Roth v. Mims, Civ.A.3:00-CV-04470-L.

CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Northern District of Texas
Citation298 B.R. 272
Docket NumberNo. Civ.A.3:00-CV-04470-L.,Civ.A.3:00-CV-04470-L.
PartiesAnthony G. ROTH, Appellant, v. Jeffrey H. MIMS, Trustee of the Estate of Performance Nutrition, Inc., Appellee.
Decision Date14 March 2003
298 B.R. 272
Anthony G. ROTH, Appellant,
Jeffrey H. MIMS, Trustee of the Estate of Performance Nutrition, Inc., Appellee.
No. Civ.A.3:00-CV-04470-L.
United States District Court, N.D. Texas, Dallas Division.
March 14, 2003.

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Fredrick E. Roth, Richard T. LiPuma, Roth/LiPuma Law Firm, P.C., for appellant.

W. Mike Baggett, John P. Kincade, Christopher W. Carr, Phillip L. Lamberson,

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Winstead Sechrest & Minick P.C., Dallas, TX, for appellee.


LINDSAY, District Judge.

Appellant Anthony G. Roth ("Roth") appeals the bankruptcy court's order awarding costs, entered on May 21, 1999, its Amended Findings of Fact and Conclusions of Law, entered on March 23, 1999, and corresponding Amended and Final Judgment, entered on March 22, 1999. After careful consideration of the parties' briefs, the record on appeal, and the applicable law, the court finds no reversible error. Accordingly, the judgment of the bankruptcy court and the award of costs is affirmed.

I. Factual and Procedural Background

Performance Nutrition, Inc. ("PNI") was formed in 1988, and its business primarily involved developing, marketing, and selling nutritional supplement products. From 1991 to 1996, PNI spent approximately $7 million advertising and marketing its products and had developed a certain level of brand equity or recognition. By 1995, PNI's sales were approximately $3.4 million. In the spring of 1996, PNI started selling its products through General Nutrition Centers, Inc. ("GNC"), the largest nutritional supplement retailer in the United States.

In August of 1996, Kennedy Capital Management, Inc. ("KCM"), PNI's largest shareholder, organized and effected a takeover of PNI to oust chief executive officer ("CEO") Gary Lewellyn, who was suspected of wrongdoing. As part of the takeover, KCM also solicited Roth, a former PNI consultant, to serve as PNI's new CEO, president, and board chairman. In a written agreement, Roth promised to devote "his best efforts and substantially all of his business time and attention" to PNI and agreed not to compete with PNI for two years after leaving the company. When Roth assumed office, PNI was experiencing a number of problems as a result of prior mismanagement, including shareholder litigation, regulatory problems, an infomercial marketing strategy that was not cost-effective, and other problems, which threatened to deplete PNI's existing cash reserves of $600,000 to $700,000.

At the time Roth took office, Naturade, Inc. ("Naturade") was PNI's primary vendor and blender. As PNI's blender, Naturade mixed the various nutrients and other components in products sold by PNI. In the fall of 1996, Naturade's vice president and general counsel Michael Fernicola ("Fernicola"), acting under the authority and knowledge of Naturade's president Alan Schulman ("Schulman"), approached Roth to discuss Naturade's offer to acquire PNI's assets, including PNI's business with GNC. This offer included an agreement for Naturade to employ Roth and two other PNI employees, who had business contacts with GNC. The proposed employment agreement included a salary, commissions on the sale of PNI products, stock options, and an officer position of Performance Nutrition, a division of Naturade ("PNDN").

In October or November of 1996, Fernicola contacted Dr. L.S. Smith ("Smith"), a longtime business consultant to Naturade with extensive bankruptcy experience. Fernicola asked Smith to contact Roth and act as Naturade's agent to work out an agreement for Naturade to acquire PNI's assets. Smith introduced Roth to the concept of commencing a Chapter 11 bankruptcy proceeding with an immediate motion to sell PNI's assets under § 363 of the Bankruptcy Code. By December 10, 1996, Smith and Roth came to an agreement

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whereby Naturade would acquire PNI's assets through a bankruptcy proceeding like the one proposed by Smith. That same day, Roth called one of PNI's attorneys, Karl Nielson ("Nielson"), and told him that "there was a movement afoot" for Naturade to acquire PNI and the information had to be "kept quiet." Nielson memorialized this conversation in a memorandum to Kirk Lenhard ("Lenhard"), one of his partners. From conversations Lenhard had with Roth, Lenhard gained the impression that Roth was going to be employed by Naturade after PNI's bankruptcy.

The material terms of the proposed agreement were set forth in a personal and confidential letter Smith sent to Roth on December 22, 1996. The letter stated that after "extensive discussions" with Schulman and Fernicola, Smith would recommend to Naturade's board a transaction whereby: (1) PNI would file a Chapter 11 bankruptcy petition; (2) Naturade would offer to acquire all of PNI's assets pursuant to § 363 of the Bankruptcy Code in exchange for 675,000 shares of newly issued restricted Naturade common stock; (3) Naturade would form a new corporate entity to serve as a repository of the assets; and (4) Naturade would negotiate with certain PNI officers to serve as operating management of the newly formed entity, including compensation arrangements, performance participation, roles in the overall management of Naturade, and the formulation of equity incentives.

On January 9, 1997, Roth and Smith conferred for the first time with PNI bankruptcy attorney Glenn Portman ("Portman") by telephone. In a conference call, Roth told Portman about his intent to commence a Chapter 11 bankruptcy proceeding and file a § 363 motion to sell PNI's assets to Naturade. Roth also revealed to Portman that he had had employment discussions with Naturade at some earlier point, but neither Roth nor Naturade disclosed the existence of the December 22 letter; nor was the letter or its material terms disclosed at any point to PNI's shareholders, board of directors, or the bankruptcy court. Regarding the § 363 motion, Portman and Peter Kerth ("Kerth"), another of PNI's bankruptcy attorneys, advised Roth and Smith that there was a 95% chance the bankruptcy court would deny the motion as proposed and would likely convert the case to a Chapter 7 bankruptcy proceeding whereby PNI's assets would be liquidated a price much lower than the value. Smith indicated that the § 363 sale of PNI's assets was a condition of Naturade's offer and that the approval or denial of the motion was of no concern to Naturade.

On January 20, 1997, Roth and Fernicola, on behalf of PNI and Naturade, signed a Letter of Intent to sell PNI's assets to Naturade. The following day, on January 21, 1997, PNI filed for Chapter 11 bankruptcy with only $26,400 in cash remaining, which was insufficient to support PNI's business operations. That same day, Roth sent a letter to GNC offering Naturade's blending services. On January 24, 1997 and February 7, 1997, Roth sent similar letters to Internutria, another nutritional company, offering Naturade's services. On January 28, 1997, PNI filed a § 363 Emergency Motion to sell all of its assets to Naturade. In conjunction with this motion, PNI also filed its Schedules and Statement of Financial Affairs, which failed to include numerous disclosures, some of which were material. The § 363 motion did not mention the December 22 letter. PNI also filed an Emergency Motion to Factor GNC's receivables from the sale of PNI's assets, because it was unable to fill a $325,000 order placed by GNC due to its low cash reserves.

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Before the bankruptcy court ruled on PNI's motion, Roth sent a document entitled "Executive Summary" to Naturade at Naturade's request on or about February 3, 1997. This document set forth some of the specific terms of the employment agreement being negotiated by the parties and stated that "Performance Nutrition will operate as a wholly-owned subsidiary of Naturade ... and ... Anthony Roth will serve as president." The document also provided that Roth would relocate and work out of Naturade's office in Los Angeles. The Executive Summary was not disclosed to the bankruptcy court.

On February 18, 1997, the bankruptcy court heard and denied PNI's Emergency Motion to Factor. At the hearing on the motion, Roth denied discussing possible employment opportunities with Naturade, and denied that an offer of employment had been made. On February 19, 1997, the bankruptcy court heard and denied PNI's § 363 Emergency Sale Motion. At the hearing, Fernicola testified that he had not discussed employment with any of PNI's employees. He further testified that no stock or finder's fees had been offered to anyone. Similarly, Smith testified that employment negotiations were not his area of involvement and he was unaware of any offers of employment that had been made to PNI employees as part of the proposed deal. After denying the motion, the bankruptcy court appointed Jeffrey H. Mims ("Mims") as PNI's Chapter 11 trustee. At the time of Mims's appointment, PNI had approximately $40,000 in cash, no employees, and no operations.

After his appointment as trustee, Mims seized several documents from PNI's offices that refer to employment negotiations between Roth and Naturade. Among these documents was an unsigned letter from Fernicola to Roth that set forth the terms of Roth's compensation package as president of NaturePlex, Inc., a wholly owned subsidiary of Naturade. This letter was later determined to have been drafted by Roth. Also seized was a January 15, 1997 fax to Fernicola on Roth's stationery, which was signed by Roth. This fax contained the proposed compensation packages for two other vital PNI officers and was sent after PNI attorney Portman had told Roth not to discuss employment with Naturade any further. In addition, handwritten notes by Roth were seized. These notes track the language in the letter to Fernicola and included reimbursement for moving expenses.

On April 15, 1997, a Chapter 7 auction of PNI's assets,...

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