United States District Court, E.D. Tennessee, Knoxville
STEPHEN J. BARTON and KENNETH D. BILES, Plaintiffs,
DANIEL J. SMITH, DONALD M. PATTON, and RELYANT GLOBAL, LLC, Defendants.
ORDER AND MEMORANDUM DECISION
CAMPBELL, U.S. DISTRICT COURT JUDGE
case arises out of a dispute between current and former
members of Relyant LLC (Relyant or Company), which has been
performing contracts for the United States government.
Plaintiffs Stephen Barton (a current member of Relyant) and
Kenneth Biles (a former member of Relyant), seek financial
returns from the Company, which they say were unlawfully
withheld by Individual Defendants Daniel Smith and Donald
Patton, the managing members of Relyant. According to the
complaint, Mr. Smith and Mr. Patton fraudulently transferred
those funds to their company, Defendant Relyant Global LLC
(Global) (not to be confused with Relyant, which is a
completely separate entity).
bring claims for breach of contract, fraud-based torts,
breach of fiduciary duty, unjust enrichment, and conversion,
and they ask for an equitable accounting. Defendants have
filed motions for summary judgment.
the court finds that genuine disputes of material facts
exist, the court DENIES the motions.
LLC Operating Agreement
to this suit is the 2011 Fifth Amended and Restated Operating
Agreement between members of Relyant (Operating
Agreement). At the time the agreement was executed,
all the individuals in this suit were members of Relyant.
That agreement (attached as Exhibit A to Smith and Patton
Mot. Summ. J., ECF No. 28-1) is the subject of the
Plaintiffs' breach of contract claim and contains
language upon which Defendants rely to argue that summary
judgment is appropriate.
parties entered into the Operating Agreement to resolve a
financial issue Relyant faced in 2011. That issue arose after
both Mr. Barton and Mr. Smith loaned a substantial amount of
money to Relyant.
time, Defendants Smith and Patton, who were also
Relyant's managers, wanted to establish a line of credit
which Relyant could use to finance its operations and invest
in equipment, facilities and other assets needed to expand
the business. But Relyant had difficulty obtaining a loan or
line of credit in light of its loan obligations to Mr. Barton
and Mr. Smith.
solve that problem, Mr. Barton agreed to convert the debt
Relyant owed to him into 2, 314.537 non-voting Class B Units
of Relyant, at a purchase price of $939.20 per unit, for a
total of approximately $2.2 million. That resolution of the
debt was reflected in the Operating Agreement, through which
Mr. Barton, as a Class B member, was entitled to monthly
preferred return payments from Relyant's
the Operating Agreement, Mr. Smith was the only other Class B
Member. As priority Class B members, Mr. Barton and Mr. Smith
received distributions before the Class A members, which
included Mr. Biles and Mr. Patton. Mr. Biles, who is no
longer a member of Relyant, owned five percent of the Class A
the Operating Agreement was finalized, Mr. Smith and Mr.
Patton, on behalf of Relyant, obtained a line of credit with
Bank of America.
America Foreclosure and Sale of Relyant Assets
2013, unbeknownst to Mr. Barton and Mr. Biles, Relyant
defaulted on its line of credit with Bank of America. In
2014, Bank of America seized about $500, 000 in Relyant's
operating account and began a foreclosure sale of the loan
collateral. That collateral was auctioned off at the Blount
County courthouse on May 29, 2014. The only person or entity
who bid on the collateral was a local attorney, James
Rickman, who offered $377, 001 on behalf of Tennessee Rental
Holdings, LLC (TRH), an entity that was formed on May 15,
2014, approximately two weeks before the foreclosure sale.
The bank accepted TRH's bid.
have presented evidence that TRH was not an independent
third-party buyer but, through Mr. Rickman, was an agent of
Relyant and Defendants Smith and Patton. Mr. Rickman, during
his deposition, testified that he did not create TRH, never
had any ownership interest in or control over TRH, and only
appeared at the foreclosure sale in exchange for $5, 000 to
bid on behalf of Relyant using TRH as the vehicle to
accomplish that goal. He did not use any of his own money to
purchase Relyant's assets; rather, he used money provided
by either Relyant, Defendants' attorney (who was the
registered agent for TRH), or both. He also testified that in
preparation for the foreclosure purchase, he arranged with
the Defendants' attorney and other individuals to go to
Relyant's offices shortly before the foreclosure sale,
where they discussed how much they would be willing to bid on
TRH acquired Relyant's collateral, Relyant agreed to
continue performing and staffing its existing contracts on
behalf of TRH. But only one week after the sale,
Defendants Patton and Smith reached an agreement with Mr.
Rickman to purchase TRH (in other words, the Relyant assets
sold at auction), for the same price TRH had paid, plus a $5,
000 payment to Mr. Rickman for his service. As a result of
that agreement, TRH was transferred to a new company created
by Defendants Patton and Smith, called Veterans Holding Group
LLC (VHG). According to the Plaintiffs, VHG purchased TRH
using funds earned by Relyant.
one month later, on July 8, 2014, Defendants Smith and Patton
formed Global. Global obtained Relyant's assets from VHG
and is performing Relyant's contracts as well as its own
government contracts using Relyant's assets.
this evidence in a light most favorable to the Plaintiffs, it
appears that Mr. Smith and Mr. Patton transferred
Relyant's assets to Global over a short period of time
through a set of straw purchases.
to Mr. Barton
this time, according to Mr. Barton, he was deceived by Mr.
Smith and Mr. Patton who misrepresented Relyant's
financial condition after he began asking why Relyant stopped
making payments to him. Mr. Smith told Mr. Barton that
Relyant “was going to go under, ” “was
barely paying the bills, ” and was ready to file for
bankruptcy. (Decl. of Stephen Barton ¶ 8, ECF No. 37-1.)
Both Mr. Smith and Mr. Patton told Mr. Barton that Relyant
was “not doing well, ” “lacked work,
” and “would have to shut down.”
(Id.) In May 2016, after the foreclosure sale, they
told Mr. Barton that “in February 2014, Bank of America
had foreclosed on Relyant's assets and had ‘wiped
out' its bank accounts.” (Id. ¶ 17.)
were significant omissions as well. Throughout Mr.
Barton's quest for payment and information about
Relyant's financial status, Mr. Smith and Mr. Patton did
not tell Mr. Barton that Relyant had defaulted on the line of
credit with Bank of America, that they had attempted to
negotiate a resolution of liability to Bank of America, or
that there were any plans or strategies for resolving the
debt to Bank of America. They did not tell him that Bank of
America was foreclosing on the Relyant's assets, much
less that Relyant sold its assets to TRH.
declare that their representations about Relyant's
financial situation were accurate. But Plaintiffs' expert
witness testimony and Relyant's financial documents
contradict Defendants' characterization of Relyant's
to Plaintiffs' expert witness Jimmy Jackson,
Relyant's 2014 and 2015 tax returns reflect a substantial
profit and distributions paid to both Mr. Smith and Mr.
Patton at a time when they say Relyant was in dire financial
straits. (See Decl. of Jimmy J. Jackson (Sealed), ECF No.
62-10.) For instance, Relyant's 2014 tax return reported
ordinary business income of over $1.7 million with a payment
of distributions to Mr. Smith (approximately $400, 000) and
Mr. Patton (approximately $200, 000). Its 2015 tax return
reported payment of distributions of approximately $108, 000
to Mr. Smith and approximately $54, 000 to Mr. Patton.
Jackson, after analyzing these and other financial documents,
concluded that Relyant had profits and sufficient cash flow
and assets from which to make Class B preferred return
payments and distributions. He said that although this
determination could be made from the face of the records, it
was even more apparent when one corrected for what he
concluded were improper accounting methods applied by Mr.
Smith and Mr. Patton. Mr. Jackson was referring to records
showing that after May 19, 2014, the Defendants attributed
profits to TRH and Global rather than Relyant based on the
fiction that TRH, and not Relyant, owned Relyant's
contracts and past performance. Plaintiffs contend that if
Relyant were ...