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Wes&A Holdings, LLC v. Malino

United States District Court, Second Circuit

September 20, 2013



KEVIN NATHANIEL FOX, Magistrate Judge.

This is an action for damages, brought pursuant to the court's diversity jurisdiction, 28 U.S.C. § 1332, and for a declaratory judgment, pursuant to 28 U.S.C. § 2201. WES&A Holdings, LLC ("WES&A") asserted: (1) causes of action for common-law breach of fiduciary duty, allegedly owed to Amerex Group, Inc. and Amerex Companies, Inc. by defendants Nicholas J. Malino ("Malino") and Robert T. Roever ("Roever"); (2) voidable transfer claims, under the Oklahoma Uniform Fraudulent Transfer Act ("UFTA"), Okla. Stat. tit. 24, §§ 112-123, against Malino and Capitoline Advisory Group Inc. ("Capitoline"); and (3) causes of action for common-law contribution, against Malino and Roever. Through the first amended complaint, WES&A and Waste Express, Inc., also seek a judgment declaring Malino and Roever jointly and severally liable to the Internal Revenue Service ("IRS") "for the assessed taxes and statutory additions of $154, 817.90 stemming from unpaid taxes of Waste Express, Inc. incurred in tax years 2005 and 2007 and the first 6 months of 2008, less any abatement granted by the IRS"; and a judgment in favor of WES&A, declaring Malino and Roever "jointly and severally liable to the States of Oklahoma, Connecticut and Oregon for the assessed taxes and statutory additions of $54, 969.88, stemming from unpaid taxes of Amerex, Inc. incurred in tax years 2006 and 2007 and the first 6 months of 2008, less any abatement granted by the States tax authorities."

According to the complaint, Roever was a director and Malino the chief executive officer ("CEO") and a director of Oklahoma corporations, Amerex Group, Inc. and its wholly-owned subsidiary Amerex Companies, Inc. The plaintiffs alleged that Waste Express, Inc. was a wholly owned subsidiary of Amerex Companies, Inc. until about August 24, 2009, when Amerex Group, Inc., Amerex Companies, Inc. and Waste Express, Inc. agreed to the terms of a nonjudicial foreclosure with CAMOFI Master LDC ("CAMOFI"), an institutional investor that lent funds to Amerex Companies, Inc., and WES&A as CAMOFI's designee, and, as a result, Waste Express, Inc. became a wholly-owned subsidiary of WES&A. WES&A is alleged to be a Missouri limited liability company and Waste Express, Inc. a Missouri corporation.

Pursuant to 28 U.S.C. § 636(c), the parties consented to having a non-jury trial of this action, presided over by a United States magistrate judge. The trial was conducted on November 19, 20 and December 14, 2012. Thereafter, the parties submitted post-trial proposed findings of fact and conclusions of law. The following are the Court's findings of fact and conclusions of law, made pursuant to Rule 52 of the Federal Rules of Civil Procedure.


WES&A is a limited liability company owned by CAMOFI, the master fund of CAM Opportunity Fund. Richard Smithline ("Smithline") is CAMOFI's director and the CEO of Centrecourt Asset Management ("Centrecourt"). WES&A was formed in September 2009 to hold the assets of Amerex Group, Inc. and Amerex Companies, Inc. CAMOFI was Amerex Companies, Inc.'s senior secured lender.

Smithline formed Centrecourt in 2004. Centrecourt served as CAM Opportunity Fund's investment advisor. As Centrecourt's CEO, Smithline reviewed and approved all CAMOFI's investments before they were made. In 2005, Smithline met Roever, who was introducing companies to institutional investors in exchange for a fee. Smithline introduced Roever to Jeff Hass ("Hass"), a portfolio manager. Roever informed Smithline and Hass that he was raising funds on behalf of Amerex Companies, Inc., a privately held company based in Tulsa, Oklahoma. Amerex Companies, Inc. was to be a holding company for several waste management companies. Centrecourt performed due diligence on CAMOFI's behalf regarding Amerex Companies, Inc. As part of the due diligence process, Centrecourt gave Roever a list of due diligence requests; in response, a 600-page due diligence binder was provided.

The due diligence binder listed Rick Coody ("Coody") as "Chairman, " Malino as CEO, and Ron Brewer as chief operating officer of Amerex Companies, Inc. Craig McMahon was listed as a vice president of operations and Roever was listed as a director. The due diligence binder indicated that Amerex Companies, Inc. engaged Capitoline to act as its exclusive financial advisor. Roever has been the president of Capitoline since 2003. The agreement between Amerex Companies, Inc. and Capitoline provided that Amerex Companies, Inc. would pay Capitoline a fee of 10% of any financing obtained from prospects introduced to Amerex Companies, Inc. by Capitoline, as well as reimburse Capitoline for all out-of pocket expenses incurred under the agreement.

Malino entered into an employment agreement with Amerex Companies, Inc. on August 4, 2006, by which Amerex Companies, Inc. appointed Malino as its CEO, at a $15, 000 monthly salary, and agreed that Malino would "be paid normal pre-approved expenses relating to travel, meeting attendance, sales efforts as may be required during the term."

On November 21, 2005, CAMOFI and Amerex Companies, Inc. signed a note entitled "10% Senior Secured Convertible Note Due November 21, 2007, " (the "2005 Note") by which Amerex Companies, Inc. promised to pay CAMOFI, on or before November 21, 2007, $6, 000, 000, the principal advanced by CAMOFI, and to pay interest to the holder of the note on the aggregate, unconverted and then-outstanding principal amount of the note. The 2005 Note provided that all overdue, accrued and unpaid interest would be paid at the rate of 20% per annum, or such lower maximum amount of interest permitted to be charged under applicable law. Section 7 of the 2005 Note provides:

So long as any portion of this Note is outstanding, [Amerex Companies, Inc.] will not permit any of its Subsidiaries to directly or indirectly: a) enter into, create, incur, assume or suffer to exist any indebtedness or liens of any kind (other than indebtedness in an aggregate amount of no more than $450, 000 and liens, each in favor of the PTF to the extent such indebtedness and liens are existing as of the date hereof), on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom that is senior to or pari passu with, in any respect or subordinated to (unless on terms satisfactory in all respects to the Investor), [Amerex Companies, Inc.'s] obligations under the Notes.... d) engage in any transactions with any officer, director, employee or any affiliate of [Amerex Companies, Inc.], including any contract, agreement or other agreement providing for the furnishing of services to or by, providing for rental or real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee... in each case in excess of $10, 000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of [Amerex Companies, Inc.] and (iii) for other employee benefits, including stock option agreements under any stock option plan of [Amerex Companies, Inc.].

CAMOFI advanced $2.5 million to Amerex Companies, Inc. on November 21, 2005. Subsequently, Amerex Companies, Inc. acquired certain assets, including property in Pryor, Oklahoma (the "Kaiser Facility"). In July 2006, Amerex Group Inc. became a public company and made various filings with the Securities and Exchange Commission ("SEC").

On August 31, 2006, Amerex Companies, Inc. entered into a loan agreement (the "2006 Agreement") with CAMOFI, through which CAMOFI agreed to advance up to $1.5 million to Amerex Companies, Inc. pursuant to the terms described in a Revolving Credit Note (the "Revolver Note"), which provided for mandatory repayment of CAMOFI's loan by Amerex Companies, Inc. The Revolver Note was secured by Amerex Companies, Inc.'s accounts receivable. The 2006 Agreement provided that all Amerex Companies, Inc.'s customers would be directed to remit invoice payments into Amerex Companies, Inc.'s account called the "Controlled Account, " referred to by Amerex Companies, Inc. and CAMOFI as the "lock box." Under the terms of the 2006 Agreement and the Revolver Note, the funds in the Controlled Account belonged to CAMOFI. Thereafter, Amerex Companies, Inc. provided Centrecourt, on a regular basis, a list of expenses to be paid. Centrecourt, on behalf of CAMOFI, reviewed the list and released funds from the Controlled Account to Amerex Companies, Inc.'s operating bank account.

After Amerex Group Inc. became public, Hass had primary responsibility for overseeing the 2005 Note on behalf of CAMOFI. He was assisted by Centrecourt's chief financial officer, Richard Edelson ("Edelson"). Edelson communicated regularly with Amerex Companies, Inc. about requests for additional funding and the release of funds from the Controlled Account. Roever, who remained a director when Amerex Group Inc. became public, served as the main liaison to CAMOFI. He provided updates on how Amerex Companies, Inc. was doing from time to time. He also visited Centrecourt's office and met regularly with Hass to discuss Amerex Companies, Inc.

By the end of 2006, Amerex Companies, Inc. had defaulted on certain nonfinancial covenants. In January 2007, Roever and Malino informed Centrecourt that Amerex Companies, Inc. could not make monthly interest payments on the 2005 Note. In the first half of 2007, CAMOFI continued to lend funds to Amerex Companies, Inc., under the 2006 Agreement. In the spring of 2007, Amerex Companies, Inc. filed a form 10-KSB with the SEC for the year ending December 31, 2006, disclosing that: (a) it failed to pay certain payroll taxes to the IRS during 2006; (b) as of December 31, 2006, it owed approximately $455, 000 in tax arrears and $130, 000 in estimated penalties and interest; and (c) the IRS had placed a lien on Amerex Companies, Inc.'s assets.

Amerex Group, Inc. obtained a $750, 000 loan in August 2007, from Professional Offshore Opportunity Fund, Ltd. ("PROOF"). On or about August 16, 2007, Amerex Group, Inc. filed a form 8-K with the SEC, disclosing this transaction. CAMOFI did not approve the transaction. On September 19, 2007, Malino received $50, 000 from Amerex Companies, Inc., which reimbursed him for expenses incurred during the period from August 1 through December 31, 2006. Capitoline received $50, 000 on August 17, 2007, and $50, 000 in September 2007, which were payments for Capitoline's outstanding contractual fees and expenses owed to it by Amerex Companies, Inc.

On December 19, 2007, CAMOFI and Amerex Companies, Inc. entered into a letter agreement (the "2007 Letter Agreement"), through which CAMOFI agreed to extend the maturity date on the 2005 Note from November 21, 2007 to November 21, 2010, and to defer interest payments until April 1, 2008. On December 20, 2007, an e-mail message from Brad Morris, Amerex Companies, Inc.'s comptroller, to Stephen K. Onody, one of Amerex Companies, Inc.'s directors, revealed that payroll taxes had not been paid. Shortly afterwards, CAMOFI was notified about the failure to pay taxes.

Centrecourt engaged an independent consulting firm, the Durkin Group, to review Amerex Companies, Inc.'s financial condition. The Durkin Group visited Amerex Companies, Inc.'s main office in Tulsa and issued a report in January 2008. The Durkin Group confirmed that Amerex Companies, Inc. did not pay state payroll taxes in 2007, or federal payroll taxes for the period October through December 2007. Subsequently, Amerex Companies, Inc. defaulted on certain covenants in the 2007 Letter Agreement.

In May 2008, Smithline recommended an independent restructuring advisor, Glenwood Capital, LLC ("Glenwood"), to Amerex Group, Inc. Randall Humphreys ("Humphreys") was a managing director of Glenwood. Roever objected to Glenwood's monthly fee of $37, 500 as being too high. Retaining Glenwood was one of CAMOFI's conditions for extending additional funding to Amerex Companies, Inc. Amerex Group, Inc. engaged Glenwood on a monthly basis. On May 21, 2008, Humphreys participated telephonically in Amerex Companies, Inc.'s board of directors meeting. He informed the board about the financial issues faced by Amerex Companies, Inc., including Glenwood's estimate that it owed over $500, 000 in tax arrears.

On June 9, 2008, Amerex Group, Inc. and CAMOFI entered into a letter agreement ("the "2008 Letter Agreement"). The 2008 Letter Agreement indicated that the outstanding principal of the 2005 Note was $5, 141, 648, and the obligation on the Revolver Note was $1, 925, 301. On July 10, 2008, Malino resigned as Amerex Group, Inc.'s CEO. Roever remained as its director.

Subsequently, Amerex Companies, Inc. entered into an amended Securities Purchase Agreement and the Second Amended and Restated 12% Senior Secured Convertible Note (the "2008 Second Amended Note") with CAMOFI. On November 13, 2008, CAMOFI provided $28, 731.47 to Amerex Companies, Inc. for it to participate in a tax amnesty program run by Oklahoma State and to reduce interest and penalties.

In 2009, CAMOFI decided to foreclose on its collateral. On August 24, 2009, Amerex Group Inc., Amerex Companies, Inc., Waste Express, Inc., CAMOFI, as a Lender, and WES&A, as CAMOFI's designee, entered into an agreement (the "2009 Agreement"). The 2009 Agreement, governed by New York law, provided that Amerex Companies, Inc. shall:

(i) Convey to Lender (or its designee) its entire interest in the Real Estate and all property related thereto and used in connection therewith, whether personal, real, or mixed, subject only to the encumbrances recited herein...;
(ii) Convey to Lender its interest in the Personal Property pursuant to the Bill of Sale, Blanket Transfer and Assignment in the form attached hereto as Exhibit B....;
(iii) Assign all of its rights, title and interest in all contracts, leases and agreements (the "Contracts") identified on Exhibit C pursuant to the Assignment and Assumption ...

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