IN THE UNITED STATES BANKRUPTCY COURT
FOR THE MIDDLE-DISTRICT OF PENNSYLVANIA
IN RE : CHAPTER 11
:
C.B.G. LIMITED : CASE NOS. 5-92-00525
TRACHELE, INC. : 5-92-00615
VALLEY UTILITIES CO., INC. : 5-92-00617
THE ONEIDA WATERS CO., : 5-92-00619
CHEZ-RAEL, INC. : 5-92-00620
:
DEBTORS-IN-POSSESSION :
OBJECTION TO DISCLOSURE STATEMENTS OF DEBTOR AND CREDITOR
AND REQUEST FOR APPOINTMENT OF A TRUSTEE PURSUANT TO
11 U.S.C. § 1104(a), OR AN EXAMINER PURSUANT
TO 11 U.S.C. § 1104(b)(2)
The Office of Attorney General, Bureau of Consumer
Protection, has been granted the leave of the Court to appear and
be heard on behalf of Consumers because said appearance is in the
public interest as set forth in the Bankruptcy Rule 2018(b), 11
U.S.C.A. This Order of the Court was entered and filed on August
31, 1994.
The intervention of the Office of Attorney General,
Bureau of Consumer Protection, was prompted by the receipt of
several dozen formal complaints from residents and property
owners of Valley of Lakes. The office of Attorney General
believes that the unsecured interests of both complaining and
1
silent residents and property owners will be adversely effected
by the implementation of either of the two Disclosure Statements
now before the Court.
Therefore, the Office of the Attorney General of the
Commonwealth of Pennsylvania, moves the Court as follows:
I. OBJECTIONS TO DEBTORIS DISCLOSURE STATEMENT
1. To refuse to approve the Disclosure Statement filed
by C.B.G. Limited, Trachele, Inc., Valley Utilities Co., Inc.,
The Oneida Water Co., and Chez-Rael, Inc., (hereinafter
"Debtors") on or about August 31, 1994, on the grounds that: (a)
the Debtors have concealed and misrepresented the financial
viability of the proposed financier, Agnew International Ltd.;
(b) the statement does not provide information of a kind and in
sufficient detail that would enable a hypothetical reasonable
investor typical of holder of claims or interests to make an
informed judgment; and (c) the plan could never be legally
confirmed pursuant to 11 U.S.C. § 1129; as is more particularly
detailed hereinafter.
2. Said Disclosure Statement states that a new
corporation Eagle Rock Resort, Inc. ("ERR") will purchase the
assets of the Debtors based on a loan from a "British
investor/lender" known as Agnew International Ltd., located at
2
the offices of Caribbean Corporate Services Limited, Omar Hodge
Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola,
British Virgin Islands. The Debtors represent the "ERR has
entered into a loan agreement with Agnew International to borrow
twenty-five (25) million dollars of which ten (10) million
dollars will be used to fund this Plan of Reorganization." See
Page 12 of Debtor's Disclosure Statement.
3. Said Disclosure Statement conceals and fraudulently
misrepresents the fact that the alleged "British
investor/lender", Agnew International Ltd., is actually a
Caribbean shell company which does NOT have the capital
structure, or financial resources, to make a loan for $25
million. In truth and fact, Agnew International Limited only has
a maximum authorized capital of $50,000(US). A copy of the
Memorandum of Association, Articles of Incorporation of Agnew
International Limited, dated January 5, 1994, together with a
final certification by the British Vice Consul, New York N.Y.,
pursuant to Fed. R. Civ. P. 44, is attached hereto as "Exhibit
A." According to paragraph 8 of the Memorandum of Association of
Agnew International Limited, at page 2, which is attached hereto
as "Exhibit All, the total authorized capital of the company is
"US $50,000.00."
3
4. Said Disclosure Statement conceals and fraudulently
misrepresents the financial resources of Agnew International
Ltd., to wit:
a. Said Caribbean shell company is less than one
year old. A copy of the Certificate of
Incorporation of Agnew International Limited,
dated January 5, 1994, together with a final
certification by the British Vice Consul, New
York, NY, pursuant to Fed. R. Civ. P. 44, is
attached hereto as "Exhibit "B".
b. Said Caribbean shell company only has an
existence in the office of its "registered
agent", like any typical shell company.
According to paragraph 2 of its Memorandum of
Association, at page, 1, which is attached
hereto as "Exhibit All, Agnew International
Ltd. is "situated at the offices of Caribbean
Corporate Services Limited, Omar Hodge
Building, Wickhams Cay I, P.O. Box 362, Road
Town, Tortola, British Virgin Islands.
c. Said Caribbean shell company cannot engage in
the business of banking. According to
4
paragraph 5(c), of its Memorandum of
Association, at page 1, which is attached
hereto as "Exhibit All, "The Company may not:
(c) carry on banking or trust business,
unless it is licensed to do so under the
Banks and Trust Companies Act, 1990." There
is no indication that it is so authorized.
d. Said Caribbean shell company is not even
authorized to do business in the British
Virgin Islands. See paragraph 6, of its
Memorandum of Association, at page 1, which
is attached hereto as "Exhibit A."
5. Said Disclosure Statement misrepresents the
"OPERATIONS DURING CHAPTER 11" of VALLEY UTILITIES CO., INC. The
Debtors attempt to mislead the Court into believing that they are
complying with their duties as a public utility. In truth and
fact, the Debtors have grossly mismanaged the operation of Valley
Utilities Co., Inc. The Debtors have failed to disclose to the
Court that Valley Utilities Co., Inc. has been cited for
violations by the Department of Environmental Resources of the
Commonwealth for violating the terms of its permit. A copy of a
Notice of Violation issued to Valley Utilities, Inc., dated
5
August 15, 1994, by the Department of Environmental Resources of
the Commonwealth, for "violation of the terms and conditions of
the permit and the Clean Streams Law, the Act of June 22, 1937,
P.L. 1987, as amended", is attached hereto as "Exhibit C." In
addition, scores of sworn complaints have been filed with the
Public utility Commission by the residents of the Valley of Lakes
against Valley Utilities Co., complaining of gross mismanagement.
Some homes in the Valley of Lakes development are repeatedly
flooded as a result of the gross mismanagement of this company.
Furthermore, the office of Consumer Advocate has intervened in
the complaint proceedings before the Public Utility Commission.
The complaints request, inter alia, that a trustee or receiver be
appointed to operate the system.
6. Said Disclosure Statement misrepresents the
"OPERATIONS DURING CHAPTER 11" of THE ONEIDA WATER CO. The
Debtors attempt to mislead the Court into believing that they are
complying with their duties as a public utility. In truth and
fact, the Debtors have mismanaged the operation of the Oneida
Water co. The Debtors have failed to disclose to the Court that
Oneida Water Co. has been cited by the Department of
Environmental Resources for its operations. A copy of a Notice
of Violation issued to Oneida Water Company, dated May 18, 1994,
by the Department of Environmental Resources of the Commonwealth,
6
for "violation of Chapter 109.501 of the Rules and Regulations of
the Department of Environmental Resources pertaining to drinking
water for construction and use as a source of supply and
modification to a public water supply system without the
appropriate permits" is attached hereto as "Exhibit D."
Additionally, in 1992, several complaints had been filed with the
Public Utility Commission by the residents of the Valley of Lakes
against Oneida Water co., complaining of gross mismanagement.
The recommended decision of a Public Utility Commission
Administrative Law Judge is pending before the Public Utility
Commission.
7. Said Disclosure Statement completely misrepresents
the "OPERATIONS DURING CHAPTER 11" of C.B.G. LIMITED. While
C.B.G. Limited has used its Chapter 11 Protection to continue to
collect maintenance fees, it has completely failed to maintain
the development. The Office of the Attorney General, Bureau of
Consumer Protection, has received dozens of formal complaints
from the residents testifying to the lack of maintenance. It
appears that C.B.G. Limited is using the funds it collects for
maintenance for other purposes. As the Court knows, a Debtor-in-
Possession in a Chapter 11 case has the same fiduciary duties as
a trustee appointed by a Court. See, e.g., Wolf v. Weinstein,
7
372 U.S. 633, 649, 83 S.Ct. 969, 10 L.Ed. 2d. 33 (1963). C.B.G.
is clearly breaching its fiduciary duties.
8. Said Disclosure Statement completely misrepresents
the "CAUSES OF DEBTORS' FINANCIAL DIFFICULTIES". The disclosure
statement attempts to paint a picture in which the Debtors were
victims of the economic times. In truth and fact, the Debtors
collected tens of millions of dollars in revenue and loans, and
then simply failed to deliver the promised improvements in
violation of the Interstate Land Sales Full Disclosure Act (15
U.S.C. § 1701 et. seq.). The Debtors engaged in a massive multi-
state media campaign promising that they would make the "Valley
of Lakes" the premier resort in the northeast. The Debtors filed
numerous registration statements with the Department of Housing
and Urban Development (HUD), and its state counterparts,
promising to complete the improvements by the late 1980s. The
Debtors reneged on virtually all of their promises, prior to the
filing of this petition, and in violation of the Interstate Land
Sales Full Disclosure Act (15 U.S.C. § 1701 et seq.). The
Debtors used the Chapter 11 reorganization to shield themselves
from the claims of the property owners. As detailed in the
Valley of Lakes Civic Association Proof of Claim, the developer
owed approximately $10 million dollars worth of uncompleted work-
-although they collected the revenue from the lot sales at
8
inflated prices. As a result, numerous families lost their life
savings, by e.g.: purchasing golf course lots of a promised
"Arnold Palmer designed and managed golf course" which never
materialized; purchasing "lake front lots," for as much as
$100,000 each, on the promised "Lake Algonquin" which never
materialized; purchasing unimproved lots for inflated prices
based on the promised improvements only to see the improvements
never materialize and the development virtually shut down;
purchasing unimproved lots based on the developer's promise to
install water lines, and/or sewer lines, and/or roads which never
materialized. Moreover, from the developer's actions, it is
obvious that he never had any intention of completing the
promised improvements. For example, he never even obtained a
permit to build the dam necessary to complete the promised lake.
In fact, the Debtors undertook virtually the same course of
action as the previous developers which were prosecuted for
violations of the Interstate Land Sales Full Disclosure Act (15
U.S.C. § 1701 et. seq.), and mail fraud by the U.S. Attorney for
the Middle District of Pennsylvania.
9. Said Disclosure Statement, apart from its gross
misrepresentations, lacks "adequate information" as required by
11 U.S.C. 1125, because it does not detail the loan agreements
9
with the alleged financier, lacks income projections, lacks
balance sheets, etc.
10. Said Disclosure Statement's proposed
Reorganization Plan is fatally flawed because Agnew international
Ltd. does not have sufficient financial resources to make a $25
million loan. Plans that are mere visionary schemes based on
speculation, conjecture, or unrealistic projections cannot be
confirmed. See In re Briscoe Entervrises Ltd., II, 138 B.R. 795
(N.D.Tex. 1992); In re Sound Radio, Inc., 93 E.R. 849, 856
(D. N. J. 1988) , aff'd in part, remanded in part, 103 B. R. 521 (D.N.J.
1989), aff'd, 908 F2d 964 (3rd Cir.1990). Therefore, confirmation
issues may be taken up at the disclosure hearing. See In re
Pecht, 53 B.R. 768 (E.D.Va.1985) (where it is apparent that the
plan accompanying the disclosure statement cannot be legally
confirmed, it is appropriate for the court to address
requirements of 11 U.S.C. § 1129(a)O. See, also, In re McCall,
44 B.R. 242 (E.D.Pa.1984).
11. Said Disclosure Statement demonstrates bad faith
on the part of the Debtors because of its nondisclosure and
misrepresentation. A finding of bad faith is warranted based on
nondisclosure or misrepresentation. See, e.g., American United
Mutual Insurance Co. v. City of Avon Park, 311 U.S. 138 (1940);
Barnes v. Whelan, 689 F.2d 193 (D.C.Cir. 1982); In re Goeb, 675
10
F.2d 1386, 1390 n. 9 (9th Cir. 1982) ; Big Shanty Land Corp. v.
Comer Properties. Inc., 61 B.R. 272, 281 (N.D.Ga. 1985).
Consequently, the plan cannot be approved for lack of good faith
pursuant to 11 U.S.C. § 1129 (a)(3).
12. Said Disclosure Statement also demonstrates bad faith
on the part of the Debtors because it is not feasible. See
In re Briscoe Enterprises Ltd., II, 138 B.R. 795, 809 (N.D.Tex.
1992) (A plan that is not feasible does not support a finding of
objective good faith). Consequently, the plan cannot be approved
due to a lack of good faith pursuant to 11 U.S.C. § 1129(a)(3).
13. Said Disclosure Statement's plan of reorganization
can not be approved because it violates 11 U.S.C. § 1129(a)(11),
which requires that "Confirmation of the plan is not likely to be
followed by the liquidation, or the need for further financial
reorganization, of the debtor or any successor to the debtor
under the plan, unless such liquidation or reorganization is
proposed in the plan." Since Agnew International Limited does
not have $25 million to loan to Eagle Rock Resort Inc., it is
almost certain that Eagle Rock Resort Inc. would file for
reorganization shortly after approval of the plan, i.e.
manifesting the "new entity syndrome', prevalent in bankruptcy
practice.
11
14. Said Disclosure Statement's plan of reorganization
can not be approved because it violates 11 U.S.C. §
1129(a)(5)(A)(i), which requires that the proponent of the plan
have "disclosed the identity and affiliations of" "a successor to
the debtor under the plan." The Debtors have failed to disclose
any information about Eagle Rock Resort Inc., the company they
propose to succeed the debtors. In fact, it appears that said
corporation has not even been formed, which throws into question
the validity of any loan agreements with a non-existent
corporation. A copy of certificate of non-existence, as to any
corporation named "Eagle Rock Resort, Inc." by the Secretary of
State of the Commonwealth of Pennsylvania is attached hereto as
"exhibit E."
15. Said Disclosure Statement and plan have been used
by the Debtors in violation of 11 U.S.C. § 1125(b) and Rule
3017(a). Specifically, the Debtors have mass mailed throughout
the U.S. solicitation form letters urging the property owners of
the Valley of Lakes to immediately pay the Debtors money, in the
amount og $360.00 each, based on the Debtors' representations
concerning their new financier and the presentation of their
alleged "plan" to this Court on September 1, 1994. A copy of
said solicitation letter is attached hereto as "Exhibit F".
12
II. OBJECTIONS TO CREDITOR'S DISCLOSURE STATEMENT
16. And the office of Attorney General, Bureau of
Consumer Protection, further moves this Court to refuse to
approve the Disclosure Statement filed by PNC Bank, National
Association, (hereinafter "Creditor") on or about September 15,
1994, on the grounds that: (a) the Creditor has concealed and
misrepresented the nature of the "class action" lawsuit
represented in Creditor's Disclosure Statement; (b) Creditors
statement relies on and is based on the inadequate and false
information presented by the Debtors; (c) Creditor's statement
does not provide information of a kind and in sufficient detail
that would enable a hypothetical reasonable investor typical of
holder of claims or interests to make an informed judgment; and
(d) the plan could never be legally confirmed pursuant to 11
U.S.C. § 1129; as is more particularly detailed hereinafter.
17. Said Creditor's Disclosure Statement seeks to
liquidate the assets of the Debtors, while nonetheless obtaining
a discharge of the liabilities of the Debtors, pursuant to
Chapter 11 of the bankruptcy laws. Creditor's Disclosure
Statement proposes to have a trustee sell the assets of the
Debtors, free and clear of all liens, and to permit the unsecured
creditors to share in a fund of $500,000 "provided it receives
the entirety of its distribution from the Free and Clear Sale."
13
18. Said Creditor's Disclosure Statement lacks
adequate information and is based almost completely on
misrepresentations from the Debtors. The Creditor's Disclosure
Statement admits that its information is based on Debtors'
Disclosure Statement. The Creditor's Disclosure Statement, at
page 1, states that: "Since the Creditor is not the Debtors
above, the Creditor must rely significantly upon the information
provided by the Debtor in delineating a Disclosure Statement
under 11 U.S.C. § 1125 to provide 'Adequate Information' .... As
such, the Creditor relies upon the Disclosure Statement filed by
the Debtors herein for many elements of its disclosure."
Consequently, the Creditor's Disclosure Statement fails to
provide adequate information because the Debtors' Disclosure
statement is based on numerous misrepresentations, and lacks
adequate information, as discussed supra. Creditor's Disclosure
Statement is based on false information in virtually all of its
elements: "Description and History of Debtors", "Debtors
Statement of its Financial Difficulties", "Operations During
Chapter 11", "Analysis of Present Situation", etc.
19. Said Creditor's Disclosure Statement fails to
disclose, and misrepresents the nature of the claims of the
residents of Valley of Lakes, and improperly classifies these
claims. Specifically, at page 15, Creditor's Disclosure
14
Statement classifies the residents, claims as follows: "(f)
Funds for Claims of Residents - Inclusive of all rights as shown
in their Proof of Claim and as reflected in a Class Action
Complaint filed against Debtor. 2 1/2% of the allowed claim."
The Creditor's Disclosure Statement fails to disclose to this Court
that the Creditor is also a defendant in said Class Action Complaint. Failure to
make such a disclosure demonstrates bad faith. See, e.g., In re
Unichem Corporation, 72 B.R. 95 (N.D. Ill. 1987)(court found lack
of good faith where nature of court proceeding not disclosed).
20. Said Creditor's Disclosure Statement is made for
an improper purpose. At present, the only reason that the
Debtor's continue to operate the Valley of Lakes Development is
that the Creditor (PNC Bank Corp.) has refused to exercise their
right to foreclose. As it admits, the creditor has already
obtained relief from the automatic stay and can foreclose on the
property. Yet, it has refused to do so. As a result, the
property owners in the Valley of Lakes have been forced to live
in a development that is grossly mismanaged by a "developer"
which defrauded many of them of their life savings, as discussed
supra. The only purpose in re-organizing the debtor pursuant to
the creditor's plan would be to discharge the debtor from its
liabilities. It would be an abuse of the bankruptcy laws to
discharge Debtors who have so abused their fiduciary duties, and
15
have engaged in dishonesty, fraud and mismanagement, both during
their Chapter 11 protection and prior to the filing of the
petition.
21. Said Creditor's Disclosure Statements embodies a
plan which is not viable because it is highly unlikely that any
funds would be left after the Creditor receives the entirety of
its distribution from the proposed Free and Clear Sale.
Consequently, the unsecured creditors would be receiving nothing
from creditor's plan.
III. REQUEST FOR APPOINTMENT OF TRUSTEE OR EXAMINER
22. For all of the above reasons and causes, the
office of Attorney General, Bureau of Consumer Protection,
further moves this Court to appoint a trustee to oversee the
Valley of Lakes Development pursuant to 11 U.S.C. § 1104(a). As
the Court knows, where the Debtor fails to disclose material and
relevant information to the Court and creditors, a Chapter 11
trustee is required. See, e.g., In re V. Savino Oil & Heating
Co., Inc., 99 B.R. 518 (E.D.N.Y. 1989) ; In re Deena Packaging
Industries, Inc., 29 B.R. 705, 706 (S.D.N.Y.1983). Pursuant to
11 U.S.C. § 1104 (a), a trustee is required where a debtor-in-
possession has breached its fiduciary duties, or where there are
allegations of fraud, dishonesty, incompetence, misconduct,
16
mismanagement, or irregularity in the management of the affairs
of the debtor. Moreover, the interests of the property owners,
the largest body of unsecured creditors, are continually being
prejudiced because the property owners are forced to live and own
property in a development which is grossly mismanaged.
23. As an alternative to the appointment of a trustee
pursuant to 11 U.S.C. § 1104 (a), the Office of Attorney General,
Bureau of Consumer Protection, moves for the appointment of an
Examiner pursuant to 11 U.S.C. § 11 04 (b) (2) . As the Court knows,
upon the request of a party in interest, the appointment of an
examiner is mandatory in cases in which borrowed money debt
exceeds $5 million. See, e.g., In re Revco D.S. Inc., 898 F.2d
498 (6th Cir. 1990). The Debtors' borrowed money greatly exceeds
$5 million. Consequently, the appointment of an examiner is
mandatory in this case.
WHEREFORE, the Office of Attorney General, Bureau of
Consumer Protection, prays that (a) the Court refuse to approve
the disclosure statement of the debtor; (b) the Court refuse to
approve the disclosure statement of the creditor; and (c) that
the Court appoint a trustee to oversee the Valley of Lakes
Development pursuant to 11 U.S.C. § 1104 (a), or appoint an
17
examiner pursuant to 11 U.S.C. § 1104(b)(2); and for such other
relief as this Court deems just.
/s/
J.P. McGowan
ATTORNEY I.D. NO. 30126
DEPUTY ATTORNEY GENERAL
OFFICE OF ATTORNEY GENERAL
BUREAU OF CONSUMER PROTECTION
214 SAMTERS BUILDING
101 PENNS AVENUE
SCRANTON, PA 18503
TELEPHONE: 717-963-4913
|
|