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Barton v. Smith

United States District Court, E.D. Tennessee, Knoxville

May 28, 2019

STEPHEN J. BARTON and KENNETH D. BILES, Plaintiffs,
v.
DANIEL J. SMITH, DONALD M. PATTON, and RELYANT GLOBAL, LLC, Defendants.

          ORDER AND MEMORANDUM DECISION

          TENA CAMPBELL, U.S. DISTRICT COURT JUDGE

         This 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).

         Plaintiffs 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.

         Because the court finds that genuine disputes of material facts exist, the court DENIES the motions.

         FACTUAL BACKGROUND[1]

         Relyant LLC Operating Agreement

         Central to this suit is the 2011 Fifth Amended and Restated Operating Agreement between members of Relyant (Operating Agreement).[2] 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.

         The 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.

         At that 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.

         To 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 profits.[3]

         Under 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 Units.

         After the Operating Agreement was finalized, Mr. Smith and Mr. Patton, on behalf of Relyant, obtained a line of credit with Bank of America.

         Bank of America Foreclosure and Sale of Relyant Assets

         In 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.

         Plaintiffs 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 the property.

         After TRH acquired Relyant's collateral, Relyant agreed to continue performing and staffing its existing contracts on behalf of TRH.[4] 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.

         Approximately 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.

         Viewing 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.

         Representations to Mr. Barton

         Throughout 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.)

         There 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.

         Defendants 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 financial status.

         According 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.

         Mr. 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 ...


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