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TransFirst, LLC v. Brown

United States District Court, D. Colorado

February 13, 2018



          RAYMOND P. MOORE, United States District Judge

         On July 27, 2017, plaintiff TransFirst, LLC (“plaintiff”) filed a Second Amended Complaint (“SAC”) against defendants Daniel Brown (“Brown”), David Grek (“Grek”), David Y. Reich (“Reich”), Veteran Toner Services, LLC (“VTS”), Brian Appelhans (“Appelhans”), and BA Brokerage, LLC (“BA”) (collectively, “defendants”), raising the following claims: (1) breach of contract; (2) restitution; (3) fraud/deceit; (4) aiding and abetting fraud/deceit; (5) civil theft; (6) aiding and abetting civil theft; (7) violation of the Colorado Organized Crime Control Act, Colo. Rev. Stat. § 18-17-101 et seq.; and (8) civil conspiracy. (ECF No. 102.)

         On August 14, 2017, defendant Reich filed a Motion to Dismiss Second Amended Complaint for Lack of Personal Jurisdiction (“Reich's motion”), pursuant to Fed.R.Civ.P. 12(b)(2) (“Rule 12(b)(2)”), on the ground that this Court lacks personal jurisdiction over Reich. (ECF No. 115.) On the same day, defendant Brown also filed a Motion to Dismiss Pursuant to Rule 12(b)(2), on the ground that this Court lacks personal jurisdiction over Brown (“Brown's motion”). (ECF No. 116.) Plaintiff then filed a Corrected Response in Opposition to both Reich's and Brown's motions (“the response”). (ECF No. 139.) Reich has filed a reply (ECF No. 146), but Brown has not.[1]

         I. Legal Standard

         When an evidentiary hearing has not been held, a “plaintiff must only make a prima facie showing of personal jurisdiction.” Melea, Ltd. v. Jawer SA, 511 F.3d 1060, 1065 (10th Cir. 2007). In that regard, all allegations in a complaint uncontradicted by a defendant's affidavits are accepted as true, and all factual disputes are resolved in the plaintiff's favor. The burden of proving jurisdiction is on the plaintiff. Id.

         II. Preliminary Matter

         Before the Court begins with the relevant jurisdictional facts, the Court addresses a matter that has some impact on the facts that will be considered for this purpose. Notably, the affidavits submitted by Reich. To cut short a story that is longer than it should be, it appears that Reich has, at the very least, some trouble with recalling the truth. For example, in the first iteration of an affidavit Reich submitted with a prior motion to dismiss (ECF No. 11-3), Reich stated that he had never been employed by VTS and had never been an officer or director of VTS (id. at ¶¶ 15-16). In subsequent versions of Reich's affidavit, those unequivocal statements were replaced with statements that Reich was never a paid employee of VTS and he did not believe that he acted with the authority of an officer or director for VTS. (See ECF No. 118-1 at ¶¶ 17, 29.) More recently, Reich has been forced to amend his affidavit again, this time to correct or clarify statements previously made about never signing checks for VTS and never manually entering credit transactions for VTS. (See ECF No. 157-1.) In light of Reich's deposition testimony (ECF No. 162-1), which resulted in the need to amend the affidavit, there may be further need to finesse Reich's statements.

         Put simply, the Court does not credit the statements in Reich's most recent affidavits that have been changed from previous versions of those statements. Factors to consider in this regard are whether the affiant was cross-examined during his earlier testimony, whether the affiant had access to pertinent evidence at the time, and whether the earlier testimony reflects confusion which the affidavit attempts to explain. Franks v. Nimmo, 796 F.2d 1230, 1237 (10th Cir. 1986). First, because this matter involves conflicting affidavits, whether Reich was previously cross-examined does not apply. Nonetheless, the purpose of that factor-that an affiant have an opportunity to clarify his deposition testimony-clearly weighs against Reich given that he had sole power and control over the words he used in his affidavits. Second, because the statements at issue involve Reich's conduct or role at VTS, he obviously had access to the pertinent information. Third, although Reich attempts to explain in his amendment that he could not recall certain facts (see ECF No. 157-1), the statements at issue in Reich's prior affidavits, unlike others, are unequivocal, using the word “never” to characterize Reich's conduct or role.

         The Court also does not credit Reich's statements that he cannot recall certain events or matters. In particular, the Court will not consider as disputing plaintiff's allegations Reich's statements that he cannot recall ever having heard of plaintiff or that plaintiff was processing VTS' credit card transactions. (See ECF No. 118-1 at ¶¶ 18-19.) Put simply, the failure to recall something does not contradict plaintiff's allegations. As a result, the Court will consider plaintiff's allegations as true with respect to those matters. See Melea, 511 F.3d at 1065.

         That being said, not all of the statements in the affidavit Reich submitted with the instant motion to dismiss (ECF No. 118-1) (“the Reich affidavit”) involve corrections of prior statements or non-contradictions. Most pertinently, the Court refers to Reich's statements that he was not aware of the existence or content of the application VTS submitted to plaintiff, the existence or content of any agreements between VTS and plaintiff, the location of plaintiff, and the location where VTS' credit card transactions would be processed. (Id. at ¶¶ 20-23.) Contrary to plaintiff's assertion, those statements are not vague or equivocal (see ECF No. 74 at 26-27), at least not in the manner that the Court reads the same, which is that Reich is stating that he has no knowledge of the relevant matters. See New Oxford American Dictionary 1878 (3d ed. 2010) (defining “unaware” as “having no knowledge of a situation or fact”). Whether plaintiff has presented conflicting evidence of Reich's knowledge on these matters will be discussed supra, but the statements will not be excluded merely because they exist in a document containing other statements that are sham or non-contradictory.

         III. Relevant Jurisdictional Facts

         Plaintiff is a Delaware limited liability company with its principal place of business in Broomfield, Colorado. (ECF No. 102 at ¶ 1.) Brown is a resident of Louisiana. (Id. at ¶ 2.) Reich is a resident of New York, and owns, inter alia, a New York property located at 5 Lemberg Court. (Id. at ¶ 4.) Reich operates D&R Toners, Inc. (“D&R”) and NY Toner & Supplies, Inc. (Id.) BA is an Illinois limited liability company organized by Appelhans. (Id. at ¶ 6.) VTS was organized in three states: in Illinois by Reich and Grek; in New York by Reich; and in California by Appelhans and Michael Mathison. (Id. at ¶ 7.) The version of VTS organized in New York was listed as conducting business at a residence titled in Reich. (Id. at ¶ 7(B).)

         VTS purported to sell toner cartridges and related products throughout the United States. (Id. at ¶ 16.) Brown was the Chief Financial Officer, bookkeeper, and registered agent of VTS. (ECF No. 62-1 at ¶ 16.) Reich was the Chief Executive Officer/manager of VTS. (ECF No. 102 at ¶ 9; ECF No. 74-14 at 3.)

         Plaintiff is in the business of processing and settling card transactions on behalf of merchants. (ECF No. 102 at ¶ 13.) In performing these functions, plaintiff receives and captures card transactions initiated by merchants, routes them to the appropriate card issuing bank, settles the transactions, collects the resulting credits, and then forwards the credit to the merchant's account. (Id.) Regulations issued by the card networks, such as VISA and MasterCard, provide that a card holder is entitled under certain circumstances to charge back a transaction between the card holder and a merchant. (Id. at ¶ 14.) Such charge-back rights may be exercised up to 180 days after the date of the card transaction. As the processor of a transaction that has been charged back, plaintiff is required to re-credit the issuing bank for the card holder's account, and must look to the merchant to recover the re-credited amount. (Id.)

         In November 2013, Brown submitted an Application for Merchant Card Processing (“the application”) to plaintiff at its offices in Colorado, naming VTS as the prospective merchant. (ECF No. 102 at ¶ 22.) The application stated that plaintiff was located in Broomfield, Colorado. (Id.) By signing the application, Brown affirmed its accuracy and completeness, and acknowledged that he had read and agreed to the Merchant Card Processing Agreement (“the MCPA”). (ECF No. 74-2 at 6.) The MCPA provided that plaintiff's offer to enter into the same was made in Colorado, it was to be performed in Colorado, it was governed by Colorado law, and it was subject to arbitration, or the jurisdiction of courts, in Colorado. (ECF No. 74-3 at ¶¶ 19, 20.2.) Pursuant to the MCPA, VTS was required to reimburse plaintiff for any charge back, and granted plaintiff a security interest in each card transaction and its proceeds. (Id. at ¶¶ 14.1(a), 15.)

         Plaintiff accepted and approved the application. (Id. at ¶ 27.) In December 2013, plaintiff began processing card transactions, and settled the resulting proceeds to an account in VTS' name that was controlled by Grek, Appelhans, and Reich (“the account”).[2] (Id. at ¶ 28.) Brown had access to and monitored the account on a near daily basis, and initiated and/or ordered payments and transfers from the account. (Id.) From December 2013 to August 2016, plaintiff mailed monthly statements to Grek. (Id. at ¶ 29.) Brown requested additional hard copy statements from plaintiff. All of the statements showed plaintiff's address in Broomfield, Colorado. (Id.)

         From December 2013 to July 2015, VTS initiated and presented a total of 1, 490 card transactions to plaintiff, totaling more than $15 million. (Id. at ¶ 30.) Each of these transactions was manually entered at a computer terminal by Brown, Appelhans, Grek, or Reich, or a person, most often Brigitte Weber (“Weber”), who was granted access to the terminal by them and acting at their direction. (Id. at ¶ 31; ECF No. 162-1 at 47:16-50:18.) Within one or two days after plaintiff began processing card transactions, Reich presented plaintiff with a charge on his personal card in the amount of $20, 000. (Id. at ¶ 32.) One of plaintiff's employees advised Reich and Weber that personal charges were not permitted. Reich referred the employee to Brown, who emailed a purported invoice to the employee representing that the charge was for inventory. In reliance on the invoice, plaintiff allowed the transaction to be processed. Reich subsequently initiated and presented additional personal card transactions to plaintiff through VTS, each referencing or accompanied by a fabricated invoice.[3] One of those charges, in the amount of $24, 600, was charged back and forms part of plaintiff's loss. (Id.) Thereafter, Appelhans, Brown, Reich, and Grek agreed that all card transactions presented to plaintiff for the purpose of producing cash deposits would be accompanied by an invoice No. so as to disguise the transaction as a product sale. (Id. at ¶ 33.)

         Plaintiff's personnel in Colorado received multiple communications (at least nine) from Brown by email and telephone. (Id. at ¶ 34.) In at least four of those communications, Brown supplied plaintiff with fabricated invoices used to disguise card transactions. Occasional communications were also received from Reich, or a person, normally Weber, calling on his behalf. (Id.)

         In late 2015, volume and average ticket amount of card transactions began to increase. (Id. at ¶ 35.) By February 2016, volume exceeded $750, 000. At this time, Brown contacted plaintiff to request that the merchant address for VTS be changed to a P.O. box. Brown requested this change because he, Grek, Appelhans, and Reich had determined to discontinue or phase out legitimate business activity by VTS, and to use VTS' access to plaintiff's card processing as a vehicle for the presentation and settlement of card transactions designed solely to produce cash deposits to the account. (Id.)[4]

         Beginning in February 2016 and continuing into early July 2016, 251 card transactions, totaling approximately $5.4 million (“the Subject Transactions”), were submitted by defendants for processing and settlement by plaintiff. (Id. at ¶ 36.) These transactions were settled by plaintiff through deposit of the proceeds to the account. (Id.)

         On August 1, 2016, defendants abruptly announced that VTS had discontinued operation by posting a notice on VTS' website. (Id. at ¶ 39.) None of the defendants contacted plaintiff about VTS' cessation of operations. (Id.) On August 11, 2016, plaintiff began to receive charge backs related to the Subject Transactions. (Id. at ¶ 40.) As of the date of the SAC, plaintiff has received approximately $1.831 million in charge backs (“the Charge Back Transactions”). (Id.) Each Charge Back Transaction was (a) initiated and presented to plaintiff as a transaction for the purchase of goods sold by VTS for immediate delivery and referencing a purported invoice by number, (b) not for the sale of any goods or merchandise, but solely to produce cash deposits to the account, and (c) designed and intended to be charged back by the card holder, but only after plaintiff had processed the transaction and forwarded the related proceeds to the account. (Id. at ¶ 41.) The proceeds were then removed from the account by Grek, Appelhans, and Reich, and diverted and used for personal and other purposes. (Id.) The Charge Back Transactions were accompanied by correspondence, purportedly from the card holders, claiming that the subject goods had not been delivered as promised. (Id. at ¶ 43.) This correspondence was written by the same person, containing identical language and grammatical errors. (Id.) Sixty percent of the Charge Back Transactions are comprised of large, and in many cases even dollar, transactions initiated by Reich, his wife, and persons located or having property within a one mile radius of the 5 Lemberg Court address used by Reich and Grek. (Id. at ¶ 44.)

         Plaintiff learned of VTS' cessation of operations on August 11, 2016. (Id. at ¶ 47.) By that time, all proceeds related to the Subject Transactions had been removed from the account. All attempts by plaintiff to recover proceeds related to the Charge Back Transactions by debiting the account have been dishonored for insufficient funds. As a result, not a single Charge Back Transaction has been reimbursed, and plaintiff has incurred losses of more than $1.831 million. All such losses have occurred in Colorado. (Id.)

         From and after 2012, hundreds of fund transfers, totaling millions, were made without supporting documentation between and among accounts in the name of VTS, BA (which were controlled by Appelhans), and D&R (which were controlled by Reich). (ECF No. 102 at ¶ 10(A).) From 2012, credit cards held by Reich and Grek personally were used to pay expenses purportedly incurred by or for VTS in California, Illinois, New York, and elsewhere. (Id. at ¶ 10(B).) In 2012 and thereafter, card transactions purportedly representing VTS sales were processed and settled by Reich under the name of D&R. (Id. at ¶ 10(C).) In 2013 and 2014, D&R was used as a front and substitute for VTS in efforts to continue business with the State of California. (Id. at ¶ 10(D).)

         From January 2016 to August 2016, approximately $6, 924, 385 was credited to the account. (Id. at ¶ 49.) Of that amount, approximately $5, 269, 733 was transferred to or for the benefit of BA. Over $810, 000 was transferred to or for the benefit of Appelhans, his wife, Grek and members of his family, Reich, his wife, and others associated with Grek, Reich, and Appelhans. (Id.) Over ...

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