by Mark Friedman on Monday, Feb. 27, 2012 12:00 am
The way Tom Muccio sees it, Johnelle Hunt orchestrated a massive conspiracy in 2008 to remove him as CEO and then gain control of the biotech company they shared ownership interest in.
Hunt denies the accusation, saying she didn’t want to own BioBased Technologies LLC of Fayetteville, a company her late husband, trucking magnate J.B. Hunt, helped form. Hunt stepped up and rescued the company from the Chapter 11 bankruptcy reorganization it filed in 2009. And now the company is blossoming, Muccio says in court filings.
Whether she wanted to or not, Hunt took control of BioBased and bought out Muccio at “well below market value” of his stock in the company in which he had invested more than $1.2 million, or so Muccio claims in court filings.
Muccio, a former executive at Procter & Gamble who oversaw the global Wal-Mart account, and Hunt have been fighting about BioBased since 2008, including disputes over the management of the company and its value. Muccio and his son, Mike, who was the chief operating officer, rekindled the battle last month by filing a lawsuit in Pulaski County Circuit Court accusing Hunt and others of conspiracy, fraud and violating the Arkansas Deceptive Trade Practices Act. The Muccios are seeking an unspecified amount of money for the loss of the value of their stock in BioBased.
Hunt, through a spokesperson, declined to comment on the case. But Arkansas Business reviewed more than 500 pages of bankruptcy and circuit court documents that provide a cautionary tale of what happens when even well-meaning investors can’t agree on how to manage a company.
So far, the legal victories have been going to Hunt. Muccio wanted a trustee appointed to run BioBased while it was in bankruptcy, and he complained that he was removed as CEO at the end of 2008 as part of Hunt’s conspiracy. But U.S. Bankruptcy Judge Ben Barry of Fayetteville denied the request for a trustee in December 2009.
“I believed Ms. Hunt when she said she really doesn’t want to be here and she doesn’t want this company. And what she’s trying to do is come up with a plan that mitigates her losses,” Barry said, according to the December 2009 transcript of a hearing in the bankruptcy case. “I believe Ms. Hunt’s sincerity in everything she said. And as far as that goes, same goes with Mr. Muccio. I don’t believe there are any bad guys here.”
Barry said Muccio’s allegations of wrongdoing should be handled in state court rather than in bankruptcy court. The Muccios then sued Hunt and others involved in the company in Washington County Circuit Court in 2010, but Circuit Judge Mark Lindsay ruled in 2011 that the allegations should have been handled in bankruptcy court.
The Muccios voluntarily withdrew the lawsuit and repackaged the allegations in the new Pulaski County case. Hunt and the other defendants hadn’t filed a response in the case as of late last week.
After nearly 35 years at Procter & Gamble, Tom Muccio retired in December 2003 as its president of global customer teams. Muccio helped grow P&G’s sales to Wal-Mart Stores Inc. from $350 million in 1987 to about $9 billion when he left.
According to his testimony at a bankruptcy hearing in December 2009, Muccio was involved in a real estate investment with Phil Phillips of Springdale and J.B. Hunt, who retired in 2004 from the giant trucking company he founded, J.B. Hunt Transport Services Inc. of Lowell.
Hunt and Phillips invested in BioBased in 2003 and shortly thereafter invited Muccio to invest with them. BioBased is a research and development company that sells a soy-based spray foam insulation used in a number of applications for homes, carpets and automotive seating.
“I was not interested in this just being an investment,” Muccio said in the December 2009 hearing held in bankruptcy court. “So I was giving up a very lucrative post-P&G career in consulting and speaking to be involved in the BioBased business, and I want to make sure that there was a commitment from everybody to see that through.”
J.B. Hunt didn’t want to be actively involved in the company, but he’d help fund it, Muccio said. “We were going to go forward until it became successful,” he said.
Muccio became its CEO in 2004. Muccio and his son invested $1.2 million in the form of loans and stock purchases and held a 41.81 percent interest in BioBased. Phillips and Hunt each owned 26.88 percent of the company. Other investors accounted for the rest of the ownership.
Johnelle Hunt invested $7.2 million in the company, mainly through loans made by companies she controlled. Phillips also had put in $1.2 million through loans and stock purchases.
The goal “all along was every year to improve the sales and reduce the costs” to make the company look good so it could be sold to outside investors, Muccio said. “And that’s what we tried to do.”
The plan seemed to be working, Muccio said. But J.B. Hunt died suddenly at the end of 2006, and his interest in the company passed to his widow, Johnelle.
Even though BioBased wasn’t profitable, Muccio claims venture capital firms, suppliers, customers and competitors had all expressed interest in buying or investing in the company.
In 2007 or 2008, one venture capital firm placed the value of the company as high as $63.9 million, according to Muccio. He said the VCs saw the potential in BioBased.
“They could see that it was a huge, huge market, that we had a breakthrough product,” Muccio said, adding that the venture capital firms had experts validate the quality of the product and the company’s intellectual property.
Although, Muccio said, everyone “was extremely excited about the valuation,” a deal couldn’t get done with any of the offers.
Muccio blamed the Hunt and Phillips camp for dragging its feet on getting a deal approved, and it eventually collapsed.
Phil Phillips, in his testimony in the 2009 bankruptcy hearing, said the deal hinged on the venture capitalists finding another investor, and the deal crumbled when they failed.
Meanwhile, the company continued piling up losses, and Johnelle Hunt and Phillips questioned Muccio’s management skills.
In 2007, BioBased had revenue of $16.7 million and a loss of $1.5 million. In 2008, its revenue climbed to $21.6 million, but it still lost $965,000, according to its bankruptcy filing.
Phillips said he was concerned with the way Muccio ran the company.
“I’ve argued with Tom in a gentle way, … for a long time about the expenses in the company,” Phillips said in the December 2009 bankruptcy hearing. “We need to cut expenses; we need to be [a] small company until we can be a big company. … We’re a small company and we just didn’t run it that way.”
Hunt also questioned Muccio’s management decisions on several fronts, including giving employees company credit cards.
“My people that work for me don’t all have credit cards,” she said on the witness stand during the bankruptcy hearing. “We have one credit card that everyone shares if they need to buy supplies.”
She said that she was growing tired of the losses and the lack of commitments to buy the company. Hunt said she kept hearing that the company was worth millions, but she questioned those numbers.
“We had big dreams of what the valuation should be on that company and what those patents were going to be worth and what it would be,” Hunt said. “We had all those big dreams of what we were going to make out of that company.”
Eventually, she said, the investors had to become realistic. “For so long and so many years, and you keep getting these promises, and when they never happened, you finally have to look at it and say, We’ve got a problem here,” Hunt said.
Smiley Brought Aboard
In the second half of 2008, Hunt suggested that the company needed a consultant, and she wanted Walter Smiley, the Little Rock entrepreneur who founded Systematics Inc. of Little Rock in 1968. Systematics provided financial software and services to the banking industry and was sold to Alltel Corp. of Little Rock in 1990 and ultimately to Fidelity National Financial Inc. of Jacksonville, Fla., in 2003.
“He was suggested to me because [Phillips and I] were disturbed about how BioBased was being run,” Hunt said during the December 2009 hearing.
Muccio didn’t have a problem with the suggestion but wanted to wait until the beginning of 2009. He said he’d been working 20 hours a day trying to run the company and meet with venture capitalists.
Hunt and Phillips “pushed back very hard and said, ‘No, we want to bring someone in now,’” Muccio said. So he agreed. In September 2008, Smiley arrived.
“I believe he was put in the company as a Trojan horse,” Muccio said. “I think his ultimate role was to take control of the company, to get rid of me, and to deliver the company on a platter to Ms. Hunt.”
At the first meeting with the shareholders, Smiley “trashed” Muccio and said he wasn’t qualified to be the CEO, according to Muccio. “He knew he had the votes between Hunt and Phillips, so that whatever he recommended was going to get voted for,” said Muccio.
On Dec. 23, 2008, Smiley recommended that Muccio be fired as CEO. Muccio made an emergency call to Phillips to see if Smiley could be suspended. “I outlined what was going on with Walter,” Muccio said.
Phillips said that Smiley couldn’t be suspended because he was going to be the chairman of the board.
That was news to Muccio. “So obviously there was discussion that had taken place with Phil [Phillips] and with Ms. Hunt or with their team,” he said.
By the end of 2008, Muccio had been suspended as CEO and told not to come back into the building. Within days, however, Muccio was allowed back in the building but demoted to sales and marketing manager. He was fired from that position in January 2009.
In the summer of 2009, BioBased bounced some $180,000 worth of checks. Even under Smiley’s leadership, business wasn’t improving. Through the first seven months of 2009, BioBased lost $360,000 on revenue of $9.8 million.
Smiley told Muccio in a shareholders’ meeting that the company didn’t have money to pay its bills. The only options were to shut down or file for bankruptcy protection, so Muccio voted for Chapter 11 reorganization.
“It seemed like the only alternative to preserve the interests of all of the shareholders and allow the company to continue to work its way into profitability,” he said.
Hunt also said she voted for bankruptcy because it was “the best choice to keep this company in operation.
“It was a hard decision for me,” she said. “I did not want to be associated with bankruptcy. Because of the position I’m in, I didn’t feel like it … looked good for our family.”
After the company was in bankruptcy protection, Muccio began to believe that he had been misled about the health of the company. He said the company needed his vote to move it into bankruptcy.
He said later he learned that there was $600,000 in a bank account. He said that money could have been used to cover the company’s bills.
BioBased listed $13 million in debts and $2.8 million in assets.
In bankruptcy, Hunt proposed that her company buy the assets for $2.8 million.
Muccio tried to block the move in bankruptcy, saying the value was too low, especially for the intellectual property, which was listed as having zero value.
Bankruptcy Judge Barry said he didn’t think the value was too low. He said the intellectual property was worth something but he just didn’t know how much.
Barry approved Hunt’s plan, which left the Muccios with about $45,000 from their $1.2 million investment in BioBased.
Phillips also said he lost his investment in BioBased. “My whole life’s hope was in this company and Mr. Muccio,” Phillips said. “I thought it was worth $50 million, but it’s not.”
‘Growth and Success’
After the bankruptcy, BioBased started to blossom, according to Muccio’s lawsuit in Pulaski County Circuit Court.
Shortly after the bankruptcy, Smiley resigned as CEO and the company was managed by a team that included CFO Amy Sorrell, who had joined BioBased in 2005. She was named CEO in April 2010.
The April 2010 news release that announced Sorrell’s promotion said BioBased had paid off all vendor and bank debt and streamlined its business processes.
“The changes that we have gone through really position us for growth and success in the future,” Sorrell said in the news release. “Times of economic downturn are often opportunities for companies to regroup, refocus and come out stronger, and that’s what we have done.”
Even Muccio said in his lawsuit that the company had grown.
“BioBased has made significant breakthroughs in research and development, which have led to numerous valuable patent filings and joint development arrangements with major industry players,” the lawsuit said.
In February 2011, BioBased was granted a patent for its marquee product, Agrol, the lawsuit said.
“And BioBased’s primary product line is being adopted in production facilities across the globe, which will no doubt exponentially increase its sales,” the lawsuit said
K. Vaughn Knight of Fayetteville, an attorney for the Muccios, said last week that he didn’t know how much the company is worth now.
“Our clients have been out of the management for so long, we just don’t know,” he said.
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