USA Springs out of founder's hands

The company was scheduled to be auctioned off in September

The U.S. Bankruptcy Court has put USA Springs into control of a trustee Tuesday, taking it out of the hands of Francesco Rotondo, who has spent more than a decade trying to build a plant to bottle groundwater from Nottingham and Barrington and sell it overseas.

"That's life," said Rotondo after the hearing.

"I'm very pleased," said Jim Hadley, chair of the Neighborhood Guardians, a group that has fought the plan. "Now the residents and the town will have more to say about the development of the property and about adverse impacts on wetlands and property values.

"Judge J. Michael Deasy said he had no choice but to grant the trustee's motion to convert the case from Chapter 11 reorganization to Chapter 7 liquidation after four years of failed attempts to find financing, including the last one that ended in charges of fraud; after the debtor's attorney withdrew, leaving Rotondo without any bankruptcy counsel; and after last-ditch attempt of negotiation during the hearing itself.

The company was going to be auctioned off anyway — first in July, but no bids were received — and the auction was rescheduled for September. But it was Rotondo's hope, and his opponents' fear, that it would be sold as a going concern. In the meantime, Rotondo also hoped that he might still be able to convince someone to finance the plant. Indeed, the company hired Tony Soltani, a municipal attorney and state representative, to protect the project's groundwater withdrawal permits though the bankruptcy process.

But the day after that delay was granted, USA Springs' attorney — Boston bankruptcy attorney Alan Braunstein — asked to withdraw, citing "irreconcilable differences" with his client, and saying that he could now only talk to Rotondo though Soltani.

Braunstein elaborated on that on Tuesday, saying that there was a "lack of communication" and a "lack of confidence" which he said he "resents" but without that trust, he couldn't perform the duty.

In his motion, Braunstein said that the Soltani could take over, but Soltani demurred in a motion before the hearing, saying he was not competent to serve as bankruptcy counsel. The motion was seconded by Edmond Ford, the attorney for the largest creditor, Roswell Commercial Mortgage, who has first dibs on the property that straddles Nottingham and Barrington. Soltani didn't attend the hearing.

Bruce Harwood, the local counsel, also declined to step forward, saying that he had the same problems as Braunstein and didn't have the resources to take over the case. Both attorneys have only been paid a fraction of what they claim they are owed.

Ford opposed the motion, saying "it was too late in the game" for Braunstein to leave USA Springs without counsel right before the auction. He speculated that the client's disagreement with his attorney may have been related to Rotondo balking at the auction.

Rotondo was silent in the courtroom, but outside, he told Ford that Braunstein was "a liar" for allegedly blaming him for the lack of communication, which he blamed on Braunstein.

"There is clearly a disagreement in the attorney client relationship," commented Deasy. "There is no reason for thinking that this is a scam to buy time.

"So Deasy allowed Braunstein to withdraw, making it even more unlikely that USA Springs could come up with an acceptable reorganization plan. That left him "no choice," he said, but to grant the trustee's office motion to appoint a trustee or to simply dismiss the case. He chose the former, he said, because there might be some assets to pursue.

Chief among those assets, on paper at least, is a $60 million judgment against Malom Inc., the Swiss company that promised as much in financing, after taking a $1.2 million advance from a company insider. Malom, however, never came up with a dime, first blaming it on the European crisis, then on the detention of two of its principals by Swiss authorities investigating fraud, and finally on its difficulty in getting anyone to put up cash against some dubious Brazilian bonds.

In its latest motion in front of the court, Malom asked more time to respond to Braunstein's request for documents about the company's assets, particularly the $1.2 million loan fee.

But some of those documents were in the hands of one principal, who is still in custody, and others were in the hands of the other principal, Hans Jurg Lips, who had been released.

"Malom does not have sufficient funds for Mr. Lips to travel to the offices of Withdrawing Counsel to give his deposition," Malom said in its motion.

The Withdrawing Counsel — Braunstein — opposed Malom's motion. He argued that since Malom officers had said in several affidavits that they had sufficient assets to fund $16 million of loans, "this is a remarkable concession (that Malom is now insolvent) and brings into question the veracity of the affidavits.

"However, Braunstein alleged, it had enough documents to "show conclusively" that Malom "had induced the Debtor's investor to part with $1.2 million under false pretenses, which although earmarked for a particular purpose, clearly was distributed to certain co-conspirators for their personal use in a premeditated scheme to defraud the Debtor and this Court.

"Later on in Braunstein's filing said that Malom "forged emails from lending institutions as to its financial ability to perform" and "filed false affidavits with this court in an elaborate effort to perpetuate the fraud.

"Rotondo, who said he had been urging Braunstein to be more aggressive against Malom in the past, said his latest filing was simply "too late.

"Deasy, however, ruled the whole thing as moot, because "there was no one to disclose the documents to," leaving it for the trustee to pursue the matter.

The trustee could also "reset" the auction, and try to sell off the land, though there are several other mortgages on it besides Roswell. Or he could pursue $8.4 million of alleged fraudulent transfers filed by the Committee of Unsecured Creditors against various USA Springs insiders. That adversary proceeding had been on hold during the Chapter 11 reorganization process.

Deasy doubted that the trustee's office would be able to find someone to take the case because of such dubious assets, but it already had one in hand: Timothy P. Smith, who previously was trustee of the company when it was briefly in Chapter 7, before USA Springs hired Braunstein in its quest to get more time to get financing.