Genutec v. Danna, et al., Case No.: 07CC07918
In March 2013, after a trial lasting nearly five months, the Orange County Superior Court awarded over $9 million in damages to Shulman Bastian Friedman & Bui LLP client, Genutec Business Solutions, Inc. Genutec is a provider of emergency notification and voice broadcasting services. In early 2005, Genutec was profitable and its prospects looked bright. However, in September 2005, Genutec made an ill-conceived acquisition, purchasing a company called Smart Development for $14 million with the hope that Smart’s customer base, annual revenues and technology would enable Genutec to one day enjoy a public offering.
Put simply, this acquisition should never have occurred. However, pushed forward by a chief executive officer and director with a substantial financial stake in the acquisition who instructed Genutec’s acquisition attorneys to reduce necessary legal due diligence on Smart and with virtually no technical due diligence on Smart, the acquisition closed and the integration of the two companies began.
Unfortunately, not only at the time of the Smart acquisition was Smart operating illegally in violation of federal regulatory guidelines, but the Smart and Genutec technological systems were incompatible and the main asset Genutec acquired from Smart, its software, was not adequately licensed. This ultimately led to a total re-write of the acquired software, resulting in system crashes, a massive loss of customers and Genutec’s rapidly deteriorating financial condition. Genutec eventually become insolvent in February 2007 – a mere fifteen months after borrowing $20 million for the Smart Acquisition.
Gary Pemberton, a Shulman Bastian Friedman & Bui LLP litigation partner, and Kiara Gebhart, an associate in Shulman Bastian Friedman & Bui LLP‘s litigation department, brought the case to trial in September 2012. In a grueling 39 day trial that spanned nearly five months, Mr. Pemberton and Ms. Gebhart successfully demonstrated that Genutec’s CEO, Lee Danna, breached his fiduciary duties to the company both prior to the acquisition when he directed the reduced legal and technical due diligence leading to the acquisition of Smart and after the acquisition, when he and another director, Hans Smit, concealed Smart’s problems from Genutec’s Board and its shareholders and lenders. Mr. Pemberton and Ms. Gebhart also demonstrated that Mr. Smit, who joined Mr. Danna in concealing Smart’s problems, also breached his fiduciary duties to Genutec.
Relying on expert testimony of a local CPA that Mr. Pemberton and Ms. Gebhart called to testify as Genutec’s damages expert, the Court awarded Genutec over $6 million in compensation for the damages it incurred as a result of the breaches of Mr. Danna and Mr. Smit. Shulman Bastian Friedman & Bui LLP then filed a motion for pre-judgment interest on the Court’s damages award, which the Court granted adding over $2 million to Genutec’s judgment. Finally, Mr. Pemberton successfully tried the punitive damages portion of the case against Mr. Danna, resulting in an additional award of $1 million in punitive damages. In sum, total damages awarded to Genutec at the completion of the trial exceeded $9 million.