In re Vitaminspice

472 B.R. 282

67 Collier Bankr.Cas.2d 863

56 Bankr.Ct.Dec. 104

In re VITAMINSPICE, Debtor.

No. 11–16200–MDC.

United States Bankruptcy Court, E.D. Pennsylvania.

April 19, 2012.

VitaminSpice, Wayne, PA, Pro se.

MEMORANDUM

MAGDELINE D. COLEMAN, Bankruptcy Judge.

On August 5, 2011 (the “Petition Date”), John Robison, IBT South Florida LLC, Learned J. Hand, Jehu Hand, and Esthetics World (collectively, the “Petitioning Creditors”) filed an involuntary petition, under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the “Involuntary Petition”), against VitaminSpice. Thereafter, VitaminSpice filed the Motion to Dismiss the Improperly Filed Involuntary Petition and Lift the Automatic Stay Pending Adjudication of this Motion (the “Motion to Dismiss”). In the Motion to Dismiss, VitaminSpice seeks dismissal of the Involuntary Petition on the grounds that it (1) is a bad-faith filing and abuse of the bankruptcy system initiated by the Petitioning Creditors to exact payment from VitaminSpice for baseless claims, (2) was filed as a litigation tactic to frustrate pending litigation between VitaminSpice and the Petitioning Creditors, (3) had and will continue to have deleterious impacts on VitaminSpice's ongoing business.

Following several evidentiary hearings on the Motion to Dismiss and after review of voluminous documents submitted by VitaminSpice in support of the Motion to Dismiss and the Petitioning Creditors in opposition to same, the Court will grant the Motion to Dismiss. Although the Court finds that at least three of the Petitioning Creditors hold undisputed claims against VitaminSpice, dismissal is warranted because the Petitioning Creditors failed to prove that VitaminSpice is generally not paying its debts as they become due.

Consistent with Fed. R. Bankr.P. 7052, the following discussion constitutes this Court's findings of fact and conclusions of law. This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157 and 1334.

STATEMENT OF FACTS¹

A. The Formation of VitaminSpice

VitaminSpice is a Wyoming corporation headquartered in Chester County, Pennsylvania with a business address of 996 Old Eagle School Road, Suite 1102, Wayne, Pennsylvania 19087. VitaminSpice is a public company whose shares are traded on the Electronic Bulletin Board under the symbol VTMS and is in the business of selling cooking spices enhanced with vitamins. In 2008, Edward Bukstel (“Bukstel”) founded the predecessor entity to VitaminSpice, VitaminSpice, LLC. After founding VitaminSpice, LLC, Bukstel attempted to raise capital from local investors. Finding private sources of capital to be insufficient to develop a commercially-marketable product, Bukstel began investigating how he could take the company public. To this end, Bukstel's former college roommate, Kevin Woodbridge (“Woodbridge”) introduced Bukstel to Jehu Hand. Jehu Hand was and remains a securities attorney who specialized in the performance of reverse mergers.

In August 2009, upon the advice of Woodbridge, Bukstel traveled to California to meet with Jehu Hand to discuss how VitaminSpice, LLC could be taken public. As a result of their conversation, the two determined that a reverse merger with a publicly-traded “shell company” would most effectively allow VitaminSpice, LLC to access public capital markets. The principal reason for the adoption of this method was that a reverse merger with a pre-existing, publicly-traded company would permit VitaminSpice, LLC to avoid the costs of going public via an initial public offering.

In September 2009, VitaminSpice achieved its present corporate form as the result of a reverse merger of VitaminSpice LLC with Qualsec, LLC (“Qualsec”). Jehu Hand's brother. Learned J. Hand, owned Qualsec. Qualsec, a limited liability company organized under the laws of the State of Wyoming, was at the time a publicly-traded shell company. The resulting entity was renamed “VitaminSpice” and is the VitaminSpice in this proceeding. At the close of the merger, Bukstel was appointed to serve as VitaminSpice's chief executive officer and chief financial officer. Jehu Hand agreed to serve as VitaminSpice's corporate counsel. In that capacity, Jehu Hand assisted VitaminSpice with, inter alia, identifying potential investors, the preparation of VitaminSpice's financial statements and the distribution of press releases. Existing creditors of Qualsec were given shares in the newly-formed entity. Learned J. Hand was among those receiving such shares and received 50,000 shares as a result of the transaction. Bukstel received 46,255,234 shares in the new entity.²

From this beginning, things quickly went south for VitaminSpice and the cast of characters involved in its business operations. During this period, it appears that substantial friction developed between Jehu Hand and Bukstel. On the one hand, Bukstel alleges that, beginning with the performance of the reverse merger, the Hands, along with other parties, engaged in a scheme to manipulate the shares of VitaminSpice and divest control of VitaminSpice from Bukstel. On the other, the Petitioning Creditors allege that Bukstel diverted corporate assets for his personal benefit and wasted corporate opportunities.

In the beginning of 2010, Jehu Hand claims to have become concerned by Bukstel's conduct when Jehu Hand noticed certain accounting irregularities during the performance of his bookkeeping role. Jehu Hand concluded that it was necessary to impose accounting procedures with VitaminSpice to prevent Bukstel from using corporate funds for personal purposes. To address his concerns, Jehu Hand traveled to Philadelphia in March 2010 to meet with Bukstel with regard to the adoption of accounting procedures necessary to comply with Securities and Exchange Commission financial reporting requirements. After traveling to Philadelphia, Jehu Hand determined that it was necessary for VitaminSpice to hire an employee to establish accounting controls. Because Bukstel and VitaminSpice did not have the funds to pay for the salary of this employee, Jehu Hand agreed to pay the salary of the employee in the amount of $2,000.00 every two weeks. The parties did not provide any documentary evidence establishing the terms of this agreement including whether VitaminSpice or Bukstel agreed to reimburse Jehu Hand for such expenses.

Around this time, Jehu Hand engaged himself in the business of preparing draft financial statements that were presented to VitaminSpice's auditor in connection with VitaminSpice's June 30, 2010 Financial Statements (“June 2010 Statements”). As part of his efforts, Jehu Hand prepared several documents that describe capital investments in VitaminSpice and are now part of the record before this Court. Among these documents is a copy of the “Notes to Unaudited Condensed Financial Statements” dated June 30, 2010. Trial Exh. D–11. In this document, VitaminSpice states “In the first quarter of 2010 we sold 300,000 shares of common stock for cash of $75,000.” Although the statement does not identify the source or sources of the $75,000, VitaminSpice's record reflects that the $75,000 investment came from three sources—Keith Destephano, Chip Rodden and Esthetics World. Trial Exh. D–17, Attachment A 24.

Following Jehu Hands' completion of his work relating to the preparation of VitaminSpice's June 2010 Statements, the relationshipbetween Jehu Hand and Bukstel completely deteriorated. Bukstel and Jehu Hand have leveled various accusations against each other regarding the cause for this development. Bukstel claims that his decision to terminate Jehu Hand was the result of his discovery of an alleged stock manipulation scheme. On the other hand, Jehu Hand alleges that his termination was in retaliation for his efforts to inform VitaminSpice's board of directors of Bukstel's alleged mismanagement of VitaminSpice. Whatever the true cause of their disagreement, it is apparent that on July 6, 2010, Bukstel terminated Jehu Hand's relationship with VitaminSpice.

B. The Pre–Petition Litigation

Prior to the Petition Date, VitaminSpice, several of the Petitioning Creditors, and certain of VitaminSpice's shareholders were litigants in various lawsuits. These disputes centered on restrictions placed on the sale of certain of VitaminSpice shares by Bukstel. During 2010, Bukstel apparently issued stop orders to Stalt, Inc., VitaminSpice's stock transfer agent, restricting the sale of shares owned by Learned J. Hand and Advanced Multilevel Concepts, Inc., Able Direct Marketing, Ken Nail, Esthetics World, International Business Development, and Irv Pyun (collectively, the “Restricted Shareholders”). Bukstel contends that the stop orders were issued to prevent a stock manipulation scheme engineered by Jehu Hand.

On March 7, 2011, Learned Hand filed a complaint against VitaminSpice in North Carolina state court (“North Carolina Action”) seeking to recover from VitaminSpice damages allegedly arising from the stop order placed on his shares. Thereafter, Learned Hand obtained a default judgment in the North Carolina Action in the amount of $12,701.24 plus punitive damages in the amount of $250,000.00 (“North Carolina Judgment”).³ Subsequent to the filing of the Involuntary Petition, the North Carolina Judgment was set aside upon motion of VitaminSpice on the grounds that the complaint initiating the North Carolina Action was not properly served. Learned Hand has since initiated an adversary proceeding before this Court in which he seeks the same relief that he sought in the North Carolina Action.

On June 8, 2011, the Restricted Shareholders filed a complaint in the United States District Court for the Eastern District of Pennsylvania.⁴ This action was captioned Advanced Multilevel Concepts Inc., Able Direct Marketing Inc., Ken Nail, Esthetics World, International Development Business, Inc., and Irv Pyun et al. v. Bukstel, VitaminSpice, Seelig, et al. (the “District Court Action”). The complaint...