978-1285770178 Case Printout Case CPC-05-08 Part 1

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Monday, September 18, 2006, as a hearing on the Warren L. Reuther, Jr.’s

Present:

Attorneys for Unsecured Creditors’ Committee

Blake Jones

Robert Ellis

captains of a sprawling enterprise of companies in the tourism or hospitality

350 B.R. 667

In re: NEW ORLEANS PADDLEWHEELS, INC., Debtor.

Bankruptcy No. 06-10413.

Sept. 22, 2006.

Kirk Reasonover

Randall Smith

operations of the companies, including NOP. Smith, a long time businessman in

the maritime industry, lent his contacts and expertise in the maritime field to the

Terminal, Inc., New Orleans Paddlewheels, Inc., New Orleans Tours, Inc.,

New Orleans Tours and Convention Services, Inc., On The Town, Inc.,

RSC Management, Inc., River Rose Boat Company, Inc., Vermillion

Queen, Inc., and Visitor Marketing, Inc.

As time wore on, Smith began to look to the future, transferring a large portion of

law firm, who represented the Hospitality Companies in all legal matters including

corporate administration, contractual issues, and litigation.

Wednesday, September 6th Transcript (“Tr.T.”) at 73-74.

Recognizing Smith’s desire to involve his children in the business more directly,

in the 1990s the two men began including Smith’s sons as officers in the

development. At a momentous directors’ meeting for the Hospitality Companies

conducted in January of 1999, the two families joined once again in an

agreement for joint and shared responsibility over management.

Reuther Exhibit (“WLR Exh”) 3.3. By the same vote of the board, Craig

Smith was elected secretary.

election, as well as Reuther’s position as Chief Executive Officer (“CEO”).

WLR Exh. 3.11. Prior to this election, Reuther had been elected CEO of

NOP by resolution adopted on November 11, 1995, WLR Exh. 3.2.

But this was to be a short respite. Over the next few years animosities

developed and strengthened between Reuther and JES. Nevertheless, Reuther,

WLR Exh. 3.9. In 2000, he was replaced by his father. WLR Exh. 3.13.

The boards of the Hospitality Companies remained unchanged from 2000

forward. WLR Exh. 3.21, 4.1, 4.3, 4.4.

In February of 2000, the boards of the Hospitality Companies were

composed of Reuther, JES, Smith and Nancy Reuther. Officers of NOP

and the powers of the presidency.

Tr.T. at 122, 147.

The contents of that opinion were held by this Court to be privileged,

however, the fact that it was requested, was not. Tr.T. at 120-122.

It is worth noting at this juncture, that JES’ law firm remained, throughout this

JES controlled the firm’s operations or those who managed. Whether or not he

billed a single hour of legal time, it is clear to this Court that JES exercised legal

control over the firm.

WLR Exh. 5.3, Tr.T. at 70-72.

Tr.T. at 67.

For example, WLR Exh. 4.2, 3-6; 4.3, 3; 4.4, 3; 4.5, 2.

WLR Exh. 5.1, 5.2; Tr.T. at 63, 265; Monday, September 18 Transcript

(“Tr.T2”) at 85.

In October of 2001, JES unilaterally terminated Reuther as CEO and denied him

access to the business offices and records of the Hospitality Companies, literally

In a board of directors meeting of the Hospitality Companies, held in November

of 2001, deadlock ensued. The lines had been drawn and the directors,

Reuther, Smith, JES and Nancy Reuther, voted along family affiliations on each

and every issue.

boards of the Hospitality Companies met on the agenda noticed by Reuther.

At trial JES did not explain the basis for the temporary restraining order,

nor does this Court believe there was a legitimate, legal purpose other

than delay. Tr.T. at 172. This Court finds that JES delayed the meeting

of the boards for the sole purpose of allowing the executive committees of

president, vice president, secretary, and treasurer of NOP. At the time of this

meeting, the president was JES, the secretary Nancy Reuther, and the treasurer

Smith. No one held the office of vice president, and Reuther, the company’s

CEO, was refused participation because he was not specifically named as a

member of the executive committee under the Bylaws.

overcome. JES proposed resolution after resolution which passed by the

predictable margin of one vote. JES even proposed amendments to the Bylaws

of the Hospitality Companies which were also adopted by the executive

committees.

WLR Exh. 4.2, 13:11-15:16, 26:11-27:21. The resolution adopted

were present at the meeting, the meeting had been properly noticed, and the

agenda circulated. An attorney from the JES firm was present and opined that

the actions of the executive committee were legal. When Reuther vehemently

WLR Exh. 4.2, 16:12-17:8.

WLR Exh. 4.2, 17:1-2.

On December 14, 2001, the boards of the Hospitality Companies met. Reuther,

Nancy Reuther, and JES were present. JES held a proxy to vote on behalf of

Smith. Not much was accomplished. The meeting culminated with JES

constitute a quorum after the meeting is called, does not deny the board

the right to proceed. Reuther and Nancy Reuther have not pressed this

point. Because this was a special meeting of the boards of the Hospitality

Companies, and the intent to remove and elect a new president was not

noticed on the original agenda, this motion was probably not valid. The

meeting, the Hospitality Companies’ chief financial officer (“CFO”) admitted that

the financials of NOP did not include income received from Shreveport

Paddlewheels, LLC. Though Shreveport Paddlewheels, LLC was a wholly owned

subsidiary of NOP, both JES and the CFO related that the money was being

accounted for “off the books” of NOP. A separate accounting of those funds was

upon reasonable notice. The CFO confirmed that he had been instructed by

JES, after a specific request from the Reuthers, not to divulge the audited

financial information.

WLR Exh. 4.4, 48.

WLR Exh. 4.4, 59:8-12.

$1.4 million per year. Tr.T. at 248.

WLR Exh. 4.4, 89:23-91:12. JES and counsel did not acknowledge that

Robert Reuther, as a director, was entitled to full access to all financial

information and JES refused to accept even counsel’s recitation that

shareholders holding 5% of the stock of the companies, on written request

Smith family members, JES, Smith, Jason Smith and Duane Smith. The slate

was defeated. Following the defeat of the Smith slate, Robert Reuther

nominated, as a Reuther slate, JES, Smith, Nancy Reuther and himself to the

boards. Reuther supported this motion and in so doing removed himself from the

boards of the Hospitality Companies, companies he both founded and in which

other Smith shareholders. The meeting was adjourned, and as was the practice,

a board of directors meeting immediately followed.

WLR Exh. 4.4 129:5-6.

Reuther’s attempt to continue the balance of power was quickly turned against

him. The first order of business taken up by the boards of he Hospitality

WLR Exh. 4.5, 5:22-24.

Under fierce and audible opposition, JES then summarily dismissed Nancy

Reuther’s further participation on the board. The board, comprised of JES, Smith

and Robert Reuther, then elected Craig Smith as secretary, Smith as treasurer,

and JES as president. The vote was recorded, JES voting for himself and Smith

decide if there is an issue.”

WLR Exh. 4.5, 12:18-22, 19:12-15.

WLR Exh. 4.5, 24:1-26:25. JES’ compensation had been, and continued

outside auditors that reviewed them for accuracy. JES further declared that all

requests or questions regarding the financial information had to be presented to

him.

WLR Exh. 4.6, 4:1-18.

WLR Exh. 4.6, 8:5-12

these committees have all the same powers vested in the boards and may

exercise that authority in between meetings of the boards.

Tr.T. at 346.

Tr.T at 204. Perhaps JES feared that the Reuthers would vote to replace

the vacancy created by JES’ challenge to Nancy Reuther with another

governing board. A finding of either would support the appointment of the

trustee.

; see also, ; ; .

Discussion

Malfeasance

was both CEO and a director, refusing him access to the books and records of

the companies, auditors or those preparing the financial information, and

prohibiting those with financial information from timely supplying it to Reuther. In

so doing, JES breached his duty to the boards of the Hospitality Companies and

overreached his authority.

Evidently financial information was being prepared regularly, because JES

testified that he received it monthly. Tr. T. 108. Additionally, the results

of an outside audit were also delivered to JES in this year, but the

Reuthers were denied access to this information in favor of “internal

financials.”

Louisiana law provides that directors have full access to all corporate records

and those that prepare them. To hold otherwise would put directors in the

untenable position of being legally and personally responsible to shareholders for

malfeasance while denying them the tools necessary to determine if malfeasance

them is severely hampered. If questions of performance or honesty arise, it

would be a breach of duty to not inquire further. Directors have an absolute and

unqualified right to all corporate books and records. JES’ continued refusal to

honor requests by directors for financial information or allow them direct access

to the employees or professionals that prepared or audited the financial

The lack of respect for this simple principle of corporate governance by JES is

evident in his exchanges with the board. On many occasions he is heard to

complain that board meetings are a “waste of time” and “disruptive” to what he is

trying to accomplish as president. While the *678 Court will acknowledge that

having to account to a hostile board may be difficult and frustrating, the fact

subsidiary of NOP, Shreveport Paddlewheels, LLC on debtor’s schedules. He

claimed at the trial on these motions that the company was defunct because its

only asset, a minority interest in Hollywood Casinos, was worthless due to its

bankruptcy. However, it remains that Shreveport Paddlewheels, LLC supplied

substantial dividends to the debtor before this transpired. The testimony at trial,

JES testified at first that Hollywood Casinos filed for chapter 11 relief in

2003 and that dividends were not received for about a year preceding their

filing.. When the City of New Orleans revealed that Hollywood Casinos did

not file for relief until 2004, JES quickly lengthened the period of time that

dividends were not paid. Tr.T. at 306. The Court notes that regardless

NOP. This “off the books” accounting makes the records of the debtor inherently

untrustworthy. The Court accepts the testimony of the City‘s representative that

in meetings with the City in 2003, JES omitted the disclosure of significant

income in the form of dividends from Shreveport Paddlewheels, LLC when he

delivered financial statements of NOP to the City. Mr. Muse, Deputy Director of

ignore the facts when it suits him to do so. To omit a material stream of revenue

to the city by maintaining it was not the debtor’s property, even as he argued to

the share holders that it belonged to NOP was, at a minimum, a sharp practice.

The Court believes that, in fact, NOP retained the ownership interest in

Shreveport Paddlewheels, LLC and that all dividends collected from Shreveport

(“Whitney”) were undistributed dividends from Shreveport Paddlewheels, LLC

and owned by NOP. This testimony is substantiated *679 by Patrick Gros, NOP’s

outside certified public accountant who testified that he had been unable to

determine the nature of, or proper accounting for, an internal, negative balance,

in one of NOP’s accounts at Whitney in the amount of $1,600,000. Neither the

Nor did the debtor disclose the existence of a $435,000 intercompany debt owed

by Hospitality Enterprises, Inc. to NOP on its Schedule of Assets and Liabilities.

JES’ failure to account for this intercompany debt owed by its sister corporation

secretary of the corporation and its operations manager, offered testimony on the

debtor’s financial condition, the desirability of the loan, and its terms.

Surprisingly, Mr. Smith was not particularly knowledgeable about the Hospitality

Companies, alternative financing, or the availability of payment on intercompany

debt. It appeared to the Court that Mr. Smith had not bothered to conduct even

alone exceeds the total line of credit offered by Whitney. Equally troubling was

the accountant’s response that he had only been asked to look at intercompany

debt accounts two weeks prior to the hearings on these motions.

Debtor’s outside accountant, hired after the filing, testified that Hospitality

Enterprises, Inc owed debtor in excess of $435,000 and that this debt was

have been eliminated.

Despite being the alleged secretary of each and every one.

Tr.T.2 at 185. This despite the U.S. Trustee’s request for an accounting

of intercompany transfers at debtors’ § 341(a) meeting in June of 2006

(Tr.T. at 105) and debtor’s representation to the Court on August 21, 2006

substantial “off the books” income and a history, both pre and post petition, of

failing to disclose assets.

Tr.T. at 107.

*680 The debtor argues that it has employed a new, independent certified public

accountant experienced with chapter 11 reorganizations and it is correcting these