Foss judge issues $4m attachment

A federal bankruptcy judge Wednesday issued an almost $4 million attachment on Stephen and Patricia Foss’ assets, arguing that it is likely that creditors can prove their case that Foss Manufacturing Company illegally paid out dividends, excessive compensation and improvements on the family’s homes while the company was going broke.

But U.S. Bankruptcy Court Judge J. Michael Deasy did not put the couple on a budget, and denied the full $10 million attachment sought by creditors, saying that the plaintiffs could not quantify how much of the other allegedly illegal transfers directly benefited the Fosses personally. He also removed the general asset freeze against Patricia Foss, though he continued it against her husband.

The decision ends the first round of what is expected to be a long drawn-out effort by creditors to recover at least some of their $16 million in unsecured claims. While the Hampton manufacturer sold the company’s assets as a going concern in bankruptcy court, the proceeds all went to the company’s major secured creditor, leaving unsecured creditors holding the bag.

The creditors allege that former CEO Stephen Foss looted the company for his family’s personal gain, while his wife – a board member who controlled most of the stock – looked the other way. They also charge the Fosses were transferring their assets so that the creditors would come up empty-handed even if they won a judgment.

Deasy previously issued a temporary restraining order that effectively froze the couple’s assets and held a hearing on July 6 and 7 at which Patricia Foss testified. Stephen Foss did not testify, and his lawyers – while denying the underlying charges — did not contest the asset freeze, and even offered his $1.5 million share of their joint Rye home as an attachment.

Stephen Foss’s attorney also argued that there was a $10 million insurance policy and that there was no precedent to put someone on a budget before there was even a judgment against him or her.

Deasy agreed with many of these arguments, but he was not convinced that the insurance company would pay up, and he did say that the creditors were likely to show that even as the company was going broke Stephen Foss as board chairman and CEO approved nearly $3.8 million of illegal expenses, including:

• $888,762 in payroll payments above his $888,000 salary over a four year period
• $872,350 in dividends to preferred stockholders, the largest being Stephen’s brother. Dennis Foss
• $1,109,250 to Stephen Foss for loans, loan repayment and interest
• $235,969 in improvements to the Rye residence of Stephen and Patricia Foss, and the Massachusetts home of Jenifer Foss Smyth, their daughter and also a board member and an employee.

Deasy also agreed with Patricia Foss’s argument that creditors didn’t prove that she didn’t directly benefit from many of the transfers, and that she was only responsible for the events that transpired when she became a board member in February 2005, a little more than half a year before the company filed for bankruptcy.

The judge discounted the creditor’s contention that she was actually on the back in July 2004.

But by that time, she should have known something was wrong and acted on it, Deasy wrote. She disregarded an e-mail from the resigning chief financial officer in which he said that he had been acting unethically, and relied too much on the assurances of her husband, the judge wrote.

Patricia Foss “breached her duty as a director to act with the care of an ordinary prudent person by failing to make reasonable inquiries,” Deasy wrote. She may have not know about the illegal payments to her husband, but she should have known about the dividends, totaling $210,000, he ruled.

As a practical matter, this attachment will be mainly against the Fosses’ Rye home, which was recently listed on the market with an asking price of $3.35 million. (The couple now resides in Florida.)

The judge also ruled that creditors haven’t followed the proper procedure to issue a blanket attachment of their various New Hampshire bank accounts. The judge also said it would be unlikely that the court would be able to attach any assets outside the state, including property in Florida. – BOB SANDERS