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AES-Apex Employer Services, Inc. v. Rotondo

United States District Court, E.D. Michigan, Southern Division

December 12, 2017




         Before the court is Defendant the United States Internal Revenue Service's Motion for Contempt and Sanctions against Plaintiffs AES-Apex Employer Services, Inc. and AES-Apex Employer Solutions, Inc. (collectively “Plaintiffs”) and their counsel, Vandeveer Garzia P.C. (Dkt. # 155.) Additionally, Intervener Akouri filed a Motion to Compel disclosure of Plaintiffs' accounting and supporting source data. (Dkt. # 164.) Both motions have been fully briefed and the court held a hearing on December 5, 2017 at which counsel for all parties were present as well as counsel for Vandeveer Garzia P.C and counsel for Akouri. For the reasons stated on the record at the hearing and herein, the court will deny without prejudice the IRS's Motion for Contempt and Sanctions, deny Akouri's Motion to Compel, and order targeted discovery regarding Plaintiffs' finances.

         I. BACKGROUND

         This litigation, which has lasted more than four years, is a round-robin of who has a valid claim to certain funds. A brief and admittedly simplistic review of the central facts and procedural history is necessary to understand the basis for the present motions.

         The funds in dispute first existed as “customer accounts” for which Dino Rotondo performed consulting services. He is owed payment for his services on those accounts to this day. These customer accounts were owned by a company, on the assets of which Akouri allegedly held and continues to hold a lien. The company sold the customer accounts to Plaintiffs, thereby passing its debt to Rotondo onto Plaintiffs. Akouri asserts that its alleged lien on the customer accounts also transferred in the sale to Plaintiffs and, therefore, it is entitled to the funds owed to Rotondo. To complicate matters, Rotondo owes money to the IRS. As a result, the IRS claims that it is entitled to the funds due by Plaintiffs to Rotondo under the customer accounts.

         Plaintiffs filed this action in October 2013 seeking to interplead the funds owed to Rotondo, deposit them with the court, and be dismissed from the proceedings. (Dkt. # 1.) Akouri intervened in June 2014 and filed a complaint against Plaintiffs and Rotondo. (Dkt. # 33.) Akouri alleged Plaintiffs and Rotondo violated the Michigan Uniform Fraudulent Transfers Act and sought a declaratory judgment that its alleged lien on the consulting fees owed to Rotondo is senior to the IRS's claims. However, Akouri, in filing its intervener complaint, did not assert a claim against the consulting fees generally or request a finding regarding its entitlement to the fees beyond a declaration that it has “a senior perfected lien status.” (Dkt. # 33, Pg. ID 344.) In other words, Akouri's complaint began from the assumed conclusion that it holds a valid lien on the consulting fees owed to Rotondo.

         In February 2016, Plaintiffs filed an accounting with the court indicating that they owed Rotondo $333, 405, but the accounting also showed that $265, 190 of that amount had been paid to Plaintiffs' attorneys, leaving only $68, 215 available to deposit with the court.

         The IRS filed a Motion for Summary Judgment (Dkt. # 44), Akouri filed a Motion for Partial Summary Judgment (Dkt. # 45), and Plaintiffs filed a Motion to Dismiss (Dkt. # 46). Following full briefing and a hearing, Magistrate Judge Grand issued a Report and Recommendation (R&R) regarding the various motions in March 2016. (Dkt. # 110.) Magistrate Judge Grand concluded that “a question of fact exists as to whether the Directional Entities or Apex Admin actually owned the Customer Accounts that were transferred to the [Plaintiffs].” (Dkt # 110, Pg. ID 3662.) Which entity previously owned and sold the customer accounts to Plaintiff is material because Judge Grand held that Akouri has a perfected security interest in only the assets of Apex Admin and not the assets of Directional Entities. (Id. at 3659.) Therefore, if Apex Admin sold the customer accounts, Akouri may have a lien on the consulting fees owed to Rotondo, but if Directional Entities sold them, Akouri would have no claim on the consulting fees.

         In September 2016, this court adopted in part and rejected in part the R&R. Importantly, the court agreed with Judge Grand that even if Akouri has an interest in the consulting fees, its interest is subordinate to the IRS's interest. (Dkt. # 135.) Therefore, the court denied Akouri's request for a declaratory judgment, dismissed its complaint, and granted the IRS's Motion for Summary Judgment. (Id.) The court also granted Plaintiffs' Motion to Interplead Funds, but denied its request to be dismissed from the proceedings until the funds owed were deposited with the court. (Id.). Further, in sustaining an objection to the R&R, this court concluded there is no genuine issue of material fact as to Directional Entities' ownership of the customer accounts. (Dkt. # 135, Pg. ID 4844.)

         By March 2017, Plaintiffs had not deposited the funds with the court. In response, the IRS filed a Motion to Compel the deposit in accordance with the court's September 2016 order and for clarification of the court's order. (Dkt. # 143.) In July 2017, the court granted the IRS's motion and ordered Plaintiffs to deposit the amount owed outstanding with the court. The court also held that Plaintiffs could not have reasonably believed that the court's September 2016 order allowed them to deduct their attorney fees from the amount owed and clarified that they could not do so. The court also clarified that Akouri's claim against the IRS for lien priority had been dismissed with prejudice.

         In August 2017, Plaintiffs provided an updated accounting, but Plaintiffs did not deposit any funds. Instead Plaintiffs filed a Notice of Inability to Comply and have attached an affidavit from their Director of Finance stating that they “do not possess sufficient funds to comply” with the July 2017 order. (Dkt. # 152.) Plaintiffs request that the case be sent to facilitation to develop a payment plan. They are also in the process of preparing the “source data” underlying and supporting their accounting. They intend to submit the data under a stipulated protective order. Plaintiffs have not shared this information with Akouri because they contend Akouri is no longer a party to the case.

         Akouri has filed a Motion to Compel disclosure of the source data. (Dkt. #164.) The IRS has filed a Motion for Contempt and Sanctions based on Plaintiffs' failure to comply with the court's July 2017 order. (Dkt. # 155.)

         II. STANDARD

         A. ...

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