Note 11 - Commitments and Contingencies

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

11—Commitments

and Contingencies

 

Employment Agreements

 

On

November

11,

2016,

the Company announced that it will continue its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia Capital, LLC (“Simia”). In connection with its formation, Simia entered into an employment agreement (the “Employment Agreement”) with Patrick F. Preece to serve as its Chief Executive Officer. Under the Employment Agreement, Mr. Preece will receive an annual base salary of

$250,000,

subject to annual increase at the discretion of the compensation committee (the “Compensation Committee”) of the board of directors of the Company (the “Board”). Mr. Preece will be eligible to receive an annual cash or non-cash bonus in the sole and exclusive discretion of the Compensation Committee. Mr. Preece will also be eligible to receive a cash or non-cash profit bonus of an aggregate amount up to

15%

of the profit of the business of Simia (the “Business”) for each fiscal year in which the Business achieves an internal rate of return of at least

18%.

In the event that the Business is sold to a

third

-party solely for cash consideration during Mr. Preece’s employment period, he will be eligible to receive a cash or non-cash sale profit bonus of up to

15%

of the closing consideration received by the Company. He will also be entitled to participate in any other benefit plans established by the Company for management employees. The Employment Agreement has a

five

year term. Under the Employment Agreement, Mr. Preece

may

be terminated with or without “cause” (as defined in the Employment Agreement) and

may

resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece is terminated without “cause” or resigns for “good reason” he will receive severance equal to

two

years of his base salary. He will also be entitled to a pro-rata share of the profit bonus and his deferred compensation will vest immediately. Mr. Preece is also subject to a non-compete and non-solicitation provision during the term of his employment and, unless his employment is terminated without “cause” or he resigns for “good reason,” for

two

years thereafter.

 The employment contracts of the original

two

CBC principals expired at the end of

December

2016.

The Company did not renew those contracts. Ryan Silverman has been appointed as the new CEO effective

January

1,

2017.

Leases

 

The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, New York, NY, and Conshohocken, PA. 

Legal Matters

 

In

June

2015,

a punitive class action complaint was filed against the Company, and

one

of its

third

-party law firm servicers, alleging violation of the federal Fair Debt Collection Practice Act and Racketeer Influenced and Corrupt Organization Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors. 

The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about

March

 

31,

2015,

the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in

July

2015,

at which the Company agreed to settle the action on an individual basis for a payment of

$13,000

to each named plaintiff, for a total payment of

$39,000.

Payment was made on or about

July

 

24,

2015.

The

third

-party law firm servicer has not yet settled and remains a defendant in the case. 

The plaintiffs’ attorneys advised that they are contemplating the filing of another punitive class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. Through

March

31,

2016,

the parties had attended

two

mediation sessions and were continuing to discuss a global settlement. In connection with such discussions, the settlement demand from plaintiffs was

$4

million and the counteroffer from the Company and its

third

-party law firm servicer was

$3.875

million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer had also offered, as part of the counteroffer, to cease collection activity on the affected accounts. Accordingly, the Company set up a reserve for settlement costs of

$2.0

million during the

three

months ended

March

31,

2016,

which was included in general and administrative expenses in the Company’s consolidated statement of operations. 

The Company reassessed the situation as of

September

30,

2016

and deemed that an additional

$0.3

million was necessary to account for legal expenses, which were made during the

three

month period ended

September

30,

2016.

 The Company reviewed this case as of

December

31,

2016

and deemed that the

$2.3

million reserve remains valid.

In the ordinary course of the Company’s business, it is involved in numerous legal proceedings. The Company regularly initiates collection lawsuits, using its network of

third

party law firms, against consumers. Also, consumers occasionally initiate litigation against the Company, in which they allege that the Company has violated a federal or state law in the process of collecting their account. The Company does not believe that these ordinary course matters are material to its business and financial condition. As of the date of this Form

10

-Q, the Company is not involved in any other material litigation in which it is a defendant.