Lumen Sues Board Member for Allegedly Keeping Funds Paid in Clerical Error

Lumen is suing an investor and board member who allegedly pocketed the entire distribution authorized by the board in a 2019 consent, after the investor and his wife received $3.4 million -- vs. the $266,200 they should have received -- due to a clerical error, said a complaint (docket 1:23-cv-16484) in U.S. District Court for Northern Illinois in Chicago.

The investor, Joseph Stroud, an Illinois citizen, served as chair, president and sole director of Telephone USA Investments (Investments), which holds a 10% stake in TelUSA Holdings, LLC; Lumen holds a 90% interest in TelUSA, the complaint said. The TelUSA board unanimously authorized a distribution to all members of the LLC on Dec. 18, 2019, in an aggregate amount of $3.41 million, based on “pro rata membership interests in the LLC,” the complaint said. Two of the board members signing the unanimous consent were Stroud and his wife, it said.

The prorated share of the distribution that Investments was due to receive was $341,200, subject to an “agreed-upon $75,000 withholding for payment of taxes,” the complaint said. The agreed-upon net distribution to be paid to Investments after withholding for taxes was $266,200, it said.

Due to a clerical error, Investments received a wire transfer to its Charles Schwab account for $3,412,000 on Dec. 20, 2019, the complaint said. Investments received Lumen’s 90% share of $3,070,800 and the amount of its agreed-upon tax payment of $75,000, it said. “Both Investments and Mr. Stroud knew that the payment exceeded that to which Investments was entitled,” the complaint said.

On Dec. 27, Stroud, representing Investments, notified Lumen it had received the entire December 2019 distribution, totaling $3,412,000; Lumen requested return of the net overpayment amount and provided wiring instructions for doing so, the complaint said. Though “Investments and its representatives initially indicated that they would return the overpayment,” the complaint said, “no repayment ever occurred.”

On Dec. 8, 2021, Lumen initiated arbitration proceedings with the American Arbitration Association, seeking to recover the $3,145,800 overpayment received by Investments in December 2019, the complaint said. Lumen asserted claims of breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and “money had and received,” it said. Following initiation of those proceedings, the two parties entered into further discussions about resolution of the dispute, and entered into a contract the following February, it said.

Investments “failed to perform its obligations” under the letter agreement and the case went to arbitration, the complaint said. On March 11, after an in-person hearing before a panel of three arbitrators, the panel found for Lumen on all counts, it said. The panel awarded Lumen $3,412,000 in damages plus 3% interest accruing from February 22, 2022, until the award is paid in full, it said. The arbitration panel’s award was confirmed in Telephone USA Investments, Inc. v. Lumen Technologies, Inc. in U.S. District Court for the Northern District of Illinois, the complaint said.

During the arbitration proceeding, Lumen learned that a transfer from Investments’ Charles Schwab account to Stroud occurred Dec. 24, 2019, another transfer of $700,000 between the same accounts occurred on Oct. 20, 2020, and two more transfers of $400,000 each occurred in November 2020 and October 2022, the complaint said. The transfers were “made for the benefit of Mr. Stroud,” who used the funds Investments received “to pay personal expenses and debts, including, inter alia, a $1,276,718 federal income tax lien,” it said.

Lumen asserts three claims “to avoid and recover fraudulent transfers made in violation of the Illinois Uniform Fraudulent Transfer Act," said the complaint. A fourth count requests a permanent injunction against Investments or Stroud, prohibiting them from disposing of any property that could be recovered from the defendants under the first three counts to repay the December 2019 overpayment, it said.