In re Shelby Yarn Company (United States Bankruptcy Court for the Western District of North Carolina). This was the first reported case in the United States where the former employees of a company successfully filed an involuntary Chapter 7 bankruptcy petition against their former employer (in this case a textile company) and then through the bankruptcy process recovered damages and other compensation. After assuming jurisdiction of the case, the Bankruptcy Court appointed a Special Committee to represent the 637 former employees and designated O. Max Gardner III as Counsel for the Committee. The Court also designated Gardner as Special Counsel to the Chapter 7 Trustee. The Committee, which was granted standing to sue in its own name, was originally a party plaintiff in an adversary proceeding filed against the former officers, stockholders and investors of Shelby Yarn. The adversary proceeding included claims under the WARN Act, the ERISA Act, the COBRA Act, and numerous other Federal and State statutes. The case has been extensively covered by the National and Local Media and was the Cover Story in the September 2000 issue of Business North Carolina.. The adversary case was settled in March of 2004 by the Trustee for $2,000,000.00, plus an additional $100,000.00 the Trustee collected in funds from collateral parties. The settlement was thereafter approved by the United Sates Bankruptcy Court on April 30, 2004. Each of the 637 former employees of Shelby Yarn will receive on the average 4 and 1/2 weeks of back pay under the terms of the settlement. The former employees, who had been granted an administrative priority claim for at least 60 days of back pay, were the only creditors of Shelby Yarn to receive any part of the distributions from the Trustee.

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Bruce Buchanan Star Staff Writer

SHELBY - A lawsuit filed in U.S. Bankruptcy Court alleges that Shelby Yarn CEO Sidney Kosann and his wife Norma misused employee benefits to pay Kosann an "excessive, unwarranted" salary and build the Kosanns' new house on Moss Lake. 
Former employee Mary Elizabeth McCombs filed the lawsuit in Charlotte Tuesday and says Shelby Yarn owes her pay and benefits. 
O. Max Gardner III, the attorney for Ms. McCombs, said the lawsuit included the Kosanns because his client believes they personally benefited from a misuse of funds. Mrs. Kosann was also an executive at the company. 
"If income was improperly used to pay salaries of officers or if it was used improperly, such as by buying their home, that's how they are involved," Gardner said. 
Kosann said Tuesday that he didn't take company money to build his house. 
"To think I'd take money, that's foolishness, but beyond that, I can't comment," he said. "It makes no difference what they are saying." 
He said former Shelby Yarn workers are blaming him and accusing him of wrongdoing because they are upset about losing their jobs. 
"And I can understand that," he said. 
But Kosann said Shelby Yarn had to close because it had run out of money, not because of any wrongdoing. 
Last week, Cleveland County District Attorney Bill Young asked for an SBI investigation of Shelby Yarn. 
N.C. Rep. Debbie Clary, who helped trigger the investigation with a phone call to the state attorney general's office, said the SBI is investigating possible embezzlement, including charges that Kosann took company money to pay for work on his house. She also said the U.S. Department of Labor is looking into possible insurance fraud charges at Shelby Yarn. 
Kosann has already repaid the company $8,000 for tile work done at his house and billed to Shelby Yarn. Last week, he called it a "clerical error" and said no other Shelby Yarn money was used in building his house. 
The $8,000 in tile work was mentioned in the lawsuit as well as a contention that Kosann's home will cost "more than $500,000 and includes many expensive extras and amenities."
A building permit for the home, on file at the Cleveland County Building Inspection office, reveals that the home was projected to be 4,563 square feet heated with 1,401 additional unheated space, for a total of 5,964 square feet. The house sits on more than one acre of land near Moss Lake. The preliminary value listed for the house is $325,000. 
As for the insurance fraud allegations, Shelby Yarn was a self-insured company and had a self-funded retirement program. In both, workers made contributions to the funds with the understanding that the money would be there when they went to the doctor or, with the pension plan, retired. 
But after Shelby Yarn closed, workers were told they had to pay medical bills they thought were covered under the health insurance plan. Ms. Clary said employees have more than $600,000 in outstanding medical claims and that amount is growing. 
The suit alleges that Shelby Yarn commingled insurance and retirement money with the company's general operating funds and used those funds to pay the plant's expenses, including the compensation to Kosann and his wife. 
The suit also claims that Kosann received an annual salary of $300,000 from Shelby Yarn, a figure it calls "excessive" and "unwarranted." Kosann declined comment on his salary. 
Gardner said a key point of the suit was the manner in which Shelby Yarn closed. 
The company didn't reopen in early January after its customary two-week Christmas break. At first, employees were told that the break would be extended by another two weeks, but on Jan. 14, Shelby Yarn announced it wouldn't reopen, meaning 650 workers at three local plants were out of work. 
Gardner said that by failing to give a 60-day notice, Shelby Yarn violated the Federal Worker Adjustment and Retraining and Notification, or WARN, Act. 
"That's what the WARN Act is all about. You have to give that 60-day notice if you have 100 or more employees," Gardner said. 
Lynn Fuller, an attorney with the Institute of Government in Chapel Hill, agreed with this basic interpretation, but said there are loopholes in the WARN Act: if circumstances leading to the closing are not "reasonably foreseeable," for instance, or if the company was actively seeking capital which, if obtained, would have averted the shutdown. 
She said if a company is found to have violated the WARN Act, it can be required to repay salary and benefits for a 60-day period. 
Kosann said he knew of no law requiring a notice. 
"You don't know when you're going to run out of money," he said. 
Gardner said Ms. McCombs' case is unique in that she was already in a personal Chapter 13 bankruptcy proceeding. The suit was filed in federal bankruptcy court, since Ms. McCombs' creditors are affected by her loss of income. 
Gardner said that because the court was actively overseeing Ms. McCombs' debt repayment, they have an interest in seeing her assets returned. 
And he said the bankruptcy court's involvement could lead to more legal troubles for Shelby Yarn. 
"Any income the debtor earns is subject to federal jurisdiction," Gardner said. "If someone misuses that money, they could be in violation of federal bankruptcy laws." 
Gardner wouldn't put a dollar figure on the amount Shelby Yarn owes Ms. McCombs, other than it is "more than $10,000." 
The suit also asks the court to award her punitive damages in the case. 
Ms. McCombs is the only plaintiff in the suit, but Gardner said, "The bankruptcy court could look into expanding this into a class action suit involving more defendants." 
The suit is the second filed against the company in recent days. 
Jess Smith & Sons, a California cotton broker, is suing Shelby Yarn for $800,000 it claims the company owes for raw cotton delivered but not paid for and for cotton the suit claims Shelby Yarn was contractually obligated to buy in the future. 

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Bruce Buchanan Star Staff Writer 

SHELBY - A second former Shelby Yarn worker is suing the company, its CEO and his wife. 
Former employee Tommy Lee Tuft filed the suit Friday in U.S. Bankruptcy Court in Charlotte. The legal action follows an initial lawsuit filed last week by Mary Elizabeth McCombs who, like Tuft, lost her job in January when the company abruptly shut down operations. 
"It's essentially the same type of action as the first one, with the same claims for relief," said O. Max Gardner III, a Shelby attorney who represents both Tuft and Ms. McCombs. 
The Tuft suit names Shelby Yarn, CEO Sidney Kosann and his wife, Norma Kosann, also a company executive, as defendants. Like the McCombs suit, the Tuft suit claims Shelby Yarn used employee benefit money to pay Kosann an "excessive, unwarranted" salary of more than $300,000 a year and to pay for work on the Kosanns' new house on Donlynn Drive at Moss Lake. 
A copy of an invoice obtained by The Star shows that on Nov. 2, 1999, a subcontractor, Cornell "Buster" Wilson, charged $8,000 for "tile work and materials in bathrooms at Shelby Yarn Company." 
Wilson said he actually did the work in the bathroom of the Kosanns' new house. 
Kosann called that "a clerical error" and after inquiries by the U.S. Department of Labor, he reimbursed the company $8,000. 
He has said no other work at the home was done using company money. 
The Tuft suit also claims that Shelby Yarn used money in the company's self-funded retirement plan to improperly pay Kosann. 
In addition to the two lawsuits by former employees, Shelby Yarn has been sued by Jess Smith & Sons, a California cotton broker, who claims the company owes money for raw cotton. 
The suit, which was filed last month, said Shelby Yarn owes Jess Smith & Sons $800,000 for cotton it received last year plus cotton it was contractually obligated to buy this year. 
Shelby Yarn is also facing a criminal investigation, which was launched late last month by Cleveland County District Attorney Bill Young and the State Bureau of Investigation. 
According to N.C. Rep. Debbie Clary, who called the state attorney general's office about alleged problems at the company, the SBI is investigating possible embezzlement at Shelby Yarn, including charges that Kosann took company money to pay for work on his house. 
Also, Ms. Clary said the U.S. Department of Labor is looking into possible health insurance fraud related to more than $600,000 in unpaid worker medical claims.

Date:  March 14th, 2000

At 10:18 a.m. this morning O. Max Gardner III, a consumer bankruptcy attorney in Shelby, North Carolina, filed an Involuntary Chapter 07 Bankruptcy Petition against Shelby Yarn Company.  This petition was filed with the United States Bankruptcy Court for the Western District of North Carolina and has been assigned Court Number 00-40169.  The involuntary petition was filed on behalf of three former employees of Shelby Yarn:  Mary Elizabeth McCombs, Tommy Lee Tuft, and Margaret Lee Shuford.

O. Max Gardner III stated that "the purpose of this involuntary filing is to seek the immediate appointment of an Interim Court Trustee, to immediately secure all of the assets and business records of Shelby Yarn, and to attempt to prevent the further sale, transfer and disposition of corporate assets and records."  Gardner also stated that he will be filing an "Emergency Motion" with the United States Bankruptcy Court on Wednesday to seek the entry of an "Order directing the United States Attorney for the Western District of North Carolina to immediately assign agents of the Federal Bureau of Investigation to this case and to direct the Office of the United States Marshall's Service to send as many agents to Shelby as may be necessary to seize and take control of all corporate assets and business records of Shelby Yarn Company."

"I am trying to find justice for more than 650 former employees" of Shelby Yarn, said Gardner.  "As of this moment, these employees have claims against this employer and others of more than $615,000.00 for unpaid health care bills and of more than $1,600,000.00 in wages.  This is simply an intolerable and unconscionable situation for these employees, many of whom are fighting day-by-day to save their homes, cars and household goods from repossession and foreclosure.  We are going to pursue every available legal remedy on their behalf.  And, we will vigorously pursue all of the parties who are legally responsible for this tragedy."

Gardner had previously filed three lawsuits before the United States Bankruptcy Court against Shelby Yarn Company and Sidney H. Kosann, the Chief Executive Officer and Chairman, for federal wage law violations and for the alleged unlawful conversion of corporate funds for the construction of his executive home in an exclusive Moss Lake community.  Kosann's wife, Norma, was also named as a defendant in those cases.  Gardner has indicated that he will be filing a motion with the Federal Court to consolidate these cases and to convert them to a class action on behalf of the 650 former Shelby Yarn Employees.

Shelby Yarn CEO resigns

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Andrew Dys and Bruce Buchanan Star Staff Writers 

SHELBY - Sidney Kosann has resigned as CEO and chairman at Shelby Yarn. 
However, a lawyer representing three former Shelby Yarn workers says Kosann's resignation won't affect litigation against the former CEO. 
And the multi-agency investigation into Kosann and Shelby Yarn is just getting started. 
According to a document obtained by The Star, Kosann turned in a one-sentence memo to the company's Board of Directors stating, "Effective February 25, 2000, I hereby resign as an officer of Shelby Yarn Company." 
Shelby Yarn closed on Jan. 14, putting 650 employees at three local plants out of work. Kosann served as Shelby Yarn's CEO and chairman and was a member of the company's board of directors along with Jeffrey Lipkin and Joseph Finn-Egan of Recovery Equity Investors, Shelby Yarn's parent company, based in San Mateo, Calif. 
Shelby attorney O. Max Gardner III, who represents three former workers who have filed civil suits against Shelby Yarn, Kosann and his wife, Norma Kosann, said Kosann's resignation will have no bearing on those suits. 
Meanwhile, the criminal investigation of the financial records at Shelby Yarn has evolved from allegations of unpaid medical benefits into a multi-pronged probe involving local, state and federal investigators. 
More than two weeks ago, Cleveland County District Attorney Bill Young asked the N.C. Attorney General's Office to launch an investigation of Shelby Yarn's financial records, after allegations surfaced about unpaid medical claims for Shelby yarn employees. 
Friday, Young chaired a meeting with agents from the following agencies: the U.S. Department of Labor, the State Bureau of Investigation, N.C. Department of Insurance, N.C. Employment Security Commission, the Shelby Police Department and Cleveland County Sheriff's Office. 
Young said the investigation is looking at the relationship between Kosann's position as CEO of Shelby Yarn and the building of his house near Moss Lake, as well as any possible criminal wrongdoings pertaining to unpaid medical claims, insurance coverages, and employment practices. 
"We discussed possible areas of criminal wrongdoing and jurisdiction areas that each agency would cover," Young said. "The SBI is the main investigative arm right now." 
Agents from the SBI and U.S. Department of Labor declined to comment on the ongoing investigation at Shelby Yarn. Young said he expects the SBI to begin investigating at Shelby Yarn this week. 
North Carolina Department of Insurance spokesman Wendy Pruett said that because the investigation involves federal jurisdiction, the Department of Labor is handling all insurance-related investigations. 
Young said a part of the investigation is to determine if any corporate malfeasance has taken place at Shelby Yarn. Young said that, under N.C. law, directors and officers of any company have legal responsibilities to the company. 
"In general terms, corporate malfeasance is defined as when any agent of a corporation willfully embezzles or misapplies any, money, funds or credits of a corporation without the consent of the directors," Young said. 
Shelby Yarn closed its doors on Jan. 14, putting 650 employees out of work. Young said that GMAC Financial is currently in control of the Shelby Yarn corporate offices and is cooperating with the investigation. 
Gardner has filed three lawsuits on behalf of former Shelby Yarn employees Mary Elizabeth McCombs, Tommy Lee Tuft and Margaret Lee Shuford, claiming their health insurance, life insurance and retirement funds were used improperly to help build Kosann's home. 
According to N.C. Rep. Debbie Clary, who has been monitoring the Shelby Yarn situation, company workers have more than $600,000 in outstanding medical claims. 
On Tuesday, Gardner filed a motion in U.S. Bankruptcy Court to force Shelby Yarn into Involuntary Chapter 7 Bankruptcy, meaning the company's assets would be frozen and placed in the care of a court-appointed trustee until his clients get their day in court. 
Susan Sowell, Shelby Yarn's attorney, declined comment when contacted Wednesday. Kosann was unavailable for comment.

Shelby Yarn VP blows whistle: CEO accused of mismanagement

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Bruce Buchanan, Andrew Dys and Shana Bretzius Star Staff Writers 

SHELBY - The third-ranking executive at Shelby Yarn, in an extraordinary affidavit, leveled sweeping charges of corporate mismanagement, deceit and fraud against CEO Sidney Kosann and his associates. 
Paul Petrov, hired as vice president of sales and merchandising in July 1999, filed the affidavit Thursday as part of a bid to force Shelby Yarn into Involuntary Chapter 7 bankruptcy. An emergency hearing will be held in front of U.S. Bankruptcy Court Judge Marvin R. Wooten today at 1 p.m. in the Cleveland County Courthouse. 
Shelby attorney O. Max Gardner III, representing three former Shelby Yarn employees, is attempting to have the company's assets and records seized immediately. 
Petrov's affidavit spells out why. 
In the five months he spent at Shelby Yarn, Petrov says he saw it all. 
Misuse of millions of dollars in company money. 
Million-dollar errors in financial modeling that left the company in a crisis. 
Hiding of millions of dollars of company money in bank accounts to avoid creditors in case of bankruptcy.
Fraudulent purchases and payments. 
A half-million dollar salary and perks package for the Shelby Yarn CEO and his wife. 
And destruction of records to cover it all up. 
Petrov said all the fraud was authorized and carried out by Kosann and Jim Potter, the company's chief operating officer. Petrov said Kosann and Potter reported to Jeffrey Lipkin and Joseph Finn-Egan, the heads of a San Mateo, Calif., venture capital firm called Recovery Equity Investors. 
Petrov was told after he started with Shelby Yarn in July 1999 that one day he would succeed Sidney Kosann as CEO of Shelby Yarn. But now, he's out of work and says he is owed $200,000 by Shelby Yarn. 
Kosann, reached at his home Thursday, refused to comment as did Potter. Shelby Yarn lawyer Susan Sowell also declined comment. 
Petrov's affidavit is the latest blast to the hit the defunct company since it shutdown almost two months ago. A task force of law enforcement agencies - including the U.S. Department of Labor, the State Bureau of Investigation and others - are investigating the company and Kosann for possible fraud and embezzlement, according to N.C. Rep. Debbie Clary, who has been monitoring the case. Former employees are facing a total of more than $600,000 in unpaid insurance claims. Some of those workers were infuriated to learn that Kosann had filed for about $9,000 in unemployment benefits shortly before the official shutdown of the plant. 
But Petrov's sworn statement breaks new ground. 
"This is an extraordinary, unheard of act of courage. It is certainly unheard of in corporate America," Gardner said. 
First, he alleges that Recovery Equity Partners Inc. (REI) of California had a much larger role in the operations at Shelby Yarn than just providing financing. 
Petrov said that REI owns all the stock in Shelby Yarn, and that Kosann was the CEO. Petrov said it is his understanding that Shelby Yarn's board of directors consists of Kosann, and REI partners Lipkin and Finn-Egan. 
In fact, Petrov interviewed for his Shelby Yarn job with Lipkin, Finn-Egan and Kosann in California. 
In September, Petrov said in the affidavit that Lipkin and Finn-Egan hosted a meeting in San Mateo attended by Petrov, Kosann, and another Shelby Yarn vice president, Betty Rogers. 
He said it was a "crisis management" meeting to discuss Shelby Yarn's financial problems. It was only on the plane ride to the meeting that Petrov, who had been with the company for two months at this point, saw Shelby Yarn's financial records for the first time. 
Petrov said he knew coming in that the company was having cash flow problems, but despite holding an MBA degree from the University of Pennsylvania's Wharton School of Business, he wasn't allowed access to the company's financial records. 
"I asked Hugh Crawford, Shelby Yarn's controller, if I could look at the company's financial records," Petrov said. "He said no, because Kosann told him I couldn't see them. 
"I was surprised, especially considering my contract which said that I would gradually succeed Kosann as CEO." 
At that meeting, REI decided to advance $1.5 million to Shelby Yarn. 
But it wasn't how much, but how that caught Petrov's attention. 
The money was advanced to Shelby Yarn in collateral to the company's primary lender, GMAC. 
Why? To protect the money from creditors in case of bankruptcy, Kosann told Petrov. 
"What Petrov's statements show is that REI is not just a passive investor in Shelby Yarn, but an active player that called the shots from California," Gardner said. "What this shows is the buck stopped at the Golden Gate Bridge, not at Buffalo Creek. It's clear all the major decisions were made in California, not in Shelby. There was deep involvement in the Shelby Yarn Company by REI." 
Gardner said that the alleged misuse of company money affected all the 650 employees that were laid off when the Shelby Yarn plants and warehouse closed. He said Petrov's affidavit links REI to the day-to-day decisions that led to the company's failure. 
"The California dream of the investors has turned into a North Carolina nightmare," Gardner said. "What Paul Petrov's statement does is take those California investors up to Calvary and nail them to the cross." 
No one returned phone calls to REI's San Mateo office Thursday. 
By November, Shelby Yarn was in a financial bind again. The $1.5 million had been spent and there was another problem, a $1 million problem. 
Shortly before his second plane ride to San Mateo, Petrov and new controller Chris Wallace say they discovered a mistake in the September financial model which meant the company needed an additional $1 million, according to the affidavit. 
They went back to Lipkin and Finn-Egan in November to seek an additional $2.6 million. This time, REI said no. Petrov said this spelled the end of Shelby Yarn, although he didn't realize it at the time. 
"In hindsight, by early December, it was clear Shelby Yarn Company wouldn't make it," he said. 
"But I didn't realize it at the time; I was too busy. My days were 8 a.m. to 9 at night, making phone calls on sales and pushing until that last day." 
But as the company's financial woes intensified, Petrov said, Kosann kept spending money. 
Petrov alleges that more than $125,000 of Shelby Yarn company money was used to build the Kosanns' new house on Moss Lake. A story in Sunday's Star detailed accusations by four former Shelby Yarn employees that invoices for work done at Shelby Yarn by J.B. and Eric Rogers Contracting were falsified. 
Mickey Morehead, the former manager of Shelby Yarn's Dover Plant, told The Star that contractor J.B. Rogers claimed on time cards that as many as six of his men worked on a job when only two were actually there. Rogers has declined comment. He could not be reached Thursday. 
In his affidavit, Petrov backed up Morehead's version. 
He said Kosann and Potter developed and implemented a "scheme" where Rogers would present "false, fraudulent and improper" bills to the company. 
Petrov also said he understands that company money was used to renovate a house for Potter's daughter. He said he believes Kosann and Potter used Shelby Yarn money to pay Rogers for work at the Kosann home and at Potter's daughter's home in Kings Mountain. 
Petrov said this bothered him, but he didn't know what he could do about it. Other executives in the company were upset at having to pay for these expenses and came to him for help. 
"I told them they had to take the direction of the CEO or leave the company; that's all we could do," he said. 
Three employee civil suits against Shelby Yarn and the Kosanns charge that Kosann was paid an "unwarranted, excessive" salary of $350,000. 
Petrov said he believes that Kosann also received more than $50,000 in fringe benefits from Shelby Yarn, including paying the rent on his home near the Cleveland Country Club while his Moss Lake house was under construction. Kosann's package also provided him with a company car and paid for his utility bills, according to Petrov. 
Petrov also testified that he believed Kosann's wife, Norma, also a Shelby Yarn executive, earned $30,000 a year as vice president of marketing. 
Kosann and Potter had been business partners before, at the failed SteveCo Textiles, Petrov said. After Kosann took over Shelby Yarn, he looked to help out his old business partner. 
Another new charge by Petrov is that Kosann bought outdated and used equipment from Potter, or from a business owned by Potter. 
"It was my understanding that the purchase price of the Potter equipment was approximately $90,000," Petrov said. "I was advised that the wholesale value was no more than $5,000 and its value at retail was no more than $15,000." 
Petrov said he has received information that indicates Potter and other executives have attempted to destroy company records by shredding documents and deleting data on company computers. 
Petrov said he also saw some strange business practices at Shelby Yarn. 
For instance, Kosann bought 11 million pounds of cotton at one time last year - more than a year's supply. Petrov said it was unusual to buy this much cotton at once and the decision seemed even worse after the price of cotton dropped steeply. 
"I was surprised at this situation because Mr. Kosann kept a commodity terminal in his office that was linked via satellite to the exchanges, and was constantly monitoring the price and charts of various commodities," Petrov stated in his affidavit. 
He also said that before he joined the company, Shelby Yarn had violated an unwritten rule of the textile business by raising their yarn prices during the selling season. Normally, once a price is agreed to between customer and seller, it is fixed until the end of that season, he said. 
"A big part of my job was to make peace with the customers," Petrov said. 
He said Kosann also greatly overspent for some cards used to prepare cotton fiber for spinning. 
According to Petrov, the company spent approximately $550,000 on the cards. He said employees informed him the actual retail value was no more than $200,000 and that many of these used cards were defective and required rewiring before they could be used. 
Petrov alleges Kosann purchased the cards from a friend or business associate. 
He also said Kosann and/or Potter signed affidavits that said raw cotton processed at the plants was grown and produced in the United States. Some of the cotton, in fact, was grown and produced in Greece. 
The affidavits are required by law and Petrov said other parties at Shelby Yarn refused to sign them. 
According to U.S. Customs agent Larry Harrell, a textiles exports expert, raw cotton from another country that is transformed into yarn in America does qualify as 100 percent domestic origin under the NAFTA agreement. 
But even if there was no violation of NAFTA regulations, another former Shelby Yarn employee said that she was told by Jim Potter to lie about the Greek cotton being used at the plant. 
Sylvia Daves, the former purchasing manager for Shelby Yarn, said the company purchased 6,000 bales of Greek cotton in 1999, and processed 3,585 bales of the cotton. 
Ms. Daves said that Doris Lloyd, a customer service specialist who normally signed the NAFTA invoices, found out that Shelby Yarn was using Greek cotton. Ms. Lloyd then refused to sign the invoices. 
"Jim Potter told Doris to treat the cotton like it was not imported, but she refused to sign them," Ms. Daves said. "Doris was even going to change it and Potter said to leave it like it was. 
"Potter signed those forms himself. I personally saw him sign those forms many times. I told Potter at that time that it would be found out, and he didn't seem concerned." 
Doris Lloyd confirmed Ms. Daves' story. 
Ms. Daves said that Potter told her to not tell anyone that the Shelby Yarn plants were using Greek cotton. 
"He said keep that information to yourself, and not to tell anybody," Ms. Daves said. "Mr. Potter told me that we would not say there was Greek cotton in the plants. Mr. Kosann also knew that there was Greek cotton in the plants. I knew it was wrong but didn't feel like I could do anything about it. I felt like I would be fired if I told anyone." 
In the affidavit, Petrov corroborates that Shelby Yarn employees are owed hundreds of thousands of dollars in unpaid medical claims. 
Shelby Yarn was a self-insured company. This means claims were handled by a third party, American Group Administrators (AGA), but paid by Shelby Yarn. 
Petrov puts the amount owed at $615,068.57 and said Kosann knew one or more of AGA's principal owners before he came to Shelby Yarn. The president of AGA, Lloyd Goldstein, could not be reached for comment. 
Petrov said Shelby Yarn did not pay AGA for claims submitted after September 1999, but continued paying the monthly management fee. The premiums taken from payroll deductions were held in a separate bank account, but Petrov does not know the status of these accounts. Petrov said he has been told the company is establishing new accounts to protect Shelby Yarn's cash accounts from creditors. 
Gardner, who represents former Shelby Yarn employees Mary Elizabeth McCombs, Tommy Lee Tuft and Margaret Lee Shuford in civil suits against the company, said Petrov's testimony is a major weapon in his case. 
"Paul Petrov has taken the most courageous stand of any corporate executive that I have ever seen," Gardner said. "Here is the third ranking executive at Shelby Yarn who saw problems so severe at Shelby Yarn that he has now committed himself to the cause of justice for the 650 employees who lost their jobs." 
Petrov is not the only former Shelby Yarn worker to testify about the company on Thursday. 
Wayne Feilke signed a sworn affidavit about how the employees were told that the Shelby Yarn plants would close. According to Gardner, Feilke joins four other creditors who are petitioners to force Shelby Yarn into Involuntary Chapter 7 Bankruptcy. 
Feilke worked for what was Doran Textiles, then Shelby Yarn after Doran folded, for more than 19 years. During his time at the mills, Feilke worked his way up to supervisor for all second-shift winding operations at the Dover plant, located off N.C. 150. 
Feilke said he was called by his supervisor, Joe Earwood on Jan. 14 to say that the plant would not reopen. Feilke was instructed to call the people who worked under him and tell them they were unemployed. 
"I was crushed, and I didn't want anyone who worked under me to think I knew anything about the plant closing," Feilke said. 
Feilke said he contacted Gardner and gave an affidavit because Kosann filed for unemployment in January. 
"That was the last straw," Feilke said. "The people I worked with are like family to me, and everybody has gotten shafted in this whole thing. I've had enough of Kosann, Potter and REI. I figured it's time to stand up for justice and get something done." 

Shelby Yarn assets, records seized

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Courtroom packed with former workers hears new revelations of missing money Bruce Buchanan Star Staff Writer SHELBY

A U.S. Bankruptcy Court judge ordered Shelby Yarn's records seized and its plants locked down, amid new allegations that $75,000 of Shelby Yarn's money was wired out of the company to an unknown destination in December. 
The order was issued Friday by Judge Marvin R. Wooten, who agreed with an emergency motion filed on behalf of three former company workers, who were among 650 local employees to lose their jobs when the company closed on Jan. 14. Their motion asked that the records should be taken by a court-appointed trustee in order to protect them. 
The trustee has the authority to use U.S. Marshals to secure all records, Wooten said, and the locks on the company's offices and plants will be changed. 
"Your evidence clearly shows that fraud is such that there is serious danger of loss," Wooten said. "I have no problem with appointing a trustee." 
O. Max Gardner III, the attorney representing the former workers in their suit against Shelby Yarn, its former CEO Sidney Kosann and his wife, Norma Kosann, said the case was "one of the most outrageous acts of corporate crime I've seen in my entire career." 
The lawsuits allege that Kosann siphoned off company health insurance, life insurance and pension money to pay his $350,000 salary and for work done on his Moss Lake house. 
Former Shelby Yarn Vice President Paul Petrov said in a sworn affidavit that he believes more than $125,000 of Shelby Yarn company money was used to build the house. A story in Sunday's Star detailed accusations by four former employees that invoices for work done at company plants by J.B. and Eric Rogers Contracting were falsified and exaggerated. 
Petrov said in his affidavit that Kosann and Shelby Yarn's Chief Operating Officer Jim Potter had a "scheme" where the Rogerses would present "false, fraudulent and improper" bills to the company. 
In a Cleveland County courtroom on Friday, Gardner unveiled some new charges. 
He said that in December, $75,000 was wired from Shelby Yarn to an unknown location. 
"We have confirmed that through bank records," Gardner said. 
Gardner said the information about the alleged wire transfer came from a tip he received from a former employee late this week. He said he hopes more people will come forward with information. 
At the time the money was allegedly transferred, Shelby Yarn was on its last financial legs. Back in November, members of Shelby Yarn's board of directors, Jeffrey Lipkin and Joseph Finn-Egan of Recovery Equity Investors in California, decided they weren't going to put any more money into the company. 
Employee medical claims, which were supposed to be paid by Shelby Yarn's self-funded health insurance plan, had gone unpaid since September, Petrov said, and he estimates the company owes $615,000 in unpaid claims. 
Gardner said workers didn't know they owed this money until Feb. 7, three weeks after the company shut down. 
"American Group Administrators, which most of these workers here know as AGA, continued to process claims even though they weren't getting any money for claims from Shelby Yarn," Gardner said. 
However, AGA President Lloyd Goldstein said Shelby Yarn continued to pay its medical claims through mid-December. He said any unpaid claims from before then weren't submitted to AGA by doctors until mid-December, when the company closed for Christmas. 
"They funded their claim up until the middle of December," Goldstein said. "So people who went to the doctor in October but didn't get bills in until December or January might not have been paid." 
Goldstein also responded to Gardner's assertion that he and Kosann are "old business buddies," saying that claim is "absolutely false." 
"I was the guy that started AGA. I know firsthand all my clients. Nobody has ever had a relationship with Mr. Kosann prior to us taking on the administration. If he walked into my office right now, I still wouldn't know who he is," Goldstein said. 
Shelby Yarn faces a criminal investigation for possible insurance fraud and embezzlement, according to N.C. Rep. Debbie Clary, who has been monitoring the case. 
Many of Gardner's sharpest criticisms were reserved for Kosann's personal lifestyle and spending habits, including a December 1999 cruise to Barbados the Kosanns took. 
In his affidavit, Petrov said that in addition to Kosann's six-figure salary, he also had fringe benefits estimated at $50,000 a year. These benefits included a house near the Cleveland Country Club, a company car, and payment of utility and phone bills. 
Norma Kosann also earned $30,000 at the plant, Petrov testified. 
"No one knows what she did, but everybody knows she didn't doff any cotton or wind any winding," Gardner said, drawing laughs from the displaced mill workers in the courtroom audience. 
Gardner praised Petrov for his willingness to file an affidavit on behalf of the workers. 
Petrov was hired as the company's vice president of sales and merchandising in July 1999, and was told at the time he would gradually succeed Kosann as Shelby Yarn's CEO. At the time the company closed, he ranked behind Kosann and Potter as the company's third highest-ranking executive. 
Gardner also noted that on Jan. 10, Kosann filed for $9,256 in unemployment benefits, as reported by The Star. 
Gardner concluded his remarks by showing a 1 oz. silver coin Kosann had minted in 1977, when he owned SteveCo. Textiles in New Jersey. One side shows a field of cotton; on the other side is a picture of Sidney Kosann. 
"I think I can speak for everybody in this room when I said we'd be willing to decide this with a coin flip," Gardner said. "Heads Sidney loses and tails Sidney loses." 
Shelby Yarn's attorney, Susan Sowell, declined to comment after the hearing. 

Shelby Yarn bankruptcy proceedings begin today

Comments
Bruce Buchanan Star Staff Writer

SHELBY - After two relatively quiet months of fact-finding and gathering information, the legal proceedings surrounding the defunct Shelby Yarn Company are about to get cranked up again. 
The next step is a 3 p.m. hearing today with Wayne Sigmon, the trustee appointed by the court to oversee Shelby Yarn's bankruptcy proceeding. 
Because Shelby Yarn has so many creditors - 1,035 of them, including its 650 former workers - the hearing will be held in Shelby High School's Malcolm Brown Auditorium. Sigmon will explain what has happened so far and answer any questions creditors may have. 
O. Max Gardner III, a Shelby attorney representing three former Shelby Yarn employees who are suing the company, said the hearing itself probably won't be eventful, but the case should start moving forward soon. 
"I expect some decisions to be made and actions to be taken by the end of the month," he said. 
Gardner said Sigmon has broad powers to reclaim any money he feels should go to Shelby Yarn's former workers and other creditors. Gardner said he expected Sigmon to file legal motions to start reclaiming that money soon. 
"It's a matter of who and how many," he said. 
Shelby Yarn's total debt is more than $16 million, according to a report compiled by Gardner and filed in U.S. Bankruptcy Court. 
Today's session is primarily intended as a chance for Shelby Yarn's workers to hear more about what's happened so far and what they need to do in the future. 
On Jan. 14, Shelby Yarn abruptly closed its two Shelby plants, its Cherryville plant and a Shelby warehouse. Around 650 local workers lost their jobs. 
Gardner's clients are suing their former employer, its former CEO Sidney Kosann, and his wife, Norma Kosann, claiming the workers are owed both back pay and reimbursements for unpaid medical bills. 
Shelby Yarn had a self-funded health insurance plan, meaning participating employees had money deducted from their paycheck to go into a fund. Money from that fund was supposed to be used to pay for worker's medical bills. 
However, when the plant closed, employees discovered that recent bills, some going back to October, hadn't been paid. Gardner said the unpaid health care bills total nearly $1 million. 
The lawsuits allege that Kosann improperly took money from the company to pay for work on his Moss Lake home. Kosann has repeatedly denied any wrongdoing. 
In addition, Cleveland County District Attorney Bill Young and the State Bureau of Investigations are investigating possible criminal charges at Shelby Yarn. 
Gardner said he has spent the last two months identifying and locating all of the company's creditors. 
"In bankruptcy, each creditor has to file a written claim before they can collect anything," Gardner said. "We're trying to develop a streamlined version to do that." 
He hopes today's meeting will uncover a way to make sure all of Shelby Yarn's former employees and creditors stay informed and signed up for any money due to them, but without any more red tape than necessary. 
With more than 1,000 creditors, Gardner said mailing out a simple notice of a hearing can be a massive, cost-prohibitive undertaking. 
"The cost is $2,500 to mail anything out right now," he said. "It's too expensive. There's no need to spend $250,000 on postage before this thing is over."

Shelby Yarn insurance woes may be studied

Comments
Barry Smith Star Raleigh Bureau 

RALEIGH - The closing of Shelby Yarn and the subsequent revelation that more than $1 million in medical insurance claims went unpaid could lead to a legislative study on self-insured group health benefit plans. 
"We need to look into it and see what, if any, authority the state would have to require certain things in self-insured plans," said Sen. Walter Dalton, D-Rutherford, who requested the study. 
Former employees of Shelby Yarn, which closed its doors on Jan. 14, have learned that between $1.6 million and $1.7 million in medical bills have been unpaid by the company, said attorney O. Max Gardner III, who is representing former employees. 
Under the Employee Retirement Income Security Act, state laws do not apply to self-insured companies, said Bill Hale of the N.C. Department of Insurance. 
"There's no safety net," Hale said. 
Dalton said he hopes a study will look at what authority state government could have. And he also hopes a study will bring the problem to the attention of members of Congress. 
"If our state law can address it, we need to address it," Dalton said. "If our state law cannot address it, we need to call attention on it to those who serve in the federal government. Hopefully they can correct the situation." 
"It's not cut and dry that there's not anything the state can do," Hale said. 
Dalton said one thing he hopes will come out of a study is a requirement that self-insured companies notify employees of the nature of self-employed plans and the risks associated with them. 
Gardner said most of the Shelby Yarn employees did not even know that the company was self insured. "The vast majority of these employees thought that there was a real insurance company involved here," Gardner said. 
Dalton said he also wanted to study whether the state could assess criminal penalties if money that is supposed to go toward the insurance plan is spent on something else. 
Since the medical bills have gone unpaid, collection agencies are beginning to contact the former Shelby Yarn employees in an effort to collect the bills, Gardner said. 
Gardner noted that patients are individually responsible for their medical bills. "It has created a problem for all these employees," he said. 
He said the failure to pay the claims has also created an economic problem for the area's health care providers. 
The study is one of a number that have been authorized, but not required, by the General Assembly. Later this year, the Legislative Research Commission will meet to decide which issues actually get studied. Study commissions may make findings and recommendations to the 2001 session of the General Assembly.

Shelby Yarn settles lawsuit

The Associated Press 

SHELBY -- Shelby Yarn has reached a nearly $2.1 million settlement with former employees who wanted back pay and unpaid medical expenses from the now-defunct company. 
Max Gardner III helped the workers start their case, considered one of the first in recent history to highlight corporate malfeasance before the media embraced the topic. 
"What employees told me is they, at least, wanted a moral victory," Gardner said. "They wanted them to pay and wanted to be able to say, 'Those guys put profits over people.' " 
The settlement amount with 636 former employees Friday did not include massive attorney fees and taxes, which were to be withheld. Each will get $988.92. 
"Workers said to me, 'I don't care if we get 100 dollars, 50 dollars or whatever -- just get 'em,' " Gardner said, adding that the settlement is the equivalent of four to five weeks of gross pay for the average Shelby Yarn worker. 
CEO Sidney Kosann will pay out $200,000 of the settlement, and other former officers, directors and owners will pay the bulk of the rest. That group includes California venture capital firm Recovery Equity Investors, headed by Joseph Finn-Egan and Jeffrey A. Lipkin. 
Shelby Yarn closed suddenly in January 2000 after an expected Christmas holiday shutdown. Workers at three plants -- two in Shelby and one in Cherryville -- found locked gates when they returned to work and were told they no longer had jobs or medical insurance. 
Many of the employees found that bills dating back several months before the closings also were not covered. Employees accused the company of failing to send employee deductions for insurance to the carrier. 
Plaintiffs detailed concerns expressed by company investors about Kosann's management abilities and lavish spending. Court hearings showed Kosann went on an opulent, caviar-and-champagne cruise in December 1999 just as the plant shut down. The Shelby Star also discovered documents showing Kosann filed for unemployment despite a $300,000 salary and other evidence showing a contractor at the plant who also worked for Kosann exaggerated labor costs and falsified records. 
Mark Fancher, an attorney with the Guild/Sugar Law Center, a Detroit-based workers' rights advocacy group, underscored the company's mistreatment of its workers. 
"There was a deliberate design to make life difficult for the workers," Fancher said.

Lawyer for Shelby Yarn workers wins Honor

By Amelia Townsend

SHELBY - The attorney who set a precedent in the way he used bankruptcy laws to win a multi-million dollar settlement for the former workers of Shelby Yarn now has another feather in his cap.  O. Max Gardner III of Shelby received the 2004 "Champion of Consumer Rights" award from the National Association of Consumer Bankruptcy Attorneys.

Gardner says the award that came at the annual meeting of the association surprised him.

"It was a dinner meeting and I was planning on leaving early," Gardner said.  "I had no clue.  It certainly means a lot to me, coming from this group.  It's like being nominated for the all-star game by the players."

The award is not presented every year.  Maureen Thompson, executive director of NACBA, said this year the choice of Gardner was unanimous.

"He has really been selfless in mentoring and providing information to his fellow attorneys," Ms. Thompson said.  "He is widely considered among the members of our organization to be a tireless champion for people who are facing financial difficulties and for the attorneys who are working to help them."

Shelby Yarn shut down four years ago, stranding hundreds of employees.  Using the bankruptcy laws, Gardner forced the company to file involuntary bankruptcy.

Just this March, 636 former employees who were working the day of the shutdown won a $2.1 million settlement.  It was reached just five days before the case was scheduled for trial.

After attorney fees and taxes, each worker received $988.92.

At the time, Gardner talked about the legal maneuvering he used.

"I knew these folks didn't have the means to file individual suits or to launch a traditional class action suit.  So, I figured that if we could get an involuntary bankruptcy, then the trustee would file for compensation on their behalf and it worked," he said.

Some of his clients in the case say Gardner's work deserves national recognition.

"I'm glad because we would have gotten nothing without his help," said Billy Gene Davis of Shelby.  "There are a lot of people who could still use a lot more from Shelby Yarn."

"I'm glad to see he got some attention," said Debbie Bolin.  "He stuck in there and stuck with us."

She says she has just recently found a job, paying roughly half of the wages she earned at Shelby Yarn.

Gardner says he is now teaching other lawyers how to use the strategy and has consulted on about a dozen other cases.