In re Gen. Aeronautics Corp., Bankruptcy Number: 17-28510

• Citation: 594 B.R. 442
• Decision Date: 04 December 2018
• Docket Number: Bankruptcy Number: 17-28510
• Parties: IN RE: GENERAL AERONAUTICS CORPORATION, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

594 B.R. 442

IN RE: GENERAL AERONAUTICS CORPORATION, Debtor.

Bankruptcy Number: 17-28510

United States Bankruptcy Court, D. Utah.

Signed December 4, 2018

Kenneth L. Cannon, II, Penrod W. Keith, Durham Jones & Pinegar, Salt Lake City, UT, for Debtor.

MEMORANDUM DECISION

R. KIMBALL MOSIER, U.S. Bankruptcy Judge

General Aeronautics Corporation and other related companies have tried to build and market gyroplanes for over 30 years, but business has not been easy. Funding shortfalls have been common, and the company could not afford to pay employees their full compensation for significant stretches of time. When the last shortfall hit in early 2015, many of its remaining employees resigned or were laid off. The company received new funding in late 2016, and word spread among the former employees and creditors, who joined together to consider their options. On September 28, 2017, Jason Chen, Jacob van der Westhuizen, Robert Wilson, Howard Kent, William Scott Carron, and Henry Parry II filed an involuntary petition against General Aeronautics, asserting claims principally for unpaid rent, unpaid compensation, and loans made to the company.¹ They were joined by three additional creditors—Carolynn Taft, Martie Nadauld, and Lori Chigbrow—on June 25, 2018 (with the original six, the Petitioning Creditors).

General Aeronautics controverted the petition and filed a motion to dismiss it and a motion to require the Petitioning Creditors to post a bond. The Court conducted preliminary hearings on those matters and set a date for trial. Shortly thereafter, General Aeronautics filed a separate motion to dismiss the case under 11 U.S.C. § 305(a).² The Court conducted trial on all of these matters on September 18, 19, 20, 24, 26, and 27. After thoroughly reviewing the evidence and assessing the credibility of witnesses; and having read the motions, memoranda, and briefs; and having heard the arguments of counsel and conducted its own independent research of applicable law, the Court issued its ruling from the bench on October 4, suspending proceedings for 60 days under § 305(a). The Court reserved the right to enter a written decision memorializing that oral ruling without altering its substance or the Court's final judgment. In accordance with that reservation the Court issues the following Memorandum Decision.³

I. JURISDICTION

The Court's jurisdiction over this contested matter is properly invoked under 28 U.S.C. § 1334(b) and § 157. This a core proceeding under 28 U.S.C. § 157(b)(2)(O ), and the Court may enter a final order. Venue is appropriate under 28 U.S.C. §§ 1408 and 1409.

II. FINDINGS OF FACT

A. The Debtor's History

David Groen, a former Army helicopter pilot who served in the Vietnam War and flew commercially afterward, founded Groen Brothers Aviation, Inc. (GBA) in the mid-1980s with the goal of developing and bringing to market the technology of sustained autorotative flight using gyroplanes and other similar aircraft. While gyroplane technology has existed for approximately a century—it was the brainchild of Juan de la Cierva in the years shortly after World War I—Groen used his knowledge of helicopters to make improvements, such as the addition of collective pitch control, to gyroplanes. GBA believed that these advances, along with the particular characteristics of gyroplanes that distinguish them from helicopters and airplanes,⁴ would allow it to carve out a niche in the aircraft market.

GBA grew sporadically. Its funding in the early days consisted of numerous investments from small shareholders, and it was often playing catch-up on its financial obligations. By 2001, it had not brought a product to market that generated any meaningful revenue. That same year, GBA received a $5 million investment, which allowed it to begin a program to achieve FAA certification on an aircraft called the Hawk 4. But the ebb in the aviation industry after the 9/11 terrorist attacks caused GBA to lay off approximately 100 of its 135 employees. It weathered the downturn and secured a contract to begin work on a project called the Heliplane for the Defense Advanced Research Projects Agency (DARPA) around 2005, and employment numbers rebounded. Even so, GBA frequently remained short of cash and required additional investment. Although GBA completed the first of four phases required under the DARPA program, the contract was not renewed. The loss of the contract combined with the Great Recession led to another bout of financial trouble. GBA asked employees to defer compensation and eventually accrued approximately $1 million in unpaid wages and salary, which it later repaid, but it laid off 90 of 96 employees in 2007-08.

After those layoffs GBA stalled. Of the 20 engineers and 20 drafters it employed during the peak of the DARPA project, it retained only one of each after the layoffs. Its debt structure discouraged additional investment, and it produced nothing from 2008-12. GBA eventually changed its name to Groen Brothers Aviation USA, Inc. and developed a financial restructuring and recapitalization plan whereby it would transfer its assets, employees, and operations to a new entity, Groen Brothers Aviation Global, Inc. (GBAG).⁵ As part of that plan, GBA's creditors would have their debt converted into equity in GBAG. Trade creditors, utilities, and employees were excluded from this conversion arrangement. After some delay, the transfer from GBA to GBAG was carried out in December 2012 (Transition).

Freed from the debt of GBA, GBAG was supposed to attract new investment from certain funds managed by Steven Stevanovich, who is currently one of two Executive Directors of the debtor. The expected funding did not materialize, however, and cash was acutely scarce pre- and post-Transition, which led to reductions in employee pay and, as before, the accrual of unpaid compensation.⁶ GBAG's finances were uncertain enough that it asked its landlord in December 2013 for some time to vacate the property in the event it could not pay rent.⁷ In addition, employment numbers had not recovered to prior levels. GBA had 47 employees on its payroll in January 2012, many of them part-time or temporary.⁸ Those numbers dropped to 13 at GBAG a year later,⁹ but later climbed to as high as 28 in November 2014.¹⁰

In early 2014, Jason Chen, who had previously worked for GBA as a fundraiser from 2004-08 and as an advisor for a shorter six-month period, was asked by GBAG to investigate and pursue a potential deal with Wuhai, a city in Inner Mongolia, China. That deal did not come to fruition. Though not formally appointed, Chen became de facto CEO, and at his insistence the company changed its name to General Aeronautics Corporation (GAC). With Chen's assistance, GAC negotiated with the Aviation Industry Corporation of China (AVIC) to form a joint venture to develop and produce a two-seat and a four-seat aircraft. While the parties signed a letter of intent in July 2014 and a cooperation agreement in December 2014, the deal was later terminated. Chen also provided much-needed cash, which was used to fund payroll and other expenses. But when Chen left GAC the company ran out of money and in January 2015 it laid off nearly all of its employees (2015 Layoffs). Other employees, including executives Robert Wilson and Jacob van der Westhuizen, resigned.

As GBA had done in 2008, GAC entered a period of doldrums. Groen, who was restored as CEO shortly after the 2015 Layoffs, was one of five employees remaining, though GAC had no operations. By April 2015, it had $205 left in its bank account. GAC received relatively modest amounts of funding beginning around May 2016 and started to repay some amounts owed to former employees.¹¹ Then with Groen at the helm, GAC changed its name to Groen Aeronautics Corporation. In late 2016, Groen Aeronautics began conversations with West Mountain Partners, L.P. to fund the development of a new aircraft. The company believed it needed approximately $13 million to complete the project or $5 million to create a prototype, and in November 2016, West Mountain agreed to invest $5 million with the option to invest up to $8 million more.¹² The following month, $4,993,290.77 was deposited into the bank account of GAC Unmanned Aircraft Systems, Inc.,¹³ the wholly-owned subsidiary of Groen Aeronautics. There is no evidence that West Mountain has invested funds beyond the original $5 million.

Once Groen Aeronautics received those funds, Groen and the board grappled over authority to use them. Groen's apparent insistence on using a portion of that money to repay some of GAC's old debts led to the board ousting Groen as CEO and a board member in January 2017. By May 2017 Groen Aeronautics had changed its name to Skyworks Global, Inc. Since Groen's ouster Skyworks has spent substantial sums of money, but it has largely ignored the old unpaid debts accrued at GAC.¹⁴

GAC presently has three employees and outsources its engineering work. While developing an aircraft from design to production is an admittedly long and difficult process, GAC has not built a gyroplane. During its existence GBA only built ten, none of which received FAA certification. Like GBA before it, GAC has not generated meaningful revenue during its existence and is entirely dependent on equity investments or loans to fund its operations.

GAC is currently pursuing, to varying degrees, six projects for the application of its technology.¹⁵ Two projects—the Hawk 6e and the Gyroliner—are in the earliest stages of development and their potential for success is unclear. The Hawk 6e is a six-seat electric composite-body gyroplane that exists only in an artist's conception; the design process has not yet begun. But other aviation companies have started to explore the market for distributive electric propulsion, in which the Hawk 6e would compete. The Gyroliner is a passenger airplane fitted with a rotor—a modern analogue to the Fairey Rotodyne—and is intended to serve the inner-city market in India....