Joystar Bankruptcy Returns: Trustee Sues Former Owners

Soneet R. Kapila, a court-appointed Trustee, has filed suit against former Joystar owners William M. Alverson and Katherine T. West a/k/a Katherine Alverson, to recover funds during the prepetition period for Joystar’s bankruptcy. The complaint was filed in the U.S. Bankruptcy Court for the Southern District, Fort Lauderdale.

The plaintiff is the trustee in a Chapter 7 proceeding. The case was commenced by creditors, including travel agents, filing an involuntary petition on Dec. 31, 2008. An order for relief under chapter 11 was entered on Feb. 10, 2009, and the case was converted to a Chapter 7 case on June 11, 2009. The case ( No. 08-30191-RBR) was filed against Joystar, Inc., a/k/a Travelstar, Inc. on Dec. 30, 2010.

The debtor is a California corporation, incorporated in 1998, which did business most recently in Aliso Viejo, California and, at various times, in Aventura, Sunrise, and Palm Beach, Florida. It changed its name from Joystar, Inc. to Travelstar, Inc. in 2007. Alverson was a shareholder, director, chief executive officer, and president of the debtor while West was a shareholder, director, and vice president of the debtor at all times, the suit alleges. Throughout the chapter 11 case, West was also chief financial officer.

The suit alleged that for at least three and one-half years prior to December 31, 2008 (“prepetition”), the debtor sold leisure travel, primarily cruises and vacation packages, through a network of home-based travel consultants or agents.

“The company paid too large a share of travel commissions to its agents, and charged too little to its agents as a membership or signup fee, to be profitable," the suit alleged. “The company incurred heavy expenses in developing and implementing several Internet technology initiatives intended to build the nation’s largest network of agents. The company raised more than two million dollars in capital in 2006 to fund some of these expenses, but it was unable to pay its payroll taxes timely in late 2006 or afterwards, and never paid the payroll taxes for the fourth quarter of 2007 or later quarters.

At its peak in May 2006, the company had 55 employees. By January 2007, it had dropped to about 30 employees. On the petition date, it had 12 employees, but it was no longer selling travel, having been cut off from its two principal travel providers in October 2008. There was never a time during the four years prepetition when the debtor was solvent, or had net operating revenues. By no later than Oc. 1, 2006, the defendants knew that the debtor could not fulfill all of its obligations and that its business plan would lead only to an endlessly increasing amount of debt, the suit alleged.

“By continuing to accept new agents and new bookings, the defendants knew that the debt would likely never be reduced,” the suit claimed

The suit alleged that the defendants made all decisions about the company’s business strategy, tactics, and operating methods: “The reason they did this, even after it became clear to them that the company could not survive, is that the debtor’s large flow of incoming commissions from travel providers, notwithstanding the mounting debts, permitted the defendants to draw substantial funds for their personal benefit from the debtor’s bank accounts.”

When the involuntary proceeding was commenced on December 31, 2008, the debtor had millions of dollars in debts, primarily to the IRS and to travel agents, and no more than $500,000 in assets, primarily commissions receivable, the Trustee said.

The Trustee alleges that during the 27 months prepetition, Alverson drew at least $63,624.20 in salary net of taxes and West drew at least $195,804 in salary net of taxes from the debtor: “No amount of the salaries during this time period was reasonable, and the entire amount of the defendants’ salaries exceeded the value that the defendants provided to the debtor during that period, because that value was $0.”

The Trustee alleged that during the four years prepetition, the defendants caused the debtor to pay $841,697 in other payments to or for the benefit of the defendants.

“On information and belief, the Benefits were not reported on the defendants’ IRS form W-2s,” the suit alleged. “The 2007-2008 Salaries and the 2007-2008 Benefits paid to or for the benefit of Alverson were paid by the debtor with its actual intent to hinder, delay or defraud the debtor's creditors.”

The Trustee is demanding judgment against Alverson and West.


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