Citing “gross mismanagement,” “dishonesty,” “self-dealing,” and “potential fraud,” the California attorney general wants a Delaware bankruptcy court to appoint an independent trustee, or shut down Flipcause entirely, to protect more than $29 million owed to over 3,200 nonprofits nationwide.
The Jan. 2 filing asks for a Chapter 11 bankruptcy trustee to replace the donation platform’s management, investigate insider payments, control the sale of the company’s assets, and “claw back” the money for charities.
As an alternative, the motion asks the court to consider converting the case into a Chapter 7 case, which would shutter Flipcause, appoint a trustee to liquidate assets, sell the company, and pay its creditors.
The attorney general’s “primary concern (is) that as many charitable assets as possible be protected, clawed back, and returned to the rightful beneficiary,” Deputy Attorney General Kim Kasreliovich wrote in the filing. “The record in this case, although small, has established ongoing mismanagement and commingling of funds, dishonesty, self-dealing, and potential fraud.”
A disinterested third party is in the best interest of creditors – nonprofits owed by Flipcause – to investigate potential fraud and self-dealing prior to the company filing for bankruptcy on Dec. 19, Kasreliovich wrote. She added an independent trustee could possibly sue to recover the money.
At press time, Flipcause’s bankruptcy attorney at Gellert, Seitz, Busenkell & Brown LLC told Oakland Voices that he’s been in communication with the attorney general’s office about the platform’s response.
During a Dec. 22 hearing, Flipcause’s attorney Ronald Gellert suggested a Chapter 7 liquidation would result in less money being returned to nonprofits.
“If we get converted into a (Chapter) 7 then I think it’s going to be pretty clear that the creditors who are owed money are going to get a lot less,” Gellert said.
Hearing suggests ‘outside fiduciary’
During a Dec. 22 hearing U.S. Bankruptcy Judge Thomas M. Horan questioned whether an “outside fiduciary might have been brought in” prior to bankruptcy, “because there are really, really significant problems.
“Looking at the list of charities owed by Flipcause, one can only imagine the effects,” Horan noted.
Horan questioned whether management should remain in control.
Kasreliovich agreed.
“We are deeply concerned that $29 million in charitable assets is missing,” Kasreliovich testified, “and we have no faith that even the $70,000 remaining is properly utilized.”
Attorney general: Flipcause executives ‘bled the business dry’
Oakland Voices previously reported that Flipcause executives paid themselves $3.8 million before filing for bankruptcy. While organizations filed complaints with the Better Business Bureau, multiple attorney generals, and filed lawsuits, Flipcause Executive Chairman Emerson Ravyn and CEO Sean Wheeler paid themselves and family members $3.8 million.
Ravyn testified during the Dec. 22 hearing that donations made through the company’s platform belonged to the company, not nonprofit organizations which used the platform.
Under cross-examination by Kasreliovich on Dec. 22, Ravyn said he paid himself $3.28 million and his brother, former CEO Rolando Valiao, $270,125. CEO Sean Wheeler paid himself $275,781. Former Flipcause employee Jessica Wheeler received $63,488. The Wheelers are siblings, according to Ravyn.
“The only action Debtor appears to have taken in the 90 days preceding this action is to
transfer millions of dollars out of the company for the exclusive and personal benefit of executive staff and their families,” Kasreliovich wrote. “Now that Debtor has bled the business dry, it is seeking to discharge its obligations to charitable clients whose funds it held in trust.”
‘A personal piggybank’
Kasreliovich said that Flipcause’s bankruptcy petition, Ravyn’s own declaration and testimony “demonstrate gross mismanagement, if not fraud, that poses a present risk of harm to Debtor’s more than 3,200 charity clients.”
During the Dec. 22 hearing, Ravyn testified that the company had just one Citibank account through which the company received donations, subscription fees, and paid employees and other bills. The account held $70,000 when Flipcause filed bankruptcy, according to the filing.
Flipcause opened a second bank account, after filing for bankruptcy.
“Debtor apparently treated all the funds flowing into Flipcause, Inc., as a personal piggybank and has been unable to explain what happened to the $29 million in charitable assets that are missing,” Kasreliovich wrote. “[I]t shocks the conscience.”
Flipcause took no steps before bankruptcy to prevent going further into debt, Kasreliovich argued.
Ravyn had no solid basis for his evaluation of the platform at $15 million. She added that Ravyn lacked the training or education to lead Flipcause out of a multimillion dollar bankruptcy.
Mounting opposition to Flipcause
Flipcause’s financial and legal woes have coalesced around the bankruptcy.
In December, Stripe, a payment processor, terminated services to Flipcause and froze the company’s account until the end of February.
At the Dec. 22 hearing, Flipcause asked the court to compel Stripe to release funds. Horan said that Stripe and creditors did not have adequate notice to respond to that motion just three days after the bankruptcy filing. Stripe filed an objection.
Grand Avenue Advisors, one of Flipcause’s “secured creditors” also appeared at the hearing. Flipcause owes the investment banking firm $600,000.
On Jan. 2, the North Dakota Attorney General’s office also filed a notice to appear. In response to a records request, the office shared that at least two organizations filed complaints. Flipcause owes six North Dakota organizations more than $65,267.22, according to its petition.
Complaints have been filed with attorney generals in at least 10 states.
A federal lawsuit with 29 plaintiffs and 18 states was stayed due to the bankruptcy filing.
“A willingness to flout lawful orders for personal gain”
The California attorney general’s office on Nov. 12 ordered Flipcause to shut down operations, provide a record of its accounting since 2015, and move all its assets to a blocked bank account.
Flipcause appealed the order, arguing that California’s donation platform law does not apply to the company since it allegedly only processes payments.
The attorney general’s office has encouraged affected groups to file complaints with its office.
Kasreliovich’s motion said Flipcause’s refusal to comply with the order demonstrated “a willingness to flout lawful orders for personal gain.”
What’s next?
Flipcause has until Jan. 12 to object to the motion for a trustee.
The motion for an independent trustee will be held on Jan. 15. at 2 p.m. Creditors are able to attend virtually through eAppearances.
U.S. Trustee Malcolm Bates also scheduled a meeting for “creditors” for Jan. 30.
Nonprofit organizations may recover little, according to the attorney general.
“The recovery most charitable clients are seeking may be minimal, but with a trustee in place, an orderly and equitable process can be implemented,” Kasreliovich wrote.
Clarification: In the original stated, “The Wheelers are married, according to the attorney general’s new court filing.” During a March 6 meeting with creditor’s, Ravyn stated that the Wheelers were siblings.
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