Gelman Will Pay To Settle Lawsuit

Gelman will pay to settle lawsuit

Web firm says he hurt company with doubts about its finances

BY SCOTT ANDERSON

News Business Reporter

Life sciences entrepreneur Charles Gelman will pay $2.1 million to settle a lawsuit with an Ann Arbor Web services firm that accused him of hurting the company by raising doubts about its finances to customers and lenders.

In a settlement approved last week by Circuit Court Judge Timothy P Connors, Gelman also will cancel a $400,000 loan including interest, which he made to Internet Applications and Solutions Inc. The firm designs Web sites and handles information technology projects for large entities such as the Ford Motor Co., the Charles Stewart Mott Foundation and Clear Channel Communications Inc.

The settlement will end a two-year legal battle between the company and Gelman, the founder of Ann Arbor-based Gelman Sciences Inc., which is now owned by Pall Corp.

The business and legal squabble began during the height of the technology boom in 1999, after Gelman and his wife Rita loaned $350,000 to Internet Applications and Solutions, known as IAS, according to a contract filed with court records in the case. Charles Gelman joined as a director alongside company co-founders Arthur Talbot and Kelley Bezrutch.

But in August 2001, Gelman wrote several letters and e-mails to loan officers at the Bank of Ann Arbor raising doubts about the company’s financial health, according to court records. In a letter dated Sept. 5,2001, Gelman wrote to Bill Broucek, the bank’s then president and chief executive, saying the firm was losing $10,000 or more a month.

“I believe your entire collateral is at risk of going ‘poof’ if you do not act within a very timely manner,” Gelman wrote in the letter, found in court records.

The bank later reeled in a line of credit worth $300,000 for the then-financially strapped company, and contacted IAS customers directly to collect payments, court documents show.

Also in the letter to Broucek and in e-mails to other bank officials, Gelman accused IAS cofounders of using up to $160,000 in company funds to buy personal items without the knowledge of the board of directors. Attorneys for IAS claim the firm paid the money back.

Gelman resigned from the IAS board in September 2001. He sued the company in December 2002, accusing it of breach of contract when it failed to make payments on its loan that year. While IAS attorneys acknowledge the company missed payments, the owners counter-sued Charles and Rita Gelman in March 2003. They claimed Charles Gelman had failed his duty as a director, and his comments to creditors undermined their business, causing it to lose money.

Judge Connors ruled in November that Charles Gelman “clearly breached his fiduciary duty to the corporation,” when he communicated to the bank.

“Mr. Gelman independently encouraged the bank to take a stance highly skeptical of the financial condition of the company of which he was a director,” Connors said, according to a court transcript. “That, while beneficial to the bank’s interest, was clearly not in the sole interest of the company.”

The case was scheduled to go to a jury trial next week regarding the amount of damages, according to IAS attorney Marta Manildi of Ann Arbor.

Manildi said the company had to lay off the majority of its 17-person staff as a result of Gelman’s communications to creditors.

“They had to take their eye off growth and had to focus on their existing accounts,” Manildi said. “Our belief and our hope is this (settlement) will allow them to get into the black.”

Diane L. Akers, Detroit-based attorney for Charles and Rita Gelman, said the couple settled because they wanted to put the litigation and protracted legal costs behind them.

“They have decided that terminating the lawsuit and getting on with other things is in their best interests and their family’s best interest,” Akers said.

She added that the Gelmans “wish (IAS founders) success in future business endeavors.” Akers said the Gelmans had no further comment. Charles Gelman did not return phone calls to his office.

Scott Anderson can be reached at sanderson@annarbornews.com or at (734) 994-6843.