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Charles Schwab & Co., Inc. v. WS Wealth Management, LLC

United States District Court, E.D. Virginia, Alexandria Division

December 2, 2016

CHARLES SCHWAB & CO., INC., Plaintiff,
WS WEALTH MANAGEMENT, LLC, et al., Defendants.


          Anthony J. Trenga, United States District Judge

         Plaintiff Charles Schwab & Co. (“Schwab”) seeks a judgment against the Defendants based on a judgment it previously obtained through an arbitration award against Bluemont Capital Advisors, L.L.C. (“Bluemont”). Schwab claims in that regard that Defendant WS Wealth Management, L.L.C. (“WS Wealth”), whose members are Defendants Jonathan David Wagner (“Wagner”) and Mark Stys (“Stys”), is a mere continuation of Bluemont. Bluemont's members were Wagner, Stys and Stys' wife, Carolyn Stys (collectively, the “individual Defendants”). Schwab also claims that the individual Defendants, while acting as members or managers of Bluemont, breached their obligations to Schwab as a creditor and otherwise acted unlawfully when they distributed certain payments to themselves during Bluemont's winding down and dissolution after Bluemont had been rendered insolvent as a result of an arbitration award against it and a subsequent judgment of this Court enforcing that arbitration award. According to Schwab, these individual Defendants then orchestrated the creation of WS Wealth and the transfer of nearly all of Bluemont's clients to WS Wealth in order to avoid payment of Schwab's judgment against Bluemont. More specifically, Schwab asserts claims for (1) successor liability against WS Wealth (Count I), (2) fraud against WS Wealth (Count II); (3) conspiracy against WS Wealth (Count III); (4) breach of fiduciary duty against Wagner and Stys (Count IV); (5) aiding and abetting breach of fiduciary against Carolyn Stys (Count V); and (6) imposition of a trust or equitable lien on all monies paid to the individual Defendants during the period of Bluemont's insolvency (Count VI).[1]

         Following the completion of discovery, the parties each filed a motion for summary judgment as to all counts [Doc. Nos. 39 and 46]. On October 7, 2016, the Court held a hearing on those motions, following which the Court took both motions under advisement. For the reasons stated herein, the Court concludes as a matter of law, based on undisputed facts, that (1) WS Wealth is a mere continuation of Bluemont, created so as to avoid Schwab's judgment against Bluemont; (2) Schwab's successor liability claim against WS Wealth is not barred by the applicable statute of limitations; (3) Schwab's conspiracy claim against WS Wealth is barred by the intra-corporate/entity doctrine; (4) Defendant WS Wealth did not engage in actionable fraud; and (5) the individual Defendants did not breach any duties or obligations to Schwab as a creditor in their capacity as managers and members of Bluemont. Based on these conclusions, the parties' cross-motions for summary judgment will be granted in part and denied in part. Schwab's motion is GRANTED as to Count I of the Complaint and otherwise DENIED. Defendants' motion is GRANTED as to Counts II, III, IV, V, and VI and otherwise DENIED.


         Unless otherwise stated herein, the following facts are undisputed:

         Bluemont operated as a registered investment advisory firm (“RIA”), which provided investment advice to retail clients in exchange for fees. Because Bluemont was not a registered broker-dealer, it was prohibited, however, from taking custody of client assets. Instead, those assets were held by Schwab, which is a registered broker-dealer authorized by the Financial Industry Regulation Authority (“FINRA”) to take custody of client assets and provide a variety of investment services. Bluemont maintained a contractual relationship with Schwab in order to provide those custodial and trading services to Bluemont's clients under the Schwab “platform.” Under this arrangement, Bluemont advised its clients and managed their stock portfolios, while those clients' assets were held by Schwab.

         Bluemont was also a signatory to the “Broker Protocol, ” a standard, industry-wide agreement pursuant to which brokerage houses agree that their individual investment advisors are permitted to identify clients they bring with them into those houses and then contact and/or solicit those clients if they eventually leave the brokerage house to pursue other employment. Schwab has never been a party to the Broker Protocol.

         From January 2010, when Wagner joined Bluemont, until Bluemont ceased operations in October 2013, the sole members of Bluemont were Stys, Carolyn Stys and Wagner. Each of these individual Defendants had an ownership agreement and a compensation agreement with Bluemont. All compensation agreements were dated October 15, 2011 and were in effect when the events pertaining to Schwab's claims took place. The Styses' compensation agreements entitled them to receive monthly compensation “based on the quarterly revenues of the firm and paid in arrears for the previous quarter.” Defendants' Memorandum in Support of Defendants' Motion for Summary Judgment (“Defs.' Mem. Supp. Defs.' Mot.”), Ex. 4 at 2-3. Additionally, the Styses had a continuing entitlement to any unpaid amounts due to lack of “cash flows.” Id. Wagner's compensation scheme was different: he was entitled to forty percent of revenues generated from clients attributable to him, minus healthcare costs, to be paid monthly in arrears as well as three percent[2] of revenue generated for the previous year starting in the fourth quarter of 2011 and paid monthly in arrears. Id. at 4. In addition, each of these individual Defendants was entitled as an owner of the firm to an equity distribution equal to his or her ownership interest.[3] Id. at 2-4.

         On March 4, 2011, an investment advisor with Schwab named Michael Duprey (“Duprey”) resigned from Schwab and began employment with Bluemont. Defs.' Mem. Supp. Defs.' Mot. ¶ 5. Shortly thereafter, Schwab complained to Bluemont that Duprey was improperly soliciting Schwab's clients while at Bluemont, given that Schwab was not part of the Broker Protocol. On April 8, 2011, Schwab terminated its contract with Bluemont, and on April 13, 2011, Schwab notified Bluemont's clients it was servicing that Schwab's contract with Bluement was being terminated effective July 18, 2011. Schwab advised them to decide whether to remain with Schwab, independent of Bluemont, or transfer their accounts to a broker-dealer other than Schwab.

         In May 2011, Bluemont replaced its arrangement with Schwab with a similar contractual arrangement with Pershing Advisors Solutions, L.L.C. (“Pershing”). Between May and July 2011, all of Wagner's and Stys' clients and all but two of Duprey's clients made the decision to transfer their accounts to the Pershing platform and remain with Bluemont.

         In June 2012, Schwab filed a U5 Separation Disclosure Form with FINRA, thereby beginning arbitration proceeding against Bluemont.[4] On February 19, 2013, Schwab obtained an arbitration award against Bluemont in the amount of $311, 294.50. On July 11, 2013, this Court affirmed the arbitration award and entered judgment accordingly in favor of Schwab and against Bluemont.[5] See Charles Schwab & Co. v. Duprey, Civil Case No. 1:11-cv-427-AJT-TCB (E.D. Va. July 11, 2013) (consolidated with Bluemont Capital Advisors, LLC v. Charles Schwab & Co., Civil Case No. 1:13-cv-0380-AJT-TCB). Id. ¶ 9.[6] As a result of the arbitration award and this Court's judgment, Bluemont was rendered insolvent on February 20, 2013, and Schwab has been a creditor of Bluemont continuously since February 20, 2013.[7] From January 1, 2013 through July 2, 2013, Bluemont distributed to the individual Defendants a total of $290, 050 for amounts due and owing under their compensation agreements.[8]

         On April 29, 2013, Carolyn Stys formed an entity known as Integrated Analytics, which leased the same space that Bluemont occupied, and simultaneously continued to operate Bluemont as it wound down its operations. Defs.' Mem. Supp. Defs.' Mot. ¶ 16.

         On May 28, 2013, Mark Stys and Wagner formed WS Wealth, and in July 2013, WS Wealth joined the Broker Protocol. On July 2, 2013, Wagner and Mark Stys resigned from Bluemont, identified their respective clients, and became the sole owners of WS Wealth. Id. ¶ 14. As of July 2013, Bluemont managed $106 million in client funds, with a total of fifty-six clients, all but three of whom transferred their accounts totaling $91 million in investments to WS Wealth.

         Wagner and Mark Stys initially operated WS Wealth out of their respective homes from July 2013 until October 2013. In October 2013, Integrated Analytics, through Carolyn Stys, purchased the furniture, fixtures, and equipment of Bluemont and subsequently sold them to WS Wealth. Integrated Analytics also leased the same space that Bluemont had occupied and then subleased that space to WS Wealth, pursuant to an oral agreement. Therefore, beginning in October 2011, Bluemont, Integrated Analytics, WS Wealth, Stys, and Wagner all worked out of the same space that was previously used exclusively by Bluemont. In October 2013, Bluemont ceased operations, and Andrew Casteel, its remaining Vice President of Wealth Management, moved to WS Wealth.

         On February 3, 2014, Carolyn Stys, acting as an authorized individual on behalf of Bluemont as a debtor, filed a voluntary petition for bankruptcy protection under Chapter Seven of the Bankruptcy Code. In re Bluemont Capital Advisors, LLC, Case No. 14-10397-RGM (Bankr. E.D. Va. Jan. 27, 2016). The 2014 bankruptcy was closed on January 27, 2016 with no distribution to creditors based on a finding that no property was available for distribution. Id., Doc. Nos. 48, 51.


         Under Federal Rule of Civil Procedure 56, summary judgment is appropriate only if the record shows that “there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Evans v. Techs. Apps. & Serv. Co., 80 F.3d 954, 958-59 (4th Cir. 1996).

         The party seeking summary judgment has the initial burden to show the absence of a material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). A genuine issue of material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248. Once a motion for summary judgment is properly made and supported, the opposing party has the burden of showing that a genuine dispute exists. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). To defeat a properly supported motion for summary judgment, the non-moving party “must set forth specific facts showing that there is a genuine issue for trial.” Anderson, 477 U.S. at 247-48 (“[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.”). Whether a fact is considered “material” is determined by the substantive law, and “[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Id. at 248. The facts shall be viewed, and all reasonable inferences drawn, in the light most favorable to the non-moving party. Id. at 255; see also Lettieri v. Equant Inc., 478 F.3d 640, 642 (4th Cir. 2007).

         III. ANALYSIS

         A. Count I: Successor Liability

         Under Virginia law, [9] a company that purchases or receives the assets of another company generally is not liable for the debts and liabilities of the company selling those assets. See Kaiser Found. Health Plan of the Mid-Atlantic States v. Clary & Moore, P.C., 123 F.3d 201, 204 (4th Cir. 1997); In re SunSport, Inc., 260 B.R. 88, 104 (Bankr. E.D. Va. 2000). However, there are four notable exceptions to this rule that have been recognized under Virginia law:

In order to hold a purchasing corporation liable for the obligations of the selling corporation, it must appear that (1) the purchasing corporation expressly or impliedly agreed to assume such liabilities, (2) the circumstances surrounding the transaction warrant a finding that there was a consolidation or de facto merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is fraudulent in fact.

Kaiser, F.3d. at 204. See also Harris v. T.I., Inc., 413 S.E.2d 605, 609 (Va. 1992); In re SunSport, Inc., 260 B.R. at 104. Plaintiff alleges that exceptions three (mere continuation) and four (de facto merger) apply to this case.[10]

         As an initial matter, the Defendants contend that the exceptions to the ban on successor liability apply only to sales transactions, relying principally on Harris v. T.I., Inc., 413 S.E.2d 605, 609 (Va. 1992). Harris was decided within the context of a sales transaction, but nothing in the Harris court's reasoning suggests that the Supreme Court of Virginia intended to limit its holding to a sales transaction; and other courts have concluded that under Virginia law, successor liability does extend outside of the context of a sales transaction. See, e.g., Kaiser, F.3d. at 204; In re SunSport, Inc., 260 B.R. at 104. Although the Supreme Court of Virginia has not explicitly decided that issue, the Court concludes pursuant to its obligations under Erie, 304 U.S. 64, that the Supreme Court of Virginia would decide that the exceptions identified in Harris apply outside the sales context and to limited liability companies.

         1. Mere Continuation

         Courts have considered the mere continuation exception as the most compelling basis on which to impose successor liability. See Kaiser, 123 F.3d at 205. To determine whether there is a sufficient continuity between two companies, courts have typically considered (1) whether and to what extent there is an identity of ownership (the most important factor), (2) how the nature and scope of two businesses compare; (3) whether there has been an asset transfer for less than adequate consideration; (4) whether two separate entities still remain after the transaction; (5) whether the new company continues in the same trappings as the old company, such as the same address, the same physical space and the same phone numbers; and (6) how the two companies' assets compare. See Id. at 205. Overall, “courts must not elevate form over substance when addressing the issue of successor liability.” Id. (citation omitted) (internal quotation marks omitted).

         Here, once Schwab obtained an arbitration award and judgment against Bluemont, which was rendered insolvent as a result, Bluemont's members clearly engaged in a series of transactions designed to thwart Schwab's ability to collect its judgment from Bluemont. Bluemont began winding down its business activities, Stys and Wagner formed WS Wealth and took steps to have all of Bluemont's customers transfer their business to WS Wealth, Bluemont was rendered unable to continue servicing those customers, WS Wealth acquired the same space as that occupied by Bluemont and some of its equipment, and shortly thereafter, Bluemont ceased to operate entirely. While these events occurred in steps and with some involvement of Integrated Analytics, which was a separate legal entity from Bluemont, that intermediary was controlled by the majority member of Bluement, Carolyn Stys. In short, the individual Defendants acted according to a pre-arranged plan to dismantle Bluemont as an operating entity and continue Bluemont's business through WS Wealth, created for the purpose of continuing the same business as Bluemont, with effectively the same members and employees servicing the same clients out of the same office through the same third-party broker-dealer: Pershing. As a practical matter, and certainly from the clients' perspective, little, if anything, had changed other than that the name of Bluemont had changed to WS Wealth. While the formal ownership and management structure as between Bluemont and WS Wealth was not identical, the only real difference was that Mark Stys alone, rather than Mark and his wife, Carolyn, owned a membership interest along with Wagner in WS Wealth, but for the purpose of the successor liability analysis, the interests of the Styses collectively must be considered in evaluating an identity of ownership as between Bluemont and WS Wealth.[11]

         Defendants also contend that there was not an identity of ownership because Carolyn Stys was the sole founder of Bluemont and served as its sole manager, chief administrative officer, and operating officer throughout its existence but had no role in WS Wealth. Whatever her initial role in Bluemont may have been, by the time WS Wealth was formed, the record is clear that all three, the Styses and Wagner, played management roles, to varying extents, with respect to Bluemont's cessation of business and WS Wealth's founding. Carolyn Stys' lack of formal involvement in WS Wealth, under the particular facts of this case, is immaterial for the same reasons that her lack of a formal ownership interest in WS Wealth is immaterial.

         The individual Defendants point to their clients' unqualified right to change investment advisors and their own rights to solicit Bluemont customers once they departed Bluemont under the Broker Protocol. For those reasons, they contend, Bluemont had no “assets” to transfer and in fact, did not transfer any “assets” to WS Wealth. But these contractual arrangements do not insulate WS Wealth from the consequences that flow from the exercise of those rights in a way that resulted in WS Wealth's simply continuing Bluemont's business under a different name. Likewise, that WS Wealth expanded upon the services that Bluemont offered, which came to include a hedge fund and a small business development focus, does not change the fundamental character of WS Wealth as a mere continuation of Bluemont. Both companies were in the business of wealth management, and nearly all of the business performed by Bluemont is now being performed by WS Wealth for essentially the same client base.

         By way of summary, while the two companies did not have perfectly identical formal ownership and management structures and had different names, phone numbers, websites, and scopes of services, both were effectively operating the same type of business. Only one company existed before and after the “restructuring, ” and each company serviced essentially the same client base through the same owners or an owner's spouse. Furthermore, each company used the same employees and platform, while occupying the same physical space. Upon weighing the factors discussed in Harris, Kaiser, In re SunSport, and Crawford, the Court finds and concludes as a matter of law, based on the undisputed facts, that WS Wealth is a mere continuation of Bluemont and therefore is a successor to Bluemont, responsible for Schwab's judgment against Bluemont.

         2. De Facto ...

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