In re Strategic Labor, Inc.

• Citation: 56 Bankr.Ct.Dec. 39,467 B.R. 11,109 A.F.T.R.2d 2012
• Decision Date: 05 March 2012
• Docket Number: No. 10–43245–MSH.,10–43245–MSH.
• Parties: In re STRATEGIC LABOR, INC., Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

109 A.F.T.R.2d 2012-1361

467 B.R. 11

56 Bankr.Ct.Dec. 39

In re STRATEGIC LABOR, INC., Debtor.

No. 10–43245–MSH.

United States Bankruptcy Court,D. Massachusetts,Central Division.

March 5, 2012.

The Gordon Law Firm, Boston, MA, for Debtor.

Rebecca Israel, United States Department of Justice, Washington, DC, for Internal Revenue Service.

MEMORANDUM OF DECISION ON MOTION OF THE UNITED STATES FOR ADEQUATE PROTECTION, ACCOUNTING, DISGORGEMENT, AND PAYMENT; AND MOTION AND AMENDED MOTION OF THE DEBTOR FOR RECOVERY PURSUANT TO 11 U.S.C. § 506(c)

MELVIN S. HOFFMAN, Bankruptcy Judge.

This matter offers an object lesson in how not to run a chapter 11 case. The dispute between the Internal Revenue Service and the debtor, Strategic Labor, Inc., is embodied in the following motions now under consideration: Creditor United States' Motion For Adequate Protection, Accounting, Disgorgement, And Payment Of The United States' Prepetition Tax Claim [Docket # 87]; Motion Of Debtor In Possession For Recovery Pursuant To 11 U.S.C. § 506(c) Of The Reasonable And Necessary Costs And Expenses Of Preserving And Disposing Of Property Securing The Secured Claim Of The Internal Revenue Service For Its Benefit [# 99]; and Amended Motion Of Debtor In Possession For Recovery Pursuant To 11 U.S.C. § 506(c) Of The Reasonable And Necessary Costs And Expenses Of Preserving And Disposing Of Property Securing The Secured Claim Of The Internal Revenue Service For Its Benefit [# 116]. None of the motions would have been necessary had Strategic Labor and its counsel administered this case with more care and candor or if the IRS had stepped in earlier to assert its rights. The IRS has offered a plausible although, with the benefit of hindsight, not necessarily a superlative explanation for its apathy. The conduct of the debtor and its counsel, on the other hand, defies justification.¹

Background

The relevant facts are not in dispute. On June 28, 2010 Strategic Labor, a company which developed, distributed and supported automated workforce scheduling software, filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code ² for the stated purpose of consummating a sale of its assets. Strategic Labor's counsel on the petition date and throughout this case was The Gordon Law Firm LLP. A few days after the bankruptcy filing, on July 2, 2010, Infor Global Solutions (Michigan), Inc., a reseller of Strategic Labor's software, entered into an asset purchase agreement (the “APA”) with Strategic Labor pursuant to which Infor agreed to acquire substantially all the company's assets, excluding cash, accounts receivable and “work-in-progress accounts receivable,” ³ for a purchase price of $200,000. On the same day Strategic Labor filed its motion to sell the assets to Infor or the highest bidder free and clear of liens pursuant to Bankruptcy Code § 363.

According to the schedules of assets and liabilities filed by Strategic Labor to support its bankruptcy petition, the company had assets valued at $112,137.53 on the petition date consisting primarily of accounts receivable valued at $103,141.29. Schedule D entitled “Creditors Holding Secured Claims” listed a single creditor, Balboa Capital, holding a secured claim in the amount of $18,000. The schedule described Balboa Capital's collateral as “workforce scheduling product development software” of “undetermined value.” ⁴ Strategic Labor did not list the IRS as a secured creditor but rather scheduled the IRS's claim as a priority unsecured claim in the amount of $491,594.62 on schedule E along with the wage claims of certain employees, including members of the Gondek family. The family wage claimants were Michael Gondek, the debtor's president and 20% shareholder; James Gondek, the debtor's secretary and 50.5% shareholder; Richard Gondek, the debtor's director of professional services and 27% shareholder; and Daniel Gondek, whose primary duties have been described as handling customer support. James is the father of Michael, Richard and Daniel. All are insiders as defined in Bankruptcy Code § 101(31)(B).

Despite listing the IRS in its schedules as an unsecured priority creditor, in its statement of financial affairs (the “SOFA”) accompanying the schedules Strategic Labor represented that the IRS had placed a tax lien on its assets in the amount of $492,569.28, an amount slightly higher than the amount stated in schedule E.

It is also to be noted that while schedule H of Strategic Labor's schedules of assets and liabilities did not list any co-debtors for any of the company's obligations, the IRS has alleged and the debtor has not denied that James, Michael and Richard Gondek were individual guarantors of the Balboa Capital debt.

Not only are the schedules incomplete and inconsistent with the SOFA they are also inconsistent with statements in the affidavit of Michael Gondek filed in support of first day motions on June 30, 2010 (the “Gondek Affidavit”). According to the affidavit, the debtor had, as of the petition date, “(i) cash on hand of $4,650; (ii) accounts receivable of $103,141.21; and (iii) anticipated future billings in open software contracts of $184,095.00” for a total asset valuation of $291,886.21. Mr. Gondek also stated that:

14. Prior to the Petition Date, the Debtor granted a security interest in substantially all of its assets to Balboa Capital (“Balboa”) to secure financing in the amount of approximately $128,000 provided by Balboa for the debtor's product development initiatives in 2008. To perfect its security interest in the Debtor's assets, Balboa filed a UCC–1 Financing Statement under the name Carbaldav on January 30, 2008. As of May 31, 2010, the approximate amount owed to Balboa by the Debtor was $18,633.86.

[and]

16. As of the Petition Date, the Internal Revenue Service held tax liens of $469,004.94 against the Debtor's assets resulting from the Debtor's alleged failure to make payroll tax payments in parts of 2007 and 2008. Of the total liens as of May 31, 2010, $290,859.17 is attributed to tax, $145,703.16 is attributed to penalties, and $32,482.61 is attributed to interest.

Mr. Gondek's affidavit, filed two days after the bankruptcy petition and prior to the schedules and SOFA, materially contradicts the schedules as to the extent of Balboa's security interest in Strategic Labor's assets, the value and description of those assets and the status of the IRS as a secured creditor. ⁵

On June 30, 2010 Strategic Labor filed an “Emergency Motion for Entry of Interim and Final Orders (1) Approving Post–Petition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, 364 and 507, (2) Granting Liens and Providing for Superpriority Administrative Expense Status, (3) Modifying the Automatic Stay, and (4) Scheduling a Final Hearing” (the “DIP motion”) seeking to borrow up to $50,000 from Infor, the stalking horse bidder under its sale motion. In the DIP motion Strategic Labor acknowledged the IRS's lien stating:

Approximately six (6) months ago, the Debtor and the Lender [Infor] began discussing the purchase by the Lender of certain of the Debtor's assets. Shortly thereafter, and during the Lender's due diligence, the Debtor learned for the first time that it had substantial payroll tax liens of $470,000.

On July 7, 2010, I entered an interim order and on July 22, 2010 a final order allowing the DIP motion which authorized Strategic Labor to borrow up to $50,000 from Infor (the “DIP loan”) and granted Infor a security interest in all of the debtor's property subject to “existing, valid, prior, and otherwise unavoidable, perfected liens and security interests....” Neither the DIP Motion nor the order referred to Balboa Capital or the IRS by name but the order clearly subordinated Infor's security interest to their liens to the extent valid. The DIP Motion did not include nor was it accompanied by a request to use cash collateral of any secured creditor; in fact, Strategic Labor acknowledges that it never made such a request at any point in this case. Indeed, the DIP motion proclaimed that Strategic Labor had no intention of using either the IRS's or Balboa's cash collateral. Paragraph 16 of the DIP motion states:

Approval of the DIP Facility will provide the Debtor with immediate and ongoing access to borrowing availability to pay its operating expenses, including post-petition wages, as well as to satisfy the costs of administration of this case.

The IRS was served with a copy of the DIP motion and did not object to it.

On August 18, 2010, the IRS filed a proof of claim in the amount of $491,505.37 arising from Strategic Labor's failure to remit payroll taxes to the IRS. The IRS asserted a security interest in all of Strategic Labor's personal property. Attached to its proof of claim was a schedule setting forth a series of federal tax liens for tax periods in 2007 and 2008, notices of which had been filed between December 24, 2009 and January 28, 2010 in the United States District Court for the District of Massachusetts in accordance with 26 U.S.C. § 6323(f)(1)(A)(ii).⁶

According to its monthly operating reports filed with the United States trustee,⁷ Strategic Labor received a total of $41,000 in DIP financing from Infor.⁸ Strategic Labor repaid the DIP loan in full during the bankruptcy. Paragraph 9 of the final order approving the DIP motion provides for the loan to be repaid out of the proceeds of the sale of the debtor's assets. The term sheet for the DIP loan provides that the loan would serve as Infor's deposit for the purchase of the assets. Neither of these provisions was complied with. Instead, the debtor's monthly operating report for the month of August 2010 indicates that during that month Strategic Labor, using cash in its general operating account, repaid Infor by check in the amount of $1,000 and by electronic transfer in the amount of $40,388.61. The monthly operating report described both payments as “Repay DIP Financing.”

As indicated...