Ashby & Geddes Succeeds in Dismissing Claims Brought Against Agfeed’s Former CEO

Ashby & Geddes successfully moved to dismiss all of the state law claims and many of the bankruptcy related claims against AgFeed Industries, Inc.’s (“AFI”) former Chief Executive Officer, K. Ivan F. Gothner. The Trustee of the AgFeed Liquidating Trust (the “Trustee”) filed numerous complaints against AFI’s former directors, officers and professionals related to purported accounting fraud in China and false financial reporting to the Securities and Exchange Commission and AFI shareholders. Despite giving the Trustee leave to re-plead previously dismissed claims in the original complaint, the Court found that the Second Amended Complaint (the “Complaint”) fared no better, dismissing nearly all of the claims with prejudice and “reiterate[ing] its profound concerns with respect to the dissipation of monies otherwise available for distribution to stakeholders being burned up in litigation of dubious merit and questionable collectability.”

Applying Nevada law, the Court found that the Complaint failed to plead many of the elements necessary to state a claim for breach of fiduciary duty. For instance, the Complaint failed to allege that Gothner made the false disclosures or knew that the disclosures were false at the time made. With regard to the breach of loyalty claim related to compensation received under his employment agreement and company transactions with third parties, among other things, the Complaint failed to allege that Gothner stood on both sides of the transaction. Moreover, the Trustee’s Caremark claim was defeated by the Complaint’s own allegations, which detailed the actions taken by Gothner and the board to investigate, address and disclose the wrongdoing in China.

The fraudulent transfer claim related to “a number of payments” Gothner received under his employment agreement was dismissed. Allegations that Gothner received an aggregate amount of money over a year and a half period were insufficient, and the Complaint contained only conclusory allegations that the alleged transfers were not for reasonably equivalent value. Importantly, the Complaint did not allege that Gothner received any compensation that he was not owed under his employment agreement. The actual fraud claims were likewise dismissed as the Complaint did not sufficiently identify the transferor and contained only conclusory allegations. Counts VIII and IX of the Complaint were dismissed because recoupment and setoff are defenses, not causes of action. Lastly, the Court found that the Trustee lacked standing to bring the intentional misrepresentation by nondisclosure claim as fraud claims belong to the stockholders, not the company. Even so, the Complaint failed to allege that the stockholders justifiably relied on the allegedly false statements.

The only causes of action that survived the motion to dismiss were constructive fraudulent transfers in the amount of $261,000. Because any potential setoff defense that the Trustee may raise will be capped at that amount, the Court directed that the balance of Gothner’s proof of claim for amounts owed under his employment agreement be paid immediately.  A copy of the Court’s Opinion can be found here.

Ashby & Geddes attorneys William P. Bowden, Andrew D. Cordo, Stacy Lynn Newman and F. Troupe Mickler IV represented Mr. Gothner in this action.