The problems began immediately. Scott was often in Arizona, where he had two children, and sought reimbursement for the trips, according to a lawsuit filed by Greg in Oakland County, Mich., in February 1994. Scott also told employees, some upon threat of termination, not to listen to Greg, according to the lawsuit.
Greg also accused Scott of seeking sales commissions, even though each brother was to receive a $30,000 salary with performance bonuses.
Scott and Bettie countersued. Scott said Greg did not inform him of problems and questioned Scott’s ability in front of employees.
Scott also alleged that Greg told him he couldn’t be absent from the company “even for one day” and continually undermined his position as CEO.
In an interview, Greg said he didn’t think working with elder brother Scott would be a problem.
“It was a beautiful deal,” he said. “I felt comfortable knowing my mom was protected and my dad was taken care of.”
Scott, reached at his home in Arizona, declined to comment. Bettie couldn’t be reached for comment, and her Arizona attorney didn’t provide a phone number. Chuck didn’t return two phone calls and, through Greg, declined to comment.
In January 1994, Scott suspended his father’s pay, according to Kuhn’s opinion. Then Greg, Brad, Chuck and Bettie discussed Scott’s behavior in a conference call and agreed to fire him.
Scott was notified of his termination Jan. 13, 1994, during what Kuhn later would rule was an illegal board meeting because Bettie was not present and did not formally vote or provide a proxy.
Then, according to Kuhn’s opinion, Bettie wrote Scott and said she hadn’t intended to fire him. Instead of filing a lawsuit, Scott continued to act as CEO and “interfered with the Smillie company’s banking relationship by wrongfully accusing Greg Smillie of misappropriation,” according to Kuhn’s opinion.
Scott also redeemed his father’s stock. That, in effect, kicked Chuck off the board of directors.
According to Kuhn’s opinion, Scott and Bettie, along with their lawyers, came to the company’s board meeting Feb. 2, 1994. Bettie was told she was welcome, but security at C.M. Smillie’s plant was told to keep Scott out, according to Kuhn’s ruling.
Scott entered anyway; Greg and Chuck left; then Scott and his mother held a meeting, during which they fired Greg. The next day, Greg filed his lawsuit in Oakland County Circuit Court to overturn the firing. Scott and Bettie countersued.
Receiver enters the fray
Kuhn appointed attorney Joel Serlin in February 1994 as special limited master and later receiver, to oversee the company. Kuhn declared the actions of Greg, Scott and Bettie to be void until the lawsuit was settled. Greg and Scott were restored to their previous positions. Kuhn had to approve Serlin’s actions.
Serlin said he tried to keep the fighting and lawsuit out of the building and concentrate on the business.
“When I was involved, I had a rule: Within the four walls of the manufacturing plant, the litigation was not to be discussed,” said Serlin, a partner in a law firm in Southfield, Mich. “But no matter how hard you try, you reach a point where the litigation becomes all-consuming.”
Scott also filed a separate lawsuit in February 1999 in Arizona against Greg, Serlin and Brad. The lawsuit moved to U.S. District Court in Detroit.
Scott accused his brothers and Serlin of keeping the company in receivership and keeping Greg’s lawsuit going. Scott alleged that Brad and Greg awarded themselves improper bonuses and misrepresented the company’s financial position to creditors and lenders. He also accused them of holding secret board meetings and keeping financial data from him.
The Arizona case was consolidated with the lawsuit Greg initiated in Oakland County, Mich., said Christopher Andreoff, a Detroit attorney who represented Scott.
Serlin and Greg said Scott’s claims are false. Serlin said Scott turned down a $2 million offer, payable over a period of time, plus $250,000 in attorney fees to settle and leave the company.
But Scott wanted to stay to protect his investment, Andreoff said.
“They didn’t feel Scott or his mom should be involved, that they should handle the day-to-day operations,” Andreoff said. “Scott didn’t think they could handle that. This should’ve been resolved years ago, but those personality conflicts caused a problem, and it was intractable.”
In his June 2000 opinion, Kuhn ruled that Scott and Bettie Smillie altered company operations against his orders and that Scott “engaged in a continuing course of action which evidences his ongoing efforts to damage the Smillie company and his brothers Greg and Brad Smillie and his intent to further his own interests.”
Scott tried to sabotage a 1998 refinancing with the company’s principal lender, Fremont Financial Corp. of California, according to Kuhn’s opinion. Fremont offered to extend its loan on favorable terms that would save about $100,000 a year in interest.
“Scott Smillie (through his agents) interfered with this proposal, and Fremont extended the loan without these concessions,” Kuhn wrote.
Kuhn ruled in favor of Greg’s claims and dismissed the claims in Scott’s countersuit.
Scott and Bettie both filed for bankruptcy in Arizona after Kuhn’s ruling.
LItigation takes its toll
It turned out to be a hollow victory for Greg, Brad and C.M. Smillie & Co. Serlin said the company lost about $400,000 in 1993 but posted profits during his receivership. Serlin said the company made a profit of $600,000 some years with about $13 million in annual revenue.
But the lawsuits, which began in 1994 and lasted until 2000, depleted the company of employees, management attention and, eventually, money. Smillie also had to pay Serlin.
Greg said attorney fees for himself and the company totaled $500,000.
“That thing actually was the death knell, that ongoing fight between the brothers,” Serlin said. “It became impossible to run the company.”
Rauss, who represented Greg, agreed. Just before Kuhn’s ruling, C.M. Smillie & Co. received its largest order for weld guns from General Motors.
But the legal battle left C.M. Smillie & Co. with little ammunition to weather any kind of payment delay, Rauss said.
And payment delays in the auto business, a result of changing production schedules and fluctuations in the economy, are common.
“All of the legal fights impeded cash flow,” said Rauss, an attorney in Troy, Mich. “It made it hard to pay the suppliers and laborers; there’s no doubt about that. The tactics used by Scott put a tremendous strain on resources individually and financially.”
Looking back, Greg wonders whether he should not have taken the GM order: 600 weld guns. The previous largest order had been for 300 to 400. To do the job, the company had to borrow up to its credit limit.
“Looking back, we should not have taken the order. We should’ve downsized,” Greg said. “But we had already made the commitment to GM, and it was the biggest order in company history.”
Usually, it takes three months to make weld guns and deliver them. GM wanted them in two months. C.M. Smillie met the schedule. But GM put the delivery off for five months, delaying payment, Greg said.
GM did not return two calls seeking comment.
“All of our cash was sitting on our floor for months,” he said. “Just as we started shipping, the judgment came out.”
In debt and in need
Kuhn’s June 2000 opinion ended Serlin’s receivership, and Greg and Brad were on their own. Greg said the company was $2 million in debt.
The pair started looking for a lender to refinance the company’s debt. Some vendors put the company on cash-on-delivery, and Greg and Brad started meeting with creditors to arrange payment schedules.
The company hired PLG Funding Corp., of Southfield, Mich., to find a lender. Greg and Brad also started putting more of their personal money into the company.
C.M. Smillie signed a loan agreement last July for $5 million with Empire Federal Bank NV, based in the Netherlands. The company had to pay a $93,000 guarantee bond to obtain the loan.
But the bank kept delaying payment. Then the Sept. 11 attacks left international banks in chaos, and the deal was delayed further. GM only paid about half of what was owed, Greg said.
Greg and Brad negotiated with trade creditors, offering equity in a reorganized company, but it didn’t work.
Finally, on Jan. 16, Empire Federal said it couldn’t provide the loan. Employees, including Greg and Brad, didn’t get paid, and Greg shut the doors.
“I was in shock,” he said. “I dumped my whole life savings into this company. Then they said they just weren’t going to do it anymore. You tend to trust people when they’re bankers.”
As a result, Chuck Smillie lost his retirement security, which was tied to his company.
Greg said delays in the GM deal and Empire Federal Bank’s pullback were what did the company in. It could have survived the lawsuit.
One of the creditors that filed the Chapter 7 petition said companies doing business with C.M. Smillie & Co. just couldn’t wait any longer.
“C.M. Smillie went from being our No. 1 customer to our worst nightmare in three years,” said James Regnier, president of Associated Machinery Service Inc., of Taylor, Mich. “I’ve been hearing this story for two years. I talked to somebody at GM purchasing, and they said they didn’t owe them (Smillie) anything. Their story changed and changed again. We said enough is enough.”
Greg Smillie said he isn’t sure about the next step. He has about $5,000 left, not enough to pay an attorney to liquidate. He still hasn’t received the $93,000 bond guarantee from the loan that was never granted. He’d like to sell a division of the company and possibly start again with a smaller operation. But he also is trying to find a job elsewhere.
“I tried to fight and keep it going,” he said. “I sacrificed myself. I’m still in a state of shock.”