In re Lupton Consulting LLC

633 B.R. 844

IN RE: LUPTON CONSULTING LLC, et al.,¹ Debtors in possession.

Case No. 20-27482-beh Jointly Administered

United States Bankruptcy Court, E.D. Wisconsin.

Signed August 31, 2021

Kirk M. Fedewa, Watton Law Group, Michael J. Watton, Milwaukee, WI, for Debtor.

Jan S. Pierce, Jan Pierce, S.C., Milwaukee, WI, Trustee, Pro Se.

DECISION AND ORDER DENYING CONFIRMATION OF DEBTORS’ PLAN

Beth E. Hanan, United States Bankruptcy Judge Two debtors that operate three fitness clubs seek confirmation of their combined Chapter 11 plan. The U.S. Trustee has objected on multiple grounds; the major lender has lodged a limited objection focused on injunctive provisions. While the managing member of these debtors vows to spend nearly heroic hours working to preserve the reorganization, confirmation must be denied based on multiple improper injunctive provisions that benefit insiders (and soon-to-be outsiders), vague and ultimately infeasible plan funding and distribution terms, and a lack of good faith as required by 11 U.S.C. § 1129(a)(3).

FACTUAL BACKGROUND

A. The Debtors and their Principals

Debtor Lupton Consulting, LLC is a sole-member LLC owned and managed by Lawrence Lupton. Debtor Anytime Partners, LLC is owned 50% by Mr. Lupton, and 50% by Darren Enger; Lupton acts as its managing member.

Together, the debtors currently operate three Anytime Fitness gyms in the Milwaukee area: (1) the "Milwaukee Gym" (located at 6015 West Forest Home Avenue, Milwaukee, Wisconsin 53220); (2) the "West Allis Gym" (located at 2229 S. 108th Street, West Allis, Wisconsin 53227); and (3) the "Hartland Gym" (located at 520 Hartbrook Drive, Hartland, Wisconsin 53029). Lupton Consulting operates the first two gyms, while Anytime Partners operates the third gym. Mr. Lupton owns the franchises for each of the three gyms.

When the debtors filed these cases, on November 16, 2020, debtor Lupton Consulting, LLC operated a third gym, located in Brookfield, Wisconsin. Lupton Consulting closed the Brookfield gym in December 2020. Prior to filing (up until the end of October 2020), the Brookfield gym was operated by another entity, DL2 Fitness LLC, of which Mr. Lupton and Mr. Enger were each 50% owners. Also up until the end of October 2020, Mr. Lupton and Mr. Enger co-owned another entity, DFIT LLC, which operated an Anytime Fitness gym in New Berlin, Wisconsin that closed that same month. DFIT LLC and DL2 Fitness LLC merged with Lupton Consulting, LLC on October 30, 2020 by filing Articles of Merger with the Wisconsin Department of Financial Institutions. Up until August 2020, debtor Anytime Partners, LLC operated another gym in Pewaukee, Wisconsin, which it closed that month.

Mr. Lupton operates and oversees the three remaining gyms on a daily basis. He testified that a "typical" gym is staffed by a district manager, a manager (possibly two managers), and three trainers. Lupton personally takes on the duties of the district manager, one of the managers, and one of the trainers, to keep his staff as slim as possible and remain profitable. According to Mr. Lupton, he works at the gyms on an average of at least six days a week, from 6:00 AM to midnight, with an hour break for dinner with his family. Mr. Enger testified that he has not been involved in the day-to-day operation of any of the gyms since early 2020.

B. The Debtors' Assets and Liabilities

1. Lupton Consulting

As of the petition date, Lupton Consulting, LLC owned personal property worth $413,307.48, consisting primarily of accounts receivable from gym members, gym equipment, and a 2019 Mercedes Benz GLC 530. Four creditors assert security interests in this property: Geneva Capital (a purchase-money security interest in the equipment); Mercedes-Benz Financial Services USA (a purchase-money security interest in the vehicle); Byline Bank (a security interest in the debtor's personal property) and the United States Small Business Administration (a junior security interest in the debtor's personal property). These creditors filed secured claims against Lupton Consulting totaling $916,122.91.

Mr. Lupton and his wife Carolyne Lupton personally guaranteed the debt owed to Geneva Capital; Mr. Lupton personally guaranteed the debt owed to Mercedes-Benz Financial Services USA; and Mr. Lupton and Mr. Enger personally guaranteed the debt owed to Byline Bank, while Mr. Enger's wife, Laura Enger, also guaranteed the Byline Bank debt, but only to the extent of her interest in real property located at 321 East Wilson Street, Batavia, Illinois 60501, on which Byline Bank holds a Junior Mortgage, Security Agreement, Assignment of Leases and Rents, and Fixture Filing.

Lupton Consulting also owes debts to a handful of creditors holding unsecured claims: $1,660.25 to the Waukesha County Treasurer for personal property taxes owed to the City of Brookfield (see ECF No. 122-1, Ex. 100, at 22); $153,170.60 to BRE Retail Residual Owner 5 for the commercial lease of the former New Berlin gym location (id. at 23); and $22,725.84 to Cream City Property Management, LLC for the commercial lease of the former Brookfield gym location.² Mr. Lupton, Mr. Enger, and Dennis Cavanna (the individual from whom DFIT LLC purchased the New Berlin gym franchise) personally guaranteed the debt owed to BRE Retail Residual Owner 5 LLC. As of the petition date, Lupton Consulting also owed a contingent debt of $30,000 to the Small Business Administration for a Paycheck Protection Program (PPP) loan.

On Schedule G, Lupton Consulting disclosed several executory contracts and leases. One of those leases is for a 2020 Lexus RXL 350, and another is for a 2020 Mercedes GLE 350, both of which the debtor identifies as having 34 months remaining as of the petition date. Mr. Lupton is a co-lessee (and codebtor) on both of these leases. The monthly lease payment for the Lexus is $730.14 (see ECF No. 122-3, Ex. 102, at 134), and the monthly lease payment for the Mercedes is $945.23 (see ECF No. 122-19, Ex. 118). Lupton Consulting, LLC makes the lease payments for both of these vehicles. The lease agreement for the Mercedes (which Mr. Lupton completed) states that the primary intended use of the vehicle is "personal," instead of business, commercial, or agricultural purposes.³

Lupton Consulting, LLC also makes the payments on the 2019 Mercedes Benz GLC 530 identified above as the debtor's personal property, in the amount of $1,595.69 per month. The retail installment sale contract for the 2019 Mercedes indicates that the primary use for which the vehicle was purchased is "personal, family, or household," and also reflects that Mr. Lupton is a co-buyer and co-owner of the vehicle.

According to Mr. Lupton, the debtor pays for these three vehicles because he, his wife, and his teenage son use them to travel to the gyms. Although his wife and son are not employees, they spend time cleaning the clubs on a daily basis. Mr. Lupton testified that his wife and son do not track their hours, but estimated that his son spends four hours a day at one or more of the gyms—working out for two hours and cleaning for two hours—while his wife spends about two hours a day cleaning the gyms.

2. Anytime Partners

As of the petition date, Anytime Partners, LLC owned personal property worth $91,114.95, consisting primarily of accounts receivable from gym members and gym equipment. Two creditors assert security interests in this property: Geneva Capital (a security interest in miscellaneous gym equipment and office furniture and equipment); and Byline Bank (a security interest in the debtor's checking account, accounts receivable, and miscellaneous gym equipment). These creditors filed secured claims against Anytime Partners totaling $428,842.61. Both Mr. Lupton and Mr. Enger personally guaranteed Anytime Partners' debts to Geneva Capital and Byline Bank.

Anytime Partners owes unsecured debts to several creditors: $78,339.13 to Big Hand, LLC for rent due under the lease for the now-closed Pewaukee gym; $119,243.45 to David Taylor Fitness, LLC; $103,713.46 to Fitness Ventures, LLC; and $23,305.00 to DHCH Properties, LLC for past-due rent on the lease of the Hartland gym location. Mr. Lupton personally guaranteed the debt owed to all four of these creditors, while Mr. Enger guaranteed the debt to David Taylor Fitness, LLC.

As of the petition date, Anytime Partners also owed a contingent debt of $25,000 to the Small Business Administration for a PPP loan.

C. The Debtors' Prepetition Financials

When Lupton Consulting, LLC filed its petition, it disclosed in its Statement of Financial Affairs (SOFA) that it had not made any payments or other transfers of property within a year of the petition date that benefited any insider (SOFA question 4), and that, within the year before filing, it had provided insider Mr. Lupton $80,000 in "[d]raws, repayment of loan, license to operate franchise, wages" (SOFA question 30). See Ex. 100 at 35, 39.

Based on Mr. Lupton's testimony at the 11 U.S.C. § 341 meeting of creditors, however, as well as the U.S. Trustee's review of the debtors' pre- and post-petition bank records, the U.S. Trustee became concerned with the accuracy of these disclosures and the commingling of the debtors' business expenses with the personal expenses of Mr. Lupton. The U.S. Trustee sought and obtained a Rule 2004 examination of Mr. Lupton to inquire into prepetition transfers between the debtors and insiders.

In March 2021, Lupton Consulting amended its SOFA to disclose additional prepetition transfers made to or for the benefit of Mr. Lupton. In response to question 4, the debtor disclosed that it had made payments of almost $330,000 that benefitted Mr. Lupton: the debtor paid four loans totaling $48,744.68 that Mr. Lupton had borrowed on behalf of the debtor, and paid $278,634.39 in charges that the debtor had incurred on Mr. Lupton's personal credit cards. See Ex. 100, at 71–72. Lupton Consulting also amended its answer to SOFA question 30, disclosing that Mr. Lupton had received over...