Bello/Walldesign fraud allegations & reasons for clawbacks

While no fraud charges have been filed against anyone, allegations frequent many of the court documents in the Bello/Walldesign bankruptcy case.

This unedited description below, excerpted from a document filed with the bankruptcy court on Feb. 25, 2014, is typical.

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MEMORANDUM OF POINTS AND AUTHORITIES
FACTUAL BACKGROUND
Walldesign, Inc. (“Walldesign”) was in the business of installing drywall, insulation, plaster and providing related services to single and multifamily construction projects throughout California, Nevada and Arizona for almost thirty years.

 

At the helm of Walldesign was its sole shareholder, Michael Bello, who was ultimately responsible for overseeing the day-to-day business operations and financial performance of Walldesign, and involved in supervising all aspects of Walldesign’s financial affairs.

 

By 2007, Walldesign was in serious financial difficulty. Its 2007 audited financial statement was issued with a “going concern” qualification; i.e., the certified public accountant had substantial doubt that Walldesign would be able to continue as a going concern business for a reasonable period of time. That problem was exacerbated by the general economic and, in particular, construction turndown in the second half of 2007.

 

Walldesign’s financial condition continued to decline unabated and on January 4, 2012 (the “Petition Date”), Walldesign filed for relief under chapter 11 of title 11 ofthe United States Code (the “Bankruptcy Code”). The Committee of Unsecured Creditors (the “Committee”) ofthe bankruptcy estate (the “Estate”) of Walldesign was appointed by the United States Trustee on January 26, 2012 [Docket No. 54].

 

From January, 2007, until the Petition Date, Michael Bello, and his various entities and family members, fraudulently and preferentially transferred at least $18 million of Walldesign’s money to themselves and other non-Walldesign vendors for non-Walldesign purposes.

 

These funds emanated from two bank accounts – the main Walldesign Comerica Bank account (the “Comerica Account”) which was recorded on the books and records of Walldesign and disclosed in Walldesign’s Schedules of Assets and Liabilities (“Schedules”) and Statement of Financial Affairs (“SOFA”), and a “secret” bank account at Preferred Bank (the “Preferred Account”) which was not recorded on the books and records of Walldesign and was not disclosed in Walldesign’s Schedules or SOFA.

 

Furthermore, the vast majority of these funds were transferred away from Walldesign while Walldesign was insolvent, about to become insolvent, and unable to pay its debts as they came due in the ordinary course of business.

 

The Committee was granted standing to bring adversary proceedings to avoid and recover these transfers on behalf of the Estate pursuant to U.S.C.§§1I03(c)(5) and (09(b) and this Court’s “Order Approving Stipulation Granting Leave, Standing and Authority to the Official Committee of Unsecured Creditors To Commence, Prosecute and Settle Certain Claims of the Debtor’s Estate entered May 13, 2013 [Docket No. 79], and “Order Approving Amended Stipulation Granting Leave, Standing and Authority to the Official Committee o f Unsecured Creditors To Commence, Prosecute and Settle Certain Claims ofthe Debtor’s Estate” entered December 2, 2013 [Docket No. 980].

 

In accordance with this standing, the Committee has brought 81 avoidance actions in this Court (and another 15 action in the United States Bankruptcy Court for the Northern District of I2 California), premised on these fraudulent and/or preferential transfers.

 

Fifty-six of these claims are for amounts under $40,000 and 26 of these claims are for amounts between $40,000 and $200,000.

 

All of these actions involve funds which were disbursed directly from either the  Comerica Account or the Preferred Account (the vast majority of these actions involve funds that came directly from the Preferred Account); accordingly, all or substantially all of the transferees named as defendants in these adversary proceedings are initial transferees.”