978-1285770178 Case Printout Case CPC-05-08 Part 2

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authorized, to undertake a review and verification of the debtor’s pre-petition

personnel to perform this work, he considered this work a distraction, and he was

problems. But it is clear that to date, the accountant has not been asked, or

While this Court has been able to navigate significant problems concerning

corporate*681 control over the debtor and subject matter jurisdiction to date, it

has only been able to do so by forging consents between the Smith and Reuther

interests. The fundamental problem of control remains and rears its ugly head

at each twist and turn of these proceedings. It is not only a distraction and

unnecessary expense for the estate to bear, but also threatens the successful

conclusion of the case. The resolution of the issue has been brought before the

Court in the form of motions for the appointment of a trustee.

Grounds for the appointment of a trustee may exist if a corporate deadlock of the

debtor’s governing body prevents debtor from receiving the necessary corporate

The Court begins by reviewing the corporate history and documents of the

debtor. The Articles of Incorporation of NOP (“Articles”) provide for a board of

no less than four, or more than six, directors. The board is vested with all

authority, and the power to exercise, all lawful acts allowed under Louisiana law.

Directors are to be elected annually at the meeting of shareholders, but retain

wholly within the control of the board of directors. The Articles authorize

directors to vote by proxy.

WLR Exh. 1, Art. V, F

Under the Bylaws, the officers of the corporation are designated as president,

vice president, secretary, and treasurer. Only the president must be a director.

All officers hold their offices until their successors are chosen. They may only be

removed by an affirmative vote of the whole board. The president is specifically

prohibited from firing officers.

WLR Exh. 2, Art. I, sect. 1,4

As is consistent with Louisiana law, the board is charged with the management of

penalty exists should this requirement be ignored.

WLR Exh. 2, Art. II, sect. 4

WLR Exh. 2, Art. I, sect. 1

The Bylaws also require that every director be a shareholder. They also

Louisiana Business Corporation Code.

Tr.T. at 76.

It is clear from the record that as of January, 1999, the boards of the Hospitality

Companies included Nancy Reuther. In fact, it was JES who first nominated

Nancy Reuther for the boards, testifying that he thought it was a “good idea at

Tr.T. at 148.

At the meeting of the shareholders of the Hospitality Companies conducted in

June of 2002, Nancy Reuther was again elected, by unanimous vote to the

board. Those voting included JES, and through a proxy given to him from

Smith, Smith. The shareholders’ meetings were adjourned and board meetings

Corporate counsel, while present at the shareholders’ meetings, sat silent while

the Reuther slate was proposed and elected, only voicing her concerns over the

propriety of Nancy Reuther’s election after the meeting of shareholders was

terminated. The bad faith of JES and his firm is palpable, particularly in light of

his single minded goal to completely control these entities.

board of directors meetings for the Hospitality Companies in December of 2001

in an effort to achieve, through their executive committees, what the boards

would never have approved.

With this backdrop, the Court concludes that the challenge to Nancy Reuther as

a unqualified director was yet another of JES’ sharp practices and illegal. As a

result, the Court finds that by affirmatively voting for Nancy Reuther without

objection, JES and Smith waived their right to challenge her qualifications as a

director later. Additionally, the Court also finds that by unanimously electing

Corporate jurisprudence provides that the validity of the election of directors

cannot be questioned by a director who has participated in the selection of the

board without objection. In order to preserve the right to challenge, the

shareholder must lodge a protest at the time of the election; otherwise, he will

have waived his right to maintain a subsequent challenge.

elect Nancy Reuther to the board without objection, he may not now complain of

her lack of qualification to serve.

It was well known to all present that Nancy Reuther was not a

shareholder. WLR Exh. 4.4, 5:24-6:21. The entire list of shareholders

was made of record at the meeting. As for the qualifications of directors

shareholders may delegate the right to set the qualifications of directors to the

board, and in this case, the Articles do provide that the board may determine the

qualifications of directors. The Bylaws of the corporation provide that all

directors must be shareholders. However, they also provide that the provisions

of the Bylaws may be repealed, amended and modified by the shareholders.

It is the shareholders, not the directors, who elect the board. It is their one and

most important right, to select those persons who they deem most capable of

managing the corporation. The shareholders clearly knew Nancy Reuther was

not a shareholder. Since Nancy Reuther was elected by unanimous consent,

they presumably believed her to be a person *684 capable of representing their

In , the Louisiana Supreme Court confirmed that the right to modify or amend the

bylaws encompasses the right to waive or disregard their application. If those

with the power to amend the bylaws, by the same vote necessary to amend,

adopt an action inconsistent with the bylaws, their action will be deemed an

amendment or waiver of the bylaws.

warranted under these facts. provides that detrimental reliance may be grounds

to estopp certain action when the conduct of a party justifiably induces another to

changes his position to his detriment.

The Court finds that the elements of estoppel exist in this case. First, JES as

the drafter of the Articles, Bylaws, former corporate counsel and member of the

not advise the shareholders at the time the slate was proposed, that one of those

nominated was not qualified to serve. From at least 2001, Ms. Rosenberg had

regularly attended the meetings of the shareholders and directors of the

Hospitality Companies. She frequently offered her legal opinions to various

actions, even when not solicited to do so. The Reuthers had every right to

his interests as the largest stockholder in the Hospitality Companies were

board would have been elected. Either way, Reuther’s interests would have

been protected.

JES Lacked Proper Authority to Vote Smith’s Interest as a Director

It was JES who moved, and seconded his own motion, for Nancy Reuther’s

removal from the board. By a vote of two to one, JES and Smith in favor and

with his own, constituted fifty percent (50%) of the voting shares of NOP and two

votes on the newly elected board. However, the proxy offered only allowed JES

to vote the interests of Smith as a shareholder, not as a director. This issue was

specifically raised on the cross examination of JES by Reuther’s counsel. No

offer of authority was supplied other than JES’ assertion that ‘he had a proxy.’

not, for the multiple reasons set forth above, the Court holds the actions of

the board to remove Nancy Reuther were illegally taken.

The Court finds JES’ offer of proof insufficient. Therefore, JES lacked the

requisite authority to vote on behalf of Smith as a director and as such, his

motion to remove Nancy Reuther was improperly seconded and carried.

For these same reasons, the Court finds that Nancy Reuther was not

removed as secretary, nor was Craig Smith elected secretary in her stead.

Officers of the Hospitality Companies

Reuther as CEO

In October of 2001, JES unilaterally fired Reuther from his office of CEO,

Reuther’s election was illegal. Further, because the boards never defined the

duties of the CEO, his title was “ceremonial” at best.

Tr.T. at 284, 319.

Tr.T. at 127. JES also maintained that the title of CFO was also

ceremonial, but by resolution of the boards in January of 1999, JES

running the companies. At that time, Joseph Fredrick, Jr., a former general

manager for Hilton Hotels, was retained and elected by the board as president.

In 1998, when JES approached Reuther about the presidency, JES transmitted

his understanding of what Reuther and JES’ respective roles in the Hospitality

Companies would be. The division of responsibility had JES acting*687 as the

WLR Exh. 6.5.

WLR Exh. 3.9. The net effect of this action and the conduct of the boards

historically was to divide the responsibilities originally housed in one office,

that of president, into two offices. This is consistent with Reuther’s

testimony that in 1995 he went to Smith for help because the duties of

individual to the corporation. “Executive officers” are those appointed by the

board and who report to the board directly, as opposed to other officers. They

hold managerial responsibilities for the affairs of the corporation that import a

close connection with the board. When in the usual course of the business of a

corporation, an officer has been allowed to manage its affairs without limitation

by the board, his authority may be implied. The record is clear and apparent that

Reuther was an active, responsible, and energetic officer. He was held out to

the community at large as the Hospitality Companies’ CEO without objection or

correction by the boards. A simple review of a portion of the exhibits submitted

into evidence establishes this fact.