In re Deluxe Bldg. Solutions, LLC
| Decision Date | 28 October 2022 |
| Docket Number | CASE NO. 5:21-bk-00534-HWV |
| Citation | 646 B.R. 715 |
| Parties | IN RE: DELUXE BUILDING SOLUTIONS, LLC, Alleged Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Pennsylvania |
Casey Alan Coyle, Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, PA, Mark Scott Stewart, Eckert Seamans Cherin & Mellott LLC, Harrisburg, PA, for Alleged Debtor.
Jill E. Durkin, Sheils Law Associates, PC, Clarks Summit, PA, for Trustee.
Gregory Benjamin Schiller, US Department of Justice, Office of the US Trustee, Harrisburg, PA, for Asst. U.S. Trustee.
This matter comes before the Court on a Motion to Dismiss the Involuntary Chapter 7 Petition filed by the Alleged Debtor, Deluxe Building Solutions, LLC (the "Alleged Debtor"). (Doc. 120.) For the following reasons, the Court will deny the requested relief in part, but will leave the record open for consideration of the remaining creditors’ claims.1
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) ().
The Alleged Debtor is a United States-based manufacturer of large-scale commercial volumetric steel modular buildings formerly operating out of Berwick, Pennsylvania. (Doc. 121-2, p. 15.)2 The Alleged Debtor is affiliated with a larger group of companies that focus on various aspects of architecture, engineering and construction software, technologies, and other innovations collectively known as the "Deluxe Group." (Id. ) Frydco Capital Group, LLC ("Frydco") and Winter Investors, LLC ("Winter") owned all interests in the Alleged Debtor through December 31, 2020, after which iBUILT Group, LLC ("iBUILT") became the owner of same. (Doc. 165, pp. 169, 210; Doc 216, p. 147.) Jacob Frydman ("Frydman") controls the Alleged Debtor as its designated Manager. (Doc. 121-2, p. 15.)
SyncPark, LLC ("SyncPark") is a Delaware limited liability company with an address at 4 South Stanwich Road, Greenwich, Connecticut. (Id. at 3, 54.) SyncPark was formed to develop a system that automatically moves vehicles through an automated self-parking facility using linear synchronous motor technology (the "SyncPark System"). (Id. at 15.) Andrew W. Hayes ("Hayes") and James G. Wieler ("Wieler") own and control SyncPark. (Doc. 144, p. 41; Doc. 242, p. 22.)
In early 2020, the Alleged Debtor and SyncPark entered into a joint venture for the purpose of designing, manufacturing, and building automated self-parking garages modeled after the SyncPark System throughout the United States. (Doc. 121-2, p. 16.) To that end, on April 29, 2020, the Alleged Debtor and SyncPark entered into an operating agreement (the "JV Operating Agreement") to form this joint venture, which they named SyncPark USA, LLC (the "Joint Venture"). (See Doc. 121-2.) Pursuant to the terms of the JV Operating Agreement, Frydman and Hayes were designated as non-member managers of the Joint Venture, and Wieler and Hayes were designated as its executives.3 (Id. at 3.) As its managers, Frydman and Hayes made up the Board of the Joint Venture. (Id. at 33.)
By agreement, the Alleged Debtor and SyncPark were each required to make an initial capital contribution in exchange for their ownership interest in the Joint Venture. (Id. at 16.) SyncPark's initial capital contribution to the Joint Venture included all its rights, title, license, and interest in and to the SyncPark System, as well as all the other assets it owned, in exchange for a 50% membership interest in the Joint Venture. (Id. at 16, 20.) The Alleged Debtor's initial capital contribution included an in-kind contribution of: (1) space in one of its buildings in Berwick, Pennsylvania for use by the Joint Venture; (2) certain design services, components, and construction work, each as defined in the JV Operating Agreement; and (3) a commitment to fund necessary purchases that it or other entities in the Deluxe Group could not manufacture and to pay for necessary engineering work that it or other entities in the Deluxe Group could not provide, subject to the terms and conditions set forth in the JV Operating Agreement (the "Funding Commitment"); all in exchange for a 50% membership interest in the Joint Venture. (Id. ) This Funding Commitment was capped by the JV Operating Agreement at approximately $500,000, with the precise amount to be set forth in a budget prepared by Wieler and Hayes and submitted to the Board for approval by May 15, 2020 (the "Proposed Budget"). (Id. at 20, 33.) Upon approval by the Board, the Proposed Budget would become the Approved Budget. (Id. at 33–34.)
While it is clear that the Alleged Debtor's Funding Commitment was implicated once the Proposed Budget was approved, it is unclear whether such an obligation arises under a Proposed Budget that has not been approved. It is also unclear from the record if a Proposed Budget was ever submitted to the Board for approval in accordance with the terms of the JV Operating Agreement and, if it was, whether it was ever formally approved by the Board.4
To advance the Joint Venture's purpose, the Joint Venture's members and executives decided to build a test garage using the SyncPark System as a proof of concept for investors (the "POC Garage"). (Id. at 15.) To assist with marketing the POC Garage to investors, Robert Labanara ("Labanara") was hired by the Joint Venture as a Business Development Consultant. (Doc. 165, p. 100.) Construction of the POC Garage was facilitated by Wieler and Hayes, who in their capacity as executives for the Joint Venture, and in apparent reliance upon the Funding Commitment, sought to retain third-party contractors outside of the Deluxe Group to contribute work and services for the POC Garage as if a Proposed Budget had been timely submitted and approved by the Board. (Doc. 144, pp. 43–44, 46, 49; Doc. 237, p. 200.) Two such contractors were Superior Controls, Inc. ("Superior") and Taylor & Peterson ("T&P"), which were retained to perform engineering and design work on the POC Garage. (Doc. 144, pp. 44, 46; Doc. 164, pp. 88, 174–75; Doc. 237, p. 200.)
Despite apparent efforts to build the POC Garage, Frydman admits that the Alleged Debtor struggled financially throughout its relationship with the Joint Venture. (Doc. 165, pp. 216–17.) According to Frydman, the original members of the Alleged Debtor, Winter and Frydco, invested some $31 million to support the Alleged Debtor from January 2018 through December 31, 2020. (Id. at 216.) While there was evidence that the Joint Venture had the potential to become profitable, in Winter and Frydco's view, the Alleged Debtor's significant financial deficit eventually outweighed the promise held by the Joint Venture. (Id. at 216–17.) Thus, effective December 31, 2020, Frydman asserts that Winter and Frydco transferred all their ownership interests in the Alleged Debtor to a newly formed member of the Deluxe Group called iBUILT. (Doc. 165, p. 210; Doc. 216, p. 147.) Contemporaneously, Frydman asserts that the Alleged Debtor also transferred its employees to iBUILT to continue the Alleged Debtor's limited operations, causing the Alleged Debtor to effectively cease all operations as of December 31, 2020.5 (Doc. 165, pp. 210, 217; Doc. 216, pp. 115–16, 121–22; Doc. 245, ¶¶ 123–24.) Shortly thereafter, Frydman asserts iBUILT began to furlough or lay off most of the employees transferred to it from the Alleged Debtor, including Wieler and Labanara.6 (Doc. 144, p. 58; Doc. 165, p. 106; Doc. 216, pp. 115–16; Doc. 217, p. 108.)
As a result of these events, the Alleged Debtor ceased payment on a number of its financial obligations while waiting for its only source of income from receivables and anticipated litigation payouts to arrive. (Doc. 216, pp. 100–01.) Accordingly, on March 18, 2021, T&P, Superior, Labanara, and Wieler (collectively, the "Petitioning Creditors"), filed an involuntary bankruptcy petition pursuant to 11 U.S.C. § 303 against the Alleged Debtor seeking to recover debts allegedly owed to them by the Alleged Debtor. (Doc. 1.) T&P and Superior filed claims as alleged trade creditors of the Alleged Debtor, while Wieler and Labanara assert that they are owed unpaid wages and reimbursement for various expenses from the Alleged Debtor. (See Proof of Claim 3-1; 20-1; 21-1; 31-1; 32-1; 34-1.)
The Alleged Debtor filed the instant Motion to Dismiss on September 2, 2021. (Doc. 120.) The Petitioning Creditors filed their Objection to the Motion on September 22, 2021. (Doc. 133.) The Court held seven non-consecutive days of evidentiary hearings on the Motion to Dismiss and Objection between September 23, 2021 and February 24, 2022,7 during which the Court heard testimony from the following witnesses: (1) Wieler; (2) Alastair Taylor ("Taylor"), one of the owners of T&P (3) Labanara; (4) Frydman; (5) Rick Pierro ("Pierro"), the President of Superior; and (6) Hayes.8 (See Docs. 144, 164, 165, 216, 217, 237, 242.) Upon the request of the parties, the Court permitted extensive post-trial briefing, which concluded on May 4, 2022. (Docs. 245, 246, 247, 251, 252, 253.) The Motion is therefore ripe for the Court's review.
There are primarily two issues before the Court, each having two parts. The first issue is whether the Petitioning Creditors have standing to file the involuntary petition against the Alleged Debtor pursuant to 11 U.S.C. § 303(b) and, if so, whether the Alleged Debtor is generally not paying its debts as they become due pursuant to 11 U.S.C. § 303(h). The second issue is whether the involuntary petition was filed in bad faith and, if so, whether additional creditors should be barred from utilizing 11 U.S.C. § 303(c) to join the petition under the bad faith bar to joinder rule. The Court discusses these issues in the order presented.
Where an alleged debtor has...
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