Poth v. Russey

99 F. App'x 446
CourtCourt of Appeals for the Third Circuit
DecidedMarch 30, 2004
DocketNo. 03-1308
StatusPublished
Cited by19 cases

This text of 99 F. App'x 446 (Poth v. Russey) is published on Counsel Stack Legal Research, covering Court of Appeals for the Third Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Poth v. Russey, 99 F. App'x 446 (3d Cir. 2004).

Opinion

Affirmed by unpublished PER CURIAM opinion.

OPINION

PER CURIAM:

This case is part of the fallout from a merger between two telecommunications firms that took place shortly before the stock market bubble burst in 2001.1 On June 1, 2000, Viasource Communications, Inc. acquired all of the voting stock of Excalibur Cable Communications, Ltd. from Konrad Eric Poth and the other Excalibur shareholders pursuant to a merger agreement. When Viasource failed to perform some of its contractual obligations, Poth filed a claim against Viasource for breach of the merger agreement. That action was automatically stayed when Via-source subsequently filed for bankruptcy protection from its creditors. Poth then filed this action, alleging that he had been fraudulently induced to sell his stock in Excalibur by several of Viasource’s officers, directors, and shareholders.2 He also alleged that the Viasource defendants breached a fiduciary duty owed to him as the creditor of an insolvent company. The district court granted summary judgment to the Viasource defendants on Poth’s fraud claims and dismissed the breach of fiduciary duty claim for lack of standing. Poth now appeals, and finding no error, we affirm.

I.

Because this is an appeal from summary judgment in favor of the Viasource defendants, we state the facts in the light most favorable to Poth, drawing all reasonable inferences from the evidence in his favor. Edell & Assoc., P.C., v. Law Offices of Angelos, 264 F.3d 424, 429 (4th Cir.2001).

Konrad Eric Poth is the founder and former majority owner of Excalibur, a small telecommunications firm.3 In the [449]*449fall of 1999, Craig Russey, then president of Viasouree, approached Poth to discuss a potential acquisition of Excalibur by Via-source. On March 30, 2001, the parties signed a letter of understanding indicating that the structure of the transaction would be a merger and specifying the essential terms of the merger. During the merger agreement negotiations, each party was allowed access to the records of the other so that each could satisfy its obligation of due diligence. The parties signed a merger agreement (the Agreement) on June 1, 2000.

The Agreement

The Agreement provided that Viasouree would purchase 100% of the voting shares of Excalibur. The total purchase price was $16,000,000, payable in a combination of cash, subordinated notes (the Notes), and Viasouree common stock.4 The Agreement contained an integration clause, which Poth understood to mean that “everything agreed to was in that agreement.” (J.A. at 578.)

The Agreement also provided for a post-closing purchase price adjustment (PPA) to account for any change in the net worth of Excalibur between January 1, 2000, and the closing. Viasouree was required to calculate the PPA by August 31, 2000, and pay Excalibur’s shareholders for any increase in their company’s net worth by September 30, 2000. If Poth disagreed with Viasource’s calculation of the PPA, he could object and have the PPA dispute settled by one of the “ ‘big five’ ” accounting firms.5 (J.A. at 642.)

Excalibur’s shareholders also agreed to indemnify Viasouree against certain enumerated claims. As security for the indemnification obligations, Viasouree was entitled to retain 10% of the purchase price for one year. In the event that an indemnifiable claim was filed, the Agreement required Viasouree to give written notice to Excalibur’s shareholders of the amount and basis of the claim.

The Agreement further required Via-source and Poth to enter into an employment agreement, which they did. Under the employment agreement, Poth was to be employed for three years at an annualized base salary of $208,000. In the event that Poth was terminated without cause during those three years, Poth was entitled to “an amount equal to one (1) year of base salary ... payable in equal semimonthly installments.” (J.A. at 1091.) The Agreement also required Poth and Viasouree to “use their best efforts to cause Eric Poth to be released from all personal guarantees” of loans made to Excalibur. (J.A. at 643.)

[450]*450The Notes

As discussed above, 25% of the purchase price was provided in the form of subordinated promissory notes. The Notes were subordinate to “all senior indebtedness,” which included Viasource’s indebtedness to General Electric Credit Corporation (GECC) “together with all amendments, modifications, increases, or refinancings thereof.” (J.A. at 1101.) The entire principal and interest on the Notes was scheduled to become due eighteen months after the date of the closing, which would have been December 1, 2001. The Notes also were subject to mandatory prepayment in the event that Viasource made an initial public offering (IPO) “pursuant to an effective registration statement on Form S-l ..., which contemplates cash proceeds ... of at least $50,000,000.” (J.A. at 1098.) Notwithstanding the maturity date of the Notes, the Excalibur shareholders were not entitled to payment at maturity unless the GECC debt had been paid in full. Poth, however, believed that the Notes were subordinate only to the GECC debt outstanding on the closing date of the merger and claims that he “was never advised until after the fact that the increased borrowing from GECC was to be considered senior to the Notes issued despite assurances to the contrary as to what constituted the senior debt to which [his] Notes were subordinate.” (J.A. at 1965 (emphasis added).) In any event, Poth alleges that the Viasource defendants assured him that the Notes “would be paid no later than 18 months from the closing, regardless of the success of the IPO.” (J.A. at 1961.)

The Planned IPO

At the time of the merger negotiations, Viasource was planning to make an IPO of its common stock set to occur shortly after the completion of the merger. The Via-source defendants represented to Poth that they anticipated that the IPO would be priced in the $14-$16 per share range and would raise more than $150,000,000. The Viasource defendants continually assured Poth that the IPO would easily satisfy the prepayment conditions of the Notes, ie., that the IPO would yield cash proceeds in excess of $50,000,000. Despite these representations, Poth knew that there was a chance that the IPO would raise less than $50,000,000. Indeed, Poth’s attorney warned him of such a possibility. It is undisputed that neither the Agreement nor the Notes contain any promises or representations about the outcome of a Viasource IPO.

Events After Closing

The merger closed as planned on June 1, 2000, and Viasource’s prospects deteriorated rapidly thereafter. On June 2, 2000, Viasource filed a registration statement on Form S 1 with the Securities and Exchange Commission indicating its intent to make an IPO on August 18, 2000. Via-source initially indicated an intent to offer 11,000,000 shares at $13-$15 per share. As August 18, 2000 approached, however, the market for telecom IPOs began to deteriorate. Viasource filed several amendments to its Form S-l; the last one, which was filed on August 18, 2000, reflected an offer of 5,750,000 shares at $8 per share, for contemplated cash proceeds of only $46,000,000. Accordingly, the prepayment threshold in the Notes was not satisfied.

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Bluebook (online)
99 F. App'x 446, Counsel Stack Legal Research, https://law.counselstack.com/opinion/poth-v-russey-ca3-2004.