Pursuant to the Federal Rules of Bankruptcy Procedure, an
appeal of right may be taken as permitted by 28 U.S.C. § 158(a)(1) or (a)(2). See Fed. R. Bankr. P.
8001(a).
II. Standard of Review
Bankruptcy Courts are governed by the Federal Rules of Bankruptcy Procedure. Federal Rule
of Bankruptcy Procedure 8013 states that a district court shall review the factual findings of a
bankruptcy court for clear error. The District Court reviews de novo the conclusions of law of the
bankruptcy court and application of the law to the particular facts of the case. See In re Feingold, 474
B.R. 293, 294 (S.D. Fla. 2012) (citing In re Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir.2009);
and In re Club Assocs., 951 F.2d 1223, 1228–29 (11th Cir.1992)) (“The Court reviews the Bankruptcy
Court's factual findings for clear error and its legal conclusions de novo.”).
III. Background1
On March 24, 2010, Infolink Group, Inc. and Infolink Information Services, Inc. (collectively
“the debtors”) filed separate voluntary petitions for relief through their president, Prieur J. Leary, III,
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. (10-10981-KG, DE 1; 10-10982-KG, DE 1). The Delaware bankruptcy court entered an
order directing the administrative consolidation and joint administration of the two cases, (10-10981KG, DE 14; 10-10982-KG, DE 8), and the consolidated case was transferred to the United States
Bankruptcy Court for the Southern District of Florida on June 2, 2010. (BKC, DE 1). A successor
chapter 11 trustee was appointed to manage the debtors’ affairs.
On April 4, 2011, the trustee instituted an adversary proceeding on behalf of the debtors
against Leary (the debtors’ president) and others for, among other things, fraudulent pre- and postpetition transfers of the debtors’ assets. (ADV, DE 1). On May 2, 2011, the bankruptcy judge entered
a Supplemental Decision and Order Granting Preliminary Injunction (ADV, DE 65) that found Leary
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The Court adopts the factual findings of the bankruptcy court as they are not disputed by the parties and the
Court finds no clear error. For purposes of clarity, documents filed in this docket, 12-21339-CIV-KAM, shall be cited
as “(DE __)”; documents filed in the underlying bankruptcy docket, 10-26423-BKC-AJC, shall be filed as “(BKC, DE
__)”; and documents filed in the related adversary proceeding, 11-01885-AJC, shall be filed as “(ADV, DE __).”
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responsible for 1) pre-petition fraudulent transfers of the debtors’ assets; 2) apparent intentional
misrepresentations made by Leary under oath in the debtors’ bankruptcy schedules; 3) post-petition
fraudulent transfers of the debtors’ assets; 4) fraudulent transfers of the debtors’ assets even after the
appointment of a Chapter 11 trustee; and 5) further fraudulent transfers and attempted fraudulent
transfers of the debtors’ assets even after the bankruptcy court entered a temporary restraining order.2
One attempted post-restraining order transfer occurred when Leary sent a written request to one of
the debtors’ merchant service providers seeking to change the payee account to Appellant Prontocom,
Inc. (ADV, DE 65 at 10 ¶ 17). Leary’s attempted transfer of assets to Prontocom was denied by the
merchant service provider, however, because provisions of the restraining order prevented the
provider from transferring ownership of the merchant accounts.3
On May 11, 2011, the bankruptcy court held Leary in civil contempt and directed that he be
arrested by the United States Marshal. Leary had twice failed to appear for depositions relating to the
trustee’s attempt to convert the restraining order into a preliminary injunction. (ADV, DE 86). The
bankruptcy court gave Leary an opportunity to purge himself of the consequences of contempt if he
appeared for a deposition and produced documents within ten days of the contempt order. Leary again
failed to appear. The bankruptcy court thus concluded that:
2
The temporary restraining order was entered on April 4, 2011— the same day the trustee instituted the
adversary proceeding. (ADV, DE 5).
3
In its Supplemental Decision and Order Granting Preliminary Injunction, the bankruptcy judge made the
following factual finding: “On April 6, 2011, after entry of the Temporary Restraining Order, Leary sent a written
request to [an entity named Innovative] attempting to change the payee account from [Defendant Pronto Group, Inc.]
to a non-defendant entity, [Appellant] Prontocom, Inc. [Appellant] Prontocom, Inc. is a Delaware corporation that was
formed post-petition and after the Trustee’s appointment, on December 20, 2010. The attempted transfer of accounts was
denied by Innovative because other provisions of the Temporary Restraining Order restrain the Defendant Merchant
Service Providers from transferring ownership of the merchant accounts.” (ADV, DE 65 at 10 ¶ 17) (emphasis in
original).
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given Leary’s long history of willful disregard and contempt for the Bankruptcy Code,
the bankruptcy process, this Court and its Orders, and these proceedings in
general . . . , the entry of a default judgment against Leary and the Defendant entities
of which Leary is an officer and on whose behalf he failed to appear for
deposition . . . is the most appropriate sanction under these circumstances.
(ADV, DE 155 at 4–5). In ordering that judgment as to liability and for injunctive relief be entered
against Leary on the trustee’s claims, the court specifically found that certain transfers were
established for purposes of the judgment and were fraudulent in nature. Id. at 6. For example:
[A merchant service account held by an entity named Innovative Merchant Solutions]
for credit card processing was transferred pre-petition from [Debtor] Infolink
Information Services to [an entity named] Infolink Communication. Post-petition, it
was again transferred to [an entity named] Pronto Inc. just eight days before the
hearing in [the bankruptcy court] on the Motion to Appoint a Chapter 11 Trustee. Two
days after entry of [the bankruptcy court’s] Temporary Restraining Order, Leary
attempted to again transfer it to [Appellant Prontocom, Inc.] (a newly formed
corporation, and not a defendant in this action) but was stifled because of provisions
in the Temporary Restraining Order that restrained Innovative Merchant Solutions
from making the requested transfer. The transfer of the account from Infolink
Information Services to Infolink Communication and the transfer of the account from
Infolink Communication to Pronto Inc. were fraudulent transfers. The transfer of the
account to Pronto Group, Inc. was also a violation of the bankruptcy automatic stay,
11 U.S.C. § 362.
Id. at 7 ¶ 5.
On January 6, 2012, the holder of the largest allowable claim against the debtors’ consolidated
bankruptcy estate, and a group of the debtors’ other creditors, stockholders and investors, proposed
a Chapter 11 Plan of Reorganization. (BKC, DE 863). Under the reorganization plan, all of the
debtors’ assets—including those the bankruptcy court found to be fraudulently transferred—would
vest in a “reorganized debtor” as of the effective date of the plan. (BKC, DE 863 ¶¶ 1.15, 5.1.2,
14.14). The bankruptcy court confirmed the plan on February 2, 2012, waiving the 14-day stay
otherwise applicable under Federal Rule of Bankruptcy Procedure 3020(e) and authorizing the plan’s
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proponents to consummate the transactions contemplated by the plan upon the order’s entry. (BKC,
DE 898 ¶¶ 11, 27).
The reorganization plan called for, among other things, the creation of an entity to serve as
the reorganized debtor. Consistent with the terms of the plan, a Florida corporation named Infolink
Global was specially created to serve as the reorganized debtor, and the “Infolink Global” entity took
over control of the debtors’ business, operations, assets, and affairs.
The plan also provided for a number of other transactions upon its confirmation: 1) all allowed
claims in the underlying bankruptcy case, totaling over $1.3 million, were paid in full while a cash
reserve was established to fund payment of disputed claims; 2) all of the debtors’ assets and property
vested in the reorganized debtor; 3) new equity shares in the reorganized debtor vested in certain of
the debtors’ existing stockholders in reconstituted amounts designated under the confirmed plan;
4) the reorganized debtor entered into a settlement and release agreement with Appellants and certain
related entities by which it sold the debtors’ business and all related assets to Appellants and released
fraudulent transfer claims against Leary and others; 5) and the reorganized debtor filed lawsuits
against certain of the debtors’ pre-petition professionals for recovery of fraudulent transfers and state
law claims. (DE 5, Attach. 1: James C. Kurzweg Aff.). Included in the debtors’ assets and property
that would vest in the reorganized debtor were 1) “the Debtors’ equity interest in any affiliate,
subsidiary or other entity, including . . . [Appellant] Prontocom, Inc.” (BKC, DE 898 ¶ 11); and 2) “all
bank accounts held in the name of the Trustee or Debtors, and all Cash held by the Trustee in the
Trustee’s operating account, the remaining Infolink Cash Contribution, and/or held in the Debtors’
bank accounts, including the Intuit Payment Solutions merchant account . . . in the name of
Prontocom Inc. (the “Intuit Merchant Account”).” Id. The reorganization plan authorized and directed
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the trustee to redirect all deposits in the Intuit Merchant Account, i.e., Prontocom’s account, to the
reorganized debtor.
Appellants timely appealed the bankruptcy court’s confirmation order. Appellant asserts that
the bankruptcy court erred by ordering an account held in the name of Appellant Prontocom, Inc., to
turn over cash and other assets to the reorganized debtor without obtaining personal jurisdiction over
Prontocom.4 The crux of Prontocom’s argument is that Prontocom was never a party to the
bankruptcy proceeding or the associated adversary proceeding, Prontocom never submitted itself to
the jurisdiction of the bankruptcy court, and Prontocom was never given notice and an opportunity
to be heard before the bankruptcy court transferred its property to the reorganized debtor.
The reorganized debtor, as Appellee, responds to Prontocom’s claims by arguing that, among
other things, Prontocom is a corporation owned and controlled by Leary, over whom the bankruptcy
court unquestionably had personal jurisdiction when it ordered Prontocom’s assets transferred.5 Thus,
according to Appellee, Prontocom should be bound by any judgment obtained against Leary. While
Appellee does not use the term “issue preclusion” in its argument, the Court construes Appellee’s
position as one under that doctrine. For the reasons that follow, the Court finds Appellee’s “issue
preclusion” argument persuasive and affirms the Order Confirming Second Amended Chapter 11 Plan
of Reorganization for Debtors, Infolink Group, Inc. and Infolink Information Services, Inc., Proposed
4
Appellants Prieur J. Leary, III, and Prontocom, Inc., filed their Notice of Appeal on April 9, 2012 (DE 1), and
their initial brief on M ay 8, 2012 (DE 13).
5
The reorganized debtor, as Appellee, moved to dismiss Appellants’ appeal on grounds of equitable mootness
and lack of standing under the Eleventh Circuit’s “person aggrieved” standard. (DE 5). The Court granted in part and
denied in part the motion on the grounds that Appellant Prontocom has standing to appeal while Appellant Leary does
not. The Court also found that there was insufficient factual support in the record to conclude that the reorganization
plan had been substantially consummated to the point that the Court could not grant Appellant Prontocom effective relief.
(DE 18).
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by Creditor James C. Kurzweg and Infolink Equity Group in Bankruptcy Case No. 10-26423-AJC.
IV. Discussion
“As a general rule, one is not bound by a judgment in personam in a litigation in which he is
not designated as a party or to which he has not been made a party by service of process. The rule
against nonparty preclusion, however, is subject to six categories of exceptions.” Griswold v. County
of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010).
First, a person who agrees to be bound by the determination of issues in an action
between others is bound in accordance with the terms of his agreement. For example,
if separate actions involving the same transaction are brought by different plaintiffs
against the same defendant, all the parties to all the actions may agree that the question
of the defendant's liability will be definitely determined, one way or the other, in a test
case.
Second, nonparty preclusion may be justified based on a variety of pre-existing
substantive legal relationships between the person to be bound and a party to the
judgment. Qualifying relationships include, but are not limited to, preceding and
succeeding owners of property, bailee and bailor, and assignee and assignor. These
exceptions originated as much from the needs of property law as from the values of
preclusion by judgment.
Third, we have confirmed that, in certain limited circumstances, a nonparty may be
bound by a judgment because she was adequately represented by someone with the
same interests who was a party to the suit. Representative suits with preclusive effect
on nonparties include properly conducted class actions, and suits brought by trustees,
guardians, and other fiduciaries.
Fourth, a nonparty is bound by a judgment if she assumed control over the litigation
in which that judgment was rendered. Because such a person has had the opportunity
to present proofs and argument, he has already had his day in court even though he
was not a formal party to the litigation.
Fifth, a party bound by a judgment may not avoid its preclusive force by relitigating
through a proxy. Preclusion is thus in order when a person who did not participate in
a litigation later brings suit as the designated representative of a person who was a
party to the prior adjudication. And although our decisions have not addressed the
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issue directly, it also seems clear that preclusion is appropriate when a nonparty later
brings suit as an agent for a party who is bound by a judgment.
Sixth, in certain circumstances a special statutory scheme may expressly foreclose
successive litigation by nonlitigants if the scheme is otherwise consistent with due
process. Examples of such schemes include bankruptcy and probate proceedings, and
quo warranto actions or other suits that, under the governing law, may be brought only
on behalf of the public at large.
Taylor v. Sturgell, 553 U.S. 880, 893–95 (2008) (internal citations, quotations, and alterations
omitted).
In Griswold v. County of Hillsborough, an Eleventh Circuit case with similar facts, the
president and sole shareholder of two companies sued a municipality and others for conspiring to
monopolize his local business market. 598 F.3d at 1291. The president was dismissed from the
litigation for lack of standing, and judgment was ultimately entered against his two companies.
The president again filed suit—this time individually—advancing claims factually related to
the previous litigation, but the district court found that his claims were barred under the doctrine of
res judicata. The court held that the president was in privity with his two companies “and thus could
be bound by the prior litigation even though he was not a party, because as the sole shareholder and
President of the business, the Companies were so closely aligned to [the president’s ]interest as to be
his virtual representative.” Id. at 1292 (emphasis added) (internal quotations omitted).
On appeal, the Eleventh Circuit recognized that the Supreme Court had recently rejected the
“virtual representation” exception that the district court had applied to the president’s claim. The
appellate court nevertheless affirmed the judgment of the district court, however, because the
president had “used his relationship with the Companies to control the prior litigation.” Id. at 1293.
Although Griswold applied the fourth “exception” to the general rule against nonparty preclusion, the
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Eleventh Circuit noted that “the adequate representation exception also likely applies.” Id. n.4
(“Although the adequate representation exception also likely applies, we need not reach that issue
given our finding on the control exception.”).
Based on the Eleventh Circuit’s suggestion that the adequate representation exception would
have likely applied in Griswold, this Court finds that the adequate representation exception applies
here, as does the exception for situations in which a substantive legal relationship existed between
the person to be bound and a party to the judgment. As noted by the bankruptcy court, Prontocom was
created post-petition, and Leary attempted to effect a fraudulent transfer of the assets at issue here to
the newly created company—the same assets that Prontocom now argues were taken in violation of
its due process rights.6 Moreover, Leary unquestionably subjected himself to the bankruptcy court’s
jurisdiction. As in Griswold, where the president was in privity with his two companies, Leary is
closely aligned to and in privity with Prontocom, the company he controlled and to which he sought
to transfer fraudulent assets.
The Court notes that generally, under the doctrine of res judicata, a claim is barred by prior
litigation if four elements are met: 1) there is a final judgment on the merits; 2) the decision was
rendered by a court of competent jurisdiction; 3) the parties, or those in privity with them, are
identical in both suits; and 4) the same cause of action is involved in both cases. See id. at 1292.
Ostensibly these elements require two separate cases. That this case lacks a predecessor case,
however, is immaterial.
6
Prontocom does not argue that Leary did not control it; rather Prontocom implicitly concedes the issue by
arguing that the bankruptcy court never “pierced Prontocom[]’s corporate veil.” (DE 36 at 5–10). To that end, Prontocom
cites cases for the proposition that corporate entities are distinct from their owners under general principles of corporate
law. (DE 36 at 6). But whether Prontocom is distinct from Leary in the corporate law sense is irrelevant to this Court’s
determination of whether Leary adequately represented Prontocom or whether a substantive legal relationship existed
between the two for purposes of nonparty preclusion.
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The bankruptcy court’s order confirming the reorganization plan constitutes a final judgment
on the merits, and that decision was rendered by a court of competent jurisdiction (at least as to Leary
even assuming Prontocom’s objections were valid). Based on this Court’s finding that a substantive
legal relationship existed between Leary and Prontocom and that Prontocom was adequately
represented by Leary, Prontocom is bound by the bankruptcy court’s order.
V. Conclusion
Accordingly, it is hereby ORDERED AND ADJUDGED that the Order Confirming Second
Amended Chapter 11 Plan of Reorganization for Debtors, Infolink Group, Inc. and Infolink
Information Services, Inc., Proposed by Creditor James C. Kurzweg and Infolink Equity Group is
AFFIRMED. The Clerk shall CLOSE this case.
DONE AND ORDERED in Chambers at West Palm Beach, Palm Beach County, Florida,
this 11th day of March, 2013.
______________________________________
KENNETH A. MARRA
United States District Judge
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