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Sept. 10 — John J. Masiz, who resigned as CEO of Vaso Active Pharmaceuticals Inc. in the wake of a Securities and Exchange Commission lawsuit, was forced to return roughly $740,000 in compensation to Vaso's bankruptcy estate.
Judge Leonard P. Stark agreed with the bankruptcy court that the money paid to Masiz was a preferential transfer made to the detriment of other creditors. The court also found no evidence that Masiz was entitled to more than the $34,520 the bankruptcy court let him keep for his 72 days of consulting work.
Masiz founded Vaso in 2001, but resigned as CEO as part of a settlement with the SEC. The lawsuit accused both Vaso and Masiz of fraud, alleging that they made “material misrepresentations and omissions in both public statements and filings with the Commission falsely claiming FDA approval for three of the company's products which were not, in fact, FDA approved,” according to an SEC press release about the settlement.
Following his resignation, Masiz continued to work for Vaso as a “strategic consultant.” Masiz agreed to work unpaid helping Vaso pursue a malpractice lawsuit, and agreed only to be paid if the lawsuit was successful.
When the suit settled for $2.5 million, Vaso reached an agreement with its attorneys in the suit to pay them a certain amount, but the agreement also “acknowledged” that Vaso intended to release $598,000 of the settlement to Masiz for the work he performed. Vaso later paid Masiz an additional $178,363 for his continued work.
This was despite the fact that Vaso's board had previously determined it would value Masiz's services at $175,000 a year.
After Vaso filed for bankruptcy, the bankruptcy trustee sued to recover the funds paid to Masiz as either a preferential or fraudulent transfer. The bankruptcy court found in favor of the trustee on the preferential transfer claim, and Masiz appealed.
Under Section 547 of the Bankruptcy Code, a transfer is preferential if the recipient received more via the transfer than he would have under a hypothetical Chapter 7 liquidation. Masiz argued this fact was in dispute because there was “no proof as to how much could have been distributed to unsecured creditors in a liquidation under Chapter 7.” But the court said the exact amount was irrelevant.
“Masiz's argument fails because the [t]rustee need only establish that Masiz would have received less than a 100% payout on his unsecured, nonpriority claim in a hypothetical [C]hapter 7 liquidation,” the court said. “If the [t]rustee can make this showing, then any payment Masiz received from the [d]ebtor on account of an outstanding debt would have necessarily increased his share of the recovery.”
In this case, Vaso's debts vastly exceeded its assets, and there was minimal recovery predicted for secured claims under a liquidation, and no recovery predicted for unsecured claims. The court thus agreed that Masiz received more than he would have under any liquidation scenario and found that the transfer was preferential.
Masiz also argued that the money had been “earmarked” for him, and thus was subject to the earmarking doctrine exception to preferential transfers. In order for the earmarking exception to apply, the court said that three elements must be met: (1) there is an agreement that the debtor will only use the money received to pay a specific, existing debt, (2) the agreement is performed according to its terms, and (3) on the whole, there is no diminution of the debtor's estate.
The court said that the agreement acknowledging part of the settlement would go to Masiz didn't measure up to the earmarking standard. The funds came from a party who had no say over who they were paid to, and Vaso could disburse them however it wished. The court found that the mention of Vaso's intention to use some of the funds to pay Masiz was not a binding obligation.
Finally, the bankruptcy court had allowed Masiz to keep $34,520 of the money transferred to him in exchange for the “new value” he had given the debtor in the form of the work he performed over the course of 72 days. The court reached this figure by prorating the $175,000 annual salary the board has ascribed to Masiz's work.
Masiz didn't suggest an alternate method for calculating what he should have been paid. The court said Masiz's “conclusory statement” that the bankruptcy court's calculation was wrong wasn't sufficient to overturn the ruling.
Christopher Page Simon and Kevin Scott Mann of Cross & Simon, LLC, Wilmington, Del., represented Masiz.
Henry A. Heiman and Robert W. Pedigo of Cooch & Taylor, Wilmington, Del., represented the trustee.
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