MOTION OF THE UNITED STATES TRUSTEE FOR APPOINTMENT OF A CHAPTER 11 TRUSTEE
Doc 156
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF KENTUCKY
Lexington Division
In re:
PLASTICON INTERNATIONAL,INC.
Debtor.
Case No. 07-50934
Chapter 11
MOTION OF THE UNITED STATES TRUSTEE
FOR APPOINTMENT OF A CHAPTER 11 TRUSTEE
Richard F. Clippard, United States Trustee, by counsel, moves this Court pursuant to section 1104 of the Bankruptcy Code, 11 U.S.C., for entry of an Order directing the appointment of a chapter 11 trustee, and in support thereof states as follows:
NOTICE
Please take Notice that this Motion will be heard by the Court on August 28, 2007 at 2:00 p.m. in the U.S. Bankruptcy Courtroom, 100 East Vine Street, 3rd Floor, Lexington, Kentucky.
Jurisdiction and Background of Case
1. Subject matter jurisdiction exists pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding.
2. The United States Trustee has standing to bring this matter under 28 U.S.C. § 586 and 11 U.S.C. § 307.
3. On May 16, 2007, Plasticon International, Inc. (“Plasticon”) filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. On the same date, one of Plasticon’s wholly-owned subsidiaries, Pro-Mold, Inc. (“Pro-Mold”) also filed for chapter 11 relief with this Court.
1All references to Forms 10-K, 10-Q, etc. refer, unless otherwise indicated, to Plasticon’s public reports filed with the Securities and Exchange Commission and available on the EDGAR database at www.sec.gov.
4. Plasticon was incorporated in Delaware in 1981 and re-domiciled in Wyoming in 2004. Plasticon was formerly known as Wicklund Holding Company, but a name change to Plasticon International, Inc. was approved in the third quarter of 2004. The shares of Plasticon are publicly traded through the “Pink Sheets” market under the symbol “PLNI” (now “PLNIQ”). 2004 Form 10-K1 at 7, 10, attached hereto and incorporated herein as Exhibit 1.
5. For all relevant periods, James N. Turek Sr. (“Turek”) was the President, Chief Executive Officer, a Director, and stockholder of Plasticon.
6. Plasticon is ostensibly “engaged in the business of designing, producing, and distributing high-quality concrete accessories (rebar supports), informational and directional signage, and plastic lumber, which are all produced from recycled and recyclable plastics.” 2005 Form 10-K at 4, attached hereto and incorporated herein as Exhibit 2.
Facts
The facts of this case provide more than ample “cause” to appoint a chapter 11 trustee, and appointment of a chapter 11 trustee will be in the best interests of creditors and equity holders. Plasticon has been a business rife with mismanagement or incompetence (at a minimum). Plasticon, a publicly traded company, suffers from nonexistent to low revenues and extremely high expenses. A related party, LexReal, inexplicably and possibly impermissibly diverted loan and stock commitment proceeds. This poor performance was compounded by transfers to related parties and concealed by tardy public filings and misleading press releases. The ownership of its major asset–its patents–is in doubt. Since filing, Plasticon has failed to comply with this Court’s Operating Order and has obtained unauthorized financing and engaged in unauthorized payment of pre-petition debt. Finally, Plasticon’s President and CEO, James N. Turek Sr., is unfit to serve as a fiduciary because he omitted key assets and transactions in his own personal bankruptcy case.
I. PLASTICON’S ABYSMAL FINANCIAL PERFORMANCE
7. The operations of Plasticon have suffered from a lack of revenue and extremely high expenses. The following summarizes the operations of Plasticon for the years ending December 31, 2003, 2004, 2005 and the nine months ending September 30, 2006:
2003 2004 2005 2006 (9 months) Revenue $0 $0 $65,565 $4,761,839
Cost of goods sold $0 - $0 - $94,227 - $3,703,192
Gross profit $0 - $0 - ($28,662) - $1,058,647
Selling, general and administrative expenses
$741,072 - $969,481 - $10,819,104 - $5,130,698
Compensation expense (stock issuances)
$0 - $72,478,628 - $21,139,784 - $14,846,168
Other income (expense)
($405,437) - ($200,446) - $327,646 - ($355,273)
Net loss ($1,146,509) - ($73,648,555) - ($31,659,904) - ($19,273,492)
Exhibit 1 at F-3; Exhibit 2 at F-4; 3d Qtr. 2006 Form 10-Q at F-3, attached hereto and incorporated herein as Exhibit 3.
2The entities include LexReal Co. LLC, Promotional Containers, inc., and TelcoBlue, Inc. Exhibit 3 at F-13 to -14. In addition, Turek’s children, James N. Turek II and Brandon Turek, allegedly made loans to Plasticon. Id. at F-14.
8. Plasticon’s financial performance was further hampered by the diversion of funds to Turek-controlled2 entities. During 2005, Plasticon raised proceeds through commitments to issue 199,464,884 free-trading shares of Plasticon stock. These proceeds, however, were diverted to LexReal Co. LLC (“LexReal”). Exhibit 2 at F-17. LexReal is a Kentucky Limited Liability Company owned by Turek. Id. While LexReal later purportedly provided services to Plasticon to reduce the amount owed, Id., the diversion is still highly suspect.
9. Another diversion of funds occurred in 2005 but was not discovered until the fourth quarter of 2006: “During the fourth quarter 2006, the Company identified $720,000 in
term debt that was incurred in 2005. Proceeds from the borrowings were deposited with LexReal. The loans were booked and offset against amounts owed to LexReal, with no increase in debt. The loans have been called, requiring the Company to provide 270,296,888 of common shares in satisfaction of the notes. On October 29, 2006, the shares were issued at a cost of $162,178. The Company is in the process of determining the impact on 2005 financial statements and will make the necessary entries in completing the accounting for 2006.” Exhibit 3 at F-16.
To date, Plasticon has not restated its financial statements for 2005.
10. Finally, on May 14, 2007, two days before Plasticon and Pro-Mold filed their petitions, Pro-Mold wired $100,000 to LexReal. Pro Mold, Inc., Cash Receipts and Disbursements Ledger, attached hereto and incorporated herein as Exhibit 4.
11. The bleak outlook for shareholders was compounded by the substantial dilution of
common stock that occurred from 2003 to the third quarter of 2006:
Date # shares outstanding
12/31/03 37,856,600
12/31/04 1,440,476,371
12/31/05 2,164,757,608
9/30/06 5,457,675,699
Exhibit 1 at F-4; 2005 Exhibit 2 at F-5; Exhibit 3 at F-4. Upon information and belief, insiders (primarily Turek) were the primary recipients of the newly-issued shares.
II. PLASTICON’S POOR PERFORMANCE WAS CONCEALED THROUGH DELAYED PUBLIC REPORTING AND MISLEADING PRESS RELEASES
12. Plasticon, as a publicly-traded corporation, was required to file certain public reports with the Securities and Exchange Commission. These reports included Annual Reports (Form 10-K), Quarterly Reports (Form 10-Q), and a Current Report (Form 8-K) of certain activities.
13. Plasticon filed Annual Reports for 2005 and 2004. Upon filing, Turek certified that the “information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.” Exhibit 1 (Exhibit 32.2); Exhibit 2 (Exhibit 32.1).
3Shorter deadlines are applicable to “large accelerated” and “accelerated” filers. Upon information and belief, Plasticon was not subject to these shorter deadlines.
4As of July 31, 2007.
14. The deadline3 for filing Form 10-K is 90 days after the end of the fiscal year. The deadline for Form 10-Q is 45 days after the end of the fiscal quarter. See Securities and
Exchange Commission, General Instructions for Forms 10-K and 10-Q.
15. Plasticon routinely filed its public reports late, as set forth below:
Form Period covered Due date When filed Days overdue
10-K yr. ending 12/31/04 3/31/05 5/4/06 399
10-Q 1st Q 2005 5/15/05 7/27/06 438
10-Q 2d Q 2005 8/15/05 7/27/06 346
10-Q 3d Q 2005 11/15/05 7/31/06 258
10-K yr. ending 12/31/05 3/31/06 9/8/06 161
10-Q 1st Q 2006 5/15/06 1/24/07 254
10-Q 2d Q 2006 8/15/06 3/6/07 203
10-Q 3d Q 2006 11/15/06 3/15/07 120
10-K yr. ending 12/31/06 3/31/07 -- 1224
10-Q 1st Q 2007 5/15/07 -- 774
See www.sec.gov EDGAR Database for Plasticon International, Inc.
16. In addition to this record of poor financial performance and tardy public filings, Plasticon issued numerous misleading press releases.
17. In 2004, Plasticon made a series of public announcements that did not come to pass:
a On June 17, 2004, Plasticon announced that it had received three orders for a Washington, D.C. project;
b On June 23, 2004, Plasticon announced that it projected an increase in revenues due to deliveries to their national distributor, Georgia Pacific;
c On July 6, 2004, Plasticon announced modified favorable projections of revenue;
d On July 26, 2004, Plasticon announced that it had received $40,000 in revenue from delivery of rebar support products; and
e On December 14, 2004, Plasticon announced that it was beginning to ship product to the BlueLinx distributors.
Exhibit 1 at 12-13.
18. In its 2004 Form 10-K, however, which was not filed until May of 2006, Plasticon painted a bleaker view, stating that these announcements did not pan out because of “faulty resins” causing product recall prevented delivery of the promised products. Id.
19. On June 17, 2005, Plasticon caused a press release to be issued entitled “Plasticon Announces Company is Profitable as of Second Quarter 2005.” In the release, Turek is quoted as follows:
‘Our momentum has been incredible over the last few months,’ said Jim Turek, President and CEO of Plasticon International, Inc. ‘As the technology leader of the recycled plastics sector, we developed several major innovations which led to substantial cost savings and leaps in productivity. We announced our exclusive contract with the largest building materials distribution company in the U.S., which makes us the largest supplier of rebar supports in the country. . . . All of these developments contributed to our profitability. So we are thrilled to announce that Plasticon International is profitable as of the second quarter of 2005.’
Exhibit 5, attached hereto and incorporated herein. Significantly, there is no mention of the “faulty resins” and product recalls.
20. Plasticon’s tardy public filings belied Turek’s rosy projections:
Three months ended June 30, 2005
Revenue $ 135,244.00
Cost of Goods Sold $ 414,892.00
Gross profit (loss) $ (279,648.00)
Total operating expenses $ 3,066,666.00
Loss from operations $ (3,346,314.00)
Total other income (expense) $ 328,247.00
Net income (loss) $ (3,018,067.00)
2d Qtr 2005 Form 10-Q at F-3 (filed July 27, 2006), attached hereto and incorporated herein as Exhibit 6.
III. PLASTICON’S QUESTIONABLE OWNERSHIP OF VALUABLE PATENTS
21. On September 12, 2005, Plasticon caused a press release to be issued entitled “Plasticon Receives Patent Confirmation for PAC Chair III–Plasticon’s Patents Now Valued at $20 Million.” This press release stated that Plasticon “has recently received confirmation of the company’s patent for the PAC Chair III product.” It also stated:
According to an independent appraiser and the federal courts, Plasticon’s recycled plastic product patents are valued at $20 million. Additionally, since the inception of the company, Plasticon has built an inventory of injection molds that the company owns outright, which are presently valued at over $10 million.
5Upon information and belief, Patent “DES. 324,643” refers to U.S. Patent No D324,643, and Canadian Patent “D500,243” refers to U.S. Patent No. D500,243.
Exhibit 7, attached hereto and incorporated herein.
22. In response to Question 22 of Schedule B to the Petition, Plasticon states that it owns the following patents:
a “Patent No. 4,942,714 Slab Bolster U.S.”
b “Patent No. 1,317,474 Slab Bolster Canada”
c “Patent No. DES. 324,643 High Chair U.S.”
d “Patent No. D500,243 High Chair Canada”5
Plasticon states that the value of these patents is “unknown” in contrast to the September 12, 2005 press release, which values the patents at $20 million.
23. A review of the Patent Assignment Abstract of Title available at the website of the Patent Office (www.uspto.gov) for these patents indicates that the present record owner of U.S. Patent Nos. 4,942,714 and D324,643 is Promotional Containers, Inc. (“PCI”), not Plasticon.
Patent Assignment Abstract of Title, Patent No. 4,942,714, attached hereto and incorporated herein as Exhibit 8; Patent Assignment Abstract of Title, Patent No. D324,643, attached hereto and incorporated herein as Exhibit 9. Turek owns and is the President of PCI. Exhibit 1 at F-13.
24. Similarly, the record owners of patent D500,243, which upon information and belief is the “PAC III Chair” referenced in the September 12, 2005 press release, are James N. Turek II and Brandon D. Turek. Patent Assignment Abstract of Title, Patent No. D500,243, attached hereto and incorporated herein as Exhibit 10.
6The final Assignment and Royalty Agreement between IPI, Dow Credit Corporation and Dow Chemical Company does not mention IPC. Form 8-K (filed Apr. 16, 1999), attached hereto and incorporated herein as Exhibit 13.
25. The Canadian Intellectual Property Office lists “International Plastics, Inc.” (“IPI”) as the owner of Canadian Patent 1,317,474. Canadian Patents Database, CA 1317474, attached hereto and incorporated herein as Exhibit 11.
26. The Abstracts of Title for 4,942,714 and D324,643 reflect that PCI received the patents from “International Plastics Corporation” (“IPC”) in 2004. Exhibits 8-9.
27. Pursuant to the Assignment Abstracts of Title, IPC previously received these patents from IPI in 1999. Id.
28. IPI had filed for relief under chapter 11 of the Bankruptcy Code in this Court in 1992. Case No. 92-52264-jl (filed Dec. 18, 1992). Turek was the corporate representative and, upon information and belief, was a corporate officer, director, and majority shareholder.
29. Pursuant to an Agreed Order entered on July 17, 1998 in the IPI bankruptcy case, IPI’s patents were held by the Clerk of Court in escrow for the benefit of Dow Credit Corporation unless IPI complied with certain terms. Exhibit 12. Upon compliance, the patents would be released to Wicklund Holding Company (now known as Plasticon) in the present case, and IPI would assign the patents to Wicklund. Id. Without explanation, the letter agreement attached to the order is signed by IPC (by Turek as President, Sole Director, Majority Preferred Shareholder, and as President of Wicklund Holding Company on as majority common shareholder).6 Id. Dow Credit Corporation later filed a Notice of Compliance with the terms of the Agreement on August 18, 1999. Exhibit 14, attached hereto and incorporated herein.
30. In January 2005, Plasticon purportedly repurchased these patents and other assets such as molds, a sales contract, and customer base from PCI. Exhibit 2 at F-18. The transfer of the patents, however, was not recorded with the U.S. Patent and Trademark Office. The consideration was a promise to exchange 100,000,000 shares of preferred stock for cash by May 2007 and a promise to pay $500,000 (non interest bearing) by May 2006. Id. As of December 31, 2005, Plasticon owed a balance of $500,000 to PCI as a result of the acquisition. Id.
31. PCI filed three patent infringement suits in the U.S. District Court for the Eastern District of Kentucky on July 20, 2004. Promotional Containers, Inc. v. General Technologies, Inc., 5:04-cv-00334-JBC; Promotional Containers, Inc. v. Concrete Accessories, Inc., 5:04-cv-00335-JBC; and Promotional Containers, Inc. v. Aztec Concrete Accessories, Inc. and Dayton Superior Corporation, 5:04-cv-00336-JBC. As of the date of filing, all three suits are pending, and counsel for PCI (the same law firm that represents Plasticon in this action) has made no effort to substitute Plasticon as a party plaintiff. If Plasticon is in fact the owner of the patents, it would appear that Plasticon is the real plaintiff party in interest.
32. Even more curious, on July 11, 2006, the same law firm representing Plasticon in this case filed a lawsuit in the U.S. District Court for the Eastern District of Kentucky on behalf of “International Plastics Corp., a division of Wickland [sic] Holding Company, a Delaware Corporation, presently known as Plasticon International, Inc.” against a number of defendants alleging breach of contract, civil conspiracy, conversion, interference with contractual relations, and misrepresentation and fraud concerning certain molds and associated tools and parts used in the processing and manufacturing of injected molded plastic parts for rebar supports.
International Plastics Corp. v. Michael, et al, 5:06-cv-00223-KSF. This suit was dismissed but later refiled in the U.S. District Court for the Eastern District of Michigan, with Turek added as a party plaintiff and the addition of another defendant. Turek, et al v. Mold-Rite Tool, et al, 2:07-cv-10162-CGS-DAS. Once again, if Plasticon is the owner of the patents, it is the real plaintiff party in interest.
33. No public filing by Plasticon indicates how International Plastics Corporation became a “division” of Plasticon, although a January 10, 1997 press release indicates that Wicklund Holding Company acquired IPC in a reverse acquisition. Exhibit 15, attached hereto and incorporated herein.
IV. PLASTICON AS DEBTOR-IN-POSSESSION FILED AN INACCURATE
STATEMENT OF FINANCIAL AFFAIRS AND FAILED TO COMPLY WITH THIS
COURT’S ORDERS AND THE BANKRUPTCY CODE
34. Plasticon filed its Statement of Financial Affairs on June 6, 2007. Docket #59.
35. Although Plasticon obtained an extension of time from the Court to prepare and file the Statement of Financial Affairs (“SOFA”), Docket #69. Plasticon nevertheless filed a SOFA with significant omissions.
36. Question 4 of the SOFA asks a debtor to list all suits and administrative proceedings to which the debtor was a party within one year immediately preceding the filing.
In response, Plasticon only listed litigation with John P. Murphy. Docket #59.
37. Plasticon omitted its “International Plastics Corporation” and PCI patent infringement lawsuits, ¶¶ 31-32, supra, although it asserts that it owns the patents at issue. ¶ 22, supra .
38. Question 23 of the SOFA asks a debtor to, inter alia, list all withdrawals or distributions credited or given to an insider, including compensation in any form, bonuses, loans,
7These payments personally benefitted Turek. See Exhibit 3 at F-16 (“In December 2006, the Company identified that a former subsidiary of the Company’s predecessor, Wickland Holdings [sic], owed $342,681 to the Internal Revenue Service (IRS). The IRS is holding the Company’s majority shareholder and president liable for this obligation. The president’s indemnification holds the president harmless. The Company will book the liability and expense in the fourth quarter 2006”).stock redemptions, options exercised and any other perquisite during one year immediately preceding the commencement of this case. In response, Plasticon indicated “None.” Docket #59.
39. In fact, Plasticon issued at least 1,333,771,000 shares of Plasticon stock ($1,333,771) as compensation within one year of filing. Exhibit 3 at F-4; 2d Qtr. 2006 Form 10-Q at F-4, attached hereto and incorporated herein as Exhibit 16. Upon information and belief, this stock was issued to Turek.
40. On May 17, 2007, the Court entered an Operating Order. Docket #6.
41. The Operating Order enjoins the Debtor “from making ANY payment on any pre-petition unsecured debt or any pre-petition priority debt.” Operating Order § VI.
42. Plasticon violated this provision by making at least three payments on pre-petition debt to the Internal Revenue Service totaling $12,750.7 Plasticon, Cash Receipts and Disbursements Ledger, attached hereto and incorporated herein as Exhibit 17.
43. Plasticon also made a number of other questionable payments to insiders and creditors after filing that may or may not represent payment on pre-petition debt:
Date Payee Memo Payment
5/18/07 Jim Turek expenses $2,500
6/7/07 TelcoBlue trans to tblu p/r... $1,300
6/27/07 LexReal PLNI payback t... $2,500
6/29/07 James N. Turek, II Vehicle - June $950
7/13/07 Jim Turek travel expense $2,000
Id.
44. After filing, Plasticon also ignored the strictures of 11 U.S.C. § 364 and borrowed money from LexReal without Court approval:
Date Memo Deposit
5/21/07 Deposit [recorded in Due to Lex... account] $4,000
5/22/07 LR loan to PLNI $6,000
5/22/07 LR loan to PL.. $4,000
5/25/07 Funds Transfer [recorded in Due to Lex... account] $8,300
5/25/07 LR loan to PLNI $1,000
5/30/07 LR loan to PLNI $2,500
6/1/07 LR loan to PLNI $1,500
6/7/07 dep into PLNI i... [recorded in Due to Lex... account] $1,300
TOTAL $28,600
Id. Additionally, LexReal possesses promissory notes signed by Turek on behalf of Plasticon for post-petition loans totaling $41,500 that include an “upfront fee” of Plasticon common stock valued at 100% of the loan amount. Promissory Notes, attached hereto and incorporated herein as Exhibit 18.
45. After filing, Plasticon also borrowed money from Turek without Court approval:
Date Memo Deposit
6/6/07 jim loan to PLNI $3,200
6/13/07 jim loan to PLNI $1,144
7/3/07 Jim loan to PLNI $8,000
TOTAL $12,344
Exhibit 17.
46. The Operating Order directs the Debtor to file Monthly Operating Reports for the preceding month no later than the tenth of each month. Operating Order § V.
47. As of the date of this Motion, Plasticon’s Monthly Operating Reports for May and June are due but have not been filed.
48. The Operating Order also directs the Debtor title all accounts as “[Debtor’s name], Debtor in Possession.” Operating Order § II.
49. Plasticon has not made this change to its accounts.
50. Plasticon has overdrawn its bank accounts on numerous occasions post-petition:
Date Payee Memo Payment
6/5/07 Central Bank & Trust OD fee ck#2771 $29
6/13/07 Central Bank & Trust OD fee ck 2854 $29
6/22/07 Central Bank & Trust OD fee ck 2855 $29
6/28/07 Central Bank & Trust OD fee ck 2864 $29
7/2/07 Central Bank & Trust OD fees(29 x 4) $116
7/3/07 Central Bank & Trust OD fee ck #2867 $29
7/5/07 Central Bank & Trust OD fee ck #2866 $29
7/9/07 Central Bank & Trust OD fee ck 286... $29
TOTAL $319
Exhibit 17.
V. OMISSIONS IN TUREK’S PERSONAL BANKRUPTCY
51. On May 14, 2002, Turek filed for chapter 11 relief in the U.S. Bankruptcy Court for the Northern District of Florida. Case No. 02-20411-LMK. After entry of a Final Decree, his case was closed on September 13, 2006.
52. The pleadings, schedules, statements, and Monthly Operating Reports filed by Turek in his personal bankruptcy contain numerous omissions.
53. In Schedule F, Turek claimed that Wicklund Holding Corporation owed him $500,000, while Plasticon’s 2004 Form 10-K states that Plasticon owed Turek at least $2,139,122 at all relevant times from 2001 through 2003. Exhibit 1 at F-12; James N. Turek, Petition, Schedules, and Statement of Financial Affairs, attached hereto and incorporated herein as Exhibit 19.
54. Plasticon’s 2004 Form 10-K states that Turek “and a related party” had subscribed to 43,904,912 shares of common stock in 1995 which were eventually issued on December 31, 2004. Exhibit 1 at F-16 to -17. Turek omitted this right to receive shares in his Schedules. Exhibit 19.
55. Plasticon reported issuing 567,664,082 shares valued at $72,478,628 during 2004 for services, Exhibit 1 at F-4, the great majority of which were issued, upon information and
belief, to Turek. Turek omitted this income in the Monthly Operating Reports for 2004 in his personal bankruptcy.
56. In addition, TelcoBlue, Inc. filed a Form 8-K with the Securities and Exchange Commission detailing its reverse acquisition of Promotional Container Manufacturing, Inc. (“PCM”). TelcoBlue, Inc., Form 8-K (filed Feb. 10, 2004), attached hereto and incorporated herein as Exhibit 20.
Attached to the report is a Plan of Reorganization to effect this acquisition through a tax-free stock exchange which indicates that Turek is the CEO, President and sole shareholder of PCM. Id. Turek failed to seek bankruptcy court approval for his disposition of his shares in PCM.
Argument and Authorities
I. CAUSE EXISTS FOR APPOINTING A TRUSTEE UNDER SECTION 1104(a)(1)
Section 1104(a)(1) states that the Court shall order the appointment of a chapter 11 Trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
As set forth in detail in the facts above, this case is replete with examples of at best, incompetence or gross mismanagement, and at worst with fraud and dishonesty.
First, Plasticon’s incurrence of more than $70 million in expenses when it earned no revenue in 2004, followed by an incurrence of an additional $31 million in expenses on revenues of only $65,000 during 2005, provides the simplest “bottom line” evidence of gross mismanagement or incompetence. Turek cannot justify these outlays as a capital investment because the overwhelming majority of these outlays went toward compensation for services.
In fact, the evidence is strong that this gross mismanagement was by design. Turek was issued millions of shares as “compensation,” public reporting (of Plasticon’s poor performance) was delayed, and in its place were misleading press releases. This pattern of incomplete and misleading disclosures should itself constitute cause to appoint a trustee. See In re Wright Air Lines, 51 B.R. 96, 98 (Bankr. N.D. Ohio 1985) (section 1104 designed to remedy concealment in public reporting of securities transactions by Debtor) (dicta). This pattern of behavior could only benefit an insider and major shareholder such as Turek. An insider such as Turek also benefits from the unclear ownership of the patents between the Debtor and PCI and Turek’s children. Cf. In re Intercat, Inc., 247 B.R. 911, 922 (Bankr. S.D. Ga. 2000) (trustee appointed when debtor, inter alia, transferred intellectual property assets to another entity controlled by insider); In re Embrace Systems Corp., 178 B.R. 112, 128-29 (Bankr. W.D. Mich. 1995) (trustee appointed sua sponte after attempted sale of intellectual property to insider corporation; ownership of intellectual property was in dispute between debtor and insider corporation of which President of Debtor had an interest.)
Post-petition, Turek has continued in his gross mismanagement by ignoring his fiduciary duties as manager of the debtor-in-possession. This also merits appointment of a trustee. E.g., In re AG Service Centers, 239 B.R. 545, 551 (Bankr. W.D. Mo. 1999) noncompliance with court orders or failure to comply with Code “similar cause” to appoint trustee or a permutation of “incompetence, or gross mismanagement”); In re Ford, 36 B.R. 501, 504 (Bankr. W.D. Ky. 1983) (breach of fiduciary duty cause to appoint trustee). Turek has failed to even minimally comply with the duties of a debtor-in-possession. He has failed to open a DIP account, he has made unauthorized transfers and received unauthorized loans, he bounced checks, and he has failed to file Monthly Operating Reports, all in direct violation of this Court’s Operating Order.
E.g., Oklahoma Refining Co. v Blaik (In re Oklahoma Refining Co.), 838 F.2d 1133, 1136 (10th Cir. 1988) (failure to keep adequate records and make prompt and complete reports justifies the appointment of a trustee); AG Service Centers, 239 B.R. at 549 (trustee appointed when debtor bounced checks, used non-DIP account, failed to file Monthly Operating Reports, and seek employment of professionals); In re McCorhill Publishing, 73 B.R. 1013, 1017 (Bankr. S.D.N.Y. 1987) ( Unauthorized post-petition transfers of estate assets constitutes grounds for the appointment of a trustee); In re Cohoes Industrial Terminal, 65 B.R. 918, 922 (Bankr. S.D.N.Y. 1986) (trustee appointed for failure to file any monthly operating reports or comply with DIP guidelines).
Turek should also be replaced by a disinterested trustee because of his varied business interests and Plasticon’s history of related party transactions. E.g., Oklahoma Refining Co., 838 F.2d at 1136 (“a history of transactions with companies affiliated with the debtor company is sufficient cause for the appointment of a trustee”); Intercat, 247 B.R. at 923 (debtor not capable of “pursuing the aggressive, independent investigation of all the transactions in issue,” because management and management’s family are possible targets); McCorhill, 73 B.R. at 1017 (directors had conflicting interests with affiliated entities).
Turek cannot be trusted to investigate the numerous transfers involving himself, his children, LexReal, and other related entities. This is compounded by the fact that many of these entities are major creditors and shareholders of Plasticon. Given the web of companies and family members present in this case, Turek will be unable to separate his own interests from that of the Debtor and will only act to further his own self-interest. For example, Turek post-petition directed Plasticon to make payments to the IRS on pre-petition tax debt, no doubt to avoid a collection action against him personally as a responsible party.
Finally, Turek’s prior track record as a debtor-in-possession provides further evidence that he is unfit to manage Plasticon. Turek in his personal case failed to disclose valuable assets, failed to report income, and failed to obtain court approval of his sale of PCM stock. These prior omissions were not an isolated incident. Turek continues to obscure the truth in Plasticon, not only by omitting significant matters in the Statement of Financial Affairs, but also by failing to file any Monthly Operating Reports.
II. APPOINTMENT OF A TRUSTEE IS IN THE BEST INTERESTS OF ALL CREDITORS AND EQUITY HOLDERS UNDER 1104(a)(2)
Alternatively, section 1104(a)(2) states that the court must order the appointment of a chapter 11 trustee “if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.” In determining whether the interest of creditors and equity holders are being served, a court should consider allegations of fraud and whether the loyalty of existing management is “substantially called into question by . .. competing business interests and the potential for inter-company dealing [favoring] those[management] owns outright.” Smith v. Concord Coal Corp. (In re Concord Coal Corp.), 11 B.R. 552, 554 (Bankr. S.D. W.Va. 1981). See also Intercat, 247 B.R. at 923 (management not capable of aggressive, independent review because family members would be target); Embrace Systems, 178 B.R. at 129 (President’s interest in insider corporation that could be target of litigation makes him not fit to undertake action).
As discussed above, Turek will be, and has been, unable to separate his own self interest from that of Plasticon.
Conclusion
WHEREFORE, for the foregoing reasons, the United States Trustee respectfully requests that the Court order the appointment of a Chapter 11 Trustee, and for such other and further relief as may be just and proper.
Dated: August 9, 2007 Richard F. Clippard
United States Trustee for Region 8
By Counsel
/s/ John L. Daugherty
John L. Daugherty
Assistant U.S. Trustee
100 E. Vine St., Suite 500
Lexington, KY 40507
(859) 233-2822
CERTIFICATE OF SERVICE
I hereby certify that on this 9th day of August, 2007, I served a copy of the foregoing Motion (i) via ECF noticing to Robert Brown, Esq.; John Brice, Esq.; Ellen Vergos, Esq., Dean Langdon, Esq. and (ii)via first-class mail, postage prepaid without exhibits to the attached list (exhibits available upon request).
/s/ John L. Daugherty
John L. Daugherty |
