Total Asset Recovery Services LLC v. Huddleston Capital Partners VIII LLC

Background

Total Asset Recovery Services (TARS) is a Michigan limited liability company formed to act as a relator in whistleblower lawsuits seeking recovery of unremitted life-insurance proceeds. Its members were Gregory Lynam, Scott Knott, Thomas Prescott, Steven Lynam, and RZE Holdings. The Ferraro Law Firm, a Florida professional association, represented TARS under a contingency contract in a New York whistleblower action.

TARS, its members, and G3 Analytics entered into a nonrecourse loan and security agreement with Hamilton Capital VIII LLC in 2014. The loan was tied to proceeds from the whistleblower action. The opinion recounts several earlier disputes involving Elder, G3, Scrantom, and the Ferraro Firm, including an arbitration and a Michigan lawsuit. The Michigan lawsuit was later dismissed with prejudice.

In 2018, Elder, G3, and Scrantom formed Huddleston. After a receiver sought permission to market the loan as an asset, TARS said it wanted to purchase the loan itself. The loan was later sold to Huddleston for $13,100. In February 2021, Huddleston demanded more than $64 million from TARS and demanded additional payment from certain individual plaintiffs and RZE Holdings. Huddleston also instructed the Ferraro Firm to stop working on the whistleblower action and sought to replace the Ferraro Firm as counsel.

The plaintiffs sought declaratory, injunctive, and monetary relief. They asserted claims including tortious interference with prospective business relations, tortious interference with contractual relations, breach of fiduciary duty, and civil conspiracy. The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because Huddleston had already answered, the court treated its motion as one for judgment on the pleadings under Rule 12(c).

Tortious Interference with Prospective Business Relations

The court held that the plaintiffs adequately pleaded this claim against Huddleston, Elder, and G3. Under New York law, the plaintiffs had to allege a business relationship with a third party, the defendants’ knowledge and intentional interference, malicious or otherwise improper conduct, and injury caused by the interference.

The court found sufficient allegations concerning the relationship between TARS and the Ferraro Firm, the defendants’ knowledge of that relationship, and efforts to end the Ferraro Firm’s representation. The alleged conduct included earlier lawsuits and arbitration proceedings, formation of Huddleston to pursue the loan, demands that the Ferraro Firm stop its work, and a motion seeking to act for TARS and remove the Ferraro Firm. The court also found that the alleged litigation, payment demands, and effort to replace counsel plausibly alleged improper conduct and injury. The court stated that the amount of damages could be determined at trial.

The court dismissed this claim against Cooper. It found that the complaint’s allegations that Cooper knew about the attorney-client relationship and intentionally interfered were conclusory. The allegations that he signed the assignment and was used to conceal Huddleston’s role did not adequately show that Cooper himself knew about or intentionally interfered with the relationship, or that he acted maliciously.

Tortious Interference with Contractual Relations

The court allowed the contractual-interference claims against Huddleston, Elder, and G3 to proceed. Although the plaintiffs acknowledged that the contingency contract could be terminated at will and did not allege an actual breach, the court explained that such an arrangement is treated as a prospective contractual relationship. The plaintiffs therefore needed to allege malice or wrongful conduct, which the court found they had done.

The court dismissed the contractual-interference claim against Cooper for failure to plead malice or wrongful conduct. The opinion’s conclusion states that Count X and Count XII, solely as to Cooper, were dismissed.

Breach of Fiduciary Duty

The court dismissed the breach-of-fiduciary-duty claims against Elder and G3. TARS based those claims on an alleged joint venture involving the consulting arrangement. The court found that the complaint did not adequately allege a joint venture because the consulting agreement described G3 as an independent contractor, the plaintiffs described Elder as a consultant, and the complaint did not allege that Elder or G3 had joint control or decision-making authority.

The court also stated that the Ferraro Firm could not bring a fiduciary-duty claim based on the alleged joint venture because it was not a party to the consulting agreement and the complaint did not allege that the Ferraro Firm formed a joint venture with any defendant.

Civil Conspiracy and Standing

The court allowed the civil-conspiracy claim against Huddleston, Elder, and G3 to proceed. It found that the plaintiffs adequately alleged an underlying tort, an agreement, acts advancing the alleged agreement, intentional participation, and resulting injury. The court dismissed the conspiracy claim against Cooper because no underlying tort was adequately alleged against him.

The court rejected the defendants’ argument that TARS lacked constitutional standing. Taking the allegations as true, it found that TARS had alleged a real and immediate threat that its relationship with the Ferraro Firm would be terminated, frustrating TARS’s stated purpose of pursuing whistleblower actions.

The court did not decide the defendants’ argument that TARS lacked corporate authority to bring the lawsuit. It stated that this issue depended on factual disputes, including the validity of the assignment and whether an event of default had occurred.

Disposition

Cooper’s motion was granted. Huddleston’s motion was denied. G3 and Elder’s motion was denied in part and granted in part. The court dismissed Count X and Count XII solely as to Cooper, and dismissed Counts VI and VIII. The Clerk was directed to terminate the motions at ECF Nos. 72, 76, and 92. Judge Andrew L. Carter, Jr. signed the amended order on April 4, 2022.