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11
12
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
14
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
17
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.
12
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
14
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
17
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.
