Presented Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
For the first time in 73 issues, I am presenting a case that was not a family law matter.
Sometimes we do get involved with other legal cases, such as civil litigation, trust, and probate disputes. Most of the non-family law case accounting issues we have dealt with have been similar to divorce matters, including the case presented here. This matter involved millions of dollars of perquisites that were not approved, let alone known about, by the other business partners. The attorney had to subpoena the records we needed to be able to conduct a thorough investigation.
The original owner of this firm allowed a few people to gain ownership interest. After the initial owner’s death, Sherry Trainor, his daughter, was appointed by the partners as the managing member and retained ownership of about 70 percent of the company. The client I represented owned the largest share of the remaining partners of the firm—approximately 15 percent. Because this case was adjudicated in arbitration and not trial, I changed the names of the parties involved, as well as the names of the entities and the amount of money associated with the case.
The arbitrator ruled on the facts of my testimony in our favor, including reimbursement of $175,000 of fees that the case cost the other partners.
In this edition of Forensic Accounting Today, I have provided background on the case. I will reveal the findings of the arbitration in our next newsletter.
If you have questions concerning this case, please contact me.
In the Matter of Arbitration Between Sherry Trainor vs. First Street Properties, LLC and Stacy Holden
Overview
Respondent First Street Properties, LLC (FSP) operated a strip mall called Atlantic Plaza. Claimant and counter-respondent Sherry Trainor was the managing member of FSP. Respondent Stacy Holden succeeded Trainor as the managing member. The LLC operated under a Revised Operating Agreement (ROA), a contract, and an agreement between the members.
The arbitration resulted from two lawsuits previously filed. In the first, FSP, as plaintiff, filed an action against defendant Sherry Trainor due to suspected mishandling by Trainor of FSP’s funds. The order, which was stayed, was directed to arbitration by the Superior Court pursuant to the ROA, which called for arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (AAA). The parties were juxtaposed because defendant Trainor was the first to file a demand of arbitration. Thus, she became the claimant and counter-respondent in this arbitration. FSP and Stacy Holden became the respondents and counter-claimants. Trainor and FSP alleged breach of fiduciary duty against each other and sought damages.
In the second lawsuit, FSP filed an action against Channel Management, Inc., and Charlene Luah. Channel was the property management company for Atlantic Plaza pursuant to a management agreement with FSP. Luah, Trainor’s sister, was the designated property manager.
Proceedings
A third-party administrator supervised the arbitration. Both parties were represented by attorneys and hired forensic accountants. I was engaged to represent the partner with the highest interest in First Street Properties (other than Sherry Trainor), and conducted extensive document discovery. The attorney subpoenaed bank and credit card statements covering the 6½ years of Trainor’s tenure as the managing member.
Contract and Limited Liability Act
While the contract gives broad powers to the managing member, Trainor was not released from restraint. The contract prohibited transactions between the company and a member unless financial transactions were authorized by a consenting vote, written permission, or approval by a majority of the other members. In addition, FSP was subject to the Limited Liability Company Act. A section of this act refrains a managing member from gross negligence, reckless conduct, intentional misconduct, or a violation of law. Furthermore, the managing member must perform his or her duties consistent with the obligation of good faith and fair dealing. Thus, the managing member acts as a fiduciary for the benefit of the LLC and the other members.
Background Facts
Trainor was voted managing member by the other members in 2013 after the death of her father, the founder of the company. She served in this capacity until 2020, when Stacy Holden assumed this position. During 2020, Atlantic Plaza was sold. Approximately $4 million of the proceeds were held back due to suspicions concerning how Trainor handled the funds. The members requested a detailed accounting concerning the financial information that Trainor evaded. Also, the members became suspicious about monies received by Channel Management under the control of Trainor’s sister. The data showed that during Trainor’s tenure, profits increased but profit distributions to LLC members decreased. At the same time, Trainor’s compensation increased, as did payments to a shell company of which Trainor was a managing member.
Claims vs. Sherry Trainor
AFP’s claim was that Trainor defrauded large sums of money by having the LLC pay her excessive compensation, as well as being reimbursed for a multitude of personal expenses. Trainor contended that her compensation was for her work, not excessive, and for legitimate business expenses.
FSP’s specific demands for damages concerning personal expenses included unreasonable travel expenses (she lived in Singapore and made several trips back and forth to California and other locations), making payments to family members with company money that was not authorized, excessive bank checks and credit card charges, and suspicious record keeping that failed to reveal many personal expenses that she paid with FSP’s funds.
In the next Issue of Forensic Accounting Today, I will discuss the evidence I uncovered concerning these claims as well as the arbitration decision.
