JDK LLC et al v. Hodge et al Doc 71-1 filed 21 Jul 15.pdf

8/20/2019 JDK LLC et al v. Hodge et al Doc 71-1 filed 21 Jul 15.pdf

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xhibit “ ”

Case 1:15-cv-00494-PAB-NYW Document 71-1 Filed 07/21/15 USDC Colorado Page 1 of 22


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JUDICIAL ARBITER GROUP, INC. _______________________________________________

Claimants: JDK LLC, a Colorado limited liabilitycompany, DEBORAH KOLASSA, JERRY KOLASSA, and

S. MARK SPOONE,

v.

Respondents: GENERAL PAYMENT SYSTEMS, INC., aColorado corporation, d/b/a EZ CARD & KIOSK;GENERAL PAYMENT SYSTEMS, INC., a Nevadacorporation, d/b/a EZ CARD & KIOSK; and DANIELCOOK.

________________________________________________

Attorneys for Claimants:

Brown & Kannady, LLCScott T. Kannady, Atty. Reg. # 29995David J. Meretta, Atty. Reg. # 444092000 S. Colorado Blvd., Suite 2-610Denver, CO 80222Phone: (303) 757-3800Fax: (303) 757-3815

Email: [email protected], [email protected]

_________________________

JAG Case Number:15-0307

AMENDED DEMAND FOR ARBITRATION

COME NOW the Claimants, JDK LLC, Deborah Kolassa, Jerry Kolassa and S. MarkSpoone, by and through their attorneys, Brown & Kannady, LLC, and for their Amended Demandfor Arbitration allege as follows:

I. PARTIES

1. Claimant JDK LLC (“JDK”) is a Colorado limited liability company with its

principal office located at 6 Greenridge Road, Greenwood Village, Colorado.

2. Claimant Deborah Kolassa (“Deborah”) is an individual who has a residentialaddress of 6 Greenridge Road, Greenwood Village, Colorado.

3. Claimant Jerry Kolassa (“Jerry”) is an individual who has a residential address of6 Greenridge Road, Greenwood Village, Colorado.



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4. Claimant S. Mark Spoone (“Spoone”) is an individual who has a residential addressof 4833 Front Street, Ste. B405, Castle Rock, Colorado.

5. Respondent General Payment Systems, Inc. d/b/a EZ Card & Kiosk, f/k/aContinental Prison Systems, Inc. is a Colorado corporation (“GPSI-Colorado”) with its principal

office located at 15375 Barranca Parkway, Ste. C102, Irvine, California.

6. Respondent General Payment Systems, Inc. d/b/a EZ Card & Kiosk, f/k/aContinental Prison Systems, Inc. is a publicly-traded Nevada corporation (“GPSI-Nevada”) withits principal office located at 15375 Barranca Parkway, Ste. C102, Irvine, California, and a satelliteoffice located at 125 Main St. #105, Dillon, Colorado.

7. Respondent Daniel Cook (“Cook”) is an individual who, upon information and belief, has a residential address of 2701 Orange Way, Unit 2, Spring Valley, California, and whois a former investor and licensee of GPSI in the State of Ohio, and who has acted as a sales agenton behalf of GPSI, in addition to acting on his own behalf.

II. JURISDICTION

8. The subject Licensing Agreements and Buy-Sell Agreement (attached to theoriginal Demand) each contain an arbitration clause; the former provide that the disputes at issuein this matter shall be arbitrated by a single arbiter who shall be a retired Colorado state court orfederal judge or attorney licensed to practice law in Colorado.

III. GENERAL ALLEGATIONS

A. Pertinent Background Facts

9.

The corporate Respondents operate numerous related payment processing entitiesthat provide jails and municipalities with proprietary hardware and cloud-based softwaretechnology used to electronically collect payments from the general public through kiosks andsecure websites in the form of cash, debit and credit, for such items as licenses, parking tickets,municipal bills, child support, real estate and school taxes, court fines and fees. These automatedsystems deliver payment acceptance, real-time accounting and payment risk-mitigation services.These entities operate under the brand, trademark and logo “EZ Card & Kiosk,” “EZ PayCorporate,” as well as numerous iterations of “EZ” payment systems (collectively, the “EZ PaySystem”).

10. Since 2006, the corporate Respondents, first through a Nevada corporation calledContinental Prison Systems, Inc. d/b/a EZCard and Kiosk (“CPSI”) and later through GPSI-Colorado, GPSI-Nevada and/or through a Colorado Corporation called Municipal HoldingsSolutions Corp. (CPSI, GPSI-Colorado, GPSI-Nevada and Municipal Holdings Solutions Corp.will hereafter collectively be referred to as “GPSI”), have provided such payment services directlyto jails and prisons, and have also licensed this system to third parties. The EZ Pay System earnsrevenue through transaction fees, which are paid by the general public at a kiosk at the time of thetransaction, which are similar to ATM fees.



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11. In approximately 2009 GPSI began offering the same payment services tomunicipalities under the EZ Pay System.

12. At all times relevant to this Demand, Paul A. Talbot (“Talbot”) has acted as amanaging partner and/or a sales and/or operational agent on behalf of GPSI, as well as thePresident of Municipal Holdings Solutions Corp., a Colorado corporation doing business underthe name of EZ Pay Corporate (“EZ Pay Corporate”). Talbot was or has been employed and/oraffiliated with GPSI, and has worked for the Chairman, President and Chief Executive Officer ofGPSI, Ronald K. Hodge (“Ronald”) and the Vice President of Marketing and Sales of GPSI, GreggK. Hodge (“Gregg”), since approximately 2006. Talbot has acted in a sales capacity for GPSI,and has helped to grow GPSI’s business by recruiting licensees, and by pursuing businessopportunities on the jail and municipal side. Talbot generated over $7 million in GPSI licensingfees rights through sales to investors such as JDK and Spoone, and he represented to each that theinvestment would be passive, in that Talbot would, at no further cost to the investor, furnish thesales team and operational staff necessary to operate the businesses, in exchange for receiving a percentage of revenue or ownership in the business.

B.

The Pennsylvania Municipal License

13. On or about July 12, 2011 JDK and GPSI-Colorado entered into a written LicensingAgreement (the “Pennsylvania License”) pursuant to which JDK was granted an exclusive licenseto develop, market, distribute, sell, lease or otherwise transfer GPSI’s payment processing servicesand technology to municipal court systems, probation departments and police departments withinthe State of Pennsylvania, using GPSI’s brand, trademarks and logos. James E. Sylvester(“Sylvester”), who has acted as the Chief Financial Officer of GPSI at all times relevant to thisDemand, executed the Pennsylvania License on behalf of GPSI-Colorado.

14. In exchange for the rights granted to JDK pursuant to the Pennsylvania License,JDK was required to pay to GPSI a license fee in the initial amount of $640,000, with an additional$710,000 in license fees that would become due to GPSI, contingent upon JDK’s achievement ofvarious gross revenue thresholds. On behalf of GPSI, Frank O. Hofmeister (“Hofmeister”), whowas a founder and an officer of GPSI between January 2010 and January 2013 (and who was alsothe mastermind of the GPSI municipal licensing scheme, as set forth infra) received the $640,000in funds paid by JDK pursuant to the Pennsylvania License.

15. Pursuant to the Pennsylvania License, as well as through the actions of GPSI’sagent, Talbot, GPSI maintained significant control over JDK’s business and/or providedsignificant assistance (albeit counterproductive) to JDK in the operation of the subject business.For example, while engaging in contract negotiations with prospective municipal clients in

Pennsylvania, Talbot refused to keep Deborah or Jerry apprised of same, and refused to discloseany information regarding the negotiations.

16. JDK invested the initial $640,000 in license fees, as well as $360,000 for kiosks,labor and other equipment for the Pennsylvania License.

17. The Respondents sold the municipal business to JDK on the aggressive premisethat JDK would passively earn a twenty percent (20%) return on its investment, with Talbot serving



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as both the operational and sales side of the business, and that he would be utilizing his extensiveexperience and familiarity with GPSI’s business, as well as his business contacts and knowledgeof the Pennsylvania market, to provide substantial ongoing support to the business.

18. The Respondents represented to Deborah and Jerry that JDK’s primary role in this

arrangement, following its initial investment, would be to simply sit back and collect checks onthe successful operations that Talbot would be running in Pennsylvania. According to theRespondents, JDK’s only other material contributions would be to cover the cost of travel andequipment.

19. On repeated occasions prior to the execution of the Agreement, Talbot and Cook,acting as franchise agents or brokers for GPSI and/or otherwise acting on GPSI’s behalf, madefalse and highly misleading oral and written Financial Performance Representations (“FPR’s”) toDeborah and Jerry. Certain of these FPR’s were transmitted by Cook with Talbot’s knowledge,assent and/or direction.

20.

In communicating with Deborah and Jerry regarding the GPSI investmentopportunity, Talbot and Cook failed to disclose and/or fraudulently withheld material informationfrom Deborah and Jerry, including but not limited to: information regarding Pennsylvania statemoney transmitter laws, the Unified Judicial System of Pennsylvania/APOC (which effectivelyhas a monopoly on the payment software for all courts and related departments throughout thestate), GPSI’s corporate business plan, financial information, information concerning GPSI’scompetitors in the municipal space in Pennsylvania (many of which offer the same services forless than the cost of doing business under the EZ Pay System), credit card and banking expenses,the limitations of GPSI’s software, GPSI’s inability and/or unwillingness to meaningfully supportthe business and/or to provide critical documentation as required, and the absence of a successfulor proven business model on the municipal side.

21.

On June 14, 2011 Cook forwarded by e-mail to Leanna Carette Cox (“Cox”), whois Deborah’s sister, a news article about GPSI along with e-mail comments from Talbot boastingthat, through a single county in Michigan, GPSI would be generating “over 200K every twoweeks,” and that the same county was going to exclusively accept child support payments throughGPSI’s kiosks, which would generate “75 million annually.”

22. On June 14, 2011 Cook also forwarded by e-mail to Cox a pro forma containingvarious projected gross revenues in Ohio over a five-year period, including projected grossrevenues of $2,436,480 during the first year of operations, along with an e-mail from Talbotasserting that “the jail side is small” compared to what GPSI was doing on the municipal paymentside of things.

23. On June 26, 2011 Talbot and Cook met face-to-face with Cox, Deborah and Jerryto discuss the investment opportunity being offered by GPSI in the State of Pennsylvania. BothTalbot and Cook acted as representatives or sales agents of GPSI in this regard.



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24. On June 27, 2011 Talbot e-mailed Cox, Deborah and Jerry with additionalinformation about the investment opportunity, and furnished a list of five names, including Cook,for them to contact “to ask if the company and I have done everything as promised.”

25. On or about June 27, 2011 Talbot furnished Cox, Deborah and Jerry with aspreadsheet, which he proceeded to discuss in detail, which projected that, by 2012, the municipal business in Pennsylvania would generate gross revenue of approximately $86 million throughapproximately 270,000 transactions.

26. On June 28, 2011 Talbot e-mailed Cox, Deborah and Jerry and included monthlyrevenue figures for four jails ranging between $66,894.40 and $267,577.73, explaining that theyshould “keep in mind” that these figures represent “a fraction of what we would do [on themunicipal side] because the number of people in the facilities is so small and they only take 3 payments as we will take over 50+ payments and our customer base is 100+ times more!”

27. On June 30, 2011 Talbot e-mailed to Cox and Jerry a spreadsheet dated January 1,2011 that was entitled “3-Year Market Universe Revenue Projections.” This spreadsheet statedthat GPSI licensees could expect to collect a fee of $4.00 per transaction. It stated that $4.00 pertransaction was, in fact, a "conservative average" and provided information showing that the"actual" average would be more than $6.50 per transaction. The spreadsheet also stated that, for payments to municipal police departments, a conservative fee estimate was $10.50 per transaction, but the "actual" average fee would be approximately $13.60.

28. Upon information and belief, the Respondents were aware at or prior to the datethat the Pennsylvania License was executed that JDK’s investment in the Pennsylvania Licensewas highly likely to fail.

C. The Ohio Municipal License

29. Approximately six weeks before JDK signed the Pennsylvania License, on or aboutJune 1, 2011, GPSI-Colorado had entered into a written Licensing Agreement (the “Ohio License”)with C & T Holdings, LLC (“C&T”), a Colorado limited liability company formed by Cook andTalbot in 2009, pursuant to which C&T was granted an exclusive license to develop, market,distribute, sell, lease or otherwise transfer GPSI’s payment processing services and technology tomunicipal court systems, probation departments and police departments within the State of Ohio,using GPSI’s brand, trademarks and logos. Cook and Talbot each owned 50% of the shares ofC&T.

30. In exchange for the rights granted to C&T pursuant to the Ohio License, C&T was

required to pay to GPSI a license fee in the initial amount of $540,000, with an additional $710,000in license fees that would become due to GPSI, contingent upon C&T’s achievement of variousgross revenue thresholds.

31. Pursuant to the Ohio License, as well as through the actions of GPSI’s agent,Talbot, GPSI maintained significant control over C&T’s business and/or provided significantassistance (albeit counterproductive) to C&T in the operation of the subject business. For example,



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Talbot furnished a dwindling amount of information to Spoone concerning the customer leads thatTalbot and his team were pursuing.

32. On behalf of GPSI, Talbot and Thomas J. Gilhooly (“Gilhooly”), who has acted atall relevant times as a sales agent for GPSI and the Vice President of EZ Pay Corporate, began

soliciting Spoone to invest in the EZ Pay System in early 2012. Over the course of several months,Talbot and Gilhooly repeatedly furnished Spoone with oral and written FPR’s and told Spooneabout the over-the-top success and returns in excess of 20 percent that Talbot and the otherinvestors in the EZ Pay System supposedly were enjoying.

33. In approximately February 2012 Spoone met with Talbot and Talbot’s directsupervisor at GPSI, Gregg, at Talbot’s home. Talbot and Gregg expanded upon the FPR’sfurnished by Talbot and discussed in detail the business model, the growth of the EZ Pay Systemgrowth and its lucrative returns.

34. Talbot and Gilhooly continued to entice Spoone into investing in the EZ PaySystem by furnishing various “insider” reports from GPSI and showing Spoone documents and

data reflecting the returns in excess of 20 percent that they claimed that Talbot, Gregg and the EZPay investors supposedly were enjoying.

35. During the months that followed, Talbot arranged for numerous follow-up meetingswith Spoone during which Talbot and Gilhooly shared online and paper reports of what Talbotclaimed were GPSI’s revenues from various jails across the country. The reports and informationthat were shared with Spoone did not delineate between jail and municipal revenues, and Talbotassured Spoone that the municipal business was really taking off. Talbot also progressivelyintimated that the “really big money” was not even in the jails, but on the municipal side of the business, because there were so many more opportunities for revenue, such as using the EZ PaySystem for items such as parking and traffic tickets, child support, court fees and

permitting. Talbot represented to Spoone that Talbot had been instrumental in the designing andcrafting of the municipal solution and that GPSI was already seeing even faster growth on themunicipal side than with the jail business.

36. Talbot invited Spoone to his office in Colorado on numerous occasions to witnessTalbot’s team in action. Part of Talbot’s regular sales pitch was the fact that he had equity interestsin a number of GPSI state licenses and kiosk leases and that Talbot had assembled an entire teamwhose full time job was to call on various counties, jails and courts across the list of states that hehad interests in and close deals. Talbot claimed to have closed several large deals and regularly pulled up the GPSI web site to show the various payments that were being processed and collectedon.

37. Talbot made numerous promises and commitments to Spoone that his role and fulltime focus was solely upon developing and closing new opportunities in the states that his teamwas calling on. Talbot further assured Spoone that since Talbot had a larger equity stake in Ohiothan any other state that Talbot would be highly focused on creating revenue in Ohio, Talbotrepresented that his operations and sales were the value that he would be bringing to the table inexchange for his equity interest in the business, in order to create the promised return well in excess



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of 20 percent. Talbot repeatedly conveyed to Spoone that this would be an “armchair” styleinvestment for Spoone while Talbot leveraged his existing team to close big deals and create sales.

38. In the spring of 2012 Talbot and Gilhooly told Spoone about a list of “huge”opportunities that were pending in Ohio – both on the jail and municipal side - with Talbot’s then partner, Cook. Talbot related that Cook had another big project that he wanted to focus on andthat Cook had put his sister’s money into the venture and that she needed it back right away for afamily emergency. Talbot, Gilhooly and Cook proceeded to solicit Spoone to purchase Cook’sinterest in the Ohio License.

39. Gilhooly, along with Talbot and Cook, told Spoone on several occasions that GPSIhad “a ton of great leads” that they supposedly were “really close to getting done” and that theywould be “closing deals within just a few weeks.” Gilhooly represented to Spoone that they were“on the verge” of closing deals in Canton, Ohio, Lucas County, Ohio and Cuyahoga County, Ohio,as well as with the administrator of the statewide child support program for the State of Ohio, aswell as with San Antonio, Texas, which Gilhooly told Spoone essentially was “a done deal.” Theyshowed him a lengthy list of leads on the SUGAR database system in Talbot’s EZ Pay Corporate

office. As it turned out, none of these deals ever closed.

40. Gilhooly, along with Talbot, boasted to Spoone on several occasions about thesuccess that GPSI had enjoyed in areas such as Broward and Dade Counties in Florida, OrangeCounty, California, the Riker’s Island penitentiary in New York, Eagle County, Colorado, theAurora, Colorado Detention Center, the Boulder County Jail in Colorado, as well as PuebloCounty, Colorado. They represented to Spoone that the tremendous success in those countieswould pale in comparison to the amount of revenue that the state of Ohio offered. They showedSpoone live, real-time updates of the amount of money that they indicated was pouring in from allover the country through GPSI kiosks and suggested that Spoone would enjoy comparablerevenues in Ohio. They told Spoone that he would soon be generating $80,000 in monthly

revenues through each municipality, and that this would soon be generating statewide revenues inexcess of $1,000,000 per month.

41. Gilhooly, acting in conjunction with GPSI, Talbot and others, made FPR’s toSpoone on at least three separate occasions, FPR’s that Gilhooly either knew to be false, orrecklessly made without reasonable substantiation, knowing and intending that Spoone would relyupon Gilhooly’s representations to decide to invest in the Ohio License. These FPR’s includeddata revealed to Spoone by Gilhooly through a customer relations management system calledSUGAR.

42. During the course of their solicitations, the Respondents furnished Spoone with a

spreadsheet that had been created by Hofmeister entitled “License Fee Schedule – All States.” Thespreadsheet identified a “market universe” for each state, based on its population and counties, andspecifically listed Ohio as having a market universe in the amount of $243,648,000.

43. In addition to the License Fee Schedule, during the course of their solicitations,Talbot and others shared with Spoone FPR’s that were substantially similar or identical to the pre-sale FPR’s that the Respondents furnished to Deborah and Jerry, as detailed in Paragraphs 17through 27, infra. Typically, Talbot would present such written FPR’s for Spoone’s in-person



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perusal, then take the documents back into Talbot’s possession while promising to furnish copiesto Spoone at a later date. Talbot would also present data on his personal computer that Talbotclaimed was data accessed through GPSI internal databases.

44. Upon information and belief, the actual reason behind Cook’s desire to sell hisinterest in the Ohio License was that he fully understood that GPSI did not have a profitable business plan on the municipal side.

45. On repeated occasions prior to the execution of the Buy-Sell Agreement referenced below, Cook, Talbot and Gilhooly, acting as franchise agents or brokers for GPSI and/or otherwiseacting on GPSI’s behalf, made false and highly misleading oral and written FPR’s to Spoone.Certain of these FPR’s were furnished to Spoone by Cook with Talbot’s knowledge, assent and/ordirection.

46. Cook furnished FPR’s and made numerous material misrepresentations to Spooneregarding the Ohio License and his reasons for wanting to exit the business, including therepresentation that his sister was a judge in Ohio and that she was on board with the EZ Pay system

and would be supporting the efforts to ensure the establishment of several kiosks in counties inOhio.

47. In April 2012 Cook, Talbot and Spoone reached an agreement (the “Buy-SellAgreement”) for Spoone to purchase Cook’s 50 percent share of the Ohio License held by C&Tfor $540,000. Of this amount, Spoone paid $200,000 up front and made one subsequent paymentto Cook in the amount of $25,000.

48. The Buy-Sell Agreement specifically required Cook to disclose all material andnon-material facts pertaining to his ownership and involvement in C&T, as well as his relationshipswith GPSI.

49.

As it turned out, Cook failed to disclose to Spoone all material and non-materialfacts pertaining to his ownership and involvement in C&T, as well as regarding his relationshipswith GPSI.

50. During the April 2012 meeting (arranged by Talbot) in which the Buy-SellAgreement was finalized, Talbot assured Spoone that he would soon thereafter be providingSpoone with a copy of the Ohio License and other reports, as well as Talbot’s list of customerleads. Spoone understood from representations made by Talbot, Cook and Gilhooly that the OhioLicense in which he was investing included both the jail and municipal sides in the State of Ohio.

51. As it turned out, other than the license agreement, Talbot failed to furnish Spoone

with any of the information that he had promised.

52. During various meetings, Talbot claimed to have a “huge” deal pending with thecounty Treasurer of Lucas County, Ohio, Wade Kapszukiewicz, and Talbot represented that hehad already received verbal approval from Kapszukiewicz to begin placing kiosks for thecollection of property taxes. Talbot claimed that he had secured that deal though an attorney inChicago who is close friends with Kapszukiewicz. As it turned out, no such deal in Lucas Countywas ever finalized.



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53. When Spoone was finally furnished with a copy of the Ohio License a few weekslater, he discovered that the license agreement was solely for the municipal side of the business inOhio and had no rights to the jail side. Spoone further discovered that the Ohio License called forthe mandatory payment of ongoing royalties to GPSI as well as an additional license fee, andcontained mandatory minimum performance requirements and events of default that couldinvalidate the license.

54. GPSI was made aware of, and consented to, the Buy-Sell Agreement. In fact, GPSIactively took steps to facilitate the Buy-Sell Agreement.

55. Upon information and belief, the Respondents were aware at or prior to the datethat the Buy-Sell Agreement was executed that Spoone’s investment in the Ohio License washighly likely to fail.

D. Actual Performance of the Pennsylvania Municipal Investment

56.

Far from the seven-figure first-year and eight-figure second-year gross revenuesforecast by the Respondents, JDK generated negative gross revenue in 2011 and 2012, only$25,408 in 2013 gross revenue and only $77,425 in 2014 gross revenue, through less than 13,000total transactions for the two years combined.

57. Even after operating under the Pennsylvania License for almost four years, JDKstill has not generated enough profit to cover the $360,000 expended by JDK on kiosks,installations and other operating expenses (such as accompanying labor). JDK has received noreturn on its substantial investment.

58. It has become apparent that the Respondents do not have, and never had to beginwith, a profitable business plan for JDK’s investments in Pennsylvania on the municipal side.

59. Contrary to how the GPSI investment opportunity was presented and sold to them,JDK has been profoundly impacted in a negative fashion in Pennsylvania by numerous undisclosedsurprises, including but not limited to:

a. The existence of Pennsylvania state Money Transmitter regulations, which imposesubstantial barriers on the operation of JDK’s business;

b. The effective monopoly held by the Unified Judicial System of Pennsylvania/AOPCthrough its proprietary payment software for all courts and related departments throughoutthe state, which prevents any opportunity for JDK to process court payments;

c. The competitive disadvantage faced by JDK, as GPSI’s primary competitors offer the sameservices for less than JDK’s cost of doing business under the EZ Pay System;

d. The existence of a previous investigation and substantial administrative fine levied againstGPSI by the State of Pennsylvania as a result of a finding by the state that GPSI had violatedMoney Transmitting Laws;



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e. That GPSI’s cyber insurance policy does not cover JDK or other Licensees, all of whichare completely dependent on GPSI for software;

f. That the Respondents’ software was deficient in numerous material respects, including butnot limited to the software’s inability to determine licensee profitability; and

g. That GPSI executives would be unresponsive and unsupportive, even regarding keyoperational requests (such as a letter requested by the City of Harrisburg in July 2014supporting an internal auditing and service report) despite repeated verbal and writtenrequests from JDK.

60. Talbot’s participation in the JDK’s business turned out to be disastrous, culminatingwith Talbot’s abandonment of his operational and sales roles for JDK on or about February 24,2014.

61. As a direct result of Talbot’s abandonment of all operations, JDK, through Deborah

and Jerry, has been forced to expend substantial time and resources procuring and supporting the business, despite having explicitly been told by Talbot and Cook that this would not be required.

62. Notwithstanding his pre-investment FPR’s (made on behalf of GPSI and with theknowledge and authorization of GPSI, Ronald, Gregg, Hofmeister and/or Sylvester), Talbot failedto deliver results to JDK on the municipal side that came anywhere close to those projections.

63. Talbot also engaged in numerous instances of post-investment misconduct,including but not limited to knowingly making false representations of material fact to JDK inconnection with a dubious self-dealing arrangement that Talbot unilaterally finalized with his wife,Brooke Talbot (“Brooke”)’s credit card company, Max 1 Financial LLC (“Max 1 Financial”), of5335 Mesa Drive, Castle Rock, Colorado, an arrangement that Talbot and Brooke falsely assuredJDK would result in significant cost savings to JDK. At all times relevant to this Demand, Brookehas acted a sales agent and employee of EZ Pay Corporate and the President of Max I Financial.

64. Without JDK’s consent or authorization, and without making proper disclosures,Talbot and Brooke signed both the City of Harrisburg and Montgomery County as merchants ofrecord for the accounts, and then proceeded to covertly deduct excessive charges from JDK’s bankaccount, also without approval from or disclosure to JDK.

65. After withholding critical credit card information from JDK for five months, inDecember 2013, Talbot and Brooke finally revealed to JDK that the credit card processing feesthat Max 1 Financial was charging to JDK were over 6% of gross revenues during that five-month period, rather than the 3.8% rate that Talbot and Brooke had promised to JDK.

66. At that time, Max 1 Financial was controlling all fee revenue that JDK wasgenerating through the City of Harrisburg and Montgomery County.

67. When JDK requested additional information documenting the establishment of thesubject credit card accounts, Talbot and Brooke refused, claiming that Harrisburg and



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Montgomery Counties in Pennsylvania were the merchants of record, and that JDK would receiveno further disclosures.

68. JDK has also been saddled with unprofitable contracts in Pennsylvania that werenegotiated by one or more of the Respondents without JDK’s approval or consultation. Acting

unilaterally and without authority, Talbot also entered into a contract with Montgomery County asthe purported “President” of JDK, again without any review, disclosure or consent from JDK.

69. By March 2013, as JDK’s investment on the Municipal side continued to flounder,Talbot approached Deborah and Jerry on behalf of GPSI with a second business opportunity: theJail side. Talbot offered them the opportunity to invest in a License Agreement with GPSI for thePennsylvania jails, an opportunity that he assured them would assist with JDK’s substantial cash-flow deficit resulting from its Municipal investment. Talbot’s offer included two established jailcontracts in Pennsylvania, and he guaranteed that Deborah and Jerry would earn at least a 20%return on their investment.

70. Talbot represented to Deborah and Jerry that Talbot would serve as both the

operational and sales side of the jail business, and that he would be utilizing his extensiveexperience and familiarity with GPSI’s jail business, as well as his business contacts andknowledge of the Pennsylvania market, to provide substantial ongoing support to the jail businessin which Deborah and Jerry would be investing.

71. Talbot further proposed that he, Deborah and Jerry would become business partnerson the jail side of the business and that the parties would “split the revenues” from any jail kioskslocated in the Westmoreland and Butler County jails in Pennsylvania in proportion to the parties’respective funds invested in the business.

72. On or about April 30, 2013, an entity formed by Deborah, Jerry and Talbot, JDP

LLC (“JDP”), entered into a written Licensing Agreement (the “Jail Agreement”) with CPSI, pursuant to which JDP was granted an exclusive license to develop, market, distribute, sell, leaseor otherwise transfer GPSI’s payment processing services and technology to jails within the Stateof Pennsylvania, using GPSI’s brand, trademarks and logos.

73. In exchange for the rights granted to JDP pursuant to the Jail Agreement, JDP wasrequired to pay to CPSI a license fee in the initial amount of $310,000.

74.

Per their agreement with Talbot, Deborah and Jerry were to pay to CPSI $217,000of the $310,000 license fee, and Talbot was to pay $93,000. In order to become entitled to anownership interest in the Jail License, Talbot was obligated to pay $93,000 to CPSI as Talbot’s

capital contribution.

75. Although Deborah and Jerry paid their $217,000 to CPSI, it was later disclosed thatTalbot never paid anything to CPSI for the license fee, and, on information and belief, Talbot neverhad any intention to pay $93,000 to CPSI.



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76. The Agreement further requires the payment by JDP to GPSI of a monthly royaltyfee of fifteen percent (15%) of net revenue throughout the term of the Jail Agreement, other thanfor two established jails in Butler and Westmoreland Counties.

77. Pursuant to the Jail Agreement, as well as through the actions of GPSI’s agent,

Talbot, GPSI maintained significant control over JDP’s business and/or provided significantassistance (albeit counterproductive) to JDP in the operation of the subject business. For example,while engaging in contract negotiations with prospective jail clients in Pennsylvania, Talbotrefused to keep Deborah or Jerry apprised of same, and refused to disclose any informationregarding the negotiations, and instead merely submitted invoices that he demanded that Deborahand Jerry pay.

78. As it turned out, in addition to discovering that Talbot had never made the initialcapital contribution to JDP, Deborah and Jerry discovered that the Respondents had failed todisclose numerous pieces of material information concerning the investment opportunity,including but not limited to the existence of a “kick back” arrangement between GPSI and the jails,through which the jails receive fifty cents per transaction in exchange for allowing GPSI to installits kiosks there, as well as the significant degree to which banking and credit card fees impact the profitability of the jail business, depending on how often money is wired to the facility and the ratethat is paid.

79. Talbot’s participation in the JDP’s business turned out to be disastrous, culminatingwith Talbot’s abandonment of his operational and sales roles for JDP on or about February 24,2014.

E. Actual Performance of the Ohio Municipal Investment

80. Notwithstanding the Respondents’ constant pre-sale representations that numerous

“huge deals” in Ohio were bound to close within a few weeks, and that Talbot would soon bemaking money at a rate exponentially higher than many of the existing GPSI jail deals, theRespondents failed to deliver to Spoone or C&T even a single account – municipal or jail – in theState of Ohio. Spoone is out every penny of his $225,000 investment.

81. During the months and years that followed Spoone’s execution of the Buy-SellAgreement, Talbot furnished a diminishing amount of information regarding the investment.Talbot periodically repeated the same assertions to Spoone as before - that Talbot and his teamwere, yet again, “onto a big one” that was bound to close, but invariably, something always wentwrong.

82.

On December 27, 2014, in response to Spoone’s demand for answers andinformation as to the progress of the investment to which Talbot had been ignoring for months,Talbot demanded that Spoone cease all communications with him and instead communicate solelythrough Talbot’s attorney.

F. The Respondents’ Fraudulent Scheme



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83. Through a fraudulent scheme, which Hofmeister claims to have generated for GPSI,the Respondents have deceived JDK, Deborah, Jerry, Spoone and other GPSI licensees intoinvesting millions of dollars.

84. In connection with the FPR’s made to JDK, Deborah, Jerry and Spoone regardingthe GPSI investment opportunity, Cook engaged in one or more acts, practices or course of business which operated as a fraud or deceit upon JDK, Deborah, Jerry and/or Spoone, or wouldoperate as a fraud or deceit upon any person.

85. At no time did the Respondents furnish JDK, Deborah, Jerry or Spoone with any prospectus or Franchise Disclosure Document.

86. The Respondents did not furnish JDK, Deborah, Jerry or Spoone with complete oraccurate information regarding the GPSI investment opportunity, and did not place them in a position to make an informed decision as to whether or not to invest or to be able to evaluate the potential risks and benefits of investing in GPSI.

87.

The Respondents furnished projected sales volumes to JDK, Deborah, Jerry andSpoone, just as they have repeatedly done with other investors and potential investors, projectionsthat the Respondents knew or should have known were unattainable.

88. Cook, who is a longtime friend of Talbot, played an important role in theRespondents’ solicitation of JDK, furnishing sales projections and other representations inconjunction with Talbot. The Respondents falsely represented to JDK that Cook would work withTalbot to ensure the success of JDK’s operations in Pennsylvania. Upon information and belief, both Talbot and Cook received compensation from GPSI in connection with JDK’s investment inthe Pennsylvania License.

89.

Cook also played an integral role in the Respondents’ solicitation of Spoone, andknew first hand from his experience as a GPSI licensee in Ohio that GPSI did not have a profitable business plan on the municipal side, yet he failed to disclose this fact to Spoone. Cook, acting inconjunction with GPSI, Talbot, Gilhooly and others, further made numerous misleading FPR’s toSpoone and deliberately misled Spoone into believing that the Ohio License included both the jailand municipal sides.

G. Damages

90. In addition to their original $640,000 investment in the Pennsylvania License fee,Deborah and Jerry, through JDK, have invested $360,000 in expenses related to the PennsylvaniaLicense, purchasing and installing seven kiosks along with travel, advertising and marketing coststo promote the business, all without turning a profit or recouping any of JDK’s investment.Through JDP, Deborah and Jerry have also invested an additional $230,525.91 in the PennsylvaniaJail License, including expenses.

91. Spoone invested $225,000 in the Ohio Municipal License, all without turning a profit or recouping any of his investment.



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First Claim For Relief

Breach of License Agreement/Breach Of Duty Of Good Faith And Fair Dealing - GPSI

92. Claimants restate and incorporate herein by this reference all above-stated paragraphs as if fully set forth herein.

93. GPSI, through its conduct, has materially breached the Pennsylvania License.

94. GPSI owed a duty of good faith and fair dealing to JDK with regard to thePennsylvania License.

95. GPSI breached its duty of good faith and fair dealing to JDK in connection with thePennsylvania License.

96. GPSI prevented JDK from realizing the intended fruits of the Pennsylvania License.

97. As a direct and proximate result of GPSI’s material breach of the Pennsylvania

License, as well as its breaches of its duty of good faith and fair dealing, JDK has sustaineddamages in an amount to be proven at the Arbitration.

Second Claim For Relief

Breach of Buy-Sell Agreement/Breach Of Duty Of Good Faith And Fair Dealing - Cook


99. Cook, through his conduct, has materially breached the Buy-Sell Agreement.

100. Cook owed a duty of good faith and fair dealing to Spoone with regard to the Buy-Sell Agreement.

101. Cook breached his duty of good faith and fair dealing to Spoone in connection withthe Buy-Sell Agreement.

102. Cook prevented Spoone from realizing the intended fruits of the Buy-SellAgreement.

103.

As a direct and proximate result of Cook’s material breach of the Buy-SellAgreement, as well as his breaches of his duty of good faith and fair dealing, Spoone has sustaineddamages in an amount to be proven at the Arbitration.

Third Claim For Relief

Civil RICO




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105. The Respondents were employed by or associated with one or more affiliatedenterprises that were engaged in or affected interstate or foreign commerce.

106. During the period 2011 through 2014, the Respondents conducted or participatedin the conduct of the affairs of the enterprise(s), and did so through a pattern of racketeering activitywhich included the numerous fraudulent misrepresentations and material omissions directed to theClaimants, as set forth infra.

107. The Respondents, working in concert with one another, knowingly carried out and participated in their fraudulent scheme.

108. The Respondents carried out and participated in the fraudulent scheme through theuse of the mail and wires in furtherance of their scheme, and by promising to perform an act in thefuture which, at the time of making the promise, they had no intention of ever performing.

109. As a direct and proximate result of the Respondents’ racketeering activity, theClaimants were damaged in an amount to be determined at the Arbitration.

Fourth Claim For Relief

Fraudulent Inducement


111. The Respondents fraudulently induced the Claimants to invest in GPSI by enteringinto the Pennsylvania License, the Jail License and the Buy-Sell Agreement.

112. As specifically set forth, infra, the Respondents, by and through their authorizedrepresentatives, furnished written and oral financial performance representations, projections, profit forecasts and other statements (the “Misrepresentations”) to the Claimants which were falseor materially misleading, contained material misrepresentations of past or existing facts, weremade without a reasonable basis or written substantiation, and/or which omitted one or morematerial facts necessary in order to make the statements made, in the light of the circumstancesunder which they were made, not misleading.

113. At the time the Respondents, by and through their authorized representatives, madethe Misrepresentations, they knew the information contained therein to be false, or they made suchMisrepresentations with reckless ignorance of their false or misleading nature.

114. The Respondents, by and through their authorized representatives, made the

Misrepresentations with the intent that the Claimants would rely on them, and with the intent thatthe Misrepresentations would cause the Claimants to invest in the GPSI system.

115. The Claimants reasonably relied upon the Misrepresentations by entering into thePennsylvania License, the Jail License and the Buy-Sell Agreement, and by investing significantsums of money into GPSI and particularly into the ongoing operation and development andoperation of the business in Pennsylvania and Ohio, to the Claimants’ substantial detriment anddamage.



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116. But for the Misrepresentations, the Claimants would not have entered into thePennsylvania License, the Jail License and the Buy-Sell Agreement.

117. The Claimants have been damaged by the Misrepresentations made by theRespondents in an amount to be determined at the Arbitration.

118. The damages incurred by the Claimants were proximately caused by theRespondents’ Misrepresentations.

Fifth Claim For Relief

Fraud


120. The Respondents, by and through their authorized representatives and agents,

engaged in fraudulent conduct in connection with the Pennsylvania License, the Jail License andthe Buy-Sell Agreement.

121. In particular, as described above, the Respondents, acting in concert with oneanother, implemented and executed a scheme through which the Respondents sold the Claimantson what amounts to a Ponzi Scheme, doing so through the use of numerous illegal FPR’s and othermisrepresentations, as well as through the concealment of critical facts. The Respondents used theClaimants as a “bank” to fund their fraudulent activities, and ultimately to put money in their own pockets at the Claimants’ expense.

122. The Respondents carried out this fraudulent scheme through a series ofmisrepresentations and material omissions made to the Claimants concerning the PennsylvaniaLicense, the Jail License and the Buy-Sell Agreement over a four-year period, including but notlimited to the acts and omissions set forth in Paragraphs 17 through 55 of the Demand.

123. As described above, Cook personally participated and furthered the fraud describedherein by, among other things, sanctioning the fraud and directly interfacing with the Claimants.

124. Cook knew or reasonably should have known that the Misrepresentations were falseand that they were concealing critical facts. He was aware that the Claimants were relying uponthe Respondents’ representations.

125. The Claimants reasonably relied upon the Misrepresentations to their substantial

detriment.

126. As a direct and proximate result of the Respondents’ Misrepresentations andfraudulent non-disclosure, the Claimants have suffered damages in amount to be proven at theArbitration.

Sixth Claim For Relief

Violation of Colorado Consumer Protection Act



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128. The Respondents violated the Colorado Consumer Protection Act, §6-1-101 et seq.(the “CCPA”) by engaging in an unfair or deceptive trade practice when they made the

representations detailed above and by concealing facts as detailed above, and by selling a franchiseto claimant without providing an FDD as required by the Federal Trade Commission’s FranchiseRule, 16 C.F.R. §436 et seq.

129. Cook participated in violations of the CCPA described herein by, among otherthings, personally conceiving of and/or orchestrating the fraudulent or unfair trade practices andthen participating in the execution thereof, by approving and sanctioning the fraudulent and unfairtrade practices.

130. Cook participated in violations of the CCPA described herein by, among otherthings, personally participating in the execution of the fraudulent or unfair trade practices.

131.

The Respondents made the above-referenced misrepresentations in the course ofthe EZ Pay System, for the purpose of inducing the Claimants to invest in GPSI through thePennsylvania License, the Jail License and/or the Buy-Sell Agreement. The Respondents’ unfairand deceptive trade practices were fraudulent, willful, knowing and intentional.

132. The Respondents’ unfair and deceptive trade practices significantly impact the public as actual or potential consumers, and their methods have a tendency and capacity to attractcustomers.

133. As a direct and proximate result of the Respondents’ violations of the CCPA, theClaimants have suffered injuries in fact to legally protected interests.

134.

The Claimants have been damaged by the Respondents’ violations of the CCPA inan amount to be determined at the arbitration of this matter, but believed to be in excess of$1,600,000.00.

Seventh Claim For Relief Civil Theft/Conversion


136. GPSI and Cook, acting directly, in concert, and/or through representatives,employees and/or agents, has knowingly retained, obtained and/or exercised control over funds belonging to JDK, JDP, Deborah, Jerry and Spoone without authorization.

137. In particular, one or more of the Respondents obtained funds from Deborah andJerry in connection with JDK or the Pennsylvania License or with JDP or the Jail License, and/orfrom Spoone in connection with C&T or the Ohio License, being fully aware that the Claimants



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would receive no consideration for their investments, and being fully aware that the investmentswould fail.

138. Working in concert, one or more of these Respondents obtained possession of theClaimants’ funds by fraud or deception.

139. As a result of the utter absence of any consideration furnished by the Respondentsto the Claimants in return for their investment in the Pennsylvania, Jail and Ohio Licenses, rightfulownership of these funds continues to belong to the Claimants.

140. Upon information and belief, one or more of these Respondents intended to permanently deprive the Claimants of the use or benefit of these funds.

141. As a direct and proximate result of the actions of one or more of these Respondents,the Claimants have suffered and/or will suffer damages in an amount to be determined at thearbitration.

Eighth Claim For Relief

For Constructive Trust

142.

Claimants restate and incorporate herein by this reference all above-stated paragraphs as if fully set forth herein.

143. All revenue and profits that the Respondents have wrongfully and unjustly obtainedas a result of their acts of infringement are subject to an equitable lien and constructive trust forthe benefit of the Claimants.

144. The Claimants therefore request that the Arbiter impose a constructive trust on the proceeds from the use of any infringing acts or products, wrongfully in the hands of theRespondents, as well as the portion thereof which are in the hands of others, whether or not theRespondents herein, in order to preserve said proceeds for the Claimants.

Ninth Claim For Relief

Accounting – GPSI

145. Claimants re-allege and incorporate by reference each and every allegationcontained in the previous paragraphs, as though fully set forth herein.

146. The actions of GPSI, which include the unauthorized taking and/or redirecting of

funds belonging to the Claimants, have resulted in improper profits, revenues, and other financialgains to GPSI for which the Claimants, in equity and good conscience, are rightfully entitled toreimbursement.

147. The Claimants not know the amount of revenue and profits wrongfully realized byGPSI, which information is uniquely within the knowledge of the Respondents. The Claimantsare, therefore, entitled to an accounting, at GPSI’s expense, to determine the amount of revenueand profits that GPSI has unjustly obtained through its wrongful acts.



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148. The Claimants accordingly demand a full and complete forensic accounting ofGPSI’s books and records, as well as the books and records of all affiliated entities as well as anyother entity under GPSI’s ownership or control, dating back to July 1, 2011.

Additional Claims For Relief

149. Claimants reserve the right to add additional claims during or following discovery.



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IV. PRAYER FOR RELIEF

WHEREFORE, the Claimants respectfully request that the Arbiter enter an Award in theirfavor, and against the Respondents, jointly and severally, for the following relief:

a.

Rescission of the Pennsylvania License and the Buy-Sell Agreement;

b. Damages in the amount of $1,600,000, trebled pursuant to statute, together with pre-and post-judgment interest, attorney’s fees, costs, expert witness fees and all otherexpenses of the Arbitration;

c. Disgorgement of all profits generated by the Respondents through the PennsylvaniaLicense, the Buy-Sell Agreement, the Ohio License, and the Jail License;

d. An order requiring an immediate accounting of all of the respective revenues and profits derived by GPSI through its wrongful activities set forth herein, at GPSI’s

expense;

e. An order imposing a constructive trust on all revenues and profits from theRespondents’ wrongful activities and conduct;

f. For such other relief as the Arbiter deems just and proper.

Dated this 13th day of March 2015.

BROWN & KANNADY, LLC

By: /s/ David J. Meretta .. David J. MerettaScott T. KannadyAttorneys for ClaimantsJDK LLC, Deborah Kolassa, Jerry Kolassa andS. Mark Spoone

Original Signature on File



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Certificate of Service

I hereby certify that on this 13th day of March 2015, I served, by electronic mail, a true and

correct copy of the foregoing document to the following recipients:

Lawrence W. Horwitz, Esq. John R. Armstrong, Esq. Susan E. Lewis, Esq. Horowitz & Armstrong

6475 Rancho Parkway South

Lake Forest, CA 92630

Robert J. Bruce, Esq. < [email protected]>1543 Champa St., #400

Denver, CO 80202

By: /s/ Karin West .


JDK LLC et al v. Hodge et al Doc 71-1 filed 21 Jul 15.pdf

Documents

Transcript of JDK LLC et al v. Hodge et al Doc 71-1 filed 21 Jul 15.pdf