Posted 11/21/06
FAQ Regarding AHRMA Reorganization and Litigation brought by Mr. Iannucci

Why couldn’t trustees speak up over the last several months and share the financial situation?

This was extremely frustrating for members, as well as the trustees. This was something we expected, but were forced to endure for the best interests of AHRMA and our membership.  Here, in very condensed form, are some of the major reasons why we were forced to withhold comment.

     ● Our financial situation. Due to the failure of our insurance company, we were faced with the reality of only $300,000 coverage from the Wisconsin insurance insolvency fund, instead of our originally inured amount of $1 million.  Even then, we expected that this would easily cover our defense in this case. We entered 2006 with approximately $70,000 in this fund after five years of Mr. Iannucci’s draining tactics (documented in the legal memorandum we filed on Nov. 14  and posted on our website). While Mr. Iannucci knew the amount of our original coverage, it wasn’t clear if he knew the exact amount of the reduced coverage. Plus, he did not know if we were able to secure additional coverage amounts or secure other benefactors willing to fund our defense. In spite of our strong case, settlement negotiations were pursued, but Mr. Iannucci’s minimum financial demands proved that he still held to his stated intent to bankrupt us.  We obtained estimates to complete depositions and get to a summary judgment that were within our resources.  However, the billings this year, beginning in the summer, were over twice the total of the previous five years, combined.  In spite of estimates to the contrary, we were being billed total costs in excess of $100,000 per month!  The rapid onset of this billing, in contrast to the estimates, was truly shocking and left us with only the options of securing additional funds to get to the judgment, or bankruptcy.  Mr. Iannucci relentlessly sought this information in court, in the depositions and a Team Obsolete plaintiff was observed with a concealed recorder at the Barber town hall meeting as he and others questioned the trustees on this.  This is a clear indication of the advantage that Mr. Iannucci intended to gain if he had this knowledge, and exactly why we were advised to keep it confidential by our attorneys.

     ● Our legal strategy.  We had strong legal advice that if Mr. Iannucci became aware of our developing financial situation, it could prejudice the case and our litigation strategy when we thought we could still get to a summary judgment decision, as well as potentially recoup all our legal costs.  Our attorneys advised that he could renew efforts to further delay the case, introduce additional claims and depositions (which he indeed did) and further expend our resources in drawing out the case beyond our breaking point.  At one point, we even had informal information that Mr. Iannucci was becoming weary of the litigation.  We strongly believed that if we could get through depositions we would prevail on summary judgment late this year based on our legal team’s estimates to complete, the BEARS decision, and the repeated dismissal of Mr. Iannucci’s claims.

     ● Our bankruptcy strategy.  Once we realized we could not likely pay the rapidly mounting legal bills, and without a cash influx from a major benefactor, we were faced with Chapter 7 bankruptcy — the dissolution of AHRMA.  That would create a liquidation process resulting in the ultimate sale by a bankruptcy trustee of all AHRMA assets (name, trademarks, track contracts, rulebook, membership list, funds remaining, etc.) to the highest bidder. AHRMA would be forced to discontinue all operations upon a Chapter 7 petition filing.  Subsequently, any attempt by any past AHRMA official to re-form a vintage racing organization could have resulted in an action seeking liability under the original lawsuit though the legal concept of “successor liability”.  New Insurance coverage would not cover this preexisting claim by Mr. Iannucci if he chose to renew it.

     ● The reorganization option. After extensive discussion with our legal counsel, we determined the best course of action was to file a petition for a Chapter 11 reorganization that would stay the present litigation, isolate and estimate the potential remaining lawsuit claim (if any), and eliminate any future litigation based on the past events.  Any new actions would be covered by current insurance with $2-million coverage. Once our bills exceeded our ability to pay them we were able to retain assets still maintained by the corporation.  AHRMA has the continuing resources to maintain its operations until a claim liquidation is made in the Chapter 11 case. In order to get to this point, it was imperative that we not disclose the situation until we could file for Chapter 11 and a motion to estimate the lawsuit contingency claim in a reorganization setting.  While AHRMA cannot pay any pre-petition obligations prior to reorganization, it can and must pay post-petition obligations (operations) as they come due.  Income from operations and membership dues should be easily sufficient to sustain continued operations.

Why wasn’t AHRMA sold or given to someone as the magnitude of the financial situation became apparent?

A nonprofit 501(c)4 can only be dissolved, sold or merged with another nonprofit.  It cannot be acquired by a for-profit organization.  Additionally, under law, the gaining entity would be liable for any litigation already in process.

How can this be allowed to happen simply over Team Obsolete using some AHRMA trademarks?

AHRMA has had continuous problems caused by Mr. Iannucci from the organization's inception, greatly disrupting our operations, our personnel, our sponsors and our members.  These issues went far beyond a simple trademark issue. The decision in the BEARS trademark case and the independent confirmation by a federal court judge, affirmed by the appellate court, clearly declared this “history of shifty behavior” with AHRMA.  Thus the court decision provided the independent confirmation that Mr. Iannucci’s history of bad behavior warranted not renewing his membership.  From that point, all the actions have been Mr. Iannucci’s regarding this frivolous lawsuit that he brought to bankrupt AHRMA and then go after individual AHRMA officials and members.

Why couldn’t we end this?

We are the defendants in this case — we did not initiate this frivolous suit. In spite of a federal court judgment confirming Mr. Iannucci’s “history of shifty behavior” (affirmed by the appellate court), we attempted to negotiate settlement with Mr. Iannucci.  Mr. Iannucci has clearly stated his intent to break the association and consistent with that, his ultimate minimum financial settlement offer greatly exceeded the assets we had available. We were forced to defend the association.

Did AHRMA hire and contract to pay a “Special Advisor for Litigation,” specifically Jeff Smith?

No, the truth is polar opposite.  Jeff Smith was asked to be a special advisor for the litigation, only, since as executive director during the period of the case claims, he was central to our knowledge of our defense.  He did not ask for, nor was he paid, nor contracted to do so.  Quite the opposite, Mr. Smith is listed as a creditor in the bankruptcy case, as he provided an interest-free loan to help us with our legal costs.  

Was AHRMA offered a settlement option involving a resignation demand for several board members?

No. This question apparently originated at Sandia, purporting that if several board members had resigned during the settlement negotiations, Mr. Iannucci indicated that he would have dropped the suit at that point. This is absolutely false. While Mr. Iannucci had several demands, the primary stumbling block was his outrageous financial demand.

Why did AHRMA’s New York attorney file to be released as our attorney in October?

Our attorneys asked to be released from defending us since we were unable to pay them.  Mr. Iannucci has also had multiple attorneys in this case.  Mr. Iannucci’s counsel withdrew in 2004.  This was unlikely due to insolvency, given the continuance of the case with another attorney.  Please see the “Memorandum of Law in Support of Motion to Estimate Claim of Team Obsolete” on our website for more details on this.

What is the status of the Benevolent Fund?

AHRMA is a non-profit 501(c)4 corporation.  The Benevolent Fund has always been a part of the general fund under this corporate classification.  That is why donations were not tax deductible. The Benevolent Fund had been kept as a part of the general fund, primarily to multiply the earning power with our cash assets in order to grow it faster, and it did benefit from that. 

Since it was a part of the general fund it could not legally be excluded from our defense. Given its success, we had begun steps earlier this year to convert it to a 501(c)3 fund, but were advised that we should not do that, given the litigation situation and that it could be considered hiding assets if we were forced to bankruptcy. We believe we have retained enough capital to continue to operate it, and we plan to recapitalize it as we move through Chapter 11, and ultimately convert it to a 501(c)3 fund. 

Several questions regarding  Chapter 11 and continuing operations:

What is it?

Chapter 11 is the reorganization chapter of the Bankruptcy Code. Under it, a corporation can seek "breathing room" from its creditors while continuing to operate, in order to develop a plan to pay them over time.  In our case it will also stay the lawsuit pending reorganization efforts in bankruptcy court.  The bankruptcy court can estimate the contingency damage claim (if any) of Mr. Iannucci and Team Obsolete, as well as potentially consider our counterclaim for attorneys fees against Mr. Iannucci and Team Obsolete.  AHRMA has filed a motion to have this claim estimated in the bankruptcy court in Nashville.  The memorandum in support of this claim is posted on our website.

How will AHRMA operations continue?

AHRMA will continue to function under reorganization and has sufficient capital to do so.  We must report monthly to the court, but we retain control of operations as what is called a “debtor-in-possession” role.  We will run our national series in all disciplines in 2007.  We have retained funds to operate successfully and pay our salaried positions. 

Will AHRMA retain insurance coverage?

AHRMA retains full insurance coverage of $2 million.

Who is AHRMA’s legal representation in the bankruptcy action?

After detailed research for the best bankruptcy counsel, AHRMA has retained Mr. Samuel K. Crocker as our attorney.  Mr. Crocker is a partner in the firm of Crocker & Niarhos in Nashville, Tenn., practicing for 25 years primarily in the areas of creditors' rights and bankruptcy. His practice includes representation of debtors, creditors and trustees. He has been a member of the Chapter 7 Trustee panel for the U.S. Bankruptcy Court for the Middle District of Tennessee since 1984. He is also the incoming president of the National Association of Bankruptcy Trustees.

AHRMA also continues to be represented by Mr. Ted Bendelow, our general counsel and former general counsel for the Sports Car Club of America (SCCA).

More information

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