VERIFIED OMNIBUS RESPONSE OF FUND RECOVERY
SERVICES, LLC TO THE DEBTORS’ FIRST DAY MOTIONS
Fund Recovery Services, LLC (“FRS”), as assignee of Princeton Alternative Income Fund, LP (“Princeton”), by and through its undersigned co-counsel, Shaw Fishman Glantz & Towbin LLC and Sills Cummis & Gross, P.C., hereby submits this verified omnibus response (“Response”) to the First Day Motions (as defined herein) filed by Argon Credit LLC (“Argon Credit”) and Argon X, LLC (“Argon X,” together with Argon Credit, the “Debtors”), and in support thereof, states and represents as follows:
Preliminary Statement
On December 17, 2016 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code, §§ 101, et seq., as amended (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Northern District of Illinois (the “Court”).
The Debtors filed bare petitions; no schedules or statement of financial affairs was filed by either Debtor.
Simultaneously with the filing of their petitions, and in addition to a motion for the scheduling of an emergent hearing, the Debtors filed the following motions:
i. Motion for Joint Administration of the Debtors’ bankruptcy cases;
ii. Emergency Joint Motion for Interim Authority to Use Cash Collateral (the “Interim Cash Collateral Motion”);
iii. Emergency Joint Motion for an Order Authorizing Maintenance of Bank Accounts, Use of Existing Business Forms and Checks, Continued Use of Cash Management Systems and Waiver of Investment and Deposit Guidelines (the “Cash Management Motion”); and
iv. Emergency Motion for an Order Authorizing the Debtor to Pay All Pre-Petition Employee Obligations and Pre-Petition Withholding Obligations, and Directing Banks to Honor Related Transfers (“Pre-Petition Wage Motion”).
The foregoing motions collectively are referred to herein as the “First Day Motions.”
The Debtors filed the Declaration of Raviv Wolfe, the Debtors’ CEO, in support of the First Day Motions (the “Declaration”).
In the First Day Motions and Declaration, the Debtors present a misleading account of the root cause of their bankruptcy filing and an overly optimistic outlook for their emergence from Chapter 11. The Debtors would have this Court believe that an allegedly inadequate third party vendor is the cause of the Debtors’ missing “just one” debt service payment. The Debtors’ pleadings suggest they have rectified the problem by firing the vendor and moving those services in-house. The Debtors suggest that, with a short “breathing spell,” the “temporary” cash flow problem will be fixed and all creditors will be paid.
The Debtors’ recitation of the events leading to bankruptcy is grossly inaccurate. The Debtors neglect to mention anything about the fraud that Argon’s Executive Vice President of Finance, Eric Schnosenberg, admits Argon committed by selling consumer loans that had been pledged as collateral to Princeton to another buyer. Having already received 100% of the principal loan amount from Princeton, the Debtors sold over 1,157 loans to Spartan Specialty Finance I SPVC LLC (“SSF”) for 70 cents on the dollar. Meanwhile, the Debtors sent fraudulent statements to Princeton, reporting that the loans sold to SSF were still part of Princeton’s portfolio.
The records of the Debtors’ payment to Princeton show fluctuations indicative of Argon’s efforts to juggle payments to two parties asserting entitlement to the same revenue stream. Argon disregarded priority rules and diverted funds belonging to Princeton.
The Debtors manipulated their balance sheets to mask the fraudulent sale of loans and the dissipation of assets pledged to Princeton. An analysis of the Debtors’ balance sheets is annexed hereto as Exhibit A. For example, the Debtors originally provided Princeton with a balance sheet for December 2015 that showed total assets of $51,062,856.85. In February 2016, the Debtors presented Princeton with a revised balance sheet for December 2015, showing total assets of $50,263,147.91 (a reduction of $800,000). In March 2016, the Debtors again provided Princeton with a revised balance sheet for December 2015; this time, the Debtors’ total assets were only $45,520,784.54. While it is not uncommon for a company to revise its balance sheet from time to time, the Debtors’ balance sheets were repeatedly revised, providing Princeton with three different values for their assets as of December 2015. It is certainly not common that asset values change by $5.5 million!
The “Total Assets” line items are not the only balance sheet items to change when Argon manipulated its financial statements. The original December 2015 balance sheet listed an asset called “Argon SSF Holding” with a stated value of $5.4 million. When the December 2015 balance sheet was revised in February 2016, that asset had been renamed “Argon Holding” (dropping the reference to SSF, to whom Princeton’s collateral loans had been improperly sold), and the asset’s value dropped to $5.0 million. By March 2016, the entire line item had been removed from the balance sheet.
On December 7, 2016, several members of the Debtor’s senior management and representatives of the Debtors’ major equity holders met with Princeton. The Debtors’ Executive Vice President of Finance, Eric Schnosenberg, admitted that there is an $8 million to $11 million shortfall in the value of collateral securing the Debtors’ indebtedness to Princeton. No mention of this shortfall is made by the Debtors in the First Day Motions.
Rather, the Debtors shockingly assert that Princeton’s interest in collateral will be adequately protected by an alleged “equity cushion.” Notably, the Debtors provide no financial statements to support their “equity cushion” argument. The balance sheets the Debtors provided to Princeton uniformly show negative “Retained Earnings” for every month since August 2015. As of October 2016 (the last balance sheet provided to Princeton by Argon), the Debtors’ Retained Earnings were ($2,573,068.49).
It appears that, on restatement by Argon, the funds from the Argon SSF Holding line item were listed under “Argon Old OPEX Account.” In January 2016, that account was valued at approximately $295,000; by February 2016, the value of that account had spiked to $4,259,867.59. The funds in that account have been depleted, with only $6,573.24 remaining in the account as of October 2016.
Some of the depletion of Argon’s cash is attributable to excessive operating expenses. The Debtors pay $40,000 per month to lease extravagant office space. The Debtors brought in a President at a salary of $200,000 per year without seeking Princeton’s approval, in violation of at least two covenants in the Loan and Security Agreement between the Debtors and Princeton. The Debtor’s CEO, Raviv Wolfe, routinely used a debit card linked to the Princeton financing to pay for personal expenses, including new tires for his car, meals and travel. The Debtors have refused Princeton’s recommendations to pare excess operating costs. The only source of overspending the Debtors seem to have acknowledged is the use of a payroll and human resources firm at a cost of $15,000 and $30,000 per month.
The Debtors paid all of their creditors on the eve of the bankruptcy filing, preferring other creditors over repayment of their indebtedness to FRS.
Based on the foregoing, the Debtors have potential claims against the Board of Directors for breach of fiduciary duty, including failure to adequately monitor the Debtors’ operations to prevent fraud from occurring. Princeton had relied on the reputation and business acumen of several members of the Board when making its $37,500,000 investment in Argon. John Kuhlman from the Royal Bank of Canada (“RBC”) was on the Board and was investing funds on behalf of his clients, the Utihaine family. Mr. Kuhlman and the Utihaine family were active in Argon’s business on a daily basis. Mr. Kuhlman even used his RBC email address for correspondence about Argon. Joe Canfora from Merit Gaming was also on the Board, guiding the company on a daily basis. With these and other very successful people investing their own money and actively monitoring their investment and participating in all decisions, Princeton’s investment was safe.
Despite the initial zeal, the Board ultimately failed to implement appropriate policies, procedures and other controls to prevent fraud, malfeasance and non-feasance by management, thereby jeopardizing Princeton’s investment. Instead, the Board (i) approved sale of collateral pledged to Princeton, without Princeton’s approval and did not remit the sale proceeds to Princeton; (ii) failed to notify Princeton of the deficiency in the Collateral; (iii) appointed Peter Ferro as President with a $200,000 per year salary without Princeton’s approval, in violation of the LSA; (iv) failed to preserve assets and reduce overhead expenses; (v) accrued grossly excessive operating expenses, including payroll liability, when Argon is without its own money; (vi) prioritized the personal financial interests of certain Board members ahead of the interests of Argon’s outside creditors; (vii) fraudulently manipulated its balance sheet to mask the SSF loan fraud and Argon’s true financial condition; (viii) withheld payments due and owing to Princeton; and (ix) allowed the CEO to use a debit card tied to the main operating bank account for personal expenses.
Several of the Board members represent companies that hold promissory notes from the Debtors (including Little Owl and Margon), making them substantial creditors of the Debtors. Neither the Debtors’ senior management nor the Board can be expected to assert breach of fiduciary duty claims against themselves or executive management. They are similarly unlikely to assert avoidance claims against the Debtors’ vendors.
The Debtors have not missed “only one” debt service payment to FRS. The Debtors have a line of credit from which they would draw on a daily basis. Every Wednesday, Argon is required to make a settlement payment to FRS. Princeton and Argon would true up the line of credit on a monthly basis. Prior to the Petition Date, the Debtors missed the December 7 and December 15 payments due FRS. The Debtors propose not to make any payments to FRS for three (3) more weeks while Argon uses the cash to pay exorbitant administrative expenses.
The Debtors’ omission of the SSF loan sale and the multi-million dollar Collateral deficiency from the Debtors’ First Day Motions and Declaration is not only glaring, but unconscionable. It is critical that the Debtors, who have shown themselves untrustworthy and lacking candor to FRS and this Court, not be permitted to utilize collections of consumer loans during these cases. In order to maximize recovery of the loans for the benefit of all parties, a third party servicer should immediately be put in control of the Debtors’ operations, and regular debt service payments should resume to FRS.
Factual Background
Argon X Borrows from Fintech Financial LLC
The above-captioned debtor, Argon X, is an originator and servicer of consumer loans. Argon X agreed to purchase consumer loans originated by its parent company, Argon Credit, and Argon Credit’s subsidiary entities (collectively, the “Argon Credit Subsidiaries”).
Pursuant to the Master Agreement, Argon X acquired the exclusive right to all payments made on account of consumer loans it acquired from Argon Credit or the Argon Credit Subsidiaries.
On June 4, 2015, Argon X perfected its security interest in the consumer loans and their proceeds by filing UCC financing statements against Argon Credit and each of the Argon Credit Subsidiaries.
On May 1, 2015, Fintech Financial LLC (“Fintech”), as lender, and Argon X, as borrower, entered into a Loan and Security Agreement (the “LSA”) pursuant to which Fintech established a revolving credit facility for Argon X in the original principal amount of up to $20 million (collectively, the “Argon Loans”). Pursuant to subsequent amendments, Argon’s borrowing base was increased to $37.5 million.
As of the Petition Date, the balance due from Argon to under the Revolving Loan Note is at least $37,291,193.98.
To secure repayment of the Debtors’ obligations, Argon X granted Fintech a security interest in, and lien upon, all of Argon’s personal and real property, whether then owned or thereafter acquired or existing and wherever located (collectively, the “Collateral”). LSA, Section 5.1. The Collateral in which Fintech obtained a security interest includes, without limitation, (i) all of Argon X’s consumer loan receivables then owned or thereafter originated or acquired by Argon, and all amounts due and to become due thereunder (the “Receivables”); (ii) all payments received on or with respect to the Receivables, including all payments of principal, interest and other fees paid by Account Parties (as defined in the LSA) pursuant to the Contracts or otherwise collected or received in respect of the Receivables (the “Collections”); (iii) all instruments, including without limitation, all promissory notes and any other instruments related to the Receivables, whether in tangible or electronic form; (iv) all Accounts, including without limitation the Accounts related to the Receivables; (v) all Contract Files; and (vi) all of the Pledged Accounts and all other monies, credit balances, deposits and other property of [Argon X] then or thereafter held or received by or in transit. Id.
On May 6, 2015, Fintech sold, transferred and assigned to Princeton all of Fintech’s right, title and interest in and to the Argon Loans, together with and including all of Fintech’s rights and remedies under the LSA and its interest in the Collateral, including the Receivables and Collections of loans originated by Argon Credit and the Argon Credit Subsidiaries. Princeton filed UCC financing statements assigning all of Fintech’s rights in the Collateral to Princeton.
On or about December 7, 2016, Princeton assigned all of its right, title and interest in any and all agreements between Princeton and Argon X, including all right, title and interest in the LSA, the Revolving Loan Notes, all other Financing Agreements, and the Collateral to FRS.
RESPONSE TO FIRST DAY MOTIONS
The Cash Collateral Motion
The Debtors have filed a motion for authority to use cash collateral.
Section 363(c)(2) of the Bankruptcy Code provides, in relevant part:
The trustee may not use, sell or lease cash collateral under paragraph (1) of this subsection unless —
each entity that has an interest in such cash collateral consents; or
the court, after notice and hearing, authorizes such use, sale or lease in accordance with the provisions of this section.
11 U.S.C. § 363(c)(2).
FRS does not consent to the Debtors’ use of the proceeds of the Loans in this case.
The term “adequate protection” is not defined in the Bankruptcy Code. However, section 361 of the Bankruptcy Code provides three non-exclusive methods as examples: (1) periodic cash payments; (2) additional or replacement liens; or (3) other relief resulting in the "indubitable equivalent" of the secured creditor's interest. 11 U.S.C. § 361.
The Debtor bears the burden of establishing that the creditor’s interest in the collateral is adequately protected. 11 U.S.C. § 363(p)(1).
The Debtor has offered, as “adequate protection,” to pay $350,000 during the fourth week of the Debtors’ bankruptcy case.
It is well established that the use of property by a debtor causes “a decrease in the value of [the creditor’s] interest in property in which the estate has an interest.” In re River Oaks Ltd. P'ship, 166 B.R. 94 (E.D. Mich. 1994). Any such decrease attributable to the Debtor's usage, therefore, “must be protected by cash payments from another source, an additional or replacement lien, or other such indubitable equivalent.” Id., quoting In re Willowood East Apartments of Indianapolis, 114 B.R. 138 (Bankr. S.D. Ohio 1990).
The Value of the Collateral is Declining
It is axiomatic that adequate protection is intended “only to assure that a secured creditor, during the pendency of a bankruptcy case, does not suffer a loss in the value of its interest in the property of the bankruptcy estate.” In re Settlers' Housing Service, Inc., 2014 WL 197682 (Bankr. N.D.I11., Jan. 16, 2014) quoting In re Markus Gurnee P'ship, 252 B.R. 712, 716 (Bankr. N.D. Ill. 1997) (citing United Sav. Ass 'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988)). The burden is on the creditor to “first prove the value of its collateral is declining.” Id. quoting In Re M.D. Moody & Sons, Inc., 2010 Bankr. LEXIS 5220, *23-24 (Bankr. M.D. Fla. Mar. 5, 2010). Thereafter, the burden shifts to the debtor to show that the creditor is adequately protected. Id.
The Debtors have acknowledged that it has not made any post-petition loans to borrowers. Therefore, the Debtors are not replacing the cash collateral dollar for dollar, but are instead depleting the cash collateral to the detriment of FRS.
Reservation of Rights
FRS reserves the right to make further appropriate response to the First Day Motions and for relief or modification of the automatic stay.
WHEREFORE, FRS respectfully requests that this Honorable Court (i) issue an Order prohibiting the Debtors from using the Collateral, including loan proceeds, pledged to FRS without providing adequate protection of FRS’s interest in the Collateral; (ii)
, and further award all such other relief as this Court deems just and appropriate or alternatively terminate the automatic stay pursuant to 11 U.S.C. § 362(d)(1).
Respectfully submitted,
SHAW FISHMAN GLANTZ & TOWBIN LLC
Date: December 21, 2016 By:
Peter J. Roberts, Esq.
321 North Clark St., Suite 800
Chicago, IL 60654
(312) 276-1322 (phone)
(312) 980-3888 (fax)
proberts@shawfishman.com
and -
SILLS CUMMIS & GROSS, P.C.
Date: December 20, 2016 By: /s/ Valerie A. Hamilton
Valerie A. Hamilton, Esq.
600 College Road East
Princeton, NJ 17110
(609) 227-4600
vhamilton@sillscummis.com
Attorneys for Fund Recovery Services, LLC
VERIFICATION
, of full age, hereby verifies as follows:
1. I am ____________________ of Fund Recovery Services, LLC, a creditor in the above-captioned cases.
2. I have read the Verified Omnibus Response to First Day Motions that has been filed in this case, and I hereby verify that all of the facts pleaded therein are true and correct, except those made upon information and belief, if any.
I certify that the foregoing statements made by me are true, and that if any of the foregoing statements made by me are willfully false, I may be subject to punishment.
________________________________
Dated: December , 2016
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