Complainants sue NanoMech in federal court for $3 million

NanoMech, formerly a Springdale-based nanotechnology manufacturer, has been sued again and faces a federal case that involves a previous complainant and a Connecticut-based private school seeking a combined $3 million in damages.

On Aug. 24, Daniel Carroll of Michigan and Kent School Corp. of Kent, Conn., filed suit against NanoMech in U.S. District Court, Western District of Arkansas, in Fayetteville. Stephen Parker Jr., attorney and managing member for Westark Law in Springdale, represents the complainants.

The suit comes after a related case was dismissed on May 28 in Washington County Circuit Court. Colt Galloway, attorney of Mitchell, Williams, Selig, Gates & Woodyard in Rogers, represented NanoMech. He said he was unaware of the new federal case and had yet to be retained for it. Galloway declined further comment. In federal court, Carroll filed the circuit court case on Aug. 20, 2019, after another related case was dismissed on July 2, 2019. Carroll filed that federal case on March 25, 2019. Carroll’s lawsuits relate to NanoMech not making payments on a $1 million loan issued June 28, 2018.

The following month, NanoMech announced Carroll had been appointed president of its automotive and industrial group and would oversee the company’s Detroit office. Parker previously said Carroll’s position at NanoMech was terminated on March 18, 2019.

Parker said Kent School joined the suit with Carroll after the Washington County Circuit Court case was dismissed. According to court documents, Kent School provided two $1 million loans to NanoMech: one on Aug. 30, 2018, and another on Sept. 24, 2018. Kent School is seeking a combined $2 million in damages.

Parker explained that NanoMech should not have accepted the money from Carroll or Kent School because of a previous agreement with New York-based lender Michaelson Capital Partners. That agreement showed NanoMech would need to receive permission from Michaelson Capital to take any additional debt.

On Feb. 4, 2019, Michaelson Capital filed suit in the Supreme Court of New York, alleging NanoMech had not made payments on nearly $7 million in loans provided in April 2018. Robbie Wills, an attorney representing Michaelson Capital, previously said NanoMech took on more debt after it received the loans from Michaelson Capital, and this violated a condition of the loans.

According to court documents in the new case, NanoMech’s general counsel Steve Brooks “erroneously advised NanoMech that it could issue” convertible promissory notes to Carroll and Kent School without written consent from Michaelson Capital. Brooks, a founding partner of Eldridge Brooks Partners in Rogers, drafted the notes from NanoMech to the complainants, the documents show. The notes were considered a form of stock because they could be transferred to company shares before the debt was paid. NanoMech breached its agreement with Michaelson Capital when it issued the notes, according to the documents. The lender notified NanoMech of the breach in September 2018.

The following month, Brooks emailed the lender seeking a “waiver of existing covenants regarding the application of ‘debt’ proceeds to remove any doubt that the convertible notes do not trigger this requirement … .” Also in the email, Brooks “included written misstatement that ‘convertible notes are neither debt nor equity, but rather a contract to issue future equity at to be defined terms,’” according to court documents.

“Fundamentally, it is unfair that Mr. Carroll and Kent School deposited these funds based on negligence from NanoMech,” Parker said. “And I feel that their claims are valid, to prevail in court and ultimately be paid by the insurance companies.”

Court documents show NanoMech’s insurance policies included a combined $6 million liability limit provided by Nationwide, Scottsdale Indemnity Co. and Argonaut Insurance Co.

On April 15, 2019, NanoMech filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware. Parker said the bankruptcy filing put a stay on Carroll’s initial federal case.

On April 8, 2020, U.S. Bankruptcy Judge John Dorsey approved a $1.7 million settlement agreement between NanoMech, its directors and officers, and Michaelson Capital. Dorsey dismissed the bankruptcy case on May 26, 2020.

Parker was disappointed Carroll was left out of the settlement. But with the stay lifted, Carroll proceeded with the circuit court case, which was dismissed. Parker disagreed with the circuit court decision that Carroll could sue the company but not its directors and officers individually.

The new federal case shows that NanoMech is the only respondent. A hearing has yet to be set.