Sykes v. Hengel
| Decision Date | 23 June 2005 |
| Docket Number | No. 4:03 CV 40526.,4:03 CV 40526. |
| Citation | 394 F.Supp.2d 1062 |
| Parties | David E. SYKES, Plaintiff, v. Charles HENGEL, Michael Iiams, David Muris, Lee Schlessman, and Fred Wiesner, Defendants. |
| Court | U.S. District Court — Southern District of Iowa |
Mark D. Sherinian, Sherinian & Walker Law Firm, West Des Moines, IA, for Plaintiff.
Wade R. Hauser, III, Ahlers & Cooney PC, Des Moines, IA, for Defendants.
ORDER ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
This matter comes before the Court on Defendants' Motions for Summary Judgment. Oral arguments were heard on May 12, 2005. Plaintiff was represented by Mark Sherinian; Defendants were represented by Nate Overberg and Wade Hauser. The matter is fully submitted and ready for disposition.
Plaintiff filed this action on September 22, 2003, alleging diversity of citizenship jurisdiction pursuant to 28 U.S.C. § 1332. Plaintiff Sykes is a resident of Fairfield, Iowa. Defendants Iiams, Schlessman, and Wiesner are residents of Colorado; Defendant Muris is a resident of California, and Defendant Hengel is a resident of Minnesota. Plaintiff alleges the amount in controversy is in excess of $75,000.
In August 2001, David Sykes signed a five-year employment contract as President and Chief Executive Officer for Vision Improvement Technologies, LLC ("VIT"), an Iowa corporation located in Fairfield, Iowa. The contract provided that aside from disabling illness, injury, or death, Sykes could only be terminated for cause. Cause, as defined in Section 7(a)(i) of Sykes' employment contract, included "[c]ommission by the Employee of any fraudulent or grossly negligent act which, in the good faith opinion of the Employer, would then impair the Employee's ability to perform his duties."
VIT's Operating Agreement placed control of the company in a six-person Board of Managers (the "Board").1 Until July 2003, the Board consisted of Defendants Charles Hengel, Michael Iiams, Davis Muris, and Fred Wiesner, as well as Cliff Rose2 and Plaintiff David Sykes. Under the terms of his contract, Sykes' duties and responsibilities as VIT's President and CEO were determined by the Board of Managers.
At all times relevant to this action, Defendants Lee Schlessman and Fred Wiesner were partners of Ithaka V, an investment partnership that provided lines of credit to investment companies, and Defendant Charles Hengel was Chief Executive Officer of Marketing Architects, a radio advertising firm. VIT contracted the services of both Ithaka V and Marketing Architects. Wiesner and Hengel were also members of VIT's Board, and Schlessman became a Board member on July 1, 2003. It is undisputed that the Board had full disclosure regarding these relationships.
The Ithaka V provided VIT with a line of credit ("the LOC") which was based on VIT's cash and accounts receivable. In March 2002, Sykes was advised that the LOC was set to expire on December 15, 2002, and that a new lending source must be secured. Unaudited financial statements as of June 2002 showed that VIT had a net income of $281,000 and a projected net income of $495,000. In September 2002, those profit projections were questioned by potential lenders. As a result, Sykes was unsuccessful in securing a new line of credit. In the fall of 2002, without new financing secured, Sykes asked Ithaka V to extend and increase the LOC. Ithaka V extended the note to December 15, 2003, but the LOC remained at $2-million dollars.
Unaudited year-end reports showed a profit of $104,683 for 2002. Based on the reported year-end profit, bonuses were awarded in February 2003. Sykes and Rose were among those that received bonuses. It is undisputed that these bonuses were never formally reported to the Board.
On March 7, 2003, the Board set up an Executive Committee to explore ways of improving VIT's operational performance. Hengel was elected Chairman of the Board of Managers, and an Executive Committee consisting of Hengel, Iiams, and Sykes was created. In April, the Executive Committee found that the monthly operating cost of over $250,000 was more than double what it should be and that staff could be reduced by more than one-half.
In March 2003, auditors began to review VIT's financial statements for the first time. By April 2003, the Board became aware that the year-end profit reports were flawed and that VIT was in financial trouble. The audit showed that the reserve rate for product returns and bad debt had been artificially reduced in the fall of 2002. Rather than having a profit of $104,683, VIT actually lost more than $859,000 for 2002. Board members began discussing remedies. Sykes' performance as president was called into question.
VIT's financial problems continued through the spring of 2003. On June 4, 2003, Sykes sent a letter to Ithaka V, describing VIT's financial condition and asking for adjustments to the LOC. Sykes explained that VIT was making progress but that cash was tight and VIT was unable to buy the media time necessary to generate sales. He went on to explain that this caused a reduction in the accounts receivable and asked Ithaka V to consider these factors and extend, rather than call, the LOC.
Concerned about the financial condition of VIT, Iiams called a board meeting for June 23, 2003, to discuss Sykes' ability to manage the company. On June 17, 2003, after being informed the Board intended to meet with him, Sykes sent a second letter to Ithaka V. Sykes informed Ithaka V that VIT would not have sufficient funds to cover the LOC repayment. He also indicated that Marketing Architects was not able to provide much needed radio advertising which would of course impact the accounts receivable. Nonetheless, Sykes encouraged Ithaka V to band together with the management team, the Board of Managers, and Marketing Architects to support the needs of VIT during its financial dilemma. Sykes again asked Ithaka V to reconsider increasing the LOC and to make its decision before the Board's visit on June 23, 2003.
On June 20, 2003, three days before the Board's scheduled visit, without consulting or informing the rest of the Board, Sykes sent out a notice ("Notice") to all VIT Unit Holders setting a special meeting for July 8, 2003. The Notice outlined VIT's financial condition and what Sykes believed would put the company back on track. The Notice indicated that Wiesner and Hengel had conflicts of interest which contributed to the current financial maladies of VIT and that their membership on the Board should be terminated. The Notice was not well-received by the other Board members.3
Hengel, Iiams, and Rose met with Sykes on June 23, 2003. Hengel and Iiams told Sykes he was going to be terminated; the four men discussed a possible severance agreement. After the meeting,4 Sykes sent an email to Hengel, Iiams, and Rose, reiterating that the discussions about a severance agreement had been preliminary and would not be definite until an agreement was signed. VIT's attorney, Jeffrey Herm, sent a draft of the proposed severance agreement to Sykes' attorney, Bob Rutt.
On July 1, 2003, the Board conducted a meeting without Sykes. After lengthy discussion, Hengel, Iiams, Muris, Wiesner, and Rose voted to terminate Sykes and remove him from the Board. The five members elected Defendant Schlessman to fill the vacancy.
The same day, the Board sent a letter to Sykes5 informing him that conditions had changed dramatically since his June 23, 2003, meeting with Hengel, Iiams, and Rose. The letter stated that as of June 30, 2003, VIT had negative owners' equity and was technically insolvent and that the losses for May and June were "a direct product of management failure to address serious financial issues at the end of 2002 and the beginning of 2003." The letter identified Sykes' manipulation of the reserve for product returns as the single most damaging factor in the company's financial condition. The letter also pointed out that Sykes had taken over $30,000 in excess compensation as advances against his profitability bonus, but that the company actually lost money. Consequently, the Board informed Sykes that he owed the money to the company. The Board announced that as a result of these new discoveries, they withdrew the severance offer and voted five to zero to terminate him and remove him from the Board.
On July 2, 2003, the Board drafted a memorandum to be sent to VIT Unit Holders disclosing the financial condition of VIT and explaining Sykes' termination. A copy of the draft was sent to Sykes. Revisions were made, and on July 10, 2003, the Board mailed the following version of the memorandum (the "Memorandum")6 to VIT Unit Holders.7
From: The Board of Managers
On July 1, 2003, the Board of Managers removed David Sykes as the President of Vision Improvement Technologies. This action by the Board of Managers was deemed necessary because of a series of key operational and management deficiencies that have occurred over the course of the last 12 to 15 months.
In March of 2002, Fred Wiesner notified David that the Company would need to find a new lender to replace the line of credit to the Company provided by Fred and Lee Schlessman. This credit facility was to expire on December 15, 2002. David, however, wanted to increase the funds available under the line from $2,000,000 to over $3,000,000. Fred and Lee stated that they needed to free up their funds for other projects.
As early as June of last year, David felt confident that he would be able to replace this credit facility by year-end. Unaudited financial statements as of June 30, 2002 showed the Company with a positive net income for the year of approximately $281,000, and a projected increase of net income to over $495,000 by September 2002....
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