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In re Environmental Technologies International, Inc.

United States District Court, M.D. Florida, Tampa Division

June 13, 2017

ASA W. CANDLER, III, et al., Appellees. MATTHEW J. FREESE, Appellant, Bankr. No. 8:15-bk-6910-KRM Adversary No. 8:15-ap-786-KRM



         This appeal arises from a Chapter 7 adversary proceeding. Appellant Matthew J. Freese filed his initial brief on March 29, 2017. (Doc. # 10). Appellees Asa W. Candler, III and Steve Ostermann filed their response brief on May 15, 2017. (Doc. # 13). Freese filed his reply brief on May 30, 2017. (Doc. # 14). After careful review, this Court affirms.

         I. Background

         Environmental Technologies International, Inc., was founded by David Barnhardt and David S. Gordon in 2000. (Doc. # 2-16 at 1). In 2005-2006, Tommy Hale introduced Barnhardt to the idea of using magnets to clean oil wells, thus beginning ETI's venture into the oil and gas industry. (Id. at 2). ETI produced a device known as the “Radial Flux Generator, ” which was meant to “condition in-well crude oil fluids by assisting these fluids to flow with less resistance thus enabling more production.” (Doc. # 2-16 at 2; Doc. # 2-19 at 2).

         Barnhardt was diagnosed with cancer and, “[d]uring the last months of his life, Barnhardt attempted to locate a successor to serve as the CEO of ETI.” (Doc. # 2-16 at 2). Having been approached by Barnhardt to see if he was interested in becoming CEO, Freese became president and CEO of ETI on March 11, 2010. (Id.; Doc. # 2-10; Doc. # 2-16 at 2; Doc. # 2-19 at 2).

         The terms and conditions of Freese's employment with ETI were memorialized in an Employment and Management Agreement. (Doc. # 2-10). In relevant part, the Employment and Management Agreement stated:

2. Term. This Agreement . . . shall terminate as of . . .:
. . .
(c) sixty (60) days after notice is given by one party to the other after a material breach of this Agreement . . . and the breach is not cured. A material breach by Freese of this Agreement is any significant failure on his part to comply with his obligations under Sections 4, 5, 6, 7, 8, 9 [sic] ¶ 10 below. . . .
3. Compensation. During the term of this Agreement . . ., Freese shall receive:
(a) Salary. [ETI] shall pay Freese, contingent on his securing adequate funding for [ETI], a base salary . . . .
. . . .
(f) Royalty.
(i) Freese . . . shall receive a two (2) percent royalty on all gross sales . . . .
. . . .
(i) Freese acknowledges and agrees that as of the date hereof, [ETI] has no funds with which to pay salary, benefits or expenses, that [ETI] is relying on him to raise the funding necessary for the development and operation of [ETI], and that it is his sole responsibility to develop adequate capital, loans, grants and other sources of funding whereby [ETI] may carry out its operations . . . .
. . . .
9. Inventions. Freese hereby sells, transfers, and assigns to [ETI], all of the right, title, and interest of Freese in and to all inventions, ideas, disclosures, and improvements . . . made or conceived by Freese, solely or jointly, or in whole or in part, during the term hereof which:
(a) relate to methods, apparatus, designs, products, processes, or devices sold, leased, used, or under construction or development by [ETI] . . .; or
(b) otherwise relate to or pertain to the business, functions, or operations of [ETI] . . .; or
(c) arise in whole or in part from the efforts of Freese during the term hereof.
Freese shall communicate promptly and disclose to [ETI] . . . all information . . . pertaining to the aforementioned inventions, ideas, disclosures, and improvements; and . . . Freese shall execute and deliver to [ETI] such formal transfers and assignments and such other papers and documents as may be required of him to permit [ETI] . . . to file and prosecute the patent applications . . . .

(Doc. # 2-10) (bolding in original).

         Before Freese signed the Employment and Management Agreement, he had begun meeting with Candler and Ostermann in an attempt to secure funding from Candler Capital Partners, which “is in the business of providing start-up or venture capital to businesses or developers” and also “provides management and operational services for . . . companies.” (Doc. # 2-19 at 2; Doc. # 2-9 at ¶ 1(b)). After Freese signed the Employment and Management Agreement he negotiated the terms of Candler Capital's investment in ETI. (Doc. # 2-16 at 2).

         The relationship between ETI and Candler Capital was set forth in the Letter Agreement. (Id.; Doc. # 2-9). The Letter Agreement stated:

(a) Exclusive Right to Fund. CCP shall have the exclusive right to provide debt and equity financing to ETI . . . .
. . . .
(e) Security. The Initial Loan shall be secured by:
. . .
ii. All of ETI's right, title and interest in the ...

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