Minnesota CEO receives $4M award for defamation

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By Patrick Thornton
Dolan Media Newswires

A recent $4 million arbitration award in favor of a Minnesota man who was terminated from the company he founded highlights how important it is for a board of directors to be certain of what they say about former employees and to follow employment agreements to the letter.

The arbitrator found that because the board characterized the termination of the CEO and chairman of the board as “for cause” when it was not, they defamed the man and he was entitled to significant damages.

According to documents filed in the case and the arbitrator’s award, Revis Stephenson III left his job in the financial services industry and founded Advanced BioEnergy LLC in the mid 2000s after raising about $200 million. By 2008 the company was operating three ethanol plants in the Midwest.

Stephenson served as chief executive officer and chairman of the board.

As the demand for ethanol slowed in 2008 and the world financial markets crashed, ABE went looking for a loan. The company found the money in the form of a convertible debt loan of $25 million from the firm Ethanol Capital Management, managed by Scott Brittenham. When the money changed hands, ECM became ABE’s largest shareholder. The cordial business relationship between ABE and ECM and Stephenson and Brittenham quickly soured.

By the fall of 2008 Brittenham had gained a spot on the board of ABE and had begun to criticize Stephenson’s leadership. His company threatened to sue to rescind its original $25 million loan. Finally at a September meeting, the board presented a document that highlighted 12 reasons that Stephenson had to go. Stephenson and his attorneys refuted the accuracy and the veracity of the claims to the board, but in October the board voted to remove Stephenson as chairman and suspend him as CEO.

The board pressured Stephenson, his attorneys allege, into releasing all claims as part of a settlement. He refused, and in January 2009 the board voted to terminate him, categorizing the termination as “for cause” based on the 12 reasons laid out in the earlier document.

Efforts to reach ECM and representatives from ABE were unsuccessful.

Stephenson was under a lot of pressure, said Roy Ginsburg, one of his attorneys at Dorsey & Whitney in Minneapolis.

“Here is a 42-year-old man at the time with five kids and a sixth on the way who has established a new business with long-term potential, and now he’s been squeezed out of the company he’s conceived and created, and the board is threatening to publicize what happened in a way that would have a negative impact on your long-term job opportunities,” Ginsburg said. “To his credit, he did not capitulate and he did not give in.”

Instead he sued ABE for breach of contract, defamation and breach of covenant.

Stephenson’s signed employment agreement stated if he was fired without cause he was due two years’ pay plus bonus and two years of benefits as severance — roughly $800,000 plus interest. If he was fired for cause Stephenson got nothing.

In the agreement was a strict definition of what constituted “for cause.” Stephenson’s lawyers contended, and the arbitrator agreed, that he was not fired “for cause,” but rather the termination was categorized as such to save money.

In the February 2011 decision, the arbitrator, Richard Pemberton, did not mince words in his criticism of the ABE directors. He categorized the board’s behavior as “detached” and “reprehensible.”

“I find that (the board) maliciously feigned ignorance of what (the directors) were doing … with the direct consequence not only of breaching ABE’s contract with Stephenson but of defaming him, causing him inability to find comparable employment, pain, suffering and emotional distress …”

The arbitrator concluded that labeling a termination as “for cause” is defamatory because the label would stick in employment searches.

Ginsburg said ABE’s board made several mistakes.

“One lesson from this case is that when a board terminates a C-level executive and characterizes it as ‘for cause,’ they had better be right and better be able to back it up,” Ginsburg said.

The second mistake was during discovery. Stephenson’s lawyers asked for all documents between ECM and ABE that related to threatened litigation from ECM on rescinding its original $25 million investment with ABE. ECM’s lawyers refused, but Ginsburg’s team won a motion to compel the documents.

“We expected everything would be produced,” Ginsburg said. “It was not.”

On the eve of the final week of the arbitration, ECM’s lawyers produced 131 pages that included a confidential settlement memo that outlined ECM would settle its pending lawsuit against ABE on the condition that Stephenson was removed as CEO and board chairman.

“That was the gun billowing smoke,” said David Trevor, another of Stephenson’s lawyers at Dorsey & Whitney. “It confirmed what we suspected, that Stephenson was terminated due to the pressure from ECM.”

The arbitrator also awarded Stephenson $1 million for defamation. His lawyers asked for a public apology from the board, but Pemberton said his 30-page decision could serve as Stephenson’s vindication.

The two sides decided to mediate the questions of the interest on Stephenson’s severance, the out-of-pocket expenses for both sides and attorneys’ fees. The two sides reached a mediated settlement of $4 million for everything, and the case closed in July.

Ginsburg said the final outcome was a vindication for his client but still bittersweet.

“The award was sizable, but for Revis, he would much rather still be CEO of the company that he worked for years to get off the ground,” Ginsburg said. “That outcome would be much preferable to him: to still be working at ABE.”