As the date of its sale at auction looms, bankrupt tech company NanoMech is asking a judge to direct the company’s former CEO to produce documents and answer questions it says show he was involved in wrongdoing that led to the company’s failure.
According to documents filed in late June, NanoMech in Springdale hired Washington, D.C.-based Treliant LLC to investigate transactions made by Jim Phillips, the company’s former top executive. Phillips stepped down as chief executive officer weeks before NanoMech’s April bankruptcy filing in Delaware.
NanoMech said its initial findings indicated Phillips spent more than $750,000 in company funds on personal expenses, including trips for himself and his wife to the Paris air show and outings to Dallas and Indianapolis to attend car races. Other claims include the company made payments for renovations at Phillips’ home and company funds were used to buy electronics and pay for other expenses not connected to Phillips’ job as CEO.
The sale of the company is set for the middle of this month after a June sale was postponed. Plans are for NanoMech’s largest creditor, Michaelson Capital, to act as the so-called stalking-horse bidder in an auction, making a $9 million initial bid for the company’s assets along with assumed liabilities. The bid deadline for NanoMech is July 17 with an auction set for July 19 and a hearing to approve the sale scheduled for July 23.
Founded in 2002, Nano-Mech develops nanotechnology for use in machining and manufacturing, lubrication, packaging, biomedical implant coatings, and the development of specialty chemicals. Nanotechnology is the manipulation of matter at the atomic and molecular scale.
NanoMech claims $7.2 million in assets and owes nearly $19 million to its creditors, according to bankruptcy filings. Property includes $2.9 million in inventory; $3 million in intangibles and intellectual property including patents, trademarks and trade secrets; and nearly $350,000 in cash. Total liabilities stand at $18.9 million with $12.5 million owed to creditors secured by property and $6.4 million in unsecured claims. Typically secured creditors take priority and are paid first in a bankruptcy.
In its motion, NanoMech asked to examine Phillips under rule 2004 of the Federal Rules of Bankruptcy Procedure.
Lynn LoPucki, professor at the UCLA School of Law, said in an ordinary civil matter lawyers rely on depositions during discovery while in bankruptcies they operate under a different procedure. He said rule 2004 examinations are similar to a deposition, with the person being examined having the right to have an attorney present during questioning. He said the questions have to focus on the matter at hand but can be broad, at least at first.
NanoMech told the court the Waring and Carmen Partridge Foundation, a creditor which holds two $1 million notes, demanded an investigation by NanoMech into the company’s failure. In a letter, the foundation said it had come to believe there may have been significant improper prepetition conduct by certain officers and directors of the company. NanoMech also noted the company’s largest creditor, Michaelson Capital, has said it will make claims against current and former officers of NanoMech for various misrepresentations.
In late May, creditor Daniel Carroll asked the bankruptcy court for relief from the automatic stay imposed by the bankruptcy code so he could amend his complaint in U. S. District Court in the Western District of Arkansas to pursue negligence claims against NanoMech and some of its directors, officers and attorneys. The automatic stay typically stops debt collection attempts, including lawsuits.
Bankruptcy Judge John Dorsey denied Carroll’s motion exclusively against NanoMech for relief without prejudice in late June. A denial without prejudice allows a plaintiff to bring a matter up again with the court. Carroll, a resident of Michigan, sued NanoMech in Arkansas in March for defaulting on a $1 million promissory note. He voluntarily dismissed his action without prejudice on Monday, according to court filings.
In mid-June, Carroll filed a limited objection in bankruptcy court to the sale of NanoMech, contending any sale order should spell out it doesn’t allow the debtor to sell the proceeds from directors’ and officers’ insurance policies. The policies are a type of liability insurance covering claims made against those serving on a company board or as an officer. Carroll contends that while owned by the debtor, the proceeds of those policies are not the property of the estate and they exist to support claims like his. It’s estimated those policies could be worth between $6 million and $7 million.
Phillips objected to the sale, contending the insurance polices should not be part of the deal for several reasons, including the nontransferable nature of the policies and that the proceeds of the polices are not the property of the estate.
CORRECTION: Lynn LoPucki is a professor at the UCLA School of Law. His last name was misspelled in an earlier version of this article.
Print Headline: NanoMech seeks ex-CEO disclosures