880 S. Rohlwing Rd., LLC v. T&C Gymnastics, LLC

• Decision Date: 19 January 2017
• Docket Number: No. 16-cv-07650,16-cv-07650
• Parties: 880 S. ROHLWING ROAD, LLC, Appellant, v. T&C GYMNASTICS, LLC, Appellee.
• Court: U.S. District Court — Northern District of Illinois

880 S. ROHLWING ROAD, LLC, Appellant, v. T&C GYMNASTICS, LLC, Appellee.

No. 16-cv-07650

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

January 19, 2017

Bankruptcy Case No. 16-14993

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Court Judge:

Movant-Appellant 880 S. Rohlwing Road, LLC has appealed from the order of the bankruptcy court denying its motion to dismiss the Chapter 11 filing of Debtor-Appellee T&C Gymnastics, LLC as a bad-faith filing. Appellant has also moved the Court to withdraw the reference of the underlying bankruptcy proceeding. (R.1, R.9). For the reasons set forth below, the Court declines to exercise jurisdiction over Movant's interlocutory appeal and denies without prejudice its motion to withdraw the reference.

PROCEDURAL BACKGROUND

On May 2, 2016, Debtor T&C Gymnastics, LLC filed a voluntary Chapter 11 Bankruptcy Petition in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 16-14993. (R.1-4, Bankruptcy Dkt. at R.1). On May 10, 2016, Movant 880 S. Rohlwing Road, LLC moved to dismiss the case as a bad-faith filing. (Id. at R.13). The Bankruptcy Court reviewed the briefing and heard oral argument on June 22, 2016, after which it denied the motion following a discussion of "bad faith" factors pertinent to an 11 U.S.C. § 1112(b) dismissal analysis. (Id. at R.45; R.10; R.12-1, A000011-43 (the "Hearing Transcript")). The Bankruptcy Court denied the motion without prejudice, noting, "[i]t may be . . . that this case was filed in bad faith, but I don't have the showing that I need to rule on that today." (Id. at A000031-33 ("I agree with the movant that there are certainly questions regarding the validity and treatment of the pre-petition appraisal . . . But right now there's not enough for me . . . to simply make what are very deep findings with respect to the nature of these transfers"). The Bankruptcy Court issued a written order on July 13, 2016, certifying that there was "no just cause for delay of enforcement or appeal of this ruling." (R.1-4, Bankruptcy Dkt. at R.53; R.1-3). On July 28, 2016, 880 S. Rohlwing Road, LLC filed the present appeal. (R.1). On September 7, 2016, following reassignment pursuant to Local Rule 40.4, 880 S. Rohlwing Road, LLC filed the present motion to withdraw the reference. (R.9).

FACTUAL BACKGROUND

I. Pre-Petition History of Debtor and Its Principals

A. Aerial Gym Stars, Inc.

Debtor's principal members are Tony and Carol Whitaker, residents of Addison, Illinois. (R.12-1, A000071-72). In February 2005, the Whitakers filed for Chapter 7 protection and received a discharge from the bankruptcy court. Prior to receiving this discharge, however, the Whitakers formed an Illinois corporation called Aerial Gym Stars Enterprises, Inc. (Id. at A000310-40). In September 2005, their previous corporation—Aerial Gym Stars, Inc.—filed for bankruptcy, listing no significant real or personal property in its petition. (Id. at A000341-64). In Movant's view, "[i]t is entirely possible that the business assets of Aerial Gym Stars were already being used by the new business under the name of Aerial Gym Stars Enterprises, Inc." (R.12, Appellant Br. at 7).

B. Aerial Gym Stars Enterprises, Inc.

In November 2010, Aerial Gym Stars Enterprises, Inc. (hereinafter, "Aerial") entered into a commercial lease agreement with Movant, 880 S. Rohlwing Road, LLC. (R.11-1). Aerial operated a gymnastics school on that property and generated gross revenues of over $1 million in 2013. (R.11-2). In September 2013, however, Aerial began defaulting on its lease payments—exceeding $20,000 per month—and Movant commenced eviction proceedings. (Id.; R.11-5, Answer to Compl. ¶¶ 7-8; see also R.7-6 at 461-62). On September 29, 2014, Aerial filed a voluntary Chapter 11 Bankruptcy Petition in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 14-35241. On December 10, 2014, the bankruptcy court granted Movant's request to lift the automatic stay, and to allow the eviction action to proceed, in light of Aerial's failure to meet post-petition lease obligations as required under 11 U.S.C. § 365. (R.12-1, A000367-69). The bankruptcy court thereafter dismissed the case on motion by the U.S. Trustee. (Case No. 14-35241, R.40). On February 11, 2015, Movant filed a Verified Complaint for Forcible Entry and Other Relief in the Circuit Court of DuPage County. (R.12-1, A000103-08). The Circuit Court entered judgment in Movant's favor in the amount of 259,590.41 on April 1, 2015 (the "Judgment"). (Id. at A000109).

C. T&C Gymnastics, LLC

1. Debtor's Formation

On March 13, 2015—two weeks before the Judgment—the Whitakers formed Debtor, T&C Gymnastics, LLC. (R.11-3, Whitaker Aff. ¶ 2). Coincident with its formation, Debtor purchased the assets of Aerial in exchange for a promissory note in the amount of $29,481.85. (R.11-4, Promissory Note, Dated Effective March 13, 2015; see also R.12-1, A000278-93, Asset Purchase and Sale Agreement). These assets included cash, miscellaneous gymnasticsequipment, service contracts, and five automobiles. (R.1-4, Bankruptcy Dkt. at R.1; R.12-1, A000056-59).¹ Movant—citing an initial valuation of Aerial's business by Debtor's appraiser—argues that Aerial transferred "valuable assets worth at least $280,000." (R.15, Appellant Reply Br. at 15 (citing R.12-1, A000471 (Apr. 17, 2015 E-mail from Appraiser Michael Strelka to Attorney Michael Polachek ("The value arrived at is $280,000")). Debtor, however, argues that "the assets of Aerial had no value[.]" (R.14, Appellee Br. at 6; see also R.11, Response Br. at 2 ("After obtaining an appraisal showing that the assets of Aerial were worthless, Debtor purchased the assets of Aerial in exchange for a promissory note in the amount of $29,481.85")). Indeed, e-mail correspondence reflects that—after Debtor's counsel questioned the appraiser's underlying rent assumptions and associated computations, including a future rent projection, and after additional review throughout April and May 2015—Debtor's counsel asked the appraiser to "[p]lease go ahead and issue your findings that Aerial has a zero value." (R.12-1, A000468-71; see also R.7-7 at 534 ("I estimate that the value of [Aerial] would be -0- under either the income method of valuation, or under the net asset method of valuation")). Aerial "shut down" in March 2015. (R.12-1, A000392 (Whitaker Dep. Tr. at 22)).

Apart from the Promissory Note, Debtor gave no other consideration in exchange for the transfer of Aerial's assets. (Id. at A000402 (Whitaker Dep. Tr. at 32 ("[Q]. Was there anything other than the promissory note which to this date . . . has not been paid? [A]. None that I know of")). The Promissory Note, moreover, is not payable until the balance remaining on a preexisting promissory note held by Tony Whitaker's father (the "Whitaker Note") is less than $25,000. (11-4, Promissory Note). According to Debtor, Tony Whitaker's father "had loaned various amounts of money to Aerial for the original purchase of its gymnastics equipment and...held an existing UCC lien on substantially all of the assets of Aerial." (R.11, Response Br. at 2). Under the terms of the Asset Purchase and Sale Agreement, Debtor assumed Aerial's liability on the Whitaker Note. (R.12-1, A000279 at § 1.5 ("No liabilities of Seller shall be assumed by Purchaser except (i) the obligation to pay to William and Janice Whitaker pursuant to the terms of a Demand Promissory Note and Security Agreement dated April 17, 2014 secured by the gymnastics equipment of Seller perfected with UCC lien number 019395081 . . . .")).

According to Movant, between Debtor's formation and its bankruptcy filing, Tony Whitaker provided "damaging testimony in a citation examination" arising from the Judgment, which, in turn, "led to the filing of an alter ego complaint" against Debtor. (R.12, Appellant Br. at 19 (citing A000167-74 (testimony concerning the personal use of Aerial funds)). In particular, Movant filed a lawsuit in the Circuit Court of DuPage County against Aerial, Debtor, and the Whitakers, alleging that Debtor was a successor to Aerial and that the Whitakers were mere alter egos of Aerial (the "Successor Liability Litigation"). (R.11-5, Answer to Compl; see also R.7-9 at 641-54 (same)). According to Tony Whitaker, Movant conducted discovery throughout 2015-2016 and rejected several offers to resolve the Successor Liability Litigation. Because "Debtor could not continue to pay substantial legal costs in defending the case" while also paying its creditors and employees, Debtor filed the present bankruptcy case. (R.11-3, Whitaker Aff. ¶¶ 4-8; R.7-7 at 520-21 (same); R.12-1, A000395 (Whitaker Dep. Tr. at 25 ("We also have a business loan [from] Direct Capital that we were trying to pay and we could not")).

2. Debtor's Business

T&C Gymnastics "operates a gymnastics school in Itasca, Illinois and services day cares and park districts throughout the Chicagoland area." (R.11-3, Whitaker Aff. ¶ 2; see also R.7-6 at 462-63). It has over 20 employees, plus the Whitakers. (Id.). Debtor has operated at a profitsince its formation, earning net income of $40,987 for the year 2015 and net income of $33,012.54 for the first five months of 2016. (Id. ¶ 3; R.7-6 at 453-56). As of June 2016, Tony Whitaker expected Debtor to generate $800,000 in gross revenue for 2016. (R.12-1, A000387 (Whitaker Dep. Tr. at 17)). In Debtor's view, part of its profitability stems from the "reasonableness" of its commercial lease with its Itasca landlord, West Suburban Industrial SDCO, Inc., pursuant to which it pays less than $14,000 per month in rent. (R.14, Appellee Br. at 7; R.7-2 at 85-125)).

II. Debtor's Bankruptcy

On May 2, 2016, Debtor filed for Chapter 11 protection. On June 10, 2016, Debtor filed its Plan of Reorganization ("Plan") and Disclosure Statement. (R.11-7, R.11-8; see also R.7-7 at 539-69). The Plan lists seven classes of...