Ruling coming on SIST bankruptcy petition

Shawano Leader, Wisconsin/January 3, 2010

By Tim Ryan

A ruling deciding the fate of the federal bankruptcy petition filed in a Delaware court last year by the Samanta Roy Institute of Science and Technology, Inc. could come at any time, according to sources familiar with the case.

The deadline to file any further arguments regarding SIST's appeal of a court ruling dismissing the petition passed more than two weeks ago. Briefs were to be filed by Dec. 17, but there is no word on how quickly the court might act on them.

One of SIST's creditors - Southwest Guaranty, Ltd. - filed a motion Dec. 21 asking the court for an expedited hearing. Failing that, the Houston-based real estate lender is requesting SIST be forced to put up a bond sufficient to protect the interests of all creditors.

SIST, meanwhile, is calling for a contempt order in U.S. Bankruptcy Court against Southwest over a recent $2.5 million civil judgment, which was awarded despite a federal court-ordered stay on civil litigation against SIST or its subsidiaries named in the bankruptcy filing.

The motion filed Dec. 2 requests the bankruptcy court vacate the Shawano County Circuit Court ruling and seeks legal fees spent defending the court's stay order and $50,000 in damages.

Circuit Court Judge Thomas Grover on Nov. 18 awarded a $2.5 million summary judgment to Southwest against defendants Naomi Isaacson, Michal Goldstein and Thelma Brown. Isaacson is CEO of SIST. Goldstein and Brown are members of the SIST board, according to a list of board members filed with the Wisconsin Department of Finance in February 2009.

Southwest filed a response to the contempt motion in U.S. Bankruptcy Court on Dec. 24, arguing the federal stay did not apply to the individual defendants Isaacson, Goldstein and Brown because none of them are named in the bankruptcy filing.

Southwest had filed a civil complaint in December 2008 and also named SIST and its subsidiary U.S. Acquisitions and Oil. The suit had been seeking what was then a $2.2 million judgment over an allegedly defaulted mortgage on the amusement park and racetrack property at W5901 County Road BE.

That case was dropped after the bankruptcy filing, and Southwest instead filed suit against Isaacson, Goldstein and Brown, who the complaint maintains executed a guaranty of the loan and are contractually obligated to make payment.

In the Dec. 24 response to the contempt motion, Southwest also accused SIST of a "systematic and continuous breach" of rules set down by the bankruptcy court, including a failure to provide weekly accounting reports.

The response also alleges five of SIST's secured creditors, including Southwest, filed motions for relief from the automatic stay because payments were not being made to the lenders.

Meanwhile, the U.S. Trustee's office has also weighed in on the SIST bankruptcy case with a motion filed Dec. 7 calling for the appeals judge to reinstate the bankruptcy court's dismissal of the Chapter 11 petition.

U.S. Bankruptcy Judge Kevin Gross ruled Sept. 22 a dismissal was necessary, given SIST's mounting financial losses, the absence of a plan to rehabilitate, lengthy inaction in obtaining financing and a lack of effort to maximize the value of assets for the benefit of creditors.

Among the concerns raised, Gross wrote, was the fact the debtors had not filed tax returns and were holding nearly $60,000 in cash in a gas station safe, segregated from other business operations.

"Such 'cash management' constitutes not only gross mismanagement but, as well, a lack of candor," Gross wrote.

Several civil lawsuits against SIST and some of its subsidiaries involving more than $4 million in claims have been waiting for a resolution of SIST's appeal.

Those cases - including the pending foreclosure sale of three Shawano gas stations and a defamation suit filed by Shawano Mayor Lorna Marquardt - were put on hold when the Chapter 11 bankruptcies were filed in March 2009.

The bankruptcy filings included SIST and subsidiaries Midwest Oil of Shawano, LLC; Midwest Oil of Wisconsin, LLC; Midwest Oil of Minnesota, LLC; Midwest Properties of Shawano, LLC; Midwest Hotels and Motels of Shawano, LLC; and U.S. Acquisitions and Oil, Inc.

The bankruptcies were filed two days before the scheduled sheriff's sale on March 18 of three Shawano gas station properties owned by SIST subsidiary Midwest Oil of Wisconsin.

According to a civil suit filed by Integrity First Bank of Wausau, Midwest Oil secured $1.3 million in financing from the bank in August and September 2006 by mortgaging the three properties. According to the suit, $1.2 million was remaining on the debt when the bank was awarded a summary judgment in December 2008.

Other cases on hold during the bankruptcy proceedings have included:

- A civil claim in U.S. District Court in Green Bay involving SIST and subsidiary U.S. Acquisitions and Oil, Inc. The claim, alleging fraudulent transfer of the racetrack property, stems from a $190,000 judgment against SIST subsidiary Midwest Amusement Park that was still being appealed when the bankruptcy was filed.

- Two civil suits filed by Draeger Oil Co. in Shawano County Circuit Court. One of the suits claims more than $206,000 in payments due on fuel products provided to the three gas stations and the other is a foreclosure action on three residential properties, which the suit contends were mortgaged to Draeger for $225,000.

- Two civil suits filed by Zien Service, Inc. of Milwaukee - alleging past due payments for mechanical, plumbing and heating work performed at several SIST properties.

SIST bankruptcy case timeline

The following is a timeline of event highlighting in the dismissal and appeal of the SIST bankruptcy case in U.S. Bankruptcy Court in Delaware. The original bankruptcy petitions were filed March 16, 2009.

September 16 - Court issues an order directing debtors to appear at a hearing to show cause why the debtors' cases should not be dismissed or a Chapter 11 trustee should not be appointed.

September 21 - "Show cause" hearing is held.

September 22 - Bankruptcy cases dismissed.

October 2 - Debtors file notice of appeal.

October 13 - Debtors file motion for a stay pending appeal.

October 19 - Court orders temporary stay, set to expire October 26.

October 21 - Debtors file an emergency motion for a stay pending appeal.

October 26 - Court enters order for extended stay, in effect "until further notice."

December 17 - Deadline for filing of briefs related to the appeal.

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