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AES-Apex Employer Services, Inc. v. Rotondo

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

August 29, 2019

AES-APEX EMPLOYER SERVICES, INC. and AES-APEX EMPLOYER SOLUTIONS, INC., Plaintiffs,
v.
DINO ROTONDO, RICHARD MARK, and UNITED STATES DEPARTMENT OF TREASURY INTERNAL REVENUE SERVICE, Defendants and AKOURI INVESTMENTS, LLC, Intervenor.

          OPINION AND ORDER GRANTING DEFENDANT IRS'S MOTION FOR DETERMINATION THAT DINO ROTONDO CONTINUES TO EARN CONSULTING FEES, GRANTING DEFENDANT IRS'S MOTION FOR DISBURSEMENT OF FUNDS, AND ORDERING FURTHER BRIEFING

          ROBERT H. CLELAND UNITED STATES DISTRICT JUDGE

         Before the court are two motions filed by Defendant Internal Revenue Service: a Motion for Determination that Dino Rotondo Continues to Earn Consulting Fees (ECF No. 179) and a Motion for Disbursement of Funds Held in the Court's Registry (ECF No. 183). Both have been thoroughly briefed. (ECF Nos. 180-81, 186-87, 189-90.) The court has reviewed the briefing and determines that a hearing is unnecessary. See E.D. Mich. LR 7.1(f)(2). For the reasons stated below, the court will grant both motions. The court will also order further briefing to help resolve an outstanding issue.

         I. BACKGROUND

         In 2013, AES[1] filed this interpleader action regarding consulting fees owed to Dino Rotondo. (ECF No. 1.) AES sought “permission to pay ‘Consulting Fees' which continue to accrue into the Court” to allow the various claimants to litigate, and the court to determine, their respective interests in the funds. (Id., PageID.12.) Among those asserting claims for the consulting fees was the IRS, based upon Rotondo's significant tax liabilities. Ultimately, the court granted summary judgment for the IRS on its claim for the consulting fees.

         The consulting fees arose pursuant to two related sets of agreements, the Asset Purchase Agreements and the Consulting Agreements. Under the Purchase Agreements, AES purchased certain customer accounts from various Rotondo-related entities (“Sellers”). Under the Consulting Agreements, a percentage of the gross profits received from these customer accounts was to be paid to Rotondo in the form of consulting fees.

         The Purchase Agreements contained an indemnification clause, which sets up a mechanism for the collection of attorneys' fees arising out of litigation related to the Purchase Agreements. The clause states that Rotondo “will pay [AES] on demand the full amount of any sum which [AES] may pay or become obligated to pay.” (ECF No. 178-1, PageID.5832.) The court explained in its September 23, 2016 Opinion that this clause operates such that “at the conclusion of this litigation, Plaintiffs will be able to make a demand on Rotondo for their attorneys' fees in this matter and Rotondo will have the opportunity to satisfy the demand.” (ECF No. 135, PageID.4840.)

         The indemnification clause also contains an Offset Provision. In the September 2016 Opinion, the court interpreted the Offset Provision as operating only with respect to costs and fees incurred to enforce the indemnification provision. “[F]or example, if Rotondo refuses to satisfy the demand and Plaintiffs incur costs attempting to collect fees, then any subsequent costs incurred in that effort, after a demand is made and rejected or goes unsatisfied, may be deducted from the fees owed to Rotondo in the future.” (Id.) Thus, the court held that AES was “entitled to attorneys' fees arising from this litigation, but [it] may not deduct those fees as an offset against the consulting fees owed to Rotondo.” (Id., PageID.4841.) It was further noted by the court “that this means that the full value of the consulting fees are owed to Rotondo (and, in turn, to the IRS by way of its tax lien). The Offset Provision has not yet been triggered and Plaintiffs will have to seek attorneys' fees by way of the demand process explained above, and then later may be entitled to offset collection costs from future consulting fees owed to Rotondo.” (Id. n.1.)

         Consequently, AES was ordered to provide an accounting of the consulting fees accrued to date and deposit them with the court without deducting any attorneys' fees. (See ECF No. 149, “the July 2017 Order.”) AES eventually did so pursuant to a stipulated order in May 2018, depositing with the court a total of $223, 995.09, which represented the consulting fees owed to Rotondo for the periods prior to July 31, 2017. (ECF No. 173, PageID.5811.) The order explained that this deposit was without prejudice to AES's appeal of the court's July 2017 Order and that the parties disputed whether AES owed any funds for the periods after July 31, 2017. (Id.) AES appealed the court's July 2017 order. (ECF No. 160.)

         While the appeal was pending, the parties continued to litigate whether Rotondo had accrued any consulting fees since July 31, 2017. (ECF No. 175.) The issue identified by the parties was whether “[AES's] terminations of Defendant Rotondo's consulting agreements were valid terminations or, alternatively, were breaches of the agreements.” (Id., PageID.5814.) To resolve this question, the parties agreed that the IRS would “file a motion for partial judgment on a stipulated factual record following targeted and limited discovery into [AES's] bases for termination of the agreements.” (Id., PageID.5815.) A stipulated record was filed on September 4, 2018, which the parties agreed “constitutes a complete stipulated factual record regarding the dispute over whether Defendant Rotondo has accrued any consulting fees since July 31, 2017, except as set forth in paragraph 18 below.”[2] (ECF No. 178, PageID.5822.) This was followed by the instant Motion for Determination that Dino Rotondo Continues to Earn Consulting Fees. (ECF No. 179.)

         The Sixth Circuit issued an opinion on May 17, 2019, affirming that “AES owes Rotondo the full amount of the Consulting Fees, without deductions.” (ECF No. 182, PageID.5995.) Although the Sixth Circuit concluded that “[t]he district court properly interpreted the agreements between AES and Rotondo [and] properly granted summary judgment in favor of the IRS's claim for the Consulting Fees, ” it interpreted the scope of the Offset Provision more broadly than this court had. (Id., PageID.6000.) This court found that “[t]he Offset Provision only operates with respect to costs and fees incurred to enforce the indemnification provision.” (ECF No. 135, PageID.4840.) The Sixth Circuit, however, found that “the Offset Provision is best read as referring to both the costs of enforcing the Indemnification Provision and the total costs that could be indemnified.” (ECF No. 182, PageID.5995.)

         Subsequently, the IRS filed the present Motion for Distribution of Monies Currently Held in the Court's Registry, Consistent with the Sixth Circuit Decision, and Request for Status Conference Regarding the Additional Disputed Funds. (ECF No. 183.) The court held a status conference with counsel on June 10, 2019. At that time, it appeared that the disbursement of the funds was not disputed. AES filed a response shortly thereafter, though, seeking a limitation on the court's release of the funds to the IRS. (ECF No. 186.) Specifically, AES asked that the release of the escrow monies to the IRS be without prejudice to its rights to a refund should the court later find AES entitled to the funds. Regarding the additional disputed funds, the parties agreed to file supplemental briefing to clarify the effect of the Sixth Circuit's opinion on the motion concerning the accrual of consulting fees after July 31, 2019. (ECF Nos. 185, 189-90.)

         II. DISCUSSION

         A. Motion for Determination that Rotondo Continues to Earn Consulting Fees

         The IRS's Motion for Determination that Rotondo Continues to Earn Consulting Fees concerns the accrual of consulting fees after July 31, 2017. As set forth in the stipulated record, AES sent Rotondo a letter on June 27, 2017[3] purporting to terminate the Consulting Agreements. (ECF No. 178, PageID.5825.) The parties dispute whether this termination was valid and whether Rotondo in fact breached the Agreements. They stipulate that “[t]he letter sets out the complete basis for Mr. Rotondo's alleged breach of the Purchase Agreement and Plaintiff's complete basis for terminating the Consulting Agreements based on facts known to Plaintiffs as of the date of the letter.” (Id.)

         The letter specifies two bases for Rotondo's alleged breach of the Purchase Agreements and AES's resulting termination of the Consulting Agreements. AES's response raises another argument, that Rotondo breached the Consulting Agreements by ceasing to provide consulting services. (ECF No. 180, PageID.5954.) The IRS moves the court to hold the termination of the agreements invalid and order the consulting fees accrued after July 31, 2017 be deposited with the court. (ECF No. 179, PageID.5939.) The court will address each of AES's stated bases for the termination of the agreements and the parties' arguments regarding them in turn.

         1. Failure to Transfer Customer Accounts Free and Clear of All Liens and Claims

         The first basis for termination AES specifies is rooted in the representation and warranties of the Purchase Agreement providing that the customer accounts would be transferred to AES “free and clear of all liens and claims” and that “all federal, state, municipal and other taxes that encumber or pose a threat of encumbering title to those Assets will have been satisfied or discharged to [AES's] satisfaction.” (ECF No. 178-9, PageID.5919.) On August 12, 2013, Akouri Investments, LLC brought claims against Rotondo, Sellers, AES, and others in state court seeking to void the sale of the assets pursuant to the Purchase Agreements and obtain a finding that the sale of the customer accounts to AES was a fraudulent conveyance. (ECF 178, PageID.5823-24.) AES contends that these claims asserted against it by Akouri in state court and the claims made by the IRS related to this litigation constitute material breaches of the agreement, as did the failure to disclose the existence, nature, and extent of these claims. Because “each of the Consulting Agreements provided for automatic termination ‘upon Consultant's material breach of the Purchase ...


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