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January 3, 2008 |
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AMS HEALTH: Files Bankruptcy Petition Over McCarty Judgment AMS Health Sciences Inc. has sought the protection of the U.S. Bankruptcy Court for the Western District of Oklahoma by filing a Chapter 11 petition for reorganization. The filing, according to AMS, was due to the verdict and subsequent judgment rendered against the company in its November 2007 jury trial relating to a 2005 acquisition of Heartland Cup Inc. Acquisition of Heartland Cup In September 2005, AMS Manufacturing Inc., a wholly owned subsidiary of the company, acquired approximately 83% of the capital stock of Heartland Cup Inc., a manufacturer of Styrofoam cups located in Allen, Oklahoma. The acquisition was effected through the purchase of shares from Truett McCarty, Heartland's controlling stockholder, who received shares of the company's common stock in consideration for the stock purchase. Over the following 15 months, the company loaned approximately US$2,400,000, substantially all of its cash reserves, to Heartland to support the newly acquired subsidiary's ongoing manufacturing operations. Suit Against McCarty On Feb. 6, 2006, the company and AMS Manufacturing filed a lawsuit against Mr. McCarty in the District Court of Oklahoma County, Oklahoma. The AMS entities alleged that Mr. McCarty defrauded them in the sale of his stock in Heartland by failing to disclose the true amount of Heartland's accounts payable as well as a long-term liability of Heartland. In addition, the AMS entities alleged that this failure was a breach of the stock purchase agreement signed by Mr. McCarty. Mr. McCarty filed an answer denying the AMS entities' allegations and alleging that he had been defrauded with regard to the value of the AMS stock he received in exchange for his interest in Heartland. Additionally, Mr. McCarty alleged that the AMS entities had breached the terms of the stock purchase agreement by failing to take steps to remove Mr. McCarty as guarantor of certain promissory notes, that the AMS entities had tortiously interfered with a promissory note between Mr. McCarty and Heartland and that the AMS entities had tortiously interfered with an employment agreement between Mr. McCarty and Heartland. Mr. McCarty also sought to reform the stock purchase agreement in numerous respects, and to pierce the corporate veils of the Company and AMS Manufacturing in order to hold them liable for any breach by Heartland of the promissory note and employment agreement between Heartland and Mr. McCarty. Dismissal of AMS' Fraud Claim On Nov. 1, 2007, after the court had dismissed the AMS entities' fraud claim, the jury returned its verdict, which was later reduced to a judgment signed by the court and filed on Dec. 17, 2007. The jury denied the AMS entities' breach of contract claim against Mr. McCarty, found in Mr. McCarty's favor on his claim against the AMS entities for breach of the stock purchase agreement and found that Mr. McCarty was entitled to US$800,000 against the company on his breach of contract claim. In addition, the jury found that Heartland had breached the employment agreement with Mr. McCarty and found that Mr. McCarty was entitled to US$368. The jury also found that Heartland breached its promissory note with Mr. McCarty and that Mr. McCarty was entitled to US$185,000. The jury found that the corporate veils of the Company and its subsidiaries should be pierced. The court allowed the jury to consider a fraud claim by Mr. McCarty against the AMS entities, even though the court had previously granted summary judgment in the AMS entities' favor on Mr. McCarty's fraud claim against them. The jury found for Mr. McCarty on the fraud claim, but did not award any additional actual damages for the claim. The jury returned a verdict in the AMS entities' favor on Mr. McCarty's claim for tortious interference and to reform the stock purchase agreement and, as noted above, awarded Mr. McCarty no damages on his claim against AMS for fraud. AMS Contests Against Verdict The company believes that certain legal errors rendered the verdict and judgment improper. The company has identified approximately 19 substantive points of error that it believes occurred in the trial and intends to pursue them in an appeal of the judgment. Since the company did not have the cash resources to satisfy the judgment rendered against it or to post an appellate bond pending the appeal of the judgment, every effort was made to settle and compromise Mr. McCarty's claim. Bankruptcy Filing AMS states that Mr. McCarty was repeatedly advised of the company's financial condition and that it would not be able to satisfy or respond to any efforts to enforce the judgment. Notwithstanding these repeated warnings and settlement efforts, Mr. McCarty declined to withhold or defer his right, in the absence of an appellate bond, to seek collection of the judgment. As a result, the company said it has been forced to seek bankruptcy protection. The company believes the action is in the best interests of the company and the direct selling network that markets AMS products. Without the filing of the Chapter 11 petition, which operates to stay all proceedings or attempts to enforce existing judgments, AMS argues that Mr. McCarty could attempt to disrupt the day-to- day operation of AMS by enforcing his judgment on the company's assets. The company's filing for the protection of the U.S. Bankruptcy Court was supported by its secured lender, Laurus Captial Management LLC. About AMS Health Sciences Oklahoma City-based AMS Health Sciences Inc. (OTC BB: AMSI) -- http://www.amsonline.com/ -- sells more than 60 natural nutritional supplements, weight management products, and natural skincare products through independent distributors across the U.S. and Canada. The company has operation in Puerto Rico. |
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