Joseph Markland v. Melissa Davis, CPA

• Court: Court of Appeals for the Eleventh Circuit
• Decided: November 5, 2021
• Docket: 21-11364
• Status: Unpublished

Opinion

USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 1 of 10

[DO NOT PUBLISH] In the United States Court of Appeals For the Eleventh Circuit

____________________

No. 21-11364 Non-Argument Calendar ____________________

In Re: CENTRO GROUP, LLC PROHCM HOLDINGS, INC., Debtors. ___________________________________________________ JOSEPH MARKLAND, Plaintiff-Appellant, versus MELISSA DAVIS, CPA, as Liquidating Trustee of the bankruptcy estates of Centro Group, LLC and ProHCM Holdings, Inc., CREDITORS COMMITTEE, USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 2 of 10

2 Opinion of the Court 21-11364

LEYVA CAPITAL, LLC, GIRALDO LEYVA, JR., Defendants-Appellees. ____________________

Appeal from the United States District Court for the Southern District of Florida D.C. Docket No. 1:20-cv-20610-KMW, Bkcy No. 18-bk-23155-AJC ____________________

Before WILSON, JORDAN, and BRANCH, Circuit Judges. PER CURIAM: Appellant Joseph Markland 1 appeals the district court’s affir- mance of the bankruptcy court’s order. Markland argues that the bankruptcy court failed to apply the correct legal framework when assessing whether to approve a provision of a settlement agree- ment enjoining claims against third parties related to or arising out of the bankruptcy action. Appellees, several parties in favor of the settlement agreement, respond that the bankruptcy court’s order is factually and legally correct. Because the bankruptcy court did

1Counsel represented Markland at both the bankruptcy and the district court proceedings. He files this appeal pro se. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 3 of 10

21-11364 Opinion of the Court 3

not abuse its discretion in approving the settlement agreement, we affirm. I. On April 25, 2018, ProHCM Holdings, Inc. (ProHCM) and Centro Group, LLC (Centro) entered into a merger agreement.2 Both companies provided businesses with payroll and human re- source management services. Centro specifically processed payroll for its clients by withdrawing money from its clients’ bank accounts and disbursing funds to its clients’ employees and taxing authori- ties. After completion of the merger, ProHCM discovered through a whistleblower that Centro had been misappropriating client funds. An investigation revealed that Centro officers and di- rectors had misappropriated money from its clients’ escrow ac- counts which held payroll taxes resulting in over 1.7 million dollars in tax liability—excluding penalties and interest. The Centro offic- ers and directors responsible for the misappropriation of its clients’ funds likely included the former CEO of Centro, Christopher Green, as well as former Centro directors Giraldo Leyva, Jr., Jeffrey Hicks, Michael Moran, and Richard Kahle. Markland, CEO of Pro- HCM pre-merger, subsequently replaced Green as the CEO of

2 Centro became the operating entity and a wholly owned subsidiary of Pro- HCM. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 4 of 10

4 Opinion of the Court 21-11364

both companies shortly before the companies were forced to file for Chapter 11 bankruptcy on October 23, 2018. During the bankruptcy proceedings, the trustee assigned to the case appointed a committee of creditors (the Committee) hold- ing unsecured claims. Centro and ProHCM initially reached an agreement to address the allocation of their respective assets and liabilities, and the bankruptcy court approved the agreement. Thereafter, Centro and ProHCM determined that they could assert claims against several third parties. Following that determination, Centro, ProHCM, and the Committee reached a proposed settle- ment with the third parties, including the Centro officers and direc- tors likely responsible for the misappropriation of clients’ funds. As part of the proposed settlement, the parties agreed to a provision—known as a Bar Order—that released third parties from any claims directly or indirectly related to Centro’s and ProHCM’s respective bankruptcies. Markland, now former CEO of ProHCM and the largest holder of the company’s preferred shares, under- standably objected to the Bar Order. The basis of his objection was that the Bar Order would prevent him from asserting claims against potentially culpable third parties. 3 Markland was the only party to object to the proposed settlement. The bankruptcy court ultimately approved the proposed set- tlement containing the Bar Order over Markland’s objections in an

3It should be noted that Markland has never filed a lawsuit against any of the third parties. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 5 of 10

21-11364 Opinion of the Court 5

amended and supplemental order.4 In doing so, the bankruptcy court applied the factors from In re Munford, 97 F.3d 449 (11th Cir. 1996) to specifically assess whether to approve the provision con- taining the Bar Order. Markland appealed to the district court, primarily arguing that the bankruptcy court erred in applying the Munford factors because it should have instead applied the factors from In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015). Af- ter briefing from the parties, the district court affirmed the bank- ruptcy court’s order, finding that the Munford factors as opposed to the Seaside factors applied to the set of facts giving rise to the Bar Order. Markland timely appealed. II. This court sits as a second court of review when a bank- ruptcy court decision is appealed. In re Daughtrey, 896 F.3d 1255, 1273 (11th Cir. 2018). The bankruptcy court’s legal conclusions are reviewed de novo and its factual findings for clear error. Id. We review discretionary determinations, including the approval of set- tlement agreements, for an abuse of discretion. Id. Under this def- erential standard, we “must affirm unless we find that the lower

4 The bankruptcy court initially filed a short order approving the settlement. Shortly after, however, the bankruptcy court issued an amended and supple- mental order approving the settlement which included more specifics regard- ing the Bar Order purposed by Centro, ProHCM, and the Committee barring claims against third parties. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 6 of 10

6 Opinion of the Court 21-11364

court has made a clear error of judgment, or has applied the wrong legal standard.” In re Walker, 532 F.3d 1304, 1308 (11th Cir. 2008) (per curiam) (alteration adopted). III. The issue on appeal is whether the bankruptcy court abused its discretion when it determined that the assessment of whether to approve the Bar Order is controlled by the Munford factors as opposed to the Seaside factors. Markland argues that both the bankruptcy court and the district court erred because the Seaside factors apply to the Bar Order since Centro and ProHCM filed Chapter 11 bankruptcies as reorganizations. Appellees respond that neither court erred because Munford applies where a bar order is essential to a litigation agreement whereas Seaside applies where a bar order is presented as part of a plan of reorganization. In Munford and Seaside, we described the factors a bank- ruptcy court should assess when evaluating the appropriateness of a bar order in two different scenarios: one in which a bar order was essential for a litigation settlement agreement and the other in which a bar order was an integral part of a reorganization plan. Munford, 97 F.3d at 455; Seaside, 780 F.3d at 1077. In Munford, a company filed for Chapter 11 bankruptcy after an unsuccessful lev- eraged buy-out. Munford, 97 F.3d at 452. The parties eventually reached a settlement agreement, which contained a bar order per- manently enjoining the non-settling defendants from pursuing claims against a third party. Id. The bankruptcy court entered an order approving the settlement agreement and bar order, which USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 7 of 10

21-11364 Opinion of the Court 7

the district court affirmed. Id. On appeal, the non-settling defend- ants attacked the bankruptcy court’s authority to approve the bar order. Id. at 452–53. This court found that bankruptcy courts can “enter bar orders where such orders are integral to settlement in an adversary proceeding.” Id. at 455. We also provided that certain factors should be assessed to reasonably determine whether a bar order is fair and equitable, including: (1) “the interrelatedness of the claims that the bar order precludes”; (2) “the likelihood of the non- settling defendants to prevail on the barred claim”; (3) “the com- plexity of the litigation”; and (4) “and the likelihood of depletion of the resources of the settling defendants.” Id. This court concluded that the bar order was necessary because at least one of the parties “would not have entered into the settlement agreement” without it, and as such, it was “integral” to the settlement. Id. Nearly twenty years later in Seaside, an engineering firm filed for Chapter 11 bankruptcy and submitted a reorganization plan which proposed that the firm reorganize and continue opera- tions under a new name. Seaside, 780 F.3d at 1075. The plan also included a bar order that prohibited lawsuits against the company (pre- or post-reorganization) and the company’s officers related to or arising out of the bankruptcy. Id. The bankruptcy court ap- proved the settlement containing the bar order. Id. One interested party, a creditor, appealed the approval of the bar order. The dis- trict court affirmed, and the creditor further appealed. Id. at 1075– 76. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 8 of 10

8 Opinion of the Court 21-11364

We explained that Seaside is factually distinguishable from Munford because the cases considered non-comparable bar orders. Id. at 1076–77. We upheld the bar order in Munford because it was integral to reaching a settlement agreement between the parties. Id. at 1066. Different from the settlement context in Mumford, the bar order at issue in Seaside was upheld because it was deemed necessary for the reorganized entity to succeed. Id. at 1077 (“In- stead of the settlement context in Munford, here the releases pre- vent claims against non-debtors that would undermine the opera- tions of, and doom the possibility of success for, the reorganized entity”). We looked to other circuits for guidance regarding treat- ment of bar orders in reorganization plans and adopted a seven- factor test used by the Fourth and Sixth Circuits to assess whether such a bar order is appropriate. Id. Seaside, 780 F.3d at 1077 (citing In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002) (listing the seven factors)). After reviewing the bankruptcy court’s appli- cation of these seven factors, this court held that the bankruptcy court did not abuse its discretion in approving the bar order. Id. at 1079–81. Markland correctly pointed out that both Centro and Pro- HCM filed bankruptcy as Chapter 11 reorganization cases. This, however, is non-determinative of which legal standard applies when assessing bar orders since bankruptcies filed under Chapter 11 are frequently referred to as “reorganization” bankruptcies. Both Munford and Seaside, for instance, arose out of bankruptcies filed under Chapter 11 yet yielded different results. Instead, the USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 9 of 10

21-11364 Opinion of the Court 9

context and facts underlying the bar order under review determine whether Munford or Seaside factors apply. The Munford factors apply to bar orders assessed in the set- tlement context. Such a bar order is appropriate where the parties would not have entered into a settlement agreement without it, and thus it is “integral” to the settlement. The Seaside factors apply to bar orders that are specifically within the reorganization context which is evidenced by this court looking to other circuits to assess “unusual cases in which such an order is necessary for the success of the reorganization.” Id. at 1078–1079. This is also further demonstrated by the language within the Seaside factors them- selves which reference “reorganization” and the “Plan” several times. The record demonstrates that this case is more like Munford than Seaside because the Bar Order under review was integral to settlement. Although reorganization may have been on the table at some point, the purpose of the Bar Order differs from the factual context under Seaside because neither ProHCM nor Centro sought to reorganize and continue operations. As such, the purpose of the Bar Order is not to ensure success for a reorganized entity by elim- inating liability against third parties but is instead to facilitate a set- tlement agreement. Because Munford controls and Markland did not preserve the argument of whether the bankruptcy court properly applied the Munford factors, the analysis stops here. USCA11 Case: 21-11364 Date Filed: 11/05/2021 Page: 10 of 10

10 Opinion of the Court 21-11364

The bankruptcy court did not abuse its discretion because it correctly applied the Munford factors as opposed to the factors prescribed by Seaside. AFFIRMED.