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Rosania v. Group O, Inc.

United States District Court, D. Colorado

March 25, 2014

JOSEPH ROSANIA, as Chapter 7 Trustee for the Bankruptcy Estate of Springbok Services, Inc., Plaintiff,
GROUP O, INC., an Illinois corporation, and MURAD VELANI, an individual, Defendants.


BOYD N. BOLAND, Magistrate Judge.

This matter arises on Group O's Motion to Compel Production of Accounting Documents [Doc. # 58, filed 1/9/2014] (the "Motion to Compel"). I heard argument on the Motion to Compel on February 13, 2014, and took it under advisement. The Motion to Compel [Doc. # 58] is DENIED.

This action is brought by Joseph Rosania as Chapter 7 Trustee for the Bankruptcy Estate of Springbok Services, Inc. The Trustee asserts Springbok's claims against Group O and its president, Murad Velani.[1]

Group O alleges that it provides to its clients prepaid rebate and incentive card programs, as follows:

In general, the prepaid card programs are initiated when a client provides to Group O the names of individual customers to whom prepaid cards should be sent and in what amount the cards should be loaded. The Group O client pays Group O for the amounts to be loaded onto the cards, fees for the cards, and ancillary services. Group O provides the load funds and the names and amounts to a card supplier to prepare, authorize, and load the cards and send them directly to the clients' customers for personal use.

Amended Complaint [Doc. # 71] at ¶10.

On June 1, 2008, Springbok and Group O entered into the Springbok Services, Inc. Prepaid Services Agreement [Doc. # 3-1] (the "Agreement"). Under the Agreement, Springbok served as card supplier and processor for Group O from June 1, 2008, until the Agreement was terminated on December 30, 2009. Amended Complaint [Doc. # 71] at ¶¶11, 63. Springbok alleges that Group O breached the Agreement by terminating it early and based solely on Springbok's "precarious" financial condition. Id. at ¶¶48-57.

Group O, by contrast, asserts that it terminated the Agreement based on Springbok's "severely flawed" performance:

(i) Springbok failed to timely remit monies owed to Group O for "breakage" and "slippage" on the Qwest program, with such failures having grown in excess of 2.2 million dollars at the time of Springbok's bankruptcy; (ii) recurring Springbok system failures and downtime; (iii) numerous complaints from both AT&T and Qwest customers that when an activated card was being used at a merchant they were receiving insufficient fund responses, when the card should have had funds available; (iv) failures of the Springbok interactive voice response (IVR) system; and (v) extensive operations problems including inability to handle call volume, inaccurate funding of card values, and failure of cards to accept transactions.
On October 1, 2009, Group O received Springbok's August 14, 2009 Independent Auditor's Report prepared by Anton Collins Mitchell LLP for the period ended December 31, 2008. That audit stated the following problems:
"The Company receives customer prepayment in advance of the issuance of cards in connection with the Company's pre-paid card program. The Company utilizes customer prepayments to fund its ongoing operations. To the extent there was significant cancellation by customers, the Company would have to obtain additional funding to repay customer prepayments."
Until receipt of this audit report, Group O was unaware that Springbok was funding its operating deficits with customer deposits intended to fund the cards being issued by Springbok. The audited financial statement further revealed that Springbok had a cumulative operating deficit of $24, 924, 693, and as a result had a total stockholders' deficit (i.e., negative net worth) of $8, 889, 922. Given this shocking information, Group O took all appropriate steps to prevent Springbok's wrongful misuse of funds which Group O was paying to Springbok for the issuance of prepaid debit cards for Qwest and AT&T customers; nothing in the Agreement allowed Springbok to use such funds for Springbok's operating deficits, and Springbok breached the Agreement by so using such funds.

Scheduling Order [Doc. # 23] at pp. 4-5.

Group O served a subpoena on Springbok's accountants, Anton Collins Mitchell, commanding the production of "[a]ll communications (including email) exchanged between Springbok and Anton Collins Mitchell" and "[a]ll documents received from or provided to Anton Collins Mitchell... from Springbok" on or after January 1, 2008; and "all documents and communications (including email) in [Anton Collins Mitchell's] possession related to work undertaken by Anton Collins Mitchell that was done in the preparation of Springbok's Audited Financial Statements for the year ended December 31, 2008." Subpoena [Doc. # 58-2].

Many documents were produced in response to the commands of the subpoena. The Trustee has asserted the accountant-client privilege with respect to 22 documents, however. In connection with asserting the privilege, the Trustee prepared a Privilege Log listing nine categories of documents withheld; providing a summary of the subject matter of the withheld materials; identifying the author; and asserting the accountant-client privilege. All of the withheld documents are described as "[a]ccountant's working papers"; generally, the author is identified as Anton Collins Mitchell; and none of the withheld documents are identified by Bates number. Greater information is contained in the subject description, however, which includes the following:

Category 1: "ACM's responsibility in accordance with AU 341.02 and AU 341.05";
Category 2: "Summary of payment card network rules and regulations and BIN sponsor agreement requirements with respect to cardholder funds";
Category 3: "Audit planning memo re 12/31/2008 audit prepared for management, board of directors, and audit committee";
Category 4: "Note to audit file re SAS 112 and 114 letters to be provided to management";
Category 5: "Letter to Springbok management and board of directors re ...

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