You opened the restaurant. You have a two-year lease.
You were affected by COVID.
- Yes. - [Judge DiMango] And as a result,
you sir, applied for PPP loans?
Yes, my company did.
You say that he kept all of the money owed to you for your employees.
Because it's free money.
That's the fraud on the American public.
[announcer] Now on Tribunal Justice.
["Ride of the Valkyries" plays]
[announcer] Today's case was filed in Palm Springs, California.
[Byrd] Your Honor, this is case number 2077 on the calendar
in the matter of Gornes versus McFarlane.
- Thank you, Byrd. - You're welcome, Judge.
Parties have been sworn in. You may be seated.
Okay. Ms. Gornes,
you and Mr. McFarlane had a business relationship.
You were actually leasing a space
in his club, Shadow Mountain...
- Resort. - [Judge DiMango] Resort.
And you were opening a restaurant
- in that space. - Yes.
[Judge DiMango] And you took a two-year lease
and you had the option to renew again for two years.
- Was that correct as well? - Correct. Yes.
And in your business, you were affected by COVID,
and as a result, you sir, Mr. McFarlane,
applied for PPP loans.
Yes, my company did.
[Judge DiMango] You're here on behalf of Shadow Resort
and you're here on behalf of your business, which is Delish...
- Bistro and Bar. Correct. - [Judge DiMango] Bistro.
You say that he kept all of the money,
when in fact he should've given you the monies
that were owed to you for your employees.
That these PPP loans, as we know,
were meant to help small businesses during COVID,
help pay payroll, help pay loans,
any kind of expenses that the business had
and you were entitled to your share based on your employees,
except he used your employees
to collect the money that he did.
You say he owes you $27,000 plus
but because of our maximum, you're suing him for $10,000.
But you say was they weren't her employees.
They were your employees. You were paying them through your payroll.
Therefore, she shouldn't have gotten the PPP as to those individuals.
And even if that weren't the case,
you had maintenance issues that you still have to address
and that would basically be a wash,
- correct? - Yes. Yes.
[Judge DiMango] Okay. I don't know very much about all of this,
but I understand, sir, that you are an accountant.
- Yes. - [Judge DiMango] And that you do have
some expertise in this area,
- so please let's have your name... - Yeah.
- ... for the record. - Craig Carr.
I'm a ERC and PPP specialist in restaurants.
And how long have you been working
- in the capacity you've just discussed? - Thirty years.
[Judge DiMango] So, you are being brought here
as a witness for the plaintiff, is that correct?
That is correct.
Now, why don't you be a little more detailed than I was
with regard to the PPP,
when it came about, and why?
Okay.
The PPP came about in March of 2020
and started to formulate and give out money
from the federal government under the CARES Act.
- [Judge DiMango] Okay. - And like you said...
- [Judge DiMango] Yes. - ... the PPP was to serve business owners
to help them cover their payroll,
maintenance during coronavirus times.
[Judge DiMango] Now, how was the amount of money determined
after they applied?
It's determined based on how many employees you had
in a certain period of time.
Then, the federal government would give you a certain amount of money
based on how many employees you had
in 2019 for 2020,
in 2020 for 2021.
It would also, I imagine, have to be based on how much money
the employer is earning in their business.
Otherwise, everybody would be getting the same amount of money.
Actually, not. Not for the PPP
- and not for the ERC. - [Judge DiMango] No?
It's all based on...
Just the number of people.
So, everybody got a flat amount?
Everybody got a flat amount
based on how many employees they were taking care of.
So, if you have five employees and everybody's entitled to $10,000
and you--then you get $50,000.
If you have nine employees,
- you get $90,000. - Correct.
So, was there a fixed number for each employee?
Well, for ERC, it's, um, $5,000 an employee for 2020,
$7,000 an employee for 2021
- for each quarter. - Now, what is--what is ERC
and how is that different from PPP?
- [Craig] Good question. - And I'm gonna say LOL,
which is how I feel about all this.
Those are very good questions.
I wish there was, uh, you know, a program called LOL, but unfortunately.
Um, so the ERC,
that's called Employee Retention Credit.
It was another program, like the PPP,
except unlike the PPP,
the ERC is not required to be paid back or proven to be forgiven.
[Judge DiMango] So now, Ms. Gornes, you opened up a restaurant.
Did you ever own a restaurant before this?
I managed several restaurants before that, yes.
And how did you come to find the defendant?
I was looking for kitchen space
and I came across his business partner.
Uh, the restaurant was closed.
Uh, we are still in summer time and in full COVID.
It's an outdoor bistro
and I wanna know, is this Delish Bistro?
- [Karine] Correct. - [Judge DiMango] And Mr. McFarlane,
your club had a restaurant there before, correct?
Yes. Like in this situation, there were also employees.
And we elected to not bring them back after COVID
and lease her the facility.
But Ms. Gornes had a lease.
And if she would've said too, you know what,
I'm not gonna come in anymore,
you would've said, well, you still gotta pay me on the lease, right?
The lease was for $0.
- [Judge DiMango] I saw that it was... - Yeah.
... for $0 but he was making, apparently,
the deal was you make me lunch,
- you make two other people lunch. - [Michael] Yeah, we just--yup.
And then, you discount everybody's lunches.
But the second year,
it was $6,000 for the year...
- [Michael] Nope. - ... $500 each month. So...
If, uh, if the lease was renewed, it was that.
And we did not enforce that portion of the lease.
We did not ask her to pay that.
Did you have to pay anything onto the lease for rent or...
No, we decided at the end of the first year
to remodel the restaurant.
So, I talk to Michael
and I offer him to, uh,
purchase the vinyl floor, lighting, the fence.
And because I invested over $12,000
to basically invest in his property,
he voided the fact that I would have to pay
- $600 per month. - [Judge DiMango] Okay.
So, you opened the restaurant, you have a two-year lease.
The first year, you pay nothing because you're making lunch for everybody.
The second year, you renovate.
And in exchange for that,
you agree to waive the $6,000
or $500 a month that she was gonna pay for that lease.
- [Karine] Correct. - [Judge DiMango] Now,
who pays your salary?
- Who pays my salary? - [Judge DiMango] Did you have a salary?
- [Karine] I did... - [Judge DiMango] Did somebody pay
- your salary? - [Karine] I did not.
I only put myself on salary in 2022.
Basically, Shadow Mountain Resort agree to do the payroll
for Delish Bistro and Bar.
And I put myself as an employee.
You became a PEO. Would that be correct?
- [Karine] Yes. - [Michael] One hundred percent not true.
I am not licensed to be a PEO.
- I'm not insured to be a PEO. - [Judge DiMango] You did say that
but not--if I understand correctly... I'm gonna ask Mr. Carr,
but you should be authorized to be a PEO,
but not all PEOs are authorized to be PEOs...
- [Craig] Correct. - ... would that be correct?
Yeah. So, Shadow Mountain would pay the payroll
and then request reimbursement of the payroll,
the taxes, the workers' comp...
- [Judge DiMango] From her? - ... any benefits from her
- Assuming she's the employer? - [Craig] ... for those employees.
- Assuming she's the employer. - [Judge DiMango] Of the people that he--
while this is going on?
- [Craig] You got it. - [Judge DiMango] So,
two things about her situation.
One, there was a bar there,
and she doesn't have a license to serve alcohol.
Only the people that are employed
by the company that have the liquor license can sell liquor.
[Judge DiMango] So, you employ her for the purposes of the bar.
Yes. Anybody that purchases liquor, sells liquor
has to be employed by the company that has a liquor license.
So, Mr. Carr, can you form an opinion
as to whether or not Ms. Gornes is an employer
or an employee of Shadow Mountain?
I can only give an opinion
on the employee retention credit that I prepared.
[Judge DiMango] Well, give me your opinion on that.
[Craig] Okay.
Ms. Gornes has submitted the payroll to me to work up.
She sent me the agreements of her lease agreement
to have the restaurant, uh, within Shadow Mountain,
which showed me, according to IRS fact-38
that she is in fact the employer
under a third party employer, uh,
and rightfully due the ERC.
So, I worked it up. Otherwise, I wouldn't have worked it up.
So, technically, she could be his employee
and the employer of the people that work in her restaurant.
- Correct. - [Judge DiMango] And why do you say
that she is an employee and not an employer?
All of the people that worked at the restaurant
were always our employees.
They were before, they were during her, and I have a new lease...
[Judge DiMango] And that's what I want...
... and they have a new people and they're also employees.
And I wanna know from you, who hired the people to work in her restaurant?
- [Michael] We did. - That's...
To backtrack a little bit, the PPP money 100% is--
you were right--you were spot on.
The PPP money came to us based on wages.
It did not come based on, you have six employees, here's $60,000.
We--uh, and I was the one that did it,
had to submit all sorts of documentation
about who worked for us,
what their employees were, and what their wages were.
That's how the money was determined. It is by the wages.
Otherwise, why did they ask for it all?
[Judge DiMango] Right. And that would make sense.
[Michael] Yeah. We have always understood
everyone that works at Shadow Mountain is employed by us
because we write their checks.
We also have the long term burden of them.
She filed for unemployment. I still...
You're still paying unemployment for her
of the--for some of the people that worked...
[Michael] Through how unemployment works, correct.
[Judge DiMango] Since you said that I was spot on
and I don't wanna be wrong anymore,
I'm gonna pass it over to Judge Levy.
[Judge Levy] All right. Thank you.
So Mr. Carr, you're an ERC/PPP specialist?
Yes.
So, you're familiar with the claims,
for instance, in the Wall Street Journal
talking about the Employee Retention Tax Credit
as being the biggest COVID scam in US history.
It was supposed to cost $55 billion
and it cost US taxpayers $230 billion
with no end in sight.
- Correct. - [Judge Levy] You're familiar with...
- Yeah. - [Judge Levy] ... the "come on" scams,
that you don't get ripped off as an employer
by people who are pretending to be specialists
to apply for these loans and take tax dollars
when they're not really entitled to it.
- That's correct. - [Judge Levy] When you prepared
the ERC and PPP for the plaintiff,
did you get paid by the hour or did you get paid
based upon the percentage of money
that you were able to get for her from the PPP or the ERC?
I got paid a flat fee.
- [Judge Levy] A flat fee? - Correct.
Have you spoken with the plaintiff about discussions that she's had
with other accountants and other specialists before you
who told her the way that they get paid
was by a percentage of the money
that they received from the government
and they took a percentage of that as their fee?
- That's correct. - [Judge Levy] That's what she told you,
- that she had information from them. - Yes. Yes.
You had your own accountant.
My CPA did it, yes.
What my accountant submitted to the IRS...
- [Judge Levy] Was approved? - ... was approved and it was correct.
- There's no doubt about that. - [Judge Levy] Well, hold on.
I totally believe that he filed it right.
He files first and then he's supposed to reimburse Karine.
[announcer] Coming up on Tribunal Justice.
I believe she's owed 18,860 bucks
according to IRS rules.
The more they talk
the more it seems like you were sort of standing in the shoes
of a payroll servicer.
[dramatic musical sting]
[theme music plays]
[announcer] Karine Gornes is suing Michael McFarlane's LLC
for her share of the government's paycheck protection relief funds.
Karine says Michael received PPP funds
using her employees
and only gave her a small portion.
But Michael says the funds are only for employers
and Karine was an employee under his business.
[Judge Levy] From the beginning,
you open up a restaurant during COVID
and you're gonna have to hire employees.
So, now, say that you have six employees, they're working,
and each one of them is making a hundred dollars a day.
But instead of $600 a day coming in through the cash register,
you only bring in $300.
How do they get paid?
You haven't earned enough money to pay them.
[Michael] She ran--it ran negative lots of months,
so there'd be four, five months in a row
where we were fronting all the money.
[Judge Levy] And you and your accountants
knew about the PPP when it came out and you applied.
Yes, absolutely.
[Judge Levy] So, when did you first tell him
that, uh, you wanted a share of the ERC?
In 2023, one of the client of the restaurant came
and told me that I should apply for the ERC...
[Judge Levy] Because it's free money.
- [Karine] Yes. - It's free money.
But you know what it's not?
- Free money. - [Karine] Uh-hmm.
We have a $33 trillion deficit in this country.
Two-hundred and seventy billion of it is for this program
that the two biggest offenders are California and New York.
Fraud, rampant fraud.
The ERC, what exactly is it?
It's an earned credit, right?
- Yes. - [Judge Levy] I want you to tell me
if I got it right.
So, if I went into a grocery store
and I wanted to buy a three-pack of paper towels
and it was $7
and I had an ERC coupon for 10,
I'd be able to go into the supermarket, take the paper towel.
I could give the cashier
for a $7 item a $10 coupon.
I can walk out with the paper towels
- and $3 in cash. - [Craig] Correct.
[Judge Levy] That's pretty much what it is.
- Yes. - [Judge Levy] So, businesses were able
to get cash for employees.
- Correct. - It is how it works, yes.
[Judge Levy] And that's how it works.
That's the fraud--
that's the fraud on the American public.
And a guy comes into your restaurant and says,
"Hey, we got free money here. You should really apply."
- [Karine] No, if I'm not mistaken... - And so what you do
is then you say to the defendant, "Let's apply."
He says, "Whoa, whoa, we got this covered already."
And then, what you want is your piece of the pie.
For the employee of the restaurant, yes, absolutely.
[Judge Levy] The employees of the restaurant
that they have been paying when you have been short on your till.
I was short for four, five months because, you know...
I don't care when it-- I don't care how long it was.
They were guaranteeing it.
But for them is your backstop.
No one would work for you.
And you were just upset that someone else filed before you did.
And by the way, did you end up giving her any money
- for the ERC? -[Michael] We did.
And I kind of regret doing that
because I do not feel that I should have.
My CPA, my attorney has advised me that you should go back and get that.
I don't want to do that, so I just kinda wanted the relationship...
[Judge Levy] And you're not gonna do that?
- I am not going to do that. No. - [Judge Levy] Judge Acker.
But doesn't the fact that you did it
- at the outset... - Uh-hmm.
... give some credence to her suggestion
that she was actually the owner of this business
and the employer of these people?
No. I mean, the entire time of this contract,
the people were always our employees,
they were always assumed to be our employees.
We handled every part of it.
I made a mistake. I should not have issued that credit to her.
[Judge Acker] So, Ms. Gornes,
if you recognize the fact that he was backstopping your payroll
and he's also still fulfilling unemployment claims,
so he's assuming all of the costs
of being an employer.
You explain to me in your words
why you think you should be entitled to anything on those facts.
Yes. I was billed for every taxes
[speaking foreign language]
Every taxes where I was billed for.
- And the labor, right? - And the labor.
- And you paid that, right? - I did pay everything.
So, what you're saying is that you actually paid
- those unemployment costs. - Absolutely. Yes.
- [Judge Acker] Is that right? - No. Not...
- [Judge Acker] I... - While she's there,
but I could tell you that she-- like, when this contract ended,
she was on unemployment as of a couple months ago.
But that has nothing to do with right now.
- But I'm paying... - Or this agreement.
... the additional cost for unemployment.
And here's the tricky part about unemployment.
Unemployment's paid at a certain rate.
The more people you have that filed, the greater the rate you pay.
- [Judge Acker] It goes up. - So, when all of her employees,
which are currently doing it right now as of a month ago,
she hasn't been at the resort for eight or nine months,
my rate is now higher for all of my employees...
[Judge Acker] So you're almost treating it
as a retroactive employment relationship of these folks.
But the unemployment might only be, like, $400 that he paid for her
because it's only, like, maybe at the max,
5.7% of the first 7,000,
and after that, there's no more unemployment,
versus the ERC she's being robbed of.
He only paid a portion.
You were paid what, 97 or so of the ERC?
Correct. Yes.
He deducted the invoice from the accountant
and my portion was $9,700.
I believe she's owed the difference-- 18,860 bucks.
But that's assuming that she is the actual employer.
She is, on agreement. She's lease--
she pays a lease for the employees,
for the resort,
for everything, and she pays that.
- So she's due that... - [Michael] If I wanted those people
- to be... - ... according to IRS rules.
If I had intended those employees to be hers,
I would have written in a lease that you're gonna lease the employees.
We did. It's on the--on the addendum.
It says the payroll for the employees of the bistro
will be paid through Shadow Mountain Resort
with the funds collected via the credit card sales
run through Shopkeep and the tennis member charges.
Yeah, I have to say, Mr. McFarlane,
the more they talk, the more it seems like
you were sort of standing in the shoes of a payroll servicer.
I've never been a payroll servicer for anybody.
It'd be like my landscape contract coming to me
and saying the exact same thing.
We are not a payroll provider.
- But you're leasing your employee. - [Michael] And I also legally
have to be the employer because I have the liquor license
and I'm the one selling the liquor.
So, are you functionally an employer
working under the auspices of his legal authority
to sell alcohol?
We had to do it this way because of the liquor license,
so that's what it say, we are going to do it this way for the liquor license.
They are your employees. Don't worry about anything.
We are going to do the payroll so that we are all protected.
- That's exactly what he said. - [Judge Acker] I mean, technically,
don't dig yourself in too much of a hole
because of what you're suggesting is,
I was representing to the authorities
that I was working under his liquor license
when actually though I was an independent business,
and I had no business selling liquor.
That would be trouble for me.
I cannot--I have to be the employer of the people selling the liquor.
I would be turned in as selling out my license.
That license cost me $3,300 a year.
But that doesn't mean he can't, like a contractor, have someone,
although it's shady
- at Shady Mountain, you know... - [Michael laughs]
... uh, have someone run that restaurant for him
so that they could keep money, they could keep the houses in.
- [Judge Acker] But then, that's under... - [Craig] You know, at higher capacity.
... the table and shady.
- [Craig] Of course. Of course. - [Michael] Its illegal.
[laughter]
- Of course. But... - And I would lose...
- ... all in the contract. - ... my liquor license...
I wouldn't have come here if it wasn't in the agreement.
- [Judge Acker] I got you. - Showing that it's leased employees
so that that restaurant could, instead of being,
you know, shut down during COVID, open,
so the hotel rooms stay booked.
I think you all did a really nice job
kind of digging into something that's complicated,
but also interesting.
- Judge? - The success of her business,
if she makes a profit, did you ever get any of that money?
[announcer] Coming up on Tribunal Justice.
[Michael] Anybody who came to us and said,
"I cut my finger, my finger no longer works,"
it would hit my workers' comp today.
[Craig] His comp will cover it because she already paid for it.
And my rates go up.
I was invoiced for it.
[dramatic musical sting]
[theme music plays]
[announcer] Karine Gornes claims Michael McFarlane's company
owes her coronavirus relief funds
from the government's Paycheck Protection Program
because she opened a bistro at his resort.
But Michael claims only employers can receive PPP funds,
and Karine was always an employee of the resort.
The success of her business, if she makes a profit,
did you ever get any of that money?
- No, zero. Yeah. - [Judge DiMango] You get nothing
- from her? - Yeah.
[Judge DiMango] My other question is, if somebody had to get
workman's compensation,
who would be paying that?
- [Michael] We would. - Then, you would be the employer
- that they would be coming to because... - [Michael] Yes.
And workers' compensation is a five-year loss front,
so if anybody from her time as the manager there
came to us and said, "I cut my finger, my finger no longer works,"
it would hit my workers' comp today.
But she paid---but she paid for it already
and workers' comp will cover it based on--
because she already paid for it.
- [Michael] And my rates go up. - I was invoiced for it.
- Yeah. - I paid it.
[Judge DiMango] So--but--okay.
So, the thing is, he pays, you reimburse him,
but it goes on his record,
- basically, that this is... - [Michael] Yes. And it...
- [Judge DiMango] ... what's happening. - ... adversely affects
all of my employees for five years.
Thank you. We're gonna retire to deliberate.
Thank you, all.
[Michael] Thank you. I appreciate it.
- [Craig] Thank you. - [Byrd] Court now stands in recess.
This case will be recalled.
Parties are excused.
[dramatic musical sting]
I'm inclined to find that she was an employee.
Once he starts doing the PEO,
my understanding of that was that they become the employer.
The workman's compensation, he would be paying all of that.
Even though she's reimbursing him, ultimately,
he is the one having to make all the payment on the bills.
He has the liquor license.
She's working under his license, which he pays for,
and for sundry other reasons that you both mentioned.
[laughter]
[Judge Levy] So, number one,
what legal theory is she filing under?
It's not a breach of contract.
What legal theory is she here arguing about?
You stole my money theory. That's it.
- Right. She wanted it. - That's just it.
If anything, the only thing I could think of was unjust enrichment,
that he got money and he wasn't entitled to it,
- and she should've gotten it. - Uh-hmm.
But it doesn't only go to employees,
it goes to a lot of other things that he was doing in and about the business.
I get that. Well, the--exactly.
The point is that he applied
and the federal government looked at his documentation...
- [Judge DiMango] And accepted it. - ... and accepted it.
So, if it is an unjust enrichment claim,
she fails, because he was entitled to that money.
Not discounting the fact
that the accountant who was here, Mr. Carr,
he made a decent argument to say that she was entitled to it,
but he never said that the defendant wasn't.
That's where I think that she loses, so on all three of those grounds.
[Judge Acker] I think that she has some points
that weigh in favor of her being the actual employer.
She was reimbursing him for some of the earlier expenses.
If she was only an employee,
why would she be paying
any unemployment insurance?
Why would she be paying any workers' comp at any time?
However, what I come back to
is where I ended during the examination,
she can't because of the liquor license issues.
Because if she becomes the employer,
then the whole thing really does become shady
and that would be untoward.
So, for her to win,
she has to acknowledge and verify that she was doing something
that she wasn't supposed to be doing because she didn't have the license.
So, I would have to join you in dismissing.
Okay. Very good.
[dramatic musical sting]
[Byrd] Court is back in session.
Parties are reminded, you're still under oath.
Thank you. And I thank the three of you
because you kinda simplified what was a very complicated issue.
But ma'am, he kinda beat you to the punch.
Nobody's saying that perhaps you might not have been able to get
some federal funding, some PPP monies,
but the defendant actually was able to file,
the federal government did find that he properly filed,
and that he was entitled to the monies that he was receiving.
Uh, there was nothing in the record which would indicate
that by his receiving that and not giving you anything
he was unjustly enriched.
It's pretty clear that you used his payroll service,
uh, any workman's comp was under the auspices of his workman's comp,
what he was paying, his money went up,
the liquor license he was paying for,
and so by no means did he take advantage of you in that way,
nor was he unjustly enriched by his receipt.
And so because of that, we are unanimous in believing
that your case should be dismissed for your failure
to meet your burden of proof by a preponderance of the evidence.
And that is the verdict of the court.
- It is dismissed. - [gavel bangs]
- [Craig] Thank you. - [Michael] Thank you.
[Byrd] This case has now concluded.
Parties are excused. You may step out.
[theme music plays]
Very disappointed.
I feel like I got taken advantage by Michael
for three years and he won today.
Pretty simple, the contract states that they were our employees,
that they were always our employees, and we treated them as such.
But overall, I think, um, Karine was--is still due that money.
Um, kinda like the judge said,
that there was money to be had and money to grab.
No, there's nothing to fight about, so...
it is what it is.
[announcer] Have you been scammed?
Let the majority rule in your favor on Tribunal Justice.
Find us on social media.
["Ride of the Valkyries" plays]