Belfor USA Grp., Inc. v. Salem Consumer Square OH LLC (In re Salem Consumer Square OH LLC)
| Decision Date | 14 July 2021 |
| Docket Number | Bankruptcy No. 21-20020-CMB |
| Citation | 629 B.R. 562 |
| Parties | IN RE: SALEM CONSUMER SQUARE OH LLC, Debtor. BELFOR USA Group, Inc., Movant, v. Salem Consumer Square OH LLC, Respondent. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
Ann Marie Uetz, Esq. and William McKenna, Esq. for Movant, BELFOR USA Group, Inc.
Kirk Burkley, Esq. and Kerri Sturm, Esq., for Debtor/Respondent, Salem Consumer Square OH LLC.
Related to Doc. Nos. 33 and 102
The matters presently before the Court are BELFOR USA Group, Inc.’s Motion for an Order Under 11 U.S.C. § 1112(b) Dismissing the Debtor's Case or, in the Alternative, Converting the Case to Chapter 7 ("Motion to Dismiss or Convert," Doc. No. 33) and BELFOR USA Group, Inc.’s Expedited Motion for an Order Under 11 U.S.C. § 1104 App ointing a Trustee to Administer the Debtor's Estate ("Trustee Motion," Doc. No. 102, together, the "Motions").1 The Motions are opposed by the Debtor, Salem Consumer Square OH LLC. An objection to the Trustee Motion was also filed by Beacon Commercial Limited ("Beacon"). For the reasons set forth herein, this Court finds that the Motions must be denied based on the record at this time. However, the Court reserves the right to appoint a trustee sua sponte if future circumstances demonstrate that Debtor is unable to faithfully discharge its fiduciary duties.
The above-captioned case was commenced on January 5, 2021, when Debtor filed its petition seeking relief under Chapter 11 of the Bankruptcy Code. The petition was filed in this district as cases filed by Debtor's affiliates are pending in the Western District of Pennsylvania. Disputes between the Debtor and one of its creditors, BELFOR USA Group, Inc. ("BELFOR"), preceded the filing and have been ongoing throughout this case. Approximately one week after the petition was filed, BELFOR filed the Motion to Dismiss or Convert. Nations Roof of Ohio, LLC ("Nations Roof"), another creditor, filed a joinder. See Doc. No. 64. Debtor filed an objection. See Doc. No. 65. Following the initial hearing on the Motion to Dismiss or Convert held February 23, 2021, the parties conferred and agreed upon discovery and related deadlines in preparation for an evidentiary hearing.
Approximately sixty days into the case, while discovery on the Motion to Dismiss or Convert was ongoing, Debtor filed its Chapter 11 Plan of Reorganization Dated March 5, 2021 ("Plan," Doc. No. 94) and Disclosure Statement to Accompany Debtor's Amended Chapter 11 Plan of Reorganization Dated March 5, 2021 ("Disclosure Statement," Doc. No. 95). On the same date, Debtor commenced an adversary proceeding against BELFOR by filing its Complaint to (I) Determine Amount, Priority and Extent of Secured Status Pursuant to 11 U.S.C. § 506(a) and (II) Determine Amount of BELFOR Group U.S.A., Inc.’s Allowed Claim (the "Adversary Complaint"). See Adv. No. 21-2019. Discovery deadlines have been set in the adversary proceeding.
Several days after the filing of the Plan, Disclosure Statement, and Adversary Complaint, BELFOR filed the Trustee Motion. Objections were filed by both Debtor and its owner, Beacon. See Doc. Nos. 106 and 107. Following an expedited hearing on the Trustee Motion, the Court scheduled an evidentiary hearing. Ultimately, the parties agreed to participate in mediation, and the Court rescheduled deadlines and hearings to accommodate the attempt to consensually resolve the parties' disputes, including the Motions now before the Court. Following the report of an unsuccessful mediation, a flurry of activity followed. Debtor and Beacon filed a joint expedited motion seeking to stay BELFOR's Motions while allowing Debtor to first seek approval of its Disclosure Statement and proceed to confirmation of the Plan. BELFOR filed its own expedited motion seeking to compel discovery. The expedited motions were quickly resolved with a determination that BELFOR's Motions would not be stayed. Due to the nature of BELFOR's Motions and the common underlying facts, the Court scheduled a joint evidentiary hearing.
On May 13, 2021, Nations Roof advised that, upon reaching a settlement with the Debtor regarding its claim, it now supports the Plan and withdraws its joinder to the Motion to Dismiss or Convert. See Doc. No. 169. At the pretrial conference on the Motions held May 20, 2021, the remaining parties agreed to another attempt at mediation. Unfortunately, the second mediation attempt was also unsuccessful, and the parties returned to their litigation posture. The parties submitted their exhibits and filed stipulated and contested facts. See Doc. No. 190.2 The evidentiary hearing was held on June 14 and 15, 2021. Each party also submitted designations of deposition transcripts for the Court's consideration. See Doc. Nos. 202 and 214. Following the docketing of the hearing transcripts,3 Debtor and BELFOR filed proposed findings of facts and conclusions of law. See Doc. Nos. 245 and 246. Each party filed a reply. See Doc. Nos. 250 and 252. The matters are now ripe for decision.
To understand the basis for the Motions, it is necessary to address certain events that preceded the bankruptcy filing, beginning with a tornado that occurred on May 27, 2019. The tornado damaged the Debtor's primary asset, a retail shopping mall known as Salem Consumer Square located in Dayton, Ohio (the "Property"). See Stipulated Facts at ¶¶13, 26. As a result of the tornado damage, BELFOR performed certain work on the Property which forms the basis of its disputed claim in this case.
At the time of the tornado, Debtor was owned by Moonbeam Capital Investments LLC ("Moonbeam Capital"). See Stipulated Facts at ¶4; Exhibit X at 000572. The Property was insured via a Travelers insurance policy in which Moonbeam Capital was a named insured. See Stipulated Facts at ¶14.4 With respect to the insurance claim related to the tornado, Travelers made payments totaling in excess of $9.8 million, with the first payment issued June 7, 2019, and the last payment issued January 15, 2020. See Stipulated Facts at ¶23. Although all seven of the checks issued by Travelers were made payable to Moonbeam Capital and Debtor, all of the payments were delivered to and received by Moonbeam Capital. See Exhibit A; Stipulated Facts at ¶23.
Moonbeam Capital did not use the insurance proceeds to make repairs to the Property. Hr'g Tr. 6/15/21 at 35:11-13. It is undisputed that BELFOR has not been paid for any of its work at the Property despite the fact that the explanation of payment for at least one check issued by Travelers in the amount of $2,418,981.08 specifically referenced "BELFOR EMS-UNDISPUTED COSTS." See Stipulated Facts at ¶¶23-24; Exhibit A at 000005. On September 3, 2019, BELFOR recorded an Affidavit for Mechanic's Lien against the Property in the amount of $3,969,438.04, which was later reduced by BELFOR to $2.8 million plus interest, fees and costs. See Stipulated Facts at ¶¶21-22.
During the time insurance checks were being issued by Travelers and received by Moonbeam Capital, Moonbeam Capital transferred its membership interests in the Debtor. With a stated purchase price of $4 million and an effective date of September 27, 2019, Moonbeam Capital entered into an agreement transferring 99.99% of its ownership interests in profits and losses and 100% of its ownership interest in capital to Beacon. See Exhibit D.5
The agreement specifically addresses the treatment of the insurance proceeds received by Moonbeam Capital:
For avoidance of doubt, Seller shall not sell, transfer, convey or assign, Buyer shall not purchase, and the Subject Interests do not include, any right, title or interest in or to any...insurance proceeds paid or distributed to Seller or received by Seller prior to the Effective Date with respect to the Subject Interests, the Company and/or the Property.
See Exhibit D at 000182. As to the $4 million purchase price, Michael Kahaian, a forensic accountant, testified that Moonbeam Capital essentially paid itself by first transferring $4 million into Debtor as a contribution of capital, which was subsequently transferred to Beacon in the form of a loan, and ultimately transferred back to Moonbeam Capital in a "roundtrip" transaction. See Hr'g Tr. 6/14/21 at 49:24-69:25. Despite the characterization as a loan from Debtor to Beacon, there was nothing to substantiate a loan, and the loan was ultimately written off in the general ledger. See Hr'g Tr. 6/14/21 at 66:1-68:4, 90:3-16. Based on his analysis, Mr. Kahaian concludes there was no economic substance to the transaction. See Hr'g Tr. 6/14/21 at 61:18-62:3. To the contrary, Debtor asserts there was substance to the transaction based on the language of the assignment.6 Nonetheless, the purpose of the so-called "roundtrip" transaction was not explained on the record, and regardless of the odd transaction underlying the transfer, Beacon is the current owner of Debtor. See Stipulated Facts at ¶1.
Despite the transfer, Debtor's connections with its prior ownership and management were not severed. Edward Sklyaroff, owner and president of Beacon, is also the president of Debtor. See Stipulated Facts at ¶¶2 and 25. However, Shawl Pryor is clearly the "boots on the ground" for the Debtor as he oversees day-to-day operations. See Hr'g Tr. 6/15/21 at 21:11-20. In fact, Mr. Pryor is the chief operating officer of Beacon and the Debtor. See Stipulated Facts at ¶¶3,9. Notwithstanding his important role for Debtor, Mr. Pryor is not paid by either the Debtor or Beacon for his services. See Hr'g Tr. 6/15/21 at 30:17-22. Mr. Pryor is, however, compensated through his roles with Moonbeam Capital and Moonbeam Leasing and Management ("Moonbeam Leasing"), the latter of which continues to provide leasing and management services to Debtor. See Stipulated Facts at ¶6; Hr'g Tr. 6/15/21 at 29:25-30:13. Moonbeam Leasing is directly or indirectly owned...
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