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IRS Has First Claim to JoyStar Assets

July 28, 2009 By: George Dooley

Patrick S. Scott, Esq, of the Fort Lauderdale firm of Gray Robinson, has provided JoyStar, Inc. creditors with a detailed update on the status of the now bankrupt travel company. JoyStar has left as many as 700 creditors in line for some compensation, including travel agents and some consumers. The JoyStar collapse is widely regarded as one of the worst failures in the recent history of the travel industry.

Scott makes clear, however, that the Internal Revenue Service has priority with a lien of $236,404 against JoyStar, the debtor. Scott warned that it could take a year or more to resolve the bankruptcy and suggests mailing the claim to the court and waiting until the process is complete, noting that it remains "unlikely" that there will be a distribution to creditors other than the IRS.

“I've received a lot of inquiries from some of the 521 creditors for whom I had mail addresses and to whom I sent to the court order converting the case to a chapter 7 liquidation case," Scott said in a memo titled "JoyStar, Inc. Response to Creditor Inquiries." He added that "another 130 creditors received the order by mail."

Scott’s memo, reproduced in full below, offers an update on the JoyStar bankruptcy, instructions on how to file claims and details on the IRS claims. A final tally of claims and claimants against JoyStar may not be known until after the October filing deadline.

Question 1: What is the status of this case?

Answer: Several creditors put the debtor into an involuntary bankruptcy last December 31. We call that the "petition date." The debtor converted the case to a chapter 11 reorganization case on February 10, planning to attempt to pay its creditors by licensing its software to others. It was not able to produce a buyer or licensee for its software, and its case was converted at the creditors' committee's request to a chapter 7 liquidation proceeding on June 11. Soneet R. Kapila, an accountant and longtime member of the panel of trustees, has been appointed to liquidate the debtor's assets and to attempt any recoveries of funds that are feasible to recover. I (Scott) have been employed by the trustee as his counsel.

Mr. Kapila and I have interviewed the debtor's Katherine West, (former vice president of JoyStar) and the trustee's staff have interviewed the debtor's chief technology officer to gain a familiarity with how the software works and how it can be marketed.

It should come as no surprise that the debtor had spent the funds that came in to the company during the chapter 11 phase of the case, leaving the trustee with $16,000, and small amounts continuing to dribble in from commissions.

Most important is the secured and priority claims of the IRS. There is a prepetition lien recorded against the debtor by the Internal Revenue Service for $236,404 for prepetition payroll taxes, and even the post petition payroll taxes were not fully paid. The IRS will surely also file a claim for these and, at least, $516,665 in other taxes as a priority creditor. Ms. West testified the total taxes due exceed $800,000. We believe that Mr. Alverson (former president of JoyStar) and Ms. West are personally responsible for most of this obligation, under IRS rules governing officers responsible for making the decision not to remit to the IRS the portion of the taxes the debtor withheld from employees' paychecks. However, the debtor's estate remains primarily responsible; and the IRS lien against all the debtor's assets places the IRS in first priority for repayment, even from an eventual sale or licensing of the debtor's software. It presently appears that the lien is valid and cannot be avoided by the trustee.

The only thing that can be paid ahead of the $236,404 IRS lien is the cost of having the trustee and his counsel and accountant administer the debtor's assets for the benefit of the IRS. For this reason, there is no realistic possibility of the trustee making any distribution to other creditors unless the trustee is able to recover assets that are not property of the debtor. Examples of potential recoveries that we are investigating that may not be property of the debtor are preferential payments to insiders, fraudulently transferred assets, and misappropriated funds. Even if we are able to make such recoveries of assets not subject to the IRS lien, the IRS is entitled to be paid nearly all of its $800,000 in priority claims from all recoveries ahead of all creditors except expenses of administration, and creditors who properly assert that their claims represent consumer deposits, employee wages and employment benefits, or sales commissions. It is beyond my role to advise whether any of the sub-agents qualify as sales commission priority creditors under 11 U.S.C. §507(a)(4)(B).

Question 2: Do I have to attend any hearings or meetings?

Answer: No.

Question 3: What will happen next?

Answer: The trustee will collect the remaining commissions. The trustee will investigate the debtor's banking records and try to identify potential recoveries. The trustee will try to find buyers for the debtor's very limited amount of furniture, office equipment, and computer hardware. The trustee will try to find buyers or licensees for the debtor's software. If any of you knows of anyone who may be interested in purchasing the debtor's software, please contact me. The trustee also may sell the debtor's assembled lists of potential customers and potential sub-agents, but the trustee will not sell certain types of "personal identification" information unless the bankruptcy judge finds that the requirements of 11 U.S.C. §363(b)(1)(A) or (B) have been met.

Question 4: Do I have to do anything at all?

Answer: There is a deadline for filing "proofs of claim," October 19, 2009, notification of which was sent out to you in June by the court clerk. If you need a form, e-mail my assistant at [email protected] There had been an earlier deadline set during the chapter 11 phase of the case, and if you filed a claim prior to the first deadline then you don't need to file another claim in the chapter 7 case. As unlikely as it is that there will be a distribution to creditors other than the IRS, you should mail your original signed claim in to the court (United States Bankruptcy Court, 299 E. Broward Blvd., Ft. Lauderdale, FL 33301). Please do not send me a copy.”

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By George Dooley | July 28, 2009
Lawyer's memo offers update on the JoyStar bankruptcy, instructions on how to file claims and details on the IRS claims.