United States District Court, N.D. Illinois, Eastern Division
880 S. ROHLWING ROAD, LLC, Appellant,
T&C GYMNASTICS, LLC, Appellee. Bankruptcy No. 16-14993
MEMORANDUM OPINION AND ORDER
ST. EVE, DISTRICT COURT JUDGE
880 S. Rohlwing Road, LLC has appealed from the order of the
bankruptcy court denying its motion to dismiss the Chapter 11
filing of Debtor-Appellee T&C Gymnastics, LLC as a
bad-faith filing. Appellant has also moved the Court to
withdraw the reference of the underlying bankruptcy
proceeding. (R.1, R.9). For the reasons set forth below, the
Court declines to exercise jurisdiction over Movant's
interlocutory appeal and denies without prejudice its motion
to withdraw the reference.
2, 2016, Debtor T&C Gymnastics, LLC filed a voluntary
Chapter 11 Bankruptcy Petition in the United States
Bankruptcy Court for the Northern District of Illinois,
Eastern Division, Case No. 16-14993. (R.1-4, Bankruptcy Dkt.
at R.1). On May 10, 2016, Movant 880 S. Rohlwing Road, LLC
moved to dismiss the case as a bad-faith filing.
(Id. at R.13). The Bankruptcy Court reviewed the
briefing and heard oral argument on June 22, 2016, after
which it denied the motion following a discussion of
“bad faith” factors pertinent to an 11 U.S.C.
§ 1112(b) dismissal analysis. (Id. at R.45;
R.10; R.12-1, A000011-43 (the “Hearing
Transcript”)). The Bankruptcy Court denied the motion
without prejudice, noting, “[i]t may be . . . that this
case was filed in bad faith, but I don't have the showing
that I need to rule on that today.” (Id. at
A000031-33 (“I agree with the movant that there are
certainly questions regarding the validity and treatment of
the pre-petition appraisal . . . But right now there's
not enough for me . . . to simply make what are very deep
findings with respect to the nature of these
transfers”). The Bankruptcy Court issued a written
order on July 13, 2016, certifying that there was “no
just cause for delay of enforcement or appeal of this
ruling.” (R.1-4, Bankruptcy Dkt. at R.53; R.1-3). On
July 28, 2016, 880 S. Rohlwing Road, LLC filed the present
appeal. (R.1). On September 7, 2016, following reassignment
pursuant to Local Rule 40.4, 880 S. Rohlwing Road, LLC filed
the present motion to withdraw the reference. (R.9).
Pre-Petition History of Debtor and Its Principals
Aerial Gym Stars, Inc.
principal members are Tony and Carol Whitaker, residents of
Addison, Illinois. (R.12-1, A000071-72). In February 2005,
the Whitakers filed for Chapter 7 protection and received a
discharge from the bankruptcy court. Prior to receiving this
discharge, however, the Whitakers formed an Illinois
corporation called Aerial Gym Stars Enterprises, Inc.
(Id. at A000310-40). In September 2005, their
previous corporation-Aerial Gym Stars, Inc.-filed for
bankruptcy, listing no significant real or personal property
in its petition. (Id. at A000341-64). In
Movant's view, “[i]t is entirely possible that the
business assets of Aerial Gym Stars were already being used
by the new business under the name of Aerial Gym Stars
Enterprises, Inc.” (R.12, Appellant Br. at 7).
Aerial Gym Stars Enterprises, Inc.
November 2010, Aerial Gym Stars Enterprises, Inc.
(hereinafter, “Aerial”) entered into a commercial
lease agreement with Movant, 880 S. Rohlwing Road, LLC.
(R.11-1). Aerial operated a gymnastics school on that
property and generated gross revenues of over $1 million in
2013. (R.11-2). In September 2013, however, Aerial began
defaulting on its lease payments- exceeding $20, 000 per
month-and Movant commenced eviction proceedings.
(Id.; R.11-5, Answer to Compl. ¶¶ 7-8;
see also R.7-6 at 461-62). On September 29, 2014,
Aerial filed a voluntary Chapter 11 Bankruptcy Petition in
the United States Bankruptcy Court for the Northern District
of Illinois, Eastern Division, Case No. 14-35241. On December
10, 2014, the bankruptcy court granted Movant's request
to lift the automatic stay, and to allow the eviction action
to proceed, in light of Aerial's failure to meet
post-petition lease obligations as required under 11 U.S.C.
§ 365. (R.12-1, A000367-69). The bankruptcy court
thereafter dismissed the case on motion by the U.S. Trustee.
(Case No. 14-35241, R.40). On February 11, 2015, Movant filed
a Verified Complaint for Forcible Entry and Other Relief in
the Circuit Court of DuPage County. (R.12-1, A000103-08). The
Circuit Court entered judgment in Movant's favor in the
amount of 259, 590.41 on April 1, 2015 (the
“Judgment”). (Id. at A000109).
T&C Gymnastics, LLC
March 13, 2015-two weeks before the Judgment-the Whitakers
formed Debtor, T&C Gymnastics, LLC. (R.11-3, Whitaker
Aff. ¶ 2). Coincident with its formation, Debtor
purchased the assets of Aerial in exchange for a promissory
note in the amount of $29, 481.85. (R.11-4, Promissory Note,
Dated Effective March 13, 2015; see also R.12-1,
A000278-93, Asset Purchase and Sale Agreement). These assets
included cash, miscellaneous gymnastics equipment, service
contracts, and five automobiles. (R.1-4, Bankruptcy Dkt. at
R.1; R.12-1, A000056-59). Movant-citing an initial valuation of
Aerial's business by Debtor's appraiser- argues that
Aerial transferred “valuable assets worth at least
$280, 000.” (R.15, Appellant Reply Br. at 15 (citing
R.12-1, A000471 (Apr. 17, 2015 E-mail from Appraiser Michael
Strelka to Attorney Michael Polachek (“The value
arrived at is $280, 000”)). Debtor, however, argues
that “the assets of Aerial had no value[.]”
(R.14, Appellee Br. at 6; see also R.11, Response
Br. at 2 (“After obtaining an appraisal showing that
the assets of Aerial were worthless, Debtor purchased the
assets of Aerial in exchange for a promissory note in the
amount of $29, 481.85”)). Indeed, e-mail correspondence
reflects that-after Debtor's counsel questioned the
appraiser's underlying rent assumptions and associated
computations, including a future rent projection, and after
additional review throughout April and May 2015-Debtor's
counsel asked the appraiser to “[p]lease go ahead and
issue your findings that Aerial has a zero value.”
(R.12-1, A000468-71; see also R.7-7 at 534 (“I
estimate that the value of [Aerial] would be -0- under either
the income method of valuation, or under the net asset method
of valuation”)). Aerial “shut down” in
March 2015. (R.12-1, A000392 (Whitaker Dep. Tr. at 22)).
from the Promissory Note, Debtor gave no other consideration
in exchange for the transfer of Aerial's assets.
(Id. at A000402 (Whitaker Dep. Tr. at 32
(“[Q]. Was there anything other than the promissory
note which to this date . . . has not been paid? [A]. None
that I know of”)). The Promissory Note, moreover, is
not payable until the balance remaining on a preexisting
promissory note held by Tony Whitaker's father (the
“Whitaker Note”) is less than $25, 000. (11-4,
Promissory Note). According to Debtor, Tony Whitaker's
father “had loaned various amounts of money to Aerial
for the original purchase of its gymnastics equipment
and… held an existing UCC lien on substantially all of
the assets of Aerial.” (R.11, Response Br. at 2). Under
the terms of the Asset Purchase and Sale Agreement, Debtor
assumed Aerial's liability on the Whitaker Note. (R.12-1,
A000279 at § 1.5 (“No liabilities of Seller shall
be assumed by Purchaser except (i) the obligation to pay to
William and Janice Whitaker pursuant to the terms of a Demand
Promissory Note and Security Agreement dated April 17, 2014
secured by the gymnastics equipment of Seller perfected with
UCC lien number 019395081 . . . .”)).
to Movant, between Debtor's formation and its bankruptcy
filing, Tony Whitaker provided “damaging testimony in a
citation examination” arising from the Judgment, which,
in turn, “led to the filing of an alter ego
complaint” against Debtor. (R.12, Appellant Br. at 19
(citing A000167-74 (testimony concerning the personal use of
Aerial funds)). In particular, Movant filed a lawsuit in the
Circuit Court of DuPage County against Aerial, Debtor, and
the Whitakers, alleging that Debtor was a successor to Aerial
and that the Whitakers were mere alter egos of Aerial (the
“Successor Liability Litigation”). (R.11-5,
Answer to Compl; see also R.7-9 at 641-54 (same)).
According to Tony Whitaker, Movant conducted discovery
throughout 2015-2016 and rejected several offers to resolve
the Successor Liability Litigation. Because “Debtor
could not continue to pay substantial legal costs in
defending the case” while also paying its creditors and
employees, Debtor filed the present bankruptcy case. (R.11-3,
Whitaker Aff. ¶¶ 4-8; R.7-7 at 520-21 (same);
R.12-1, A000395 (Whitaker Dep. Tr. at 25 (“We also have
a business loan [from] Direct Capital that we were trying to
pay and we could not”)).
Gymnastics “operates a gymnastics school in Itasca,
Illinois and services day cares and park districts throughout
the Chicagoland area.” (R.11-3, Whitaker Aff. ¶ 2;
see also R.7-6 at 462-63). It has over 20 employees,
plus the Whitakers. (Id.). Debtor has operated at a
profit since its formation, earning net income of $40, 987
for the year 2015 and net income of $33, 012.54 for the first
five months of 2016. (Id. ¶ 3; R.7-6 at
453-56). As of June 2016, Tony Whitaker expected Debtor to
generate $800, 000 in gross revenue for 2016. (R.12-1,
A000387 (Whitaker Dep. Tr. at 17)). In Debtor's view,
part of its profitability stems from the
“reasonableness” of its commercial lease with its
Itasca landlord, West Suburban Industrial SDCO, Inc.,
pursuant to which it pays less than $14, 000 per month in
rent. (R.14, Appellee Br. at 7; R.7-2 at 85-125)).
2, 2016, Debtor filed for Chapter 11 protection. On June 10,
2016, Debtor filed its Plan of Reorganization
(“Plan”) and Disclosure Statement. (R.11-7,
R.11-8; see also R.7-7 at 539-69). The Plan lists
seven classes of creditors, including: (1) William Whitaker;
(2) Direct Capital Corporation; (3) Mercedes Benz Financial
Services; (4) Internal Revenue Service; (5)
“Unsecured Claim” of Aerial; (6) “Unsecured
Claims of Attorneys;” and (7) “Contingent,
Unliquidated and Disputed Claim” of Movant. With
respect to payments, the Plan proposes to pay Movant
“monthly payments of $432.65 for a period of 60 months
for a total distribution of 10% of its alleged claim, ”
while paying Debtor's secured creditors in full and
paying its general unsecured creditors “100% of their
allowed claims.” (R.11-7, Plan at 3-5 (“Rohlwing
does not have a judgment against the Debtor and the Debtor
disputes the claim”)). Secured creditor Direct Capital
Corporation-which holds a security interest in Debtor's
assets pursuant to a UCC lien-has agreed to vote in favor of
the Plan. (R.11-9; see also R.7-8 at 597 (same)). On
September 7, 2016, the bankruptcy court compelled Debtor to
assume its lease with West Suburban Industrial SDCO, Inc.
(R.11-11, Order Compelling Debtor to Assume Unexpired Lease).
the June 2, 2016 creditor meeting held pursuant to 11 U.S.C.
§ 341, Tony Whitaker confirmed that he and four other
family members have drawn a salary or wage from Debtor since
its formation, in addition to other benefits, such as health
insurance, dental insurance, the personal use of one
automobile, and a timeshare in Florida. (R.12-1, A000377-80,
A000396-400 (Whitaker Dep. Tr. at 7-10, 26-30)). Whitaker was
not able to confirm the “exact total” of such
compensation. (Id. at A000397-98). During the
creditors' meeting, counsel for Movant also confronted
Whitaker with documents-produced in the Successor Liability
Litigation-suggesting an overlap between Aerial, Debtor, and
the Whitakers. (Id. at A000403-06 (Whitaker Dep. Tr.
at 33-37)). Whitaker disclaimed knowledge of such documents
and pressed the separateness of Debtor and Aerial.
(Id. (“[Q]. And that was negotiated between
T&C and Aerial; is that correct? [A]. Yes. [Q]. Were they
two different companies? [A]. Yes”)).
Jurisdiction over ...