An Entrepreneur Who Invented Performance Probiotic Animal Feed Supplements Engaged in a Business Sale of his Company to a Buyer Who Bankrupted It for Personal Gain

This case that offers a good overview of Texas business law, especially cases involving breach of contract, misappropriation of trade secrets, breach of fiduciary duty, negligent misrepresentation, or fraud. In this case, an entrepreneur built a business developing and marketing performance probiotic animal feed supplements. He sold the business to a lawyer who had, at various times, represented him personally, as well as the company.

Then things started to go seriously wrong. It was either, as the buyer insisted, that the performance probiotic animal feed supplement products and business agreements were not as represented, or, as the original owner maintained, a complicated shell game that transferred business assets into the buyer’s sole control and bankrupted the company. In any event, the purchase price, and royalties due him were never paid by the buyer. The Fifth Circuit Court recently took the latter view and effectively threw the book at the self-dealing buyer/lawyer.

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Thorough due diligence is always important in running a business. But even the best-researched transactions can go awry. When that happens, as it did with the company, Performance Products, Inc. (PPI), you and your company may need an experienced, trusted business lawyer from Kilgore & Kilgore. To learn more about our business and accounting fraud, and trade-secret law practice, click this link. Call us at (214) 949-9099 or reach out at Contact Kilgore & Kilgore. We offer a free review of the facts of your situation.

This Business Sale of PPI

PPI was founded in 1993. In 2006, the owner decided to sell PPI to his lawyer. The parties executed a business agreement under which the buyer paid the owner $400,000 for the stock of PPI and $50,000 for a non-compete agreement. Before buying PPI, the lawyer served as the owner’s and/or PPI’s lawyer in several transactions, including negotiating a prior attempt to sell PPI to another buyer. After the lawyer offered to purchase the company, the owner initially sought separate counsel but ended the representation before that lawyer did any work on the transaction. The lawyer who purchased the company then agreed to draft all the legal documents related to the purchase of PPI, including a licensing agreement.

Under the terms of the licensing agreement, the owner granted PPI the exclusive right to use the microbial formulations that were used to create PPI’s feed supplement products for five years. The buyer was to make royalty payments of 14 percent of net sales up to a total payment of $1,350,000.

At the end of the five-year period, the buyer would then have had an opportunity to purchase the microbial formulations for $100,000. The licensing agreement also provided PPI the right to accelerate its option to purchase the microbial formulations if the buyer paid the owner both the maximum unpaid royalties remaining under the term of the agreement and the purchase price of the formulations.

Before the end of the five-year period, the buyer accelerated PPI’s option to purchase the formulas. After they were transferred, the owner contended that the buyer refused to pay him the $100,000 purchase price and remaining unpaid royalties.

In 2007, the owner sued the buyer and PPI in County Court. The owner alleged breach of contract, misappropriation of trade secrets, breach of fiduciary duty, negligent misrepresentation, and fraud. The buyer countered that the formulations were never demanded and that any formulations delivered were not discernible and were insufficient to trigger the acceleration option. The buyer further contended that the owner misrepresented in the licensing agreement that he had invented and exclusively owned the formulations and countersued for breach of contract, fraud, and negligent misrepresentation. The dispute eventually implicated sales in Australia, Mexico, and Canada.

The trial court held for the owner, awarding him $714,010 in damages for his breach of contract claim, $1 million in damages for his breach of fiduciary duty claim, and $163,644 in attorney’s fees. This judgment was thereafter affirmed at several appellate levels.

The Buyer Had Developed An Intricate Plan for this Business Sale

The mechanism for accomplishing the fraud was complicated. Following the parties’ agreement in 2006, the owner had formed an entity called PPI. In February 2010, six days after the County Court jury returned its verdict, the owner filed an Assumed Name Certificate with the Texas Secretary of State’s office, stating that PPI would be conducting business under the assumed name “Performance.” At the time the state court entered judgment against PPI, this entity did not have any assets. But in September 2010, while the County Court judgment was pending appeal, the owner changed the name of PPI to “Performance Probiotics, LLC.” Performance Probiotics then obtained a license to sell and distribute commercial feed supplements for livestock. In January 2012, the buyer ceased selling products through PPI and began selling them through Performance Probiotics instead.

PPI, itself, went bankrupt. In September 2016, the owner’s estate, and PPI’s Bankruptcy Trustee, filed a lawsuit in federal court against the lawyer, Performance Probiotics, and another entity the buyer had created, Advanced Probiotics International, LLC (API).

In their complaint, the plaintiffs alleged that the buyer, Performance Probiotics, and/or API had continued to misappropriate the owner’s trade secrets. The plaintiffs also alleged that the buyer and her LLCs had fraudulently transferred PPI’s assets in violation of the Texas Uniform Fraudulent Transfer Act and federal law. The plaintiffs claimed that the buyer had used various corporate entities to commit fraud. Finally, the owner alleged that the buyer/lawyer breached her fiduciary duty to PPI. The case had become a virtual smorgasbord of state and federal business law.

The District Court for the Western District of Texas confirmed the jury’s compensatory and punitive damages awards, ordered the buyer to disgorge $859,490 in compensation from Performance Probiotics because of her breach of fiduciary duty to PPI, enjoined the buyer and Performance Probiotics from using the owner’s trade secrets until they had fully satisfied the judgment, and held the buyer and Performance Probiotics jointly and severally liable for “all relief granted” in this case and “all amounts due and payable under the County Court’s judgment.”

The buyer appealed to the Fifth Circuit on nine separate grounds. The Fifth Circuit held for the plaintiffs on all counts, except for a minor modification of the lower court’s opinion to improve clarity. In its recent decision, the Court methodically worked its way through the Texas law of:

  • misappropriation of trade secrets;
  • breach of fiduciary duty as a lawyer;
  • fraudulent transfer of business assets to frustrate the execution of a judgment;
  • a related issue of corporate identity, colorfully known as “piercing the corporate veil;” and
  • the validity of a variety of remedies awarded to the plaintiffs including exemplary damages, which are typically reserved for particularly egregious behavior.

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This case is certainly not the end of inventive schemes to commit business fraud. These are not questions or suspicions that you should ignore. We have experienced business lawyers who serve company owners wishing to protect their assets. Click here to get the conversation started contact Kilgore & Kilgore.

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