Court: United States Bankruptcy Court, D. Utah; December 4, 2018; Us Bankruptcy; United States Bankruptcy Court
General Aeronautics Corporation, along with related companies, has faced significant operational challenges over the past 30 years in their efforts to develop and market gyroplanes. Consistent funding shortfalls hindered their ability to pay employees fully, leading to resignations and layoffs, particularly during a critical shortfall in early 2015. In late 2016, new funding emerged, prompting former employees and creditors to explore their options. On September 28, 2017, an involuntary petition was filed against General Aeronautics by six creditors for unpaid rent, compensation, and loans; three additional creditors joined by June 2018. General Aeronautics contested the petition and sought its dismissal, leading to a series of hearings and a trial from September 18-27, 2018. On October 4, 2018, the Court ruled to suspend proceedings for 60 days under 11 U.S.C. 305(a), reserving the right to issue a written decision later.
The Court asserted jurisdiction under 28 U.S.C. 1334(b) and 157, confirming that the matter is core under 28 U.S.C. 157(b)(2)(O) with appropriate venue established under 28 U.S.C. 1408 and 1409. The findings detail the history of Groen Brothers Aviation, Inc. (GBA), founded by David Groen, a former Army helicopter pilot, in the mid-1980s. GBA aimed to innovate gyroplane technology, enhancing it with collective pitch control. Despite sporadic growth and initial investments, GBA struggled to bring a product to market, culminating in layoffs after the 9/11 attacks. The company later secured a DARPA contract in 2005, which temporarily improved employment numbers, though cash flow problems persisted.
GBA completed the initial phase of the DARPA program but did not secure contract renewal, leading to financial difficulties exacerbated by the Great Recession. As a result, GBA deferred employee compensation, accruing about $1 million in unpaid wages, and laid off 90 of its 96 employees between 2007 and 2008. After the layoffs, GBA's operations stalled, producing no output from 2008 to 2012, and retained only two employees from its peak workforce of 40. To address its debt, GBA restructured into Groen Brothers Aviation USA, Inc. (GBAG), transferring its assets to a new entity while converting creditors' debts into equity, excluding trade creditors and employees. The transition occurred in December 2012, but anticipated investments failed to materialize, leading to cash shortages and further unpaid compensation. Employment dropped from 47 in January 2012 to 13 by January 2013, though it peaked at 28 in November 2014.
In early 2014, Jason Chen, a former employee, was informally made de facto CEO and pursued a deal with Wuhai, China, which ultimately fell through. Under Chen's leadership, the company, now named General Aeronautics Corporation (GAC), attempted to establish a joint venture with the Aviation Industry Corporation of China (AVIC), signing agreements that were later terminated. Chen provided necessary funding for payroll but left GAC, resulting in financial collapse and mass layoffs in January 2015. Following this, Groen was reinstated as CEO with only five employees remaining, and the company faced operational inactivity and dwindling finances.
In April 2015, GAC had just $205 left in its bank account. By May 2016, modest funding resumed, allowing some repayment to former employees. Under Groen's leadership, the company rebranded to Groen Aeronautics Corporation and began discussions with West Mountain Partners, L.P. for aircraft development funding, estimating a need for $13 million. In November 2016, West Mountain committed $5 million, with an option for additional investment. Subsequently, nearly $5 million was deposited into GAC's subsidiary, but no further investment beyond the initial amount has been confirmed. Following this funding, Groen and the board faced disputes over authority regarding fund usage.
Groen's push to allocate funds for repaying GAC's previous debts resulted in his removal as CEO and board member in January 2017. By May 2017, Groen Aeronautics rebranded as Skyworks Global, Inc. Since then, Skyworks has incurred significant expenses while neglecting GAC's outstanding debts. Currently, GAC operates with three employees and outsources engineering work, having failed to produce a gyroplane despite the lengthy development process. GAC has not generated substantial revenue and relies on equity and loans for funding.
GAC is pursuing six projects, with varied levels of progress. The Hawk 6e, a conceptual six-seat electric gyroplane, has not entered the design phase but faces competition from other companies. The Gyroliner, an unbuilt passenger aircraft aimed at the Indian market, is in early discussions. The Heliplane project is under evaluation by DARPA's 'Red Team', and GAC is collaborating with FedTech to develop a Precision Airdrop System for military and humanitarian use, anticipating a growing market.
Additionally, GAC is revitalizing the SparrowHawk line, planning to sell existing inventory and develop an updated model, the SparrowHawk 4. The Hawk 5, a five-seat gyroplane, is GAC's primary focus, with negotiations underway with the Serbian government for prototype production. A contract has been signed for its fabrication and testing, and Gen. Michel estimates a prototype within six months, although future production remains uncertain and would require a separate contract. Despite optimistic projections for sales and profit margins, these claims lack corroborative evidence. Overall, gyroplane technology, while longstanding, has not achieved significant market penetration compared to other aircraft.
The gyroplane market has historically been targeted primarily at sports enthusiasts, with limited success in producing larger models for commercial use, exemplified by the 1950s Fairey Rotodyne. Currently, around 32 companies manufacture gyroplanes, with AutoGyro leading the market by producing 300-400 aircraft annually and generating about $40 million in revenue. AutoGyro received FAA type certification for one model in 2016, permitting broader commercial applications. Other major manufacturers like Boeing and Airbus are also developing products that could compete with gyroplanes.
In 2012, GBA faced funding issues, prompting a voluntary request for all employees to reduce their compensation, although not all complied. Consent for the reductions was communicated via email. Following the Transition to GAC, employees were informed that their pay would remain at the reduced levels, with the company optimistic about restoring full pay within 60 days; however, reductions persisted until layoffs in 2015. Disputes arose regarding GBA's and GAC's promises to repay the difference in compensation and provide a 25% bonus as an incentive for the pay cuts. While there is contention about the repayment promises, credible testimonies from former non-executive employees indicated that GBA and GAC assured them of Deferred and Bonus Compensation. The voluntary nature of the pay cuts, along with historical precedent of GBA repaying employees in similar situations, supports their claims. Additionally, a letter from Wilson in December 2012 addressed all employees, further reinforcing the expectation of repayment.
Employee compensation is categorized into two distinct types: differences in pre- and post-May 2012 compensation levels along with incentive bonuses accrued after GAC's transition, and those accrued prior to GBA's transition. David Groen indicated that reinstating pay to pre-May levels could occur within 60 days post-closing, with subsequent payments for post-transition bonuses planned shortly thereafter. GBA and GAC committed to addressing the discrepancies in compensation and bonuses, affirming that Deferred and Bonus Compensation options were extended to all employees, not just executives.
Wilson's letter signifies GAC’s obligation to repay these compensations, with a timeline for repayment once salaries are restored. Documentation supporting these claims includes an Excel spreadsheet managed by accounting manager Lori Chigbrow, which tracked payroll from January 2012 to January 2015, detailing unpaid, deferred, and bonus compensation. This documentation indicates that Deferred and Bonus Compensation was indeed offered to all employees.
However, GAC's rationale for excluding non-executives from receiving Deferred and Bonus Compensation is challenged. Groen's claim that Wilson would not approve such compensation for non-executives contradicts Wilson's acknowledgment in December 2012 of the entitlement for all employees. Furthermore, the argument that offering non-executive compensation could deter investors is undermined by the fact that executives, who received significantly more compensation, were still offered Deferred and Bonus Compensation. GAC's assertion that executive compensation was contingent on board approval lacks justification, as there was no explanation for why similar conditions could not apply to non-executive compensation. The overall compensation structure demonstrates that the concern over investor reactions to non-executive compensation is implausible, given the substantial executive compensation already in place.
Three of the Petitioning Creditors—Parry, Nadauld, and Carron—filed claims for unpaid compensation with the Utah Labor Commission, resulting in judgments totaling $69,549.73, which included a 100% penalty and attorney's fees. GAC agreed to repay this amount through a payment plan initiated in July 2016, making monthly payments of $2,250, totaling $33,750 by the filing date, leaving a remaining balance of $35,799.73. Claims with the Labor Commission are capped at either the unpaid wages from the year prior or $10,000, yet all three employees had claims exceeding this limit.
After obtaining additional funding in May 2016, GAC allocated some funds to pay unpaid wages via a Payment Plan, creating a tracking system for payments. Payments under this plan started in May 2016 and have reportedly continued through at least June 2018. Executives and certain rehired employees were excluded from the plan. GAC initially paid $12,454 in May 2016, followed by a monthly average of $4,200 from June 2016 to September 2017, totaling at least $67,831.11 by the filing date.
GAC denies responsibility for GBA's debts, claiming that these obligations were not theirs, although GAC's financial success could facilitate repayment. Groen indicated GAC intended to repurchase stock from GBA to help settle its debts, yet evidence shows that GAC may be covering some of GBA's debts through the Payment Plan. A letter from Wilson in December 2012 suggests a commitment to address certain unpaid compensations but lacks clarity on the obligation's nature. Ultimately, while Groen expressed a desire to settle GBA's debts, such intentions do not create a legal obligation, especially as GAC's board disagreed with him, and payments made under the Payment Plan do not imply liability for GBA's debts.
GAC's Board of Directors consisted of five members, including Chairman Groen, and operated remotely without formal meetings from the Transition until trial, using email and phone calls to seek unanimous written consent for decisions. Critical issues requiring board approval included expense reports, loans, stock issuance, and executive appointments. Evidence suggests the board largely neglected its oversight responsibilities, with only two documented actions during the 2013-2015 period: approving a name change and accepting the CEO's resignation. Notably, the board did not formally appoint Wilson as an officer or approve Chen as CEO, despite their significant roles. Groen's testimony revealed a startling lack of awareness regarding GAC's financial status, including unawareness of the company's insolvency after the 2015 layoffs, despite multiple cash infusions needed for payroll. GAC argued that certain claims from Petitioning Creditors were disputed due to lack of board authorization; however, there was a contradiction between the board's claims of adherence to protocols and its actual functioning. The board's inaction effectively allowed executives to manage the company autonomously, a necessity during frequent funding crises.
In terms of claims by Petitioning Creditors, Howard Kent leased commercial real estate in Salt Lake City, UT, to GBA under a five-year lease starting January 3, 1997, which underwent amendments, the last being in December 2011. This amendment set monthly rent at $11,818.13, effective from September 2011 to September 2012. Despite no further amendments, GBA and subsequently GAC occupied the space until Kent sold the property in late 2014. Kent continued to charge rent based on the fourth amendment amounts, totaling $284,817.01 from January 2013 to November 2014.
GAC made over $94,000 in rent payments from January 2013, resulting in an outstanding balance of $190,172.65, which matches the amount Kent claimed in an amended involuntary petition. GAC's Accounts Payable Aging Summary from January 15, 2015, reported $177,763.61 owed to Kent, reflecting a $12,409.04 discrepancy—suggesting GAC believes it paid an extra month’s rent not included in Kent's invoice. Kent has not received any payment as indicated in the aging summary.
Lori Chigbrow, employed by GBA since 2002 and part-time at GAC until 2015 layoffs, agreed to a 25% pay reduction in 2012. She accrued $13,513.68 in unpaid, deferred, and bonus compensation, receiving $4,627.77 under a Payment Plan, leaving a claim of $8,885.91.
Carolynn Taft, employed from October 2007, also agreed to a 15% pay cut in 2012, accruing $7,426.31 in unpaid, deferred, and bonus compensation, with a $43.60 expense claim. After receiving $4,709.72 under the Payment Plan, her total claim amounts to $2,716.19.
Henry Parry, with GBA since 1989, took a 20% pay cut in 2012 and had his pay restored in 2014. He filed a claim for $9,570.69 with the Labor Commission, documenting unpaid wages of $9,175.13 and expenses of $395.56. He calculated $27,739.30 in unpaid compensation at GAC and accrued $12,602.18 in deferred and $3,150.55 in bonus compensation. After accounting for $2,357 received under the Payment Plan, his claim totals $41,135.03.
Martie Nadauld, who worked for GBA since 2008, briefly accepted a pay reduction but did not do so at GAC. She accrued $20,081.52 in unpaid compensation, filed a claim for $6,510.46, and received $1,295 under the Payment Plan, leaving a claim of $12,276.06.
Scott Carron, employed by GAC from June 2014 and laid off in January 2015, was guaranteed a salary of $115,050, with $59,737.50 remaining unpaid at layoff. He submitted a $10,000 claim to the Labor Commission for unpaid salary and paid time off, adjusting his claim to $49,802.88 after accounting for this and a $65.38 expense reimbursement. Carron also applied for unemployment compensation following the layoffs.
Carron did not deduct the unemployment compensation he received from his total claim of $49,802.99, which remains valid as there is no evidence indicating such compensation would affect GAC’s liability. Even if deductions were required, Carron experienced a two-month period without compensation, leading to a calculated claim of $17,198.38 after accounting for unpaid wages, an expense reimbursement, and a payment received under a Payment Plan.
Jacob van der Westhuizen, who worked at GBA and GAC, initially earned a salary of $130,000 but accepted significant pay cuts, ultimately receiving only $550 per pay period at GAC. He is owed $23,850 in unpaid compensation, as well as $201,800 in deferred compensation and $50,450 in bonus compensation.
Robert Wilson also faced substantial salary reductions from his original $140,000. His unpaid compensation totals $13,569.30, alongside $256,872.86 in deferred compensation, $64,218.22 in bonus compensation, and at least $69,099.95 for expenses and loans to the company.
Jason Chen claims $694,236.50, which includes funding he provided as de facto CEO, unpaid salary, and expenses. There is contention regarding whether the funding was categorized as loans or equity. Chen wired $516,770 to GAC in 2014, with varying classifications of that amount, including $130,000 as equity and $366,770 as loans, based on conflicting testimonies and documentary evidence. An email from Chen suggested a change in investment structure, indicating a desire for part of his funding to be treated as equity while the remainder would be documented as a loan.
A handwritten note on an email deducts $130,000 in shares from the $456,770 that Chen wired to GAC. Following this, GAC created a promissory note for $326,770 payable to Chen without Stevanovich’s knowledge. Chen did not sign the note, believing the amount should be higher, which conflicted with previous figures. He later testified about signing an amended note, but no copy was found or produced in court. This indicates ongoing negotiations regarding Chen's advances to GAC that remained unresolved when he left.
Chen also claims that Stevanovich promised him a $280,000 salary, but no written employment agreement was executed during his ten-month tenure. After negotiations, Chen proposed a $300,000 salary contingent upon GAC raising $5 million, which Stevanovich rejected, and Chen was never paid for his work. Additionally, Chen claims $94,133.17 in unreimbursed expenses. GAC argued he did not submit proper documentation, but acknowledged in a January 2015 letter that it owed him $70,581.74 for recognized business expenses, although this amount was not reflected in GAC's Accounts Payable Aging Summary.
Regarding legal conclusions, Section 303 requires petitioning creditors to demonstrate two conditions: at least three creditors must hold non-contingent, undisputed claims totaling at least $15,775, and GAC must be generally failing to pay its debts unless disputed. GAC has contested the standing of the Petitioning Creditors, asserting their claims are contingent or disputed, while the creditors argue that even a portion of an undisputed claim suffices for standing, reflecting differing interpretations in case law following the BAPCPA amendment.
The Court incorporated its oral ruling on the Debtor's Motion to Dismiss into its decision. Section 303(b)(1) of the Bankruptcy Code, initially enacted in 1978, was revised in 1984 to include a requirement that a creditor's claim must not be subject to a bona fide dispute. This amendment aimed to prevent creditors from abusing involuntary bankruptcy to coerce debtors who have legitimate defenses against their debts. Senator Max Baucus, who supported the amendment, highlighted that some courts had misinterpreted the law, allowing involuntary petitions even when debtors had valid disputes over their liabilities. The amendment prohibits filing involuntary petitions based solely on debts that are genuinely contested and mandates that relief cannot be granted based on nonpayment of such debts.
Although the amendment did not define "bona fide dispute," courts began to establish standards for assessing it, leading to some disagreements. Generally, courts recognized a bona fide dispute when there was a significant factual issue regarding the debtor's liability or a legitimate legal argument concerning undisputed facts. Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the analysis focused mainly on liability issues, but some courts allowed claims with partial disputes to proceed if a portion was undisputed. In 2005, BAPCPA further amended Section 303(b)(1) by adding "as to liability or amount," resulting in a split in court interpretations. Some courts maintain that any bona fide dispute regarding even a small portion of a creditor's claim negates the creditor's standing under Section 303(b)(1).
Courts have interpreted the amendment to clarify prior legislative intent without altering the statute's operation before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This court aligns with the view that BAPCPA did not change the operation of the statute for two main reasons. First, interpretive principles suggest a departure from a strict plain meaning of the statute is warranted. Courts typically enforce the Bankruptcy Code as written, but it is presumed that Congress acts with knowledge of existing law when amending statutes. The pre-BAPCPA framework indicates that changes to the Bankruptcy Code would not be interpreted to undermine established practices without clear legislative intent. Specifically, the amendment to 303(b)(1) in 1984 balanced creditors' access to bankruptcy courts with debtors' protection from involuntary petitions. Disqualifying a creditor based on any disputed amount would significantly disrupt this balance, and there is no clear indication that Congress intended such a shift.
Second, interpreting the BAPCPA amendment to disqualify a creditor with even a minor disputed claim could lead to absurd outcomes, undermining Congress's intentions. For example, if a creditor has a $100,000 claim with only $100 in dispute, disqualifying that creditor would be unreasonable. While the application of the absurdity doctrine is rare, this situation exemplifies a literal interpretation that contradicts legislative intent, supporting the conclusion that the 2005 amendments do not alter the analysis of creditor qualifications under the statute.
A literal interpretation of section 303(b)(1) could unjustly disqualify many petitioning creditors, including those with undisputed claims except for minor amounts. The court questions why Congress would intend to disqualify creditors with noncontingent and partially undisputed claims, emphasizing that section 303 aims to balance debtors' interests against creditors' rights to initiate bankruptcy. The court concludes that a bona fide dispute over part of a creditor's claim does not disqualify the creditor, provided there are undisputed portions that meet the statutory threshold.
Determining a bona fide dispute requires an objective basis for contesting the debt's validity. The court does not need to predict the dispute's outcome but must establish whether a dispute exists. The bankruptcy court may need to analyze legal issues to determine if an objective basis exists. Once a petitioning creditor shows its claim is not in bona fide dispute, the burden shifts to the debtor to prove otherwise, with the debtor's subjective intent not influencing this assessment.
In this case, GAC disputed several claims by the Petitioning Creditors; however, many disputes were deemed not bona fide. The court found that the Petitioning Creditors sufficiently demonstrated entitlement to Deferred and Bonus Compensation. In contrast, GAC failed to prove a bona fide dispute regarding this compensation. Additionally, GAC's argument about the election of remedies related to claims filed with the Labor Commission was based on Utah Code Ann. 34-28-9.5, clarifying employees' options for pursuing unpaid wages.
Employees with wage claims of $10,000 or less must first seek administrative remedies, while those with claims exceeding $10,000, or certain exceptions for lower claims, may file directly in district court. However, the statute allows employees with claims over $10,000 to also file with the Labor Commission without forfeiting recovery of amounts exceeding that threshold. Carron's claim before the Labor Commission was limited to a specific time frame for work performed, but this does not restrict him from pursuing additional wages outside that period. Consequently, Carron, Nadauld, and Parry can seek amounts not addressed by the Labor Commission, and Utah Code Ann. 34-28-9.5 does not indicate a bona fide dispute regarding their claims.
Regarding GAC's liability for GBA's debts, the Petitioning Creditors failed to prove the absence of a bona fide dispute. GAC, as a separate legal entity, did not assume GBA's debts, and evidence of GAC’s payments under a Payment Plan does not establish liability. The Court identified a bona fide dispute concerning GBA's debts, including unpaid employee compensation. GAC also claimed that some creditors' claims were in dispute due to lack of board approval; however, the Court found that the board had delegated authority for approvals to executives, thus rendering GAC's argument ineffective.
In relation to Kent's claim, GAC argued that its liability was disputed due to the absence of a lease agreement and other factors. The Court disagreed, determining that GAC was responsible for rental payments as it continued operations post-Transition at the same location. The arrangement indicated that GAC effectively became a tenant at will and assumed rent obligations, supported by evidence including GAC’s Accounts Payable Aging Summary, which documented a rent debt to Kent of $177,763.61.
In December 2014, GAC notified Kent of its new contact information and its name change from GBAG, emphasizing that any obligations of GBAG, including rent, remained the responsibility of GAC. The court found no legitimate dispute regarding GAC's liability for post-Transition rent to Kent, despite the absence of a signed lease, since GAC was a tenant and had assumed rent responsibilities. GAC's payments were credited against GBAG's outstanding balance, which was settled by October 2014. GAC communicated that the security deposit from the 1997 lease could be used for rent payments, indicating no remaining debts from GBAG, thus confirming that the amounts owed to Kent were solely post-Transition rent.
Kent's invoice indicated a total claim of $284,817.01 for post-Transition rent, with GAC making payments of over $94,000, leaving a balance of $190,172.65. The court concluded that GAC owed at least $177,763.61 in post-Transition rent, affirming no bona fide dispute existed regarding this amount. Additionally, claims from van der Westhuizen and Wilson were deemed undisputed, with van der Westhuizen's claim totaling $276,100 and Wilson's claim amounting to $403,760.33, which included unpaid compensation and expenses. GAC argued that Wilson's and van der Westhuizen's compensation was contingent on cash flow, but the Petitioning Creditors contended this violated Utah law requiring written authorization for wage withholding. The court noted it did not need to resolve this legal issue, as the Petitioning Creditors could satisfy the requirements with other claims exceeding $15,775. However, Wilson's expense and loan claim of $69,099.95 was determined to be non-contingent and should be included in the analysis.
The Court determines that Chen's claims regarding contributions, salary, and expenses are all in bona fide dispute. The conflicting evidence regarding whether his contributions were loans or equity indicates a valid dispute about GAC's obligation to repay him. Chen's salary claim lacks a signed employment agreement, and discrepancies in their discussions about his employment terms create an objective basis for disputing the owed salary. Furthermore, while Chen partially documents his expense claim, it does not appear in GAC's aging summary, leading to an objective dispute regarding that claim as well.
The Court identifies several Petitioning Creditors with unsecured claims that are not contingent or disputed. These include Howard Kent ($177,763.61), Lori Chigbrow ($8,885.91), Carolynn Taft ($2,716.19), Henry Parry ($41,135.03), Martie Nadauld ($12,276.06), Scott Carron ($17,198.38), and Robert Wilson ($69,099.95). Since at least three creditors have non-contingent, undisputed unsecured claims exceeding $15,775, the Court concludes that the requirements under Section 303(b)(1) and 303(h)(1) have been met.
Under Section 303(h)(1), the Petitioning Creditors must prove by a preponderance of the evidence that the debtor is not generally paying debts as they become due, assessed as of the filing date. If they succeed, the burden shifts to the debtor to show that the debts are subject to bona fide disputes. Unlike Section 303(b)(1), Section 303(h)(1) does not exclude contingent debts. The Court will employ a totality of the circumstances test, allowing for the consideration of all admissible evidence and the credibility of witnesses, while also acknowledging that some approaches have included mechanical or mathematical tests. Ultimately, the Court adopts a blended approach from prior case law, noting that generally not paying debts includes regularly missing significant payments.
Debtor's financial condition is assessed in relation to the number and amount of unpaid debts, especially in cases with few creditors. The significance of missed payments is evaluated against the debtor’s overall financial operations. A thorough examination of the debtor's payment history and financial behavior is essential, employing a "mechanical test" that considers five factors: payment timeliness, overdue debt amounts, duration of payment issues, asset reductions, and the overall financial situation. The assessment of whether a debtor is generally not paying debts is flexible and requires balancing unpaid debts against the debtor's total financial picture.
The inquiry into the debtor's financial status should start with accounts payable aging reports, but in this case, the debtor (GAC) did not maintain traditional records post-2015 layoffs. Evidence included invoices and bank statements, which showed that GAC generally paid its invoices about 30 days after receipt, with the notable exception of a past due balance owed to the City of Buckeye, AZ. This past due amount, while indicative of delayed payment, was not substantial relative to GAC's overall expenditures of $212,942.28 for September 2017. Additionally, GAC continued paying employee wages and taxes, though the completeness of these payments was unclear. Overall, GAC appeared to be managing its current debts adequately at the time of the filing, despite having significant long-standing debts to various employees and creditors.
GAC has accumulated a total of approximately $3.4 million in aged debt, which includes $258,708.54 in post-Transition Unpaid Compensation (of which $67,831.11 was paid before the case filing), $2,301,694.73 in Deferred Compensation, and $575,423.68 in Bonus Compensation, none of which has been paid. Additionally, GAC's Accounts Payable Aging Summary from January 15, 2015, indicated outstanding expenses of $1,036,563.74, excluding employee wages. Specific unpaid amounts include $177,763.61 owed to Kent, $48,228.31 to Groen, $69,099.95 to Wilson, $35,799.73 related to Labor Commission judgments, and $4,456.21 in COBRA and FSA plan administration fees from 2015. Most of this debt accrued from December 2012 due to austerity measures and continued after the 2015 layoffs. Since then, GAC has made minimal payments, only partially addressing Unpaid Compensation and some Labor Commission judgments under a state agreement.
Following the 2015 layoffs, GAC's financial situation worsened, with its bank account dwindling from $1,800 in January 2015 to $205 in April. Despite receiving approximately $5 million in funding in December 2016, GAC did not prioritize repaying its debts and instead allocated funds to various entities, including significant payments to Mungo Creative Group, Seven Ply Maple, and Albright Stonebridge without evidence that these payments would advance the company's market objectives. GAC's financial records show that from January 2017 to April 2018, it received monthly transfers averaging $185,894.85 from its subsidiary, with little change in its overall cash position, suggesting that nearly all these funds were consumed in business operations, underscoring the substantial nature of the $3.4 million debt relative to GAC's operational scale at the time of filing.
GAC allocated significantly less towards its older debts compared to current obligations, spending an average of $185,894.85 monthly in 2017 while only committing $4,214 to Unpaid Compensation and $2,250 to Labor Commission claims in September 2017. Despite a 17-month Payment Plan before the filing date, GAC only paid approximately $67,831.11, or about 2% of its total $3.4 million debt. The company's financial situation worsened, with no revenue generation to offset expenditures, resulting in a decrease of cash reserves from $2,018,973.16 at the end of April 2018 to an estimated $1,089,498.91 by September 2018, assuming continued monthly expenditures. GAC deferred significant debt repayment, which the Court interpreted as a failure to pay debts as they became due. This finding shifted the burden to GAC to prove that the debts were in genuine dispute, which the Court had already determined they were not.
The Court also addressed GAC's motion to dismiss the involuntary petition based on claims of bad faith. While the Tenth Circuit has not specifically ruled on dismissing an involuntary petition for bad faith despite meeting statutory requirements, other courts have allowed such dismissals. Nevertheless, the Court found that the petition was not filed in bad faith. An involuntary petition is presumed to be filed in good faith, and GAC bore the burden to prove otherwise. Evaluating the totality of circumstances, which is the preferred method for assessing bad faith, led the Court to conclude that the filing did not exhibit bad faith.
The Tenth Circuit applies a totality test to evaluate good or bad faith in bankruptcy cases, considering various factors, including whether creditors met statutory criteria for filing, the merit of the involuntary petition, the creditors' reasonable inquiry into relevant facts, evidence of preferential payments or asset dissipation, ill will or harassment motivations, disproportionate advantage for petitioning creditors, tactical advantages in pending actions, and suspicious timing of the filing. GAC's argument against the Petitioning Creditors' good faith cites improper purpose and use tests from Collier's, which are integrated into the totality test, but do not solely determine good or bad faith. The improper use of the Bankruptcy Code without pursuing non-bankruptcy remedies is now merely one factor among many.
GAC contends that Chen orchestrated the involuntary petition to depress GAC's value for asset acquisition or to leverage a settlement. GAC alleges Chen covered legal fees for other Petitioning Creditors, suggesting they were manipulated to circumvent statutory requirements. These claims relate to factors of ill will and disproportionate advantage. However, evidence does not support these allegations; Chen's credible testimony denies any interest in purchasing GAC's assets, asserting he believes the technology is uncompetitive. GAC failed to counter this testimony, and CAG's attempts to prove Chen's motives circumstantially through past bankruptcy cases were insufficient.
The Court determined that the evidence presented against Chen was insufficient to support allegations of misuse of bankruptcy proceedings for control over GAC. Chen became a director and co-CEO of AirFastTickets, Inc. in December 2014 after providing a bridge loan. Following the appointment of a receiver in July 2015, AirFast's creditors, who did not include Chen, filed an involuntary petition against the company. Subsequently, Chen's company, AirTourist, acquired AirFast's assets during bankruptcy and later filed an involuntary petition against AirTourist in April 2017, claiming severance and unreimbursed expenses.
The Court found no evidence that Chen had previously attempted to use involuntary petitions to gain control over debtors or settle disputes improperly, nor was there any indication that the Travana case was dismissed for bad faith. Although Chen engaged with the other Petitioning Creditors and guaranteed their legal fees, they ultimately paid their own fees, undermining claims of manipulation. The testimony indicated that Chen's focus was on recovering his claim either through reorganization or liquidation, rather than extorting a settlement. The Court concluded that GAC failed to demonstrate Chen's actions constituted bad faith or an attempt to leverage bankruptcy for control, as both Chen and the other Petitioning Creditors were primarily motivated by the desire to collect what they were owed.
The Petitioning Creditors, apart from a few former employees who filed claims with the Labor Commission, did not engage in standard debt-collection methods prior to filing for bankruptcy. However, this lack of action should not carry significant weight due to GAC's precarious financial status and operational history. GAC is not a conventional business; it relies heavily on sporadic investor support rather than consistent revenue. Both GAC and its predecessor, GBA, have experienced inconsistent operational periods, failing to launch a successful product for over three decades. The Petitioning Creditors, many of whom were former employees, understood the companies' cyclical nature and potential but faced disappointment following the 2015 layoffs, which led to the departure of key executives and highlighted ongoing financial struggles. Cash flow issues persisted before and after the company transitioned in 2013, with a particularly dire situation in 2014 alleviated only by a cash infusion from an investor, Chen. After Chen's exit, GAC's financial situation deteriorated, culminating in only $205 in its bank account by April 2015. Subsequent funding received in late 2016 led to brief optimism among former employees, but they soon realized that the funds were not allocated to them. Throughout 2017, GAC continued to deplete its cash reserves, prioritizing payments to other creditors over the Petitioning Creditors, raising doubts about the viability of future investments yielding returns.
Petitioning Creditors filed an involuntary petition primarily to safeguard their interests against other creditors and to prevent the dissipation of GAC's assets before funding was depleted. The Court found that their motivations did not reflect bad faith, as they aimed to collect on long-standing debts rather than seeking a tactical advantage. Although GAC argued that the Petitioning Creditors should have pursued traditional debt-collection methods first, the Court concluded that this alone did not undermine the merits of the petition or demonstrate bad faith. Consequently, GAC's motion to dismiss the involuntary petition was denied.
Additionally, GAC filed a motion under Section 305(a) to dismiss or suspend proceedings for four months. Under this section, dismissal or suspension can occur only if it is determined that such action serves the interests of both creditors and the debtor, which is a high burden for the party requesting it. The Court employs a totality of the circumstances test, considering factors such as administrative efficiency, availability of alternative forums, necessity of federal proceedings, and the potential for out-of-court arrangements. GAC also suggested that unresolved issues under Utah law be taken into account, specifically regarding wage withholding requirements for officers and future income. The Court emphasized that no single factor is determinative, and it retains discretion to weigh factors as appropriate for the case.
Carron, Parry, and Nadauld are barred from claiming amounts exceeding those asserted with the Labor Commission. The Court finds that the legal questions raised by GAC do not create a bona fide dispute regarding the Petitioning Creditors' claims and do not need resolution for a decision under section 303. The Court notes that while alternative forums exist for resolving disputes, this case does not interfere with any ongoing non-federal insolvency proceedings, and the Petitioning Creditors' filing was not improper.
The decision on whether to proceed in bankruptcy hinges on the possibility of achieving a less costly out-of-court resolution. Section 305(a)(1) encourages out-of-court workouts, but the Court must confirm that such an approach is genuinely beneficial for the debtor and creditors. GAC's willingness to settle with at least six Petitioning Creditors outside of bankruptcy suggests a potential for an amicable resolution, despite controversies surrounding its settlement offers.
GAC is open to mediation, arbitration, and litigation for unresolved claims and believes it can generate sufficient revenue to satisfy some creditors. However, it disputes Chen's claim, indicating that substantial litigation will be necessary to resolve it. This contentious claim, along with threats of extensive litigation from other parties, could undermine the perceived advantages of bankruptcy in terms of efficiency and cost. Furthermore, bankruptcy could jeopardize GAC's funding and contracts, complicating reorganization efforts, and in the event of liquidation, creditors may not receive significant dividends.
GAC's primary assets include approximately $1 million in bank accounts, with significant claims against it totaling $1,587,212.07 from the Petitioning Creditors, surpassing its identifiable assets. Administrative costs and other creditors’ claims further reduce potential repayments, indicating minimal chance of meaningful recovery for the Petitioning Creditors, even if their claims are upheld. The Court finds that GAC's creditors may fare better outside of bankruptcy, avoiding litigation costs and sharing limited assets, while GAC might secure cash for settling claims. However, for this to be effective, GAC must fulfill its commitments. Historical skepticism surrounds GAC's assurances of imminent funding, given its past failures to capitalize on potential opportunities over the years. Despite this, GAC has a significant contract with Jugoimport for a Hawk 5 prototype, which could lead to revenue soon after production. GAC is also trying to sell SparrowHawk inventory for income. Weighing GAC’s efforts to settle claims and the detrimental effects of bankruptcy, the Court recommends a 60-day suspension of proceedings to assess GAC's progress on the Hawk 5 project and its funding efforts. Following this period, the Court will determine whether to extend the suspension, dismiss the case, or provide relief. Additionally, GAC seeks a bond from the Petitioning Creditors under Section 303(e) to cover potential damages from the involuntary petition, which allows the court to mandate a bond for indemnification of the debtor.
Under section 303(i), a court can award costs and fees to a debtor if a petition is dismissed, and damages if the petition was filed in bad faith. However, the court determined that the Petitioning Creditors did not act in bad faith, which precludes damages under section 303(i)(2). Costs and attorney's fees can still be awarded under section 303(i)(1) without a finding of bad faith, but the court declined to do so in this case, citing the totality of the circumstances, including the merits of the petition, any improper conduct by the debtor, the reasonableness of the petitioners' actions, and their motivations. The court found no improper conduct by GAC and deemed the petition meritorious with proper motivations from the Petitioning Creditors. Since the case could proceed in bankruptcy court, the court ruled against requiring the Petitioning Creditors to cover GAC's fees and costs, thus no bond is needed. The court will not enter an order for relief at this time but will reassess GAC’s progress after a 60-day suspension. A separate Order and Judgment will be issued in line with this decision. The memorandum also notes that GBA remains a corporate entity with only a stock asset and mentions proposals related to delinquent rent payments.
The debtor named in the petition is General Aeronautics Corporation (GAC), previously known as Skyworks at the time some creditors were employed. For clarity, the Court will refer to the debtor as GAC regardless of its name during specific events. Limited evidence on the gyroplane market exists, but it is deemed sufficient for assessing GAC's motions. Pay reductions were implemented for three executives—Groen, Wilson, and van der Westhuizen—starting April 15, 2012, with other employees' reductions beginning April 29, 2012. Groen indicated that executives would still receive Deferred and Bonus Compensation.
Unpaid compensation details are provided in specific exhibits, showing a $58,400 liability to the Utah Office of State Debt Collection, with discrepancies noted but unexplained during the trial. GAC was making payments on Labor Commission judgments, leading the Court to accept a pre-petition balance of $35,799.73 as accurate. Regular Labor Commission payments are excluded from the Payment Plan, but three individuals received separate payments in May 2016, which will be counted towards their claims. Two exhibits track payments, with discrepancies noted between them regarding employee inclusion and employment tax payments, suggesting Ex. SG55 underreports GAC's financial obligations. Terry Brandt, previously Vice President of Flight Operations, is not classified as an executive for compensation purposes.
Exhibit VVV is deemed unusable for the calculation since it only extends to February 2017. The board members listed in Exhibit HH are from January 2015, with Groen, Wilson, and Carter serving since the Transition. The precedence of Rudman and Emami on the board remains unclear but is not critical to the current decision. An email from Taft to Groen during the 2015 layoffs confirms GAC owed Taft $6,688.63. Parry's claim aligns with GAC's Accounts Payable Aging Summary dated January 15, 2015, but since he is receiving that amount through the Labor Commission, it will not factor into the calculation under § 303. Parry’s account shows $2,287.69 in unpaid wages from GBA, which will also be excluded from the analysis. GAC’s records indicate $27,511.40 in unpaid compensation for Parry as of March 1, 2014, with discrepancies regarding specific pay periods being deemed immaterial. Testimony from Carron states he received a check for around $500 more than a year post-layoffs. Van der Westhuizen's compensation tracking suggests he was underpaid compared to his claimed rate, but GAC's spreadsheets indicate he actually received significantly less. The Court supports the accuracy of Exhibit WWW concerning the division of van der Westhuizen's unpaid and deferred compensation. Wilson's salary is calculated at $139,999.86 annually, and the amounts listed on Exhibit A do not include any unpaid wages or salaries owed to employees. Additionally, GAC's bank records reveal multiple transactions from Chen throughout 2014.
An involuntary bankruptcy case is initiated by filing a petition under Chapter 7 or 11 with the bankruptcy court by three or more entities, each holding a non-contingent claim against the debtor, provided that the total claims exceed $5,000 more than the value of any lien on the debtor's property securing those claims. The purpose of the "no bona fide dispute" requirement is to prevent creditors from leveraging involuntary bankruptcy to enforce judgments when significant questions about the debtor's liability exist. Various courts have established that a dispute concerning any part of a claim does not disqualify a creditor from being a petitioning creditor under Section 303, provided that there remains an undisputed portion of the claim. The 2005 amendments to Section 303(b) clarify that any bona fide dispute over the amount of a claim disqualifies that claim from counting towards the threshold for initiating an involuntary case. However, some judicial interpretations suggest that a creditor may still qualify even if a bona fide dispute exists regarding part of its claim. Overall, the prevailing interpretation indicates that a creditor's claim can still be considered valid for the purpose of initiating involuntary bankruptcy, as long as there is an undisputed amount.
Key points include a legal discussion on the implications of disqualifying a creditor due to a disputed portion of debt, which may limit creditors' access to intended remedies. The excerpt references various case law decisions, including Ron Pair Enterprises, which emphasizes the importance of recognizing bona fide disputes in bankruptcy proceedings. It also highlights the courts' application of both mathematical and totality of the circumstances tests when assessing whether a debtor is generally failing to pay debts. The totality test considers factors such as the number and amount of unpaid claims, their materiality, and the debtor's overall financial conduct. Additionally, it notes inconsistencies in how courts label and apply these tests, indicating a need for flexible judicial interpretation. The excerpt closes by outlining the procedural considerations courts may take when evaluating unpaid debts against paid debts in bankruptcy contexts.
The Court clarifies that no definitive mathematical standard exists to assess if the "generally not paying" criterion has been met in bankruptcy cases. It emphasizes that a creditor's failure to demand payment does not excuse the debtor's obligation to pay. The analysis involves examining the debtor's accounts payable records, noting that discrepancies in payment timelines among creditors do not materially affect the Court's conclusions. Despite some creditors being paid more promptly than others, evidence shows that GAC generally paid its current debts as they became due. The Petitioning Creditors point to specific unpaid debts, including COBRA and FSA fees, and a significant amount owed to the Utah Office of State Debt Collection, arguing these indicate GAC’s failure to pay debts in a timely manner. However, the Court considers these older debts separately and focuses on current obligations for its analysis. Additionally, more than 98% of the Deferred and Bonus Compensation is linked to executive salaries, which GAC claims require board approval. The Court acknowledges that contingent debts are relevant in its evaluation. GAC contends that prioritizing certain payments over old debts was crucial for its operational viability, suggesting a strategic allocation of limited resources.
The argument of "necessity" is not explicitly included in the 303(h)(1) analysis, which likely reflects the understanding that if a debtor is in severe financial distress, it is generally failing to meet its debt obligations. However, the court acknowledges that the totality test allows for flexibility and considers the overall financial situation of the debtor, suggesting that the necessity argument may be relevant in exceptional cases. In such cases, if a petitioning creditor demonstrates that the debtor is not paying debts as they come due, the burden shifts to the debtor to prove that their resource allocation was necessary. In the current case, GAC failed to demonstrate that its expenditures were necessary, leading the court to dismiss this argument for the 303(h)(1) analysis.
GAC's bank statements indicated a lack of significant funding sources beyond transfers from its subsidiary. GAC's motion to dismiss included various other claims, such as the standing of the Petitioning Creditors and the existence of bona fide disputes, but these were previously addressed concerning sections 303(b) and (h), leaving only the bad faith argument for consideration. The Bankruptcy Code does not allow for the dismissal of a valid involuntary petition solely based on the subjective bad faith of the filers. Different courts have developed various tests to assess bad faith claims, including a totality of the circumstances test and an "improper purpose" test, which examines motivations such as ill will or attempts to gain a disproportionate advantage over other creditors.
The totality test in bankruptcy law combines the improper purpose and improper use tests, as described in Collier's. However, in the case of *In re Forever Green Athletic Fields, Inc.*, the totality test is expanded to include subjective and objective tests. This broader approach considers actions by creditors that may attempt to use bankruptcy to gain corporate control. In the involuntary petition filed in June 2018, three creditors—Carolynn Taft, Martie Nadauld, and Lori Chigbrow—did not participate in a fee-sharing arrangement, with the remaining Petitioning Creditors covering their legal fees. These three creditors' claims represent only 2.4% of the total claims by the Petitioning Creditors. Additionally, while the bankruptcy court has jurisdiction over an involuntary case, it has the discretion under 11 U.S.C. § 305(a) to dismiss or suspend proceedings. Various cases illustrate instances where courts exercised this discretion. A motion for settlement agreements with Nadauld, Chigbrow, and Taft was later filed, with clarification that these settlements would not impact the standing of the Petitioning Creditors.
