Item 8.01 Other Events.
On June 23, 2016, Creative Learning Corporation (the Company) filed a counterclaim against its former Chairman of the Board and Chief Executive Officer Brian Pappas in state court in St. Johns County, Florida. The opening paragraphs of the counterclaim state:
1.
This complaint seeks redress for losses and expenditures caused by fraud, conversion of company assets, and breaches of fiduciary duty that Brian Pappas perpetrated upon CLC while serving as the Chief Executive Officer of CLC and a member of its board of directors.
a.
First
, Pappas defrauded CLC, converted company assets and breached his fiduciary duty of loyalty by causing CLC to pay his company, FranVentures, more than $1,000,000 by falsely asserting that the funds were due under a contractual provision that Pappas knew had expired when CLC acquired BFK Franchise Company, LLC (BFK). After CLC stopped payments to FV in October 2015, Pappas sued CLC, claiming that CLC had to pay FV under that contract
in perpetuity
that is, Pappas took the position that CLC
never
could stop paying his company even though he knew that there was no legal basis for his claims.
b.
Second
, to conceal the foregoing fraud scheme, Pappas made and caused to be made material false statements and material omissions regarding the transaction to CLC independent directors as well as in CLCs filings with the U.S. Securities and Exchange Commission (the SEC).
c.
Third
, Pappas breached his fiduciary duty of loyalty to CLC by repeatedly engaging in self-dealing and causing CLC to enter into several transactions with, and to make payments to or on behalf of, several members of his family, including his wife and brother, which transactions and payments were not disclosed to or approved by CLCs board of directors and were not in the best interests of the Company and its shareholders.
i.
In particular, Pappas breached his fiduciary duty of loyalty by causing CLC to engage in repeated financial transactions with brother, Jeff Pappas including: (i) causing CLC to pay Jeff Pappas and/or his company approximately $560,000 in commissions and retainer payments from in or about 2010 to in or about 2015 including for handling CLC franchise sales, knowing or having reason to know that Jeff Pappas would and did do so in a reckless manner that exposed CLC to regulatory risk, liability, financial loss and reputational damage; and (ii) causing CLC to provide various financial benefits to Jeff Pappas to the financial detriment of CLC, including causing CLC to make loans and extensions of credit to Jeff Pappas and his company totaling approximately $40,000 in or about 2011-12 and thereafter causing CLC to write-off these loans and credit extensions as bad debt prior to their due date, notwithstanding that Pappas was during the same time causing CLC to pay retainer and commission payments to Jeff Pappas and his companies of at least $89,000. Pappas intentionally paid his brother these sums instead of setting off Jeff Pappas debt against the commissions and retainers purportedly owed to him.
ii.
Pappas also breached his fiduciary duty of loyalty by causing CLC to pay at least $95,000 in charges incurred by Pappas and his wife, Christine Pappas, on a CLC American Express credit card from in or about 2013 to in or about July 2015 without maintaining at the time, and thereafter in 2016 refusing to provide, proper and adequate business records and documentation for those expenditures. As a result, CLC is unable to verify that these expenditures were incurred for a proper business purpose and cannot deduct these payments as business expenses.
d.
Fourth
, Pappas breached his fiduciary duty of loyalty to CLC by causing CLC to expend hundreds of thousands of dollars to respond to an investigation of Pappas and the Company the SEC initiated in early 2015 while Pappas was CLCs CEO and Chairman of the Board as a result of Pappas misconduct detailed above, including CLCs transactions with and payments to FV and Pappas family members, public disclosures relating to these transactions that Pappas caused the Company to make, inadequate internal corporate and financial controls, and other issues.
e.
Fifth
, Pappas breached his fiduciary duty of loyalty to CLC by causing CLC liability for restitution and rescission payments, as well as state penalties and costs, in connection with an investigation conducted by the State of Virginia, alleging that Pappas committed fraud in relation to sales of Challenge Island franchises in Virginia, and that he thereafter caused an attempt to cover-up this fraud by taking further illegal actions. CLC has since divested itself of Challenge Island.
f.
Sixth
, Pappas breached his fiduciary duty of loyalty to CLC by failing to implement adequate internal financial and corporate controls, thereby concealing his other misconduct and permitting Pappas to control and dominate CLC, misappropriate the Companys assets, and repeatedly engage in fraud and self-dealing to the detriment of the Company and its shareholders.
g.
Seventh
, Pappas misconduct described above was a material cause of the substantial delay and difficulty of the Companys independent auditors in performing the audit of the Companys financial statements for the 2015 fiscal year, which required the Company to suspend its domestic franchise sales on February 1, 2016 continuing until the date of this Complaint, causing financial loss to the Company.
The misconduct outlined in this complaint was terminated only after Pappas was forced to admit new independent directors to CLCs board, and has caused the Company great expense and dislocation to mitigate the damage Pappas had caused.