When businesses and their executives part ways, company leadership usually devotes considerable time and energy to finalizing such an “executive divorce.” How the message will be communicated inside and outside the company, how the transition to a successor will be handled, and how to compensate the departing executive are all issues that need to be addressed. But as in domestic divorces, the split between a corporation and its CEO can get very messy, very quickly if there is not enough disclosure going into the relationship or sufficient forethought about how it all might end. Take for instance the heated legal battle currently being waged between local grocery chain Minyard Food Stores and its former CEO Ronald E. Johnson—a fight which has spilled over into three different North Texas courtrooms and spurred allegations of everything from breach of contract and fiduciary duty to libel, self-dealing, and even leaving the scene of an accident.
The twisted tale began in October 2004, when the Coppell-based Minyard Food Stores and its owner, Fort Worth’s Renegade Swish, LLC, recruited Johnson, a 35-year veteran in the grocery field, from Florida. They signed a two-year contract providing Johnson with annual compensation of $400,000 and eligibility for bonuses of up to an additional $400,000. According to Minyard’s, it sought a CEO of the highest ethics who was knowledgeable about the grocery industry, but instead it got someone in Johnson who, “like many other disgraced CEOs put their own personal gain above the business they were supposed to be running,” allegedly conspiring with cronies to “use Minyard’s as their own personal trough.”
Johnson, on the other hand, claims that although he was led to believe that there would be an infusion of capital he was “like Don Quixote fencing at windmills” in his efforts to improve the Minyard’s bottom line by such measures as improving the profitability of the grocery chain’s private-labeling programs and prescription sales. According to Johnson’s attorney, David Sacks of the Sacks Law Firm in Houston, Johnson was “in the process of working out a deal for the sales of certain Minyard warehouses” that would have brought a significant amount of money into the Minyard coffers. Johnson was removed from his position as CEO in May and fired in July 2006.
The lawsuit filings that followed have been fast and furious. On October 31, 2006, Herman Doyle Patterson, a consultant retained by Johnson during his Minyard’s tenure, filed a breach of contract suit against Minyard’s in the 116th Judicial District Court in Dallas County. A day later, Johnson filed his own breach of contract suit against the grocery chain in Dallas’ 193rd Judicial District Court. Among other claims, Johnson is accusing his former employer of libel, stemming from allegedly defamatory comments about Johnson made in an e-mail that Minyard’s sent to 118 persons both inside the corporation and out, as well as communications with major vendors like Coca-Cola and Smuckers.
Not to be outdone, Minyard’s and Renegade Swish, LLC, have filed counterclaims in both lawsuits laying out a litany of alleged abuses by Johnson in which he “feathered his own nest,” according to Minyard attorney John R. Crews of Crews, Shepherd & McCarty, LLP, of Dallas. And recently, Renegade Swish filed another lawsuit in Tarrant County alleging that Johnson breached a confidentiality agreement and seeking to depose certain executives at Johnson’s new employer, Mortgage Assistance Corp. Earlier this year, Johnson was hired as chief executive of the Dallas company, which buys distressed mortgages on the secondary market. Mortgage Assistance Corp.’s attorney, Michael Caolo, maintains that the executives whom Renegade Swish wants deposed know nothing relevant to the lawsuit, and that these efforts are nothing more than “an attempt to intimidate and harass” Johnson’s new employer.
Just what is at stake in the litigation that has devolved into what David Sacks describes as “a very emotional, vindictive vendetta”? Minyard’s claims that Johnson’s purported reaching into the corporate cookie jar has cost the grocer $12.3 million, a figure Sacks dismisses as having been “pulled … out of a hat.” Minyard’s court filings paint a seamy picture of Johnson as a man who allegedly conspired with friends to use the grocery chain as a personal slush fund, as Johnson—through a web of intertwined companies and individuals—received “consulting” payments and other monetary benefits from cronies that he hired as vendors and/or consultants, including Herman Patterson.
According to Minyard’s, within a few months of being named CEO, Johnson set in motion a “feeding frenzy” of corruption that directly violated not only the company’s written policy on consultants and contractors, but also its Code of Business Ethics. This code—which Johnson himself helped establish—restricted the executive from engaging “in any business at any level with any entity that could be considered a direct competitor, contractor, supplier, or customer of Minyard’s.” The grocery chain alleges that one of Johnson’s first transgressions was hiring Herman Patterson as a consultant on various projects that included slashing Minyard’s inventory levels in the health and beauty care and pharmacy areas. According to Pat Dunne, a member of the Minyard board of directors, Johnson didn’t have authority to enter into the one-year, $99,996 consulting agreement with Patterson; in fact, says Dunne, in mid-August 2005 he specifically instructed Johnson that he could no longer use Patterson’s services.
But flouting company policy and express directives were only the tip of the iceberg, according to Minyard’s. In its counterclaim, the grocery chain alleges that shortly after entering into a February 2005 supply contract with Joshen Paper and Packaging Co., Johnson ordered that a company called Battery Park Industries be added to the contract as a “broker” (with Joshen paying Battery Park a 1 percent commission on the products sold to Minyard’s each month). Minyard’s claims that Battery Park had no part in arranging or negotiating the contract with Joshen, and that this was merely a smokescreen for kickbacks paid by Battery Park to Ronald Johnson.
Indeed, documents filed with the court by Minyard’s purportedly show that Battery Park paid “commissions” of $102,264 in 2004 and $216,676.29 in 2005 to an “R. Johnson.” Minyard’s also claims that Johnson caused the grocer to enter into another questionable deal with Battery Park, in which Minyard’s purchased roughly a year’s worth of floor wax and other cleaning supplies from the company. According to Minyard’s, Johnson avoided calling attention to the unusually large ($173,000) order by causing it to be split amongst five separate purchase orders, all of which were issued on April 10 and 11, 2006.
Still, 67 grocery stores being cleaned by their employees are going to need a fair amount of floor wax. How, then, to explain the $1.2 million contract that Minyard’s entered into in March 2005 with Industrial Cleaning Management, LLC, (ICM) for ICM to clean the floors at Minyard stores? Minyard’s claims to have an explanation: According to its court filings, ICM was Ronald Johnson’s previous employer, from which he continued to receive money and in which he maintained an ownership interest even while he was serving as CEO of Minyard’s. ICM’s Limited Liability Company Annual Reports filed on April 15, 2005, and February 22, 2006, both show Ronald Johnson as a managing member; in addition, Johnson’s 2005 tax return purportedly reflects not only his ownership interest in ICM, but more than $78,000 in income received from that company that year alone—all while he was on the Minyard payroll.
Johnson supposedly entered into other questionable relationships as well. One of these was with Joseph DiFlumera and the “Northeast Consultants Group,” with whom Johnson entered into a $200,000 consulting agreement in July 2005. Curiously, the letter confirming the relationship doesn’t specify what services DiFlumera would provide; moreover, even though the agreement was dated in July 2005, DiFlumera billed Minyard’s retroactively for most of the contract ($50,000 in December 2004; $50,000 in March 2005; and $50,000 in June 2005). Just what services DiFlumera (a former assistant to the president of the United Food and Commercial Worker’s Union) would be able to provide was questionable. After all, DiFlumera was a convicted felon, having been charged in early 2004 with racketeering and wire fraud charges in federal court in Massachusetts, charges to which he pled guilty in September 2005.
In addition to entering into dubious contracts and even shadier relationships, Minyard’s alleges other improper conduct by its former chief executive. According to the company, Johnson hired a South Carolina company, Period Three LLC, to design and develop the Minyard website, bypassing the company’s accepted bidding practice and excluding the Minyard employees who typically would have a voice in choosing such a vendor in the process. Period Three LLC, it seems, is the company for which Johnson’s son works. Minyard’s also claims Johnson violated company policy and its Code of Business Ethics by improperly soliciting tickets to the 2006 NBA finals from vendors. Johnson is also accused of improper supervising of the company’s head of Hispanic merchandising, Andy Vigil, who was terminated amid allegations of kickbacks from brokers. And in perhaps the most bizarre twist, Minyard’s accuses Johnson of being involved in a hit-and-run accident in an automobile leased for him by Minyard’s on May 12, 2006. According to a Coppell police report, Johnson’s vehicle struck the other car, “then left without giving information.” The leased vehicle was later found abandoned with a flat tire on North Central Expressway. Johnson’s lawyer characterizes this as a misunderstanding over “a car accident with $1,500 worth of damage.”
The legal wrangling between Johnson and his former employer is likely to continue for some time and get even more complicated; Patterson’s case has an August 20, 2007, trial setting, while Johnson’s lawsuit isn’t set for trial until January 15, 2008. In the meantime, it serves as a cautionary tale for both CEOs and companies in a business climate marked by heightened scrutiny of executive compensation. After decades of quiet acceptance of executive pay packages, companies ranging from Disney and AT&T to Pfizer and Home Depot have seen firsthand executive pay become the latest battlefront in the corporate governance wars. As with a marital divorce, both CEOs and their companies have to plan from the beginning for what happens when the relationship ends—everything from what the company will keep and what the executive can take, to the parties’ respective financial obligations, to outlining the limitations on the CEO’s duties and responsibilities. An ounce of prevention can be worth pounds of legal bills.
John G. Browning is a partner in the Dallas law firm of Browning & Fleishman, PC, where his practice is devoted to civil litigation. He is also the published author of one book, a contributor to two others, and an award-winning legal journalist whose work has appeared in publications throughout Texas and the United States.
