This article originally appeared in Term Sheet, Fortune's newsletter about deals and dealmakers. Sign up here.
Over the summer Term Sheet reported on the unraveling of early stage venture firm Expansive Ventures. Co-founders Adeo Ressi and Jon Soberg had a major falling out involving accusations of office lock-outs, “ambushes” and threats. (Read the details of that here.) Soberg sued Ressi, and in arbitration, a judge ruled in favor of Soberg, requiring Ressi to pay him $3.5 million -- $2.5 million in compensation to make up for lost management fees and an additional $1 million in damages to his reputation.
Ressi appealed. Since then, Santa Clara county mortgage record indicates that Elon Musk, Ressi’s college roommate, loaned him $500,000 and took a lien against Ressi’s home in Palo Alto.
On August 1, Ressi filed a Form UCC1 financing statement, which gives a creditor – in this case, Musk -- the right to take possession of assets for repayment. The collateral listed includes Ressi’s real estate, the furniture and fixtures at his Palo Alto Home, his Tesla, his advisory shares and options of three companies (called Mousera, Md Collab, and Sugegstuc), receivables from his accelerator program (The Founder Institute) and web project (TheFunded), and all cash and bank accounts.
When asked about Musk’s involvement, Ressi said “Elon is a long-time friend and supporter, who epitomizes going all-in on business.”
On September 30, Judge Harold E. Kahn in the Superior Court of California confirmed the arbitration award and denied Ressi's motion to vacate or correct the decision, according to public court documents. In other words, Ressi must pay his former partner the $3.5 million.
On Nov. 11, Ressi filed an appeal to the confirmation. He was scheduled to appear in court on Wednesday for a debtor’s exam, but on Tuesday, he filed for Chapter 11 bankruptcy. (Typically Chapter 11 is for companies, but he has filed as an individual.) In the filing, he lists his assets as between $10 million and $50 million and liabilities between $1 million and $10 million. Musk is listed among his creditors.
The bankruptcy filing puts the pending lawsuit on hold. Expansive Ventures’ fund and its investments remain in limbo.
Ressi provided the following statement:
"I have been under continuous and relentless attacks against my reputation and family since a difference in vision led to problems at Expansive Ventures,” Ressi wrote in an email to Term Sheet. “At the end of the day, I always invest 100% of my time and my money into the businesses that I start, because a company is not worth building unless you are willing to go all-in. The problems with Expansive Ventures coupled with the ongoing attacks have caused me great harm. Reorganization through Chapter 11 provides me with the best option to slow the attacks, honor all of my financial obligations, protect my three children and focus on growing the Founder Institute, which recently crossed 150 cities and is stronger than ever.
We will continue to use all avenues to fight the flawed arbitration decision. An appeal has been filed in state court, and other claims have been brought. If this ordeal has taught me anything, it is to be extremely careful who you work with.
I sincerely hope nobody will ever have to suffer the wrongdoings and aggression that I have experienced recently. To help prevent that, I plan to re-launch TheFunded.com in Q1 2017 focused on reviews of individuals, versus firms.”
Soberg provided the following comment:
Mr. Ressi's bankruptcy claim is just a continuation of his efforts to avoid responsibility for his actions, and while he is doing this, he is also refusing to cooperate with the LPs to get to a resolution for Expansive Ventures. He owes $3.5M and is accruing interest at nearly $1000 per day on his debt. He has not offered to pay a penny. He is filing an appeal, which he has to do for insurance purposes and to keep pushing out the timeline. The appeal would need to prove that the judge in the SF Superior Court did not follow the law when he confirmed the arbitration. The judge confirmed the arbitration and stated that Mr. Ressi was not close to the standard for overturning it in the confirmation hearing. He cannot appeal the arbitration award itself and the reason he filed bankruptcy is to try to get out of the debt, which is enforceable during any appeal. All of this is logged publicly on the SF Superior Court web site. As the arbitrator said,
Ressi breached his fiduciary duties when he changed the office locks, deprived Soberg of access to firm assets, prevented Soberg from accessing the SVB accounts, told the LP’s and other business associates that Soberg had a reduced role in the firm, blocked salaries, drained fund money from the accounts without input from Soberg, refused to conduct company business, and so on. Ressi’s script threatened Soberg with the failure of the firm and damage to his reputation among other things. But Ressi not only made threats; he also took direct action to damage EV and Soberg.9 Through these and other actions, Ressi attempted to unfairly squeeze Soberg out of EV and take over the fund.
When a person breaches their duties like this, there are consequences. Mr. Ressi needs to deal with those consequences.