Foss creditors clear key legal hurdle

Foss Manufacturing creditors charging that Steven Foss, members of his family and business associates looted the company while it was insolvent could get their day in court, thanks to a U.S. Bankruptcy Court judge’s decision to leave intact most of allegations against the executives.

In a 96-page opinion, Judge J. Michael Deasy threw out most motions seeking to dismiss the charges, the last major hurdle before both parties proceed to trial or settlement.

“We are pleased with the results,” said Joseph Foster, an attorney representing the Official Committee of Unsecured Creditors, which is seeking to recover money from the executives personally. “Most of the complaint is intact and most of the charges that were dismissed were on technical grounds, which we should be able to correct and reinstate.”

Calls to attorneys representing Stephen Foss were not returned by deadline.

Foss Manufacturing of Hampton, which declared bankruptcy in August of 2005, was sold as a going concern to a group of private investors in April 2006 for $39 million — enough money for bankrupt shell Felt Manufacturing to pay off secured creditors in full, but with nothing left over for unsecured creditors who claimed that they were owed more than $15 million.

In a complaint filed last fall in Bankruptcy Court in Manchester, creditors charge that Stephen Foss, with the help of the firm’s former chief financial officer, Kevin Sexton, concealed the company’s insolvent condition while helping themselves to millions of dollars.

The company’s money was allegedly used to pay mortgages and taxes and improvements of private residences as well as personal travel – including use of a private jet — and membership fees in more than a dozen private clubs.

According to the suit, Foss and Sexton falsified the books and withheld the transfers from board members, as well as from board members and top officials, including Foss’ brother Dennis Foss, his wife Patricia Foss and his daughter, Jennifer Foss Smyth. But the board members and company officials looked the other way, failing to perform their fiduciary duty that could have prevented the company from accumulating even more debt that couldn’t be paid back, the suit alleges.

The defendants moved that the charges be dismissed primarily on technical grounds, including that they weren’t specific enough, especially when it comes to breach of fiduciary duty as officers and directors.

But Deasy wrote that “claimed breaches of fiduciary duty are sufficient to establish a plausible entitlement to relief. The allegations in the complaint, taken in the light most favorable to the Committee [of creditors], suggest that [the defendants] were motivated not solely to benefit FMC [Foss Manufacturing], but also to benefit various insiders of FMC … their relatives and affiliated business entities.”

Deasy did dismiss some charges, including one against Stephen Foss’s brother, Dennis, who was not on the board at the time, but as a major preferred stockholder benefited substantially from the awarding of dividends. While the board still could be faulted for awarding the dividends, Foss can’t be charged for receiving them, unless it is proved that he had inside information. However, other aspects of the case against Dennis Foss remain intact.

Deasy’s ruling doesn’t mean that the creditors proved their case, just that he says they have a case to make. The court hasn’t set a date for trial yet, which could be months, if not years, away. – BOB SANDERS