In re South Beach Securities, Inc.

• Decision Date: 01 November 2007
• Docket Number: No. 05 B 16679.,05 B 16679.
• Citation: 376 B.R. 881
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re SOUTH BEACH SECURITIES, INC., Debtor.

376 B.R. 881

In re SOUTH BEACH SECURITIES, INC., Debtor.

No. 05 B 16679.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

November 1, 2007.

Scott R. Clar, Crane, Heyman, Simon, Welch & Clar, Chicago, IL, for Debtor South Beach Securities, Inc.

M. Gretchen Silver, Cameron M. Gulden, Office of the United States Trustee, Chicago, IL, for U.S. Trustee William T. Neary.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This chapter 11 bankruptcy case is before the court for ruling following a combined hearing on the adequacy of the debtor's disclosure statement and confirmation of its plan. For the reasons that follow, confirmation of the plan will be denied.

1. Background

Debtor South Beach Securities, Inc. is a corporate shell with no business operation or income. Its only assets are net operating losses, a. tax attribute. It has a single creditor, a related entity called Scattered Corporation, with a claim of $3,297,489. South Beach proposes a plan under which stock of South Beach held by its defunct parent, NOLA, LLC, will be canceled and new stock issued to Scattered. Scattered will then pay South Beach an amount sufficient to enable it to use up the net operating losses, shielding the payment from taxes.

South Beach and NOLA filed bankruptcy petitions on April 27, 2005. After reviewing the petitions and schedules, this court made a preliminary finding that both cases should be dismissed under 11 U.S.C. § 1112(b), since both appeared to have been filed in bad faith. Neither case seemed to have any legitimate reorganizational objective: NOLA had no assets to sell or operation to preserve, and the point of the South Beach bankruptcy was to take advantage of South Beach's tax deduction. The U.S. trustee supported dismissal. Following briefing, both cases were dismissed.

South Beach (but not NOLA) appealed, and the district court reversed. See In re South Beach Securities, Inc., 341 B.R. 853 (N.D.Ill.2006). The district court acknowledged that Scattered was "likely an insider vis-à-vis South Beach" but concluded that there is no "blanket prohibition on insider creditors collecting on their debts" in bankruptcy. Id. at 857. Although there was "certainly a basis for concern" about South Beach's relationship with Scattered, the district court said, "more was needed" before the case could be dismissed. Id. at 858. The district court accordingly remanded the case for further proceedings in which the bad faith question could be revisited. Id.

On remand, however, the U.S. trustee chose not to pursue dismissal. Instead, he objected to South Beach's disclosure statement and plan on two grounds: (1) that no impaired, non-insider creditor class had accepted the plan, as 11 U.S.C. § 1129(a)(10) requires; and (2) that the principal purpose of the plan was avoidance of taxes in violation of 11 U.S.C. § 1129(d).

In January 2007, the court held a short evidentiary hearing on the adequacy of the disclosure statement and confirmation of the proposed plan. No officer or director of South Beach testified. The only witness was Leon A. Greenblatt, III, who signed South Beach's petition as its "authorized agent" and who is also an officer and director of creditor Scattered.

As discussed below, the U.S. trustee is correct on both his grounds for objecting to confirmation of the South Beach plan. The objection will therefore be sustained.¹

2. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). The confirmation of a chapter 11 plan is a core proceeding. 28 U.S.C. § 157(b)(2)(L).

3. Findings of Fact

The evidence presented at the plan confirmation hearing was sparse — partly because South Beach saw fit to offer very little evidence to support confirmation, but also because Greenblatt, the sole witness, was taciturn and uncooperative, purporting not to remember even basic information about himself and his affairs.² The facts, consequently, are sketchy at best.

Debtor South Beach Securities is a Mississippi corporation incorporated in 1984 (Ex. G),³ but Greenblatt was unable to say who had formed South Beach (Ex. A at 21). Its mailing address is 330 South Wells Street, Chicago, Illinois. (Tr. at 8). It has a single officer and director, one William Johnson. (Id. at 10). Johnson receives no compensation and has never received any. (Id.) According to Greenblatt, Johnson's only duty as an officer and director of South Beach is to occupy those positions. (Ex. A at 38). His qualification to act as an officer and director, Greenblatt said, is simply that "[h]is heart is beating." (Id.).

South Beach was once registered as a securities broker/dealer with the S.E.C (id. at 21), but it ceased to be registered some time after January 2001 (id. at 72). South Beach no longer conducts any kind of business (id. at 30-32; Tr. at 63), and the evidence did little more than hint that it had ever done so (see, e.g., Ex. A at 30-32) (stating that South Beach had certain "claims," including claims against Ernst & Young, and so implying that a business operation might have generated those claims). South Beach has no assets apart from net operating losses ("NOLs") in an unspecified amount. (Tr. at 9, 21, 35; Ex. A at 32-33). How South Beach produced the NOLs was not explained.

The sole shareholder. of South Beach is NOLA, LLC, a limited liability company (Tr. at 9) with a mailing address of 330 South Wells Street, Chicago, Illinois (Ex. A at 54).⁴ The members of NOLA include Greenblatt's father, Leon Greenblatt, II, James Nichols, and possibly Robert Jahelka. (Id. at 40). NOLA has no current business operation and has never had one. (Tr. at 65). NOLA has no assets and owns no property other than the stock of South Beach. (Id. at 65-66). Greenblatt described NOLA as "hopelessly insolvent" (Ex. A at 60), though how NOLA could have generated debts when it never had a business operation is unclear.

NOLA is managed (for want of a better term) by Teletech Systems, Inc., a nonmember of which Greenblatt is president. (Tr. at 32). Managing NOLA is Teletech's only function (Ex. A at 43), but NOLA does not pay Teletech for its services (id. at 55). Greenblatt is Teletech's only employee, and he, too, is unpaid. (Id. at 46-47) (stating that he receives only "a pat on [the] back"). Although he is Teletech's president and sole employee, Greenblatt claimed not to know who owns Teletech's stock (id. at 44-45), where its books and records are (id. at 45), whether it has a checking account (id. at 47), or where it banks (id. at 49). Like South Beach and NOLA — and Greenblatt (id. at 54) — Teletech's address is 330 South Wells Street, Chicago, Illinois. (Id. at 43).

On January 26, 2001, South Beach entered into an agreement with another entity, Loop Corp., entitled "Subordinated Loan Agreement for Equity Capital." (Ex. B). Under the agreement, Loop lent South Beach $2,198,326. (Id. at 1). The loan was to be repaid five years later and during the interim would accrue 12% interest annually. (Id.). According to the agreement, the loan was to be used as part of South Beach's "capital." (Id. at 1; see also Ex. A at 70). Asked how South Beach found Loop as a lender, Greenblatt testified that he "arranged" it. (Ex. A. at 67). Asked what that meant, he said only that he "participated in the funding of the loan" and did not elaborate further. (Id.). Greenblatt executed the agreement on behalf of South Beach as an "authorized person." (Ex. B at 5; Tr. at 34). Andrew A. Jahelka executed the agreement on Loop's behalf.⁵ (Ex. B at 5; see also Ex. A at 69-70).

The same year that Loop lent South Beach $2,198,326, South Beach lent NOLA a "significant" amount of money, probably $3.2 million.⁶ The purpose of the loan was to enable NOLA to buy the stock of a company called Health Risk Management ("HRM"). (Ex. A at 57-58).

On December 31, 2002, Loop and another entity, Scattered Corporation, executed an "Assignment and Sale of Loan." (Ex. C). Under the document, Loop assigned to Scattered its interest in the January 2001 loan agreement with South Beach in return for $100,000. (Id.; see also Ex. A at 77, 83). Greenblatt is an officer and director of Scattered. (Tr. at 11; Ex. E). The other officers and directors are Andrew Jahelka and Richard Nichols.⁷ (Tr. at 11-12; Ex. E). The shareholders of Scattered are Tejie, Inc., Giddy-up, Inc. and an Illinois investment trust the beneficiaries of which are Greenblatt's father and children. (Tr. at 30). Scattered's mailing address is 330 South Wells Street, Chicago, Illinois. (Ex. D, Sched.F). Andrew Jahelka executed the assignment as president of Loop, and Greenblatt did so as secretary of Scattered. (Ex. C at 2; see also Ex. A at 82).

South Beach filed its schedules and statement of financial affairs several days after its April 2005 bankruptcy petition. (Ex. D). The schedules reflected no assets of any kind except HRM stock with a value of "0.00." (Ex. D, Sched. B. at 2). (How South Beach ended up with HRM stock, when it was South Beach that had loaned NOLA money to buy HRM stock, was not explained.) The schedules and statement of financial affairs indicated that South Beach had no business operation: according to the latter, South Beach had had "no income for [the] last two years."⁸ (Ex. D, Stmt. of Fin. Affairs at 1). The schedules disclosed a single creditor, Scattered, with an unsecured claim of $3,297,489. (Ex. D, Sched.F). The petition and schedules were signed by Greenblatt as "Authorized Agent." (Ex. D, Pet. at 2, Decl. concerning Debtor's Scheds., Stmt. of Fin. Affairs at 7).

In September and October 2006 (following remand from the district court), South Beach filed its proposed disclosure statement and plan of reorganization. (Docket Items Nos. 83, 89). The plan establishes two classes of creditors. Class 1, "General Unsecured Claims," has one member: Scattered. (Plan at 13). Class 2, ...