The Snopes Fight Is Even Way More Complicated Than We Originally Explained

from the and-it-was-already-complicated-then dept

If you read our post a few weeks ago about the very messy legal fight between Snopes and Proper Media, you may recall that we spent many, many words explaining how the story was way, way, way more complicated than most in the media were portraying it. And significantly more complicated than how Snopes was portraying it. And we thought we did a pretty good job explaining all of that. Indeed, one of our commenters noted: "Wow. This couldn't possibly get any messier."

He was wrong. It turns out it's even messier. And it involves accusations of tax scams and shell companies, none of which came out in the last discussion on all of this. So, buckle in.

In our original story, we fact checked Snopes' claim that it was being "held hostage" by "a vendor." As we pointed out this was, at best, misleading, but the full story was hellishly complex and involved a nasty divorce, poor choices in equity structure, some poorly drafted contractual agreements and much, much more. It was not nearly as simple as saying that one party was holding the other hostage. I'm not going to repeat all of the details here (that original post was pretty damn long), but the real issue came down to the fact that the top execs at Proper Media had ended up purchasing 50% of Snopes' parent company, Bardav, due to a (very acrimonious) divorce between the two (previously) married founders. But because the company was an S Corp., Proper Media itself could not hold the shares, only individuals could. So the shares were split up between the top execs. Proper now claims that (1) those individuals were all really holding the shares on behalf of the company and (2) it accused Bardav's other shareholder, David Mikkelson, of some fairly egregious business practices and handling of corporate funds. No matter what, though, this was not a case of merely "a vendor" holding the site "hostage."

The legal claim, though, felt weak -- if Proper really wanted to own the shares as a company, it should have figured out a way to do something, such as converting the company to a traditional C corp. And, indeed, so far, the case does not appear to be going Proper's way.

In a tentative ruling issued ahead of Friday’s hearing, Judge Judith Hayes of the San Diego Superior Court decided in favor of Bardav in two crucial causes of action.

Proper Media cannot remove Mikkelson as a director of the company, the judge said.

“Proper Media does not have standing to seek removal of Mikkelson. … Plaintiffs have not presented sufficient evidence to prove fraudulent acts,” Hayes wrote in her decision.

The judge also granted Bardav’s request for Proper Media to release the advertising revenue the firm has withheld from the company.

Meanwhile, folks on both sides of the fight have reached out to us directly to supply more information, leading us to discover that what was already hellishly complex, is much, much more so. One of the complicating factors -- that was mostly a sideshow piece of the original story -- was that one of the Proper Media execs, Vincent Green, who had received 3.33% of Bardav in the equity sale had "flipped sides" during the dispute. In short, when Proper Media divvied up the shares, Green got some (much less than Proper's two top execs, but still a bunch). However in the spring, he stopped working for Proper and started working for Snopes directly (while at Proper he'd done a lot of work for Snopes already). From the complaint (and from our last story):

On Saturday, February 18, 2017, Richmond and Schoentrup had an in-person conversation with Green at Proper Media’s offices. When confronted, Green admitted that he was not acting in the best interest of Proper Media. After this conversation, Green never returned to the Proper Media office, and performed no further work for Proper Media. On Tuesday, February 21, 2017—the second business day after the conversation described above—without Richmond’s or Schoentrup’s knowledge or consent, Green removed Richmond’s and Schoentrup’s access to the Snopes content-management system, instructed three Proper Media employees not to return to work, and removed thousands of dollars of computer equipment from the Proper Media offices used by these three employees. On information and belief, Green did so in conspiracy with and at the direction of Mikkelson.

[....]

On or about March 8, 2017, Green added himself to the “Snopes.com Staff” page on Snopes, which lists his role as “Business Development”. Snopes.com Staff, http://www.snopes.com/snopes-staff/ (last accessed Apr. 27, 2017; archived at https://perma.cc/BRX7-C99L).

On March 10, 2017, again without Richmond’s or Schoentrup’s knowledge or consent, Green removed Snopes-related data from Proper Media’s communication and project-management tools, including Slack and Asana. On information and belief, Green did so in conspiracy with and at the direction of Mikkelson.

[....]

Also on March 10, 2017, Mikkelson purported to terminate the General Services Agreement, to be effective in 60 days, i.e., on or about May 9, 2017.

On or about April 1, 2017, Mikkelson removed Richmond’s and Schoentrup’s access to the bank account used for Snopes business by Bardav and Proper Media.

On April 3, 2017, Green gave written notice—from his Snopes email account—of his resignation from Proper Media.

During the weeks between February 18, 2017 and April 3, 2017, Green admitted that he was doing no work for Proper Media, and was instead working with Mikkelson at Bardav. Despite doing no work, until April 3, 2017, Proper Media continued to pay Green, and contributed to Green’s health-insurance premiums.

Now, when I had first read this, I'll admit that a little voice in the back of my head wondered about the opening of that story -- the line about how "Green admitted that he was not acting in the best interest of Proper Media." What the hell does that mean? But there wasn't much more info, so I didn't follow up. However, I was unaware that there was a parallel lawsuit going on. Not only was Proper Media suing Bardav over what it claimed was David Mikkelson's questionable behavior with Bardav, it separately sued Green. Proper's complaint about Green is pretty similar to what's already written in its complaint against Bardav, but focusing on breach of contract and similarly related claims against Green.

However it's Green's cross complaint that contains the fireworks (amusingly, Green sent us this document saying that it showed how the story was "not as messy as you think." No, it's messier.). First up, about that odd meeting in February, where Proper's 2 top guys, Christopher Richmond and Drew Schoentrup, supposedly got Green to admit that he was not acting in the best interests of Proper Media, well, Green has somewhat different take on that meeting.

In mid-February 2017, Schoentrup and Richmond were in the United States. On February 18, 2017, Schoentrup and Richmond called a meeting with Green. During this meeting, Schoentrup and Richmond told Green that they felt that Green did not respect them, that Green did not work well with Richmond, and that the personality conflict between Richmond and Green had made it impossible for Green to continue working for Proper Media. Schoentrup and Richmond further told Green that he should leave Proper Media, clear out his office, and not return to work.

Immediately after the February 18, 2017 meeting, Richmond sent Green a message stating:

will work out some proposals for the buy out and get back to you. No need to come to the office. You can start passing over any projects, accounts, logins, etc to us. And of course you will still be getting your salary this month while we make the transition.

That's a bit different than the way it's described in Proper's lawsuit, where the whole "getting fired" thing as well as the "don't come into the office" part was left out. And how did things get to this stage where Green and the others were fighting? Well, some of that actually goes back to some contentions over the purchase of Bardav/Snopes shares:

Schoentrup, Richmond, Green, Miller, and Dunn were interested in acquiring an interest in Bardav as early as summer 2015. In early 2016, Green learned that Schoentrup had begun clandestine discussions with Barbara Mikkelson ("Barbara"), David Mikkelson's estranged wife and co-owner of Bardav, to acquire Barbara's 50% interest in Bardav. When Green confronted Schoentrup about this, Schoentrup showed Green a draft purchase agreement that had Schoentrup and Richmond acquiring Barbara's interest to the exclusion of the other minority shareholders in Proper Media, namely Green, Miller, and Dunn. The opportunity to purchase 50% of Bardav was an opportunity that came to Schoentrup and Richmond as a result of their work for Proper Media and was an opportunity that did not belong solely to Schoentrup and Richmond. Indeed, the opportunity would not have existed at all except for Green's diligent work on the Snopes.com account. As such, Green insisted that all Proper Media members be given the opportunity to participate in any acquisition of Barbara's 50% interest.

And, indeed, that's how it eventually worked out. Of course, to me at least, the fact that there appeared to be some contention over this at such an early stage (with Richmon and Schoentrup potentially keeping the others out of the deal) make it that much more egregious that issues over actual ownership weren't taken care of earlier. It seems by that point alone that the likelihood of some of the minority shareholders leaving the company should have been obvious and if Proper wanted to claim it truly controlled the shares, it should have taken concrete steps to make that true contractually. It did not.

But we're just getting started here. In order to purchase the 50% of Bardav from Barbara, Proper Media needed to secure some financing. In the original post and in David Mikkelson's telling of the story, the amount was quite high. And then (per Green's cross-complaint) the following happened:

On August 19, 2016, Diamond Creek Capital sent a draft loan agreement to Schoentrup. Schoentrup forwarded the draft loan agreement to Richmond, Green, Miller, and Dunn. In this email, Schoentrup stated:

Here is a draft of the loan agreement. I haven't reviewed, and I am not sure how much we will actually end up taking.

The biggest issue for the union [e.g., Green, Miller, and Dunn] is that you are personally listed on the loan docs and joint and severally liable -- meaning should we default, Diamond Creek can seek payment in full from any one of us individually -- basically they will go where the money is. To mitigate any heartburn that this may cause, Chris and I will execute an indemnity agreement basically saying that should Diamond Creek come after anyone other than us, we will step in and assume that liability and the costs incurred.

Green claims that Schoentrup and Richmond never actually executed that indemnity agreement, and thus "misrepresented" things. This will come up again soon in connection to all of this, so consider it foreshadowing as we move on.

As part of the loan agreement, Proper Media had to create an "operating agreement" that Green claims he felt pressured into signing, and again throws some shade at Schoentrup, claiming that he misrepresented things to Green, and that he never explained that he was operating in Proper Media's interests. Which... okay... but by this point, I'm surprised that Green himself didn't find an attorney to review anything he was signing, as he's already indicated that he was uncomfortable with some aspects of this deal. But he's about to get a lot more uncomfortable by his telling of the story.

You see, before the loan itself was made, and before Green was supposedly pressured into signing this operating agreement, he argues that Richmond and Schoentrup had begun to "implement a tax avoidance scam." From Green's filing:

Additionally, in mid-2016, Schoentrup and Richmond began to implement a tax avoidance scam involving Schoentrup and Richmond relocating to Puerto Rico in order to take advantage of Puerto Rico's Promotion of Export Services Act ("Act 20") and/or Puerto Rico's Act to Promote the Relocation of Individual Investors to Puerto Rico ("Act 22").

Schoentrup moved to Puerto Rico on or about July 1, 2016. Richmond moved to Puerto Rico on or about January 1, 2017.

One of the requirements for individuals residing in Puerto Rico to avoid US. federal income tax (and thereby receive the minimal or zero income tax benefits of the Puerto Rico Act 20 and/or Act 22) is that the taxpayer cannot receive any income from a U.S. company. Therefore, in order to reap the tax benefits of Act 20 and/or Act 22, Schoentrup and Richmond could not receive any salary or distributions from PrOper Media.

Schoentrup resigned his employment with Proper Media on or about July 1, 2016. Richmond resigned his employment from Proper Media on or about January 1, 2017.

In order for Schoentrup and Richmond to continue receiving money from Proper Media, they concocted a scheme whereby they created PubLife, a Puerto Rico limited liability company, and said that Proper Media would sign a "consulting" agreement with PubLife. Instead of making distributions to members, Proper Media would pay a "consulting fee" to PubLife and would compensate its other members (Green, Miller, and Dunn) with year-end "bonuses" in lieu of membership distributions. According to Schoentrup and Richmond, the amount of each of the PubLife "consulting fee" and the year-end bonuses to Green, Miller, and Dunn would be commensurate with each member's percentage ownership in Proper Media. Being paid in "bonuses" instead of distributions would create negative tax consequences for Green.

Green is informed and believed that, using the above scheme, Schoentrup and Richmond intended not to pay any federal income tax on the money they received from Proper Media through PubLife

>

26 United States Code section 7201 provides:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be ?ned not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution

Green had serious concerns with the legality of Schoentrup and Richmond's tax avoidance scheme. In particular, Green was concerned that Schoentrup and Richmond's PubLife scheme crossed the line into illegal conduct. Green was particularly concerned about the impact of such potential tax law violations on Proper Media. Green voiced his concerns with Schoentrup's and Richmond's PubLife scheme as early as June 2016 during a series of meetings with Schoentrup and Richmond.

So, that's a bit of a twist, huh? There doesn't seem to be anything in the exhibits that Green filed with the complaint to substantiate these claims, but... uh... that's certainly notable. If the above is accurate, it would mean that technically Shoentrup and Richmond weren't even employed by Proper Media at the time they purchased the shares in Bardav, which they're telling a court is really owned by Proper Media. But, of course, all this happened prior to the loan agreement and the plan to buy into Bardav/Snopes, so it still confounds me that Green didn't think to get a lawyer to make sure this was all legit.

From there, things continued to go sour in the days leading up to that February meeting which becomes key:

Schoentrup and Richmond also revealed that PubLife intended to search for and potentially acquire websites. The opportunity of website acquisition was specifically within the scope of Proper Media's business and to the extent that PubLife acquired any such websites, Schoentrup and Richmond would be taking a corporate opportunity of Proper Media. Green told Schoentrup and Richmond that he objected to PubLife acquiring any such websites or otherwise taking any of Proper Media's corporate opportunities.

Schoentrup's and Richmond's relocation to Puerto Rico had other deleterious effects on Proper Media. Schoentrup and Richmond appeared to stop working on Proper Media's day-to-day affairs and were generally unreachable for large periods of time. On numerous occasions, Green found himself having to explain to other Proper Media employees why Richmond or Schoentrup were unavailable to assist with projects they had formerly worked on at Proper Media. Green voiced these concerns to Schoentrup as well.

When Richmond left for Puerto Rico in January 2017, Green once again voiced his concerns regarding Schoentrup and Richmond's tax avoidance scheme including the potential legal implications, especially for Proper Media. Green also made it known to Schoentrup and Richmond that their absence from Proper Media's offices was having a negative impact on the company's operations.

And that then brings us up to date (in Green's retelling) to that February meeting where (in Proper's version) Green "admitted that he was not acting in the best interest of Proper Media" and never returned to the office again. And, in Green's version, it's that Schoentrup and Richmond told Green he wasn't respecting them, and that due to personality conflicts he should "clear out his office, and not return to work."

From there things continue to disintegrate. Shoentrup and Richmond apparently try to buyout Green's shares in Proper Media as part of his termination, but that included wanting Green to give Shoentrup and Richmond the voting power over Green's shares in Bardav/Snopes. Green claims he pushed back on that. And soon after this, that whole issue of who was liable in the event of default was brought back up:

In connection with negotiating the sale of his Proper Media membership interest back to the company, Green requested that the parties address his obligations under the DCC Loan Agreement. Green proposed that the parties agree to certain specified payments to address Green's portion of the loan amount.

In response, on April 24, 2017, Richmond sent Green a series of emails, stating:

[W]e can't sign anything for the debt as we are each liable for the entire debt amount.

Considering the adverse effect you've caused to the company there is no way we will sign something saying you are responsible for a portion of the debt. You are responsible for 100% of the debt.

After Green responded that he understood that he had signed a personal guarantee with respect to the DCC Loan and was simply trying to address his portion of the loan, Richmond responded:

You didn't just sign a personal guarantee. The loan documents say we are each responsible for the entire debt amount, not just a portion based on equity lines. And I'm afraid your actions already open us up to being in default of the loan. We will be in touch once we figure out what to do.

So, yeah. Remember when I said above to remember the promise to indemnify? Yeah.

A few weeks later, in early May, Schoentrup demanded that Green go into mediation with Proper Media. Green responded saying he (FINALLY!) wanted to speak to a lawyer first, and further notes that the Proper Media Operation Agreement that they had all signed said that they agreed "to enter mediation before filing suit against any other Member...." But before Green could reply again, the lawsuit was filed.

As I said, this got a lot more complicated. Frankly, no one comes out of this looking very good -- and, yet again, this seems like another case where people should have brought in lawyers (or better lawyers) much, much earlier in the process. It's unfortunate that all this dirty laundry is airing out in public. It feels like most of this stuff could have been solved amicably very early on if the contracts and the buyouts had been clearer. But, through a series of bizarre moves on the part of almost everyone, things get more and more messed up, and eventually it all comes out in court. Bardav/Snopes doesn't come out of this looking great and neither does Proper Media. But on the legal issue, it seems that Snopes is likely to prevail at least on the bigger issues.

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Filed Under: barbara mikkelson, christopher richmond, david mikkelson, drew schoentrup, vincent green
Companies: bardav, proper media, publife, snopes