Creditors turn up heat on Mrs. Foss

Patricia Foss controlled nearly all of the voting stock in Foss Manufacturing in July 2004, more than a year before the Hampton firm went bankrupt, and she owned nearly half of the stock two years before that, she said in her second and final day of testimony July 7 in federal Bankruptcy Court.

Yet Foss still maintained that she had “absolutely no material involvement in or relationship” with the company until she voted herself onto the board of directors six months later. But by then, she contends, it was too late to do much to save the company.

“I was learning about the company, sir,” she explained to an incredulous Robert J. Feinstein, representing the Official Committee of Unsecured Creditors, who questioned her claim that she attended three board meetings as only a stockholder – one of the meetings at the end of 2004 lasted all day. But Patricia Foss did agree that “my involvement was growing more than the past.”

The creditors are suing Patricia Foss and her husband, former CEO Stephen Foss, along with a number of other company officials, to recover money that they alleged was looted or wasted as the company was going under.

During last week’s hearing, they were seeking to tighten up a temporary freeze on the couple’s assets by putting them on a monthly budget and attaching $10 million of their various properties.

Stephen Foss – who has pleaded the 5th Amendment in other venues – didn’t attend the hearing himself. Creditors have charged Stephen Foss with willful misconduct and have alleged that his wife was negligent as a board member, as well being on the receiving end of his alleged ill-gotten gains.

Stephen Foss’ attorneys say they will go along with the asset freeze and some of the attachments, but Patricia Foss is fighting the asset freeze, and since many of the assets are now in her name, she was the focus of the hearing.

Patricia Foss denies any liability, especially since the time she became a board member, but the creditors claim that she was either a board member or a board member in all but name, back in July 2004, citing a document that they found in her husbands office which said she was elected back then.

Stephen Foss transferred 47.4 percent of the company to his wife in early 2002, Patricia Foss stated in a corrected affidavit July 5, the day before she testified. (She omitted the details of her stock ownership in an earlier version of the affidavit.) Then in July 2005, he transferred the other 47.4 percent to a family trust of which she is the trustee. She thus controls slightly less than 95 percent of the common stock. Her daughter – Jenifer Foss Smyth — owns the rest, she testified on Friday.

Since she had total control of the company after the second transfer, she could have elected herself back in July.

“I could have,” said Foss. “But I did not.”

The first transfer, testified Foss, was done for tax and estate-planning purposes. Foss also said that she bought a house in Florida in the fall of 2002, and made it their official resident to take advantage of Florida tax homestead advantages.

But Feinstein – noting that a Rye property was transferred at the same time – said that such asset transfers were part of a pattern of “calculated behavior to shield assets.” The company was contemplating bankruptcy even then, he said, quoting from a letter written by Stephen Foss.

“When the company is in financial trouble, he transfers his assets to you and you move to Florida, right?” he asked.

“The two are not related,” calmly replied Patricia Foss.

Much of the rest of the questioning focused on what Patricia Foss knew about the company’s financial situation and when she knew it

Feinstein said that the board kept approving dividends to preferred stockholders while the company was falling apart, laying off employees, failing to remain up to date in payments to the workers’ pension and health insurance plans, falling behind in payments to creditors and misleading creditors.

The dividends were “paid out like clockwork,” he summed up his closing argument. “Money was going to the stockholders while the creditors were high and dry.”

He cited a New Hampshire law that makes it illegal to pay out dividends when a company is insolvent.

But Foss refused to say that the company was insolvent. It was, at times, “tight” and “dire” and “up against the wall,” she said, but not until the very end did she believe it was so bad it was “irreversible, that it couldn’t be brought back.”

Her attorney contended that the company was never insolvent.

“The fact that a company is struggling doesn’t mean it’s insolvent,” said Jeffrey Sternklar.
Insolvent or not, Feinstein said, the company was run “like a candy store,” and Stephen Foss put his wife on the board as a “decoration,” a “figurehead director” who “blinded herself to the corporate executive that happens to be her husband.” If Foss had done her duty, said Feinstein, the company would have owned up much earlier, saving creditors millions of dollars.

Besides, he said, she must pay back fraudulent transfers from which she benefited in “substantial and multiple ways,” ranging from living in various houses indirectly and directly paid for out of the company coffers, traveling around to her Florida home in a private jet paid with company funds to Business Helicopter, a company the Fosses owned, even direct deposits in their joint checking account.

Normally, a court doesn’t attach assets and put the couple on a budget until after a judgment. But Feinstein said this is an unusual case because the Fosses” have a proclivity to secrete it [their assets] away. There is no reason to trust these people.”

Sternklar said creditors hadn’t met the “high burden of proof before you deprive someone of the right of their property.” He noted that the $10 million attachment figure was taken out of the air, that creditors didn’t provide even an estimate of how much either Foss is likely to owe.

As for Patricia Foss, he said, the amount owed – if any — would be very little. There was no reason for her not to trust how her husband and officials ran company for 30 years. And there was very little she could do even after learning how bad the financial situation was when she became a member of the board. And, after she did find out – a month before bankruptcy – that the books were manipulated, she fired her husband and went to the creditors, said Sternklar. – BOB SANDERS