In re Rusty Jones, Inc., Bankruptcy No. 88 B 18708.

• Decision Date: 09 February 1990
• Docket Number: Bankruptcy No. 88 B 18708.
• Citation: 110 BR 362
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re RUSTY JONES, INC., Debtor.

110 B.R. 362 (1990)

In re RUSTY JONES, INC., Debtor.

Bankruptcy No. 88 B 18708.

United States Bankruptcy Court, N.D. Illinois, E.D.

February 9, 1990.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Karen H. Moore, Office of the U.S. Trustee, Chicago, Ill.

Marvin A. Miller, Chertow & Miller, James Carmel, Carmel, Baker & Marcus, Chicago, Ill., William Wolford, Wisconsin Dept. of Justice, Madison, Wis. for Official Warranty Claimants Committee.

Robert Nord, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for Distributor Claimant Committee.

Frank Butler, Winston & Strawn, Chicago, Ill.

James A. Chatz, Norman Newman, Much Shelist Freed Denenberg Ament & Eiger, P.C., Chicago, Ill., for debtor.

FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING HEARING ON CONFIRMATION

JACK B. SCHMETTERER, Bankruptcy Judge.

The Court conducted an evidentiary hearing on the Fourth Amended Plan of Reorganization, as modified (the "Plan") proposed by the debtor, Rusty Jones, Inc. ("Rusty Jones or Debtor"), and on objections thereto filed by Beatrice Foods and voiced orally by the U.S. Trustee, on January 11, 12, 17, 18, and 19, 1990. Rarely has this Court seen abuses of the bankruptcy process such as those found and proposed here. Based upon evidence admitted and arguments presented at that hearing and undisputed facts earlier presented to the Court during this case, the Court makes and enters the following Findings of Fact and Conclusions of Law pursuant to which confirmation is denied.

FINDINGS OF FACT

1. Rusty Jones has been in the business of providing various automotive care services to consumers, including rustproofing treatment. Prior to August 1, 1988, Rusty Jones provided a warranty with the rustproofing treatment which it offered to consumers.

2. (a) On December 5, 1988, Debtor filed its voluntary petition (the "Case") under Chapter 11 of the Bankruptcy Code, Title 11 U.S.C. § 101 et seq. (the "Code"). It has since remained in possession of its property and has operated its business as a debtor-in-possession pursuant to §§ 1107 and 1108 of the Code.

(b) About two weeks prior to filing bankruptcy, Debtor was "purchased" by Rustco Holdings Inc. ("Rustco") for $1.00. Rustco thereby acquired 100% of Debtor's common stock. Debtor then possessed cash and cash equivalents totalling about $3,000,000.

(c) Rustco stock is owned 60% by Renaissance Holdings I, Inc., 40% by Charles Wortman. The common stock of Renaissance Holdings I, Inc. is owned entirely by Renaissance Capital, Ltd. Alexander Knopfler, Donald Grauer, and Jeffrey Grossman own 100% of the stock in Renaissance Capital, Ltd.

To diagram the foregoing:

Knopfler, Grauer, and Grossman own 100% stock in Renaissance Capital, Ltd. which owns 100% of stock in Renaissance Holdings I, Inc. which in turn owns 60% of stock in Rustco Holdings, Inc. which in turn owns 100% of stock in Rusty Jones, Inc.

(d) Debtor's President until one day before the instant hearing began was Charles Wortman. He then resigned. Mr. Grauer, who is President of Renaissance Capital, Ltd., is now an officer of Debtor. Mr. Grossman is also now an officer of Debtor. Renaissance Capital, Ltd. is a corporation that Knopfler, Grauer, and Grossman formed to act as a consultant to distressed businesses.

3. Rusty Jones commenced this case in bankruptcy because of its significant contingent liabilities to warranty holders, estimated from $30 million to $50 million. It has since continued as debtor-in-possession, but at a sharply reduced scale which it slowly reached after many months. Its only current operating activity is its operation of "Rusty's Place," a small service center operated by one employee. Despite that minimal function (designed to maintain use of its trademark so as to maintain the value of that mark), Debtor leased and continues to lease an additional office location for its salaried president and salaried office administrator.¹ Largely because of the latter rental and salaries, it continues to operate with a negative cash flow for operations (non-bankruptcy expenses) of from $25,000 to $40,000 each month. This includes a negative cash flow of $10,000/month for Rusty's Place operations.

4. On the date that Rustco purchased stock in Rusty Jones, Rusty Jones had approximately $3,000,000 in cash or cash equivalents in its accounts. This bankruptcy case was filed about two weeks later. Debtor then had about $275,000 less in cash and cash equivalents. Moneys paid out during the intervening two weeks went to Renaissance Capital, Ltd., the company controlled by Knopfler, Grauer and Grossman. This company in turn controls Debtor through intervening holding companies as shown above.

5. Wortman, the former president of Rusty Jones who resigned just prior to the commencement of the confirmation hearing, testified at the hearing. The Court recognizes that he had personal motives, both in failing to come forward earlier and in coming forward when he did. Nonetheless, his specific testimony was largely unrebutted and credible.

6. Based on prior proceedings before this Court, the testimony of Wortman, and the other facts found herein, it is clear that Debtors' present officers Grauer and Grossman have at all times during this case controlled Rusty Jones through their holding companies. Further, those persons made several efforts during this bankruptcy to bleed Rusty Jones of its assets so as to benefit one or more non-debtor businesses. Unless prevented, they will continue to do so in the future. They succeeded in doing so only in small ways in the past because of the vigilance of the U.S. Trustee and this Court's refusal to sanction such efforts when made by motion, and because the former president Wortman sometimes blocked them from doing so when they tried to do so out of court.

7. The persons who were in control of Rusty Jones did not exhibit sufficient concern for the fiduciary obligation that people who control Chapter 11 estates owe to the estate and the estate's creditors, nor did they take seriously their responsibility to preserve estate assets.

8. Had those "investors" who acquired control over a $3 million cash pot in return for a $1.00 investment been conscientious, they could have helped preserve this estate and pare down the overhead below current levels. Instead, they repeatedly tried to take untoward advantage of their position. The investors could have helped negotiate a confirmable plan. Instead, as set forth below, the proposed plan is a palpable over-reaching by the controlling investors, and evidence presented was distorted by not requiring Debtor's valuation expert to take known evidence into account.

9. Rusty Jones presently retains only about $1,500,000 in cash and cash equivalents. Much of the $1,500,000 that it spent since the bankruptcy was filed was devoted to proper and necessary expenses, e.g., honoring a letter of credit (Debtor and both official creditors committees assured the Court there was and is no recourse to recover $500,000 thereby expended); necessary expenses in reducing the business scope; necessary protective steps; approved expenses necessary to the bankruptcy processes of notices, ballots, disclosure statement, and confirmation hearing; and interim professional fees that were approved. Other parts of that cash drain, however, resulted from the payment to Renaissance that was only partly repaid and from continued excessive overhead for many months longer than necessary. The latter drain continues today, albeit at a smaller level (Finding No. 3). The new "investors" during this bankruptcy made a number of efforts, some of which were successful, to obtain direct or indirect benefit from the cash assets with which Debtor started this bankruptcy. Most of those efforts were not for good business reasons and were contrary to the interests of the estate and its creditors. Some of these efforts were by motions to the Court before the instant hearing and some were proved by evidence during the hearing. Specifically:

(a) Rusty Jones moved the Court early in the case to authorize it to assume a management contract which had been entered into with Renaissance Capital, Ltd. during the two-week period between Rustco\'s "purchase" of Rusty Jones and Rusty Jones\' commencement of this case. That management contract would have cost Rusty Jones substantial sums, amounting to several hundred thousands of dollars. Rusty Jones had made a substantial deposit of approximately $275,000 including interest on account of that management contract. Due to questions raised by the U.S. Trustee and Court at the time, Rusty Jones withdrew its motion to authorize the assumption of that management contract. From the deposit Renaissance later returned $179,744 to Rusty Jones under court order. Retention of the balance was not approved, nor was approval sought or retention explained. Because Debtor withdrew its motion, it now argues that the Court has no basis for any adverse conclusions relating to it or to the management contract. That is an argument without logic. This Court saw the agreement, held a hearing on it and took evidence. Debtor cannot wipe the slate clean by withdrawing a motion once the results become obvious. The Court believed then and still finds that the contract itself was unwarranted, without substantial benefit to the estate, and unnecessary. On the face of it, this episode raised the question whether the "investors" who purchased control of Debtor for a dollar were over-reaching in their effort to get Debtor to fund an expensive "management" contract with their other company (Renaissance) although there was precious little remaining to manage and salaried officers were doing what was required.

(b) Shortly thereafter, Debtor moved the Court for authorization to add the three "investors," Knopfler, Grauer and Grossman, to Rusty Jones\' payroll. Those persons were to be paid significant salaries by Rusty Jones ($30,000 each, totaling

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