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Zweizig v. Rote

United States District Court, D. Oregon, Portland Division

July 25, 2018

MAX ZWEIZIG, Plaintiff,
v.
TIMOTHY C. ROTE, et al., Defendants.

          Linda L. Marshall Attorney for Plaintiff

          Timothy C. Rote Pro Se Defendant

          FINDINGS OF FACT & CONCLUSIONS OF LAW

          MARCO A. HERNÁNDEZ United States District Judge.

         This case arises out of Plaintiff Max Zweizig's inability to collect a judgment against Defendant Northwest Direct Teleservices.[1] Plaintiff brings claims under Oregon's Uniform Fraudulent Transfer Act (UFTA) against Defendants Timothy Rote, Northwest Direct Teleservices, Inc., Northwest Direct Marketing of Oregon, Inc., Northwest Direct Marketing, Inc., Northwest Direct of Iowa, Inc., Northwest Direct Marketing, Inc. (Delaware), and Rote Enterprises, LLC. An Order of Default was entered against all Defendants except Defendant Rote on February 20, 2017.

         Plaintiff alleges that Defendants Rote, Northwest Direct Teleservices, Inc. (“NDT”), and Northwest Direct Marketing, Inc. (“NDM”) violated ORS 95.240 when Defendant NDT granted Defendant NDM a security interest in NDT's assets on May 29, 2012, four days after Plaintiff's counsel mailed a Notice of Demand to Pay Judgment to Defendants Rote and NDT. Plaintiff also alleges that the May 29, 2012 security interest violated ORS 95.230 because the it was granted with the actual intent to defraud Plaintiff and hinder his ability to enforce the judgment. Similarly, Plaintiff alleges that the 2009 Reorganization of the Defendants was done with the actual intent to defraud Plaintiff and hinder his ability to enforce the judgment. Separately, Plaintiff brings veil piercing claims against Defendants Rote and Northwest Direct Marketing. Plaintiff also brought a claim for civil conspiracy against Defendant Rote that was dismissed by the Court at the pretrial conference.

         The Court conducted a two-day bench trial on the remaining claims against Defendant Rote on May 7 and 8, 2018. The following are the Court's Findings of Fact and Conclusions of Law from that trial. See Fed. R. Civ. P. 52(a). As explained below, the Court finds in favor of Defendant Rote on all of Plaintiff's claims. Therefore, Defendant Rote is not liable to Plaintiff.

         EVIDENTIARY RULINGS

         Currently pending before the Court are various evidentiary objections and motions in limine filed prior to trial. Plaintiff objected to Defendant's Exhibit 532, a 2011 declaration from Defendant Rote filed in the case Northwest Direct Teleservices, Inc. v. Zweizig, 3:11-cv-00910-PK, arguing that it is inadmissible hearsay and amounts to re-litigation of the arbitration. Plaintiff also objected to Defendant's Exhibit 530, a UCC filing between Wells Fargo Bank and Northwest Direct Marketing, Inc., arguing that it is irrelevant to this case. See Pl. Obj. Def. Ex. 3, ECF 254. The Court overrules both objections. As to Exhibit 532, the Court finds-as Plaintiff concedes-that the exhibit is admissible when used to show notice to Plaintiff of the reorganization for statute of limitations purposes. Id. Regarding Exhibit 530, the Court finds that the exhibit is relevant to whether the 2012 financing statement constitutes a fraudulent transfer of assets in violation of ORS 95.230.

         To the extent that other objections were made, the Court declines to address them as they have no bearing on the outcome of this case.

         FINDINGS OF FACT

         Defendant Timothy Rote testified that he was the chair and sole member of the board of directors, recording secretary, president, registered agent, and representative CEO of all the entities in the “Northwest Group.” Defendant Rote testified that he either directly or indirectly owned all of the Northwest Group, had absolute control over the entities, and made decisions for the benefit of the Group. The Northwest Group is comprised of NDT (the parent company prior to July 1, 2009), NDM (the parent company after July 1, 2009, formerly known as Northwest Direct of Eugene), Northwest Direct of Iowa (the operating call center in Iowa), Northwest Direct Marketing of Oregon (the operating call center in Beaverton, OR), and Northwest Direct Marketing (Delaware). In addition, Defendant Rote was an employee of NDT, earning an annual salary of $180, 000. He was also the managing agent of Rote Enterprises LLC, a holding company for the Northwest Group. Tanya Rote, Defendant Rote's wife, is a former banker and was employed by NDT as controller of Northwest Group. In that capacity, she performed various financial and bookkeeping functions.

         Plaintiff Max Zweizig testified that he was formerly employed by NDT as its IT Director. After Plaintiff was terminated, Defendant Rote, on behalf of NDT, filed claims in arbitration against Plaintiff in 2006. Plaintiff brought counterclaims for wrongful termination against both NDT and Defendant Rote, but Defendant Rote was dismissed as a party to the arbitration in 2007 or 2008. The evidentiary hearings in the arbitration were held in 2010.

         On March 31, 2011, Plaintiff was awarded monetary damages on one of his counterclaims in the amount of $75, 375. Def. Ex. 505. Defendant NDT was also awarded monetary damages in the amount of $4, 316.94. Def. Ex. 505. The District Court for the District of Oregon affirmed the arbitration award and entered judgment on February 14, 2012. Plaintiff testified that NDT has not yet paid the judgment.

         I. Structure of the Affiliated Group of Companies Prior to the Reorganization

         Defendant Rote testified that in 2006, NDT was the parent company of the Northwest Group. The subsidiaries of the Northwest Group at that time were Northwest Direct of Iowa (the operating call center in Iowa), Northwest Direct of Eugene (the operating call center in Eugene), and Northwest Direct Marketing (Delaware) (an entity that held a few client contracts but was not otherwise engaged in meaningful business). In 2006, Defendant testified that either he or Rote Enterprises LLC owned 100% of the stock in NDT. Rote Enterprises performed no services but held assets in the form of NDT's stock. Defendant Rote owned Rote Enterprises along with NDT and Rote & Company PC, which owned one-tenth of one percent of Rote Enterprises.

         As the parent company, NDT provided common management services to benefit the subsidiaries, including legal, finance, marketing, sales, customer, client, and IT services. The costs for NDT's services were charged down to the subsidiaries. NDT also served as the treasurer for the Group and held a zero-balance (“ZBA”) master account, which functioned as the Northwest Group's consolidated cash account. Each entity maintained separate ZBA general checking and payroll accounts. Money would move between the subsidiaries' accounts and the master account at the end of each day to cover amounts paid out of the subsidiary accounts and zero out any money deposited into the accounts. Defendant Rote and Tanya Rote testified that they maintained detailed accounting of intercompany accounts representing the amounts owed between the subsidiary entities and parent company because of these transfers.

         In 2006, Defendant Rote testified that NDT had the following assets: stock in the subsidiaries, one million dollars' worth of technology, and some accounts receivable. Defendant Rote testified that the group had anywhere from six to ten contracts per client at any given time. The contracts were the Group's sole source of income because it did not perform any services without a contract. Defendant Rote testified that the gross annual revenue for the Northwest Group generated from these contracts was approximately $5, 000, 000. Its net income was around $100, 000. But Defendant Rote testified that the contracts had no outside or predictable value even though they produced revenue for the company. The contracts could not be sold or transferred to an outside party and many were terminated by clients in breach of the termination provisions. NDT held some client contracts in its name, but Defendant Rote testified that NDT only retained 10% of the revenue generated from these contracts to cover the administrative services rendered to the subsidiaries. The remaining 90% went to the entity responsible for rendering services to the client under the contract.

         II. 2009 Reorganization

         At the July 4, 2008 Board of Directors Meeting for NDT, the Board of Directors decided to reorganize the Northwest Group on July 1, 2009, to make NDM the parent of the Northwest Group and NDT a subsidiary of NDM. Pl. Ex. 2. Per the board minutes, NDM-instead of NDT and NDM Delaware-would begin to issue client and vendor contracts. Pl. Ex. 2. The minutes also reflect NDT's intent to continue to maintain the IT equipment and “focus on developing a hosting business, factoring business, and pursue the acquisition of call center software that it can package, market and sell.” Pl. Ex. 2. Defendant Rote also testified that he could not recall whether the minutes were produced in discovery at the arbitration but that it was likely he felt there were nonresponsive.

         On July 1, 2009, NDT entered into a reorganization and distribution agreement to contribute and distribute assets between entities as resolved at the 2008 Board of Directors meeting. Def. Ex. 529; see also Pl. Ex. 1. The agreement was unanimously adopted by the Board of Directors, which was comprised solely of Defendant Rote. Per the reorganization agreement, NDT-the parent organization at the time-desired to separate its businesses into two independent companies so that NDT could “develop a hosting and IT consulting business, as well as explore leasing of equipment, licensing and factoring in the call center space.” Def. Ex. 529. Defendant Rote testified that NDT wanted to separate the technology side of its business from the services side of its business because the technology business was high risk and high reward. Specifically, Defendant Rote testified that the only way to protect the Northwest Group from cybercrime and the risks and inefficiencies of owning technology was to separate the technology into its own entity. Tanya Rote also testified that it was her opinion that the technology was transferred away from the parent company because they were concerned the technology was risky enough to ruin the entire group. The technology could not be transferred to another entity away from NDT because the licenses were non-transferable. NDT therefore became the technology-owning entity with the hope that NDT would grow into a standalone business that was both profitable and unique. Defendant Rote testified that he hoped NDT could eventually contract with outside businesses and use the technology as an additional revenue source. At the time, Defendant Rote testified that they were having difficulties with the licenses and technology supplied to NDT by a business called TouchStar.

         The reorganization proceeded in six steps. First, NDT contributed all its stock in Northwest Direct Marketing of Oregon and Northwest Direct of Iowa to Northwest Direct of Eugene. Next, Northwest Direct of Eugene was to change its name to NDM. Third, NDM Delaware transferred its rights under the various service contracts to NDM and liquidated. Fourth, NDT distributed to its shareholder Rote Enterprises 100% of the stock of NDM. Fifth, Rote Enterprises contributed 100% of the stock of NDT to NDM, making NDT a subsidiary member of the Northwest Group. See Def. Ex. 529. Defendant testified that each of these steps was carried out over a period of time.

         As a result of this agreement, NDT became a subsidiary of NDM, and NDM became the parent of the Northwest Group. According to Defendant, NDT retained the opportunity to derive income from the subsidiaries in the amount of $7, 500 per month for the use of the technology. It transferred the management services and its entitlement to 10% of the revenues from the subsidiaries to NDM as well as the ZBA master account, all customer contracts except for Leapfrog Online, and stock held in the subsidiaries. The basis for the stock in all three entities amounted to just over $100, 000. Def. Ex. 529.

         Defendant Rote also testified that as a result of the transfer NDT retained the cash and commercial debt that it had accrued as well as the equipment. NDT began carrying the ongoing litigation with TouchStar as an asset on its balance sheet and retained all debts associated with the TouchStar system. Def. Ex. 527, Pl. Ex. 3, 4. NDT was compensated by other members of the group in an amount of $7, 500 per month for the use of the technology. Pl. Ex. 4. In exchange for the stock that was transferred to NDM, Defendant Rote testified that NDM assumed the intercompany obligations that NDT owed to the other members of the Northwest Group. At the time, Defendant testified that the subsidiaries were owed money from the parent. This is supported by the 2009 reorganization spreadsheet, which shows that NDT owed $361, 973 to the other entities in the Northwest Group prior to the reorganization and was owed $226, 515 after the reorganization. Def. Ex. 528. Prior to the reorganization, the consolidated balance sheet shows that NDT had $1, 069, 835 in assets and $355, 743 in liabilities. Def. Ex. 527. After, NDT's assets remained at $1, 069, 108, and its liabilities were $350, 319. Def. Ex. 528. NDT continued to carry $160, 069 in cash, $9, 027 in accounts receivable, and $27, 808 in a note after the reorganization. Def. Ex. 528. A year later, the consolidated balance sheet shows that NDT's total assets amounted to $905, 209 and its total liabilities were $215, 411. In 2011, NDT's total assets were $224, 471 and its total liabilities were $118, 680. Def. Ex. 527. According to Defendant Rote, the balance sheets largely reflected historical basis-rather than the fair market value-for the Northwest Group's non-cash and non-accounts receivable assets.

         After the reorganization, consolidated income tax returns were filed in NDM's name. The consolidated return for the period of July 1, 2009, to June 30, 2010, shows a gain of over $200, 000 in cash in the Northwest Group's account that was owned by varying entities in the Northwest Group according to the testimony of Defendant Rote. The Northwest Group had gross sales amounting to $6, 159, 000.

         Defendant Rote acknowledged that NDT could have satisfied the judgment in 2011. Defendant Rote testified that he made a business decision that it was better to use the Group's finite resources to pursue a potential damages award of $1.6 million against TouchStar than pay the judgment owed to Plaintiff. And while Defendant Rote testified that he had an open line of credit for up to one million dollars with NDM, he explained that he did not loan money to NDM or NDT to satisfy the judgment because, as a rule, he only loaned money to the entities when he felt that there was an opportunity for substantial profit from the investment.

         III. Notice of the 2009 Reorganization

         Defendant Rote testified that he did not disclose the reorganization in the arbitration with Plaintiff because it was a private matter. Defendant Rote also admitted to testifying under oath at that proceeding that NDT was the parent company of ...


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