BOSTON (BRAIN) — CrimsonBikes is now in the hands of a Chapter 11 bankruptcy trustee after creditors including SmartEtailing and Giant Bicycle said store owner Charles James was mismanaging it and appeared to be shuffling assets between several companies he owns.
Last year SmartEtailing sued the Cambridge store in a Minnesota court to recover at least $400,000 in credit card chargebacks.
In a statement to BRAIN about the Minnesota suit, CrimsonBikes said it had gone to "extraordinary lengths to get bicycles or refunds to customers" during the pandemic-driven sales surge. But the statement said by last fall "the system broke down between CrimsonBikes, SmartEtailing, and Stripe, the credit payment processor."
In March SmartEtailing and two other creditors filed an involuntary Chapter 7 petition against CrimsonBikes. SmartEtailing, which said it was by then owed about $650,000, was joined by a Massachusetts consumer who said he paid $1,061 for a bike he never received, and CVI-TCB Commercial, the owner of a Boston-area nonprofit real estate development organization. In the petition, CVI-TCB said CrimsonBikes owed it $200,000 and was in breach of contract. Giant was not a party in the Chapter 7 petition.
A Chapter 7 bankruptcy would have led quickly to liquidation of the business, but in May the court granted CrimsonBikes' request to convert the case to Chapter 11, which allows for a reorganization.
Chapter 11 cases do not always have a court-appointed trustee, who acts like the business's chief executive on behalf of creditors. But under some circumstances the court will appoint one.
At a June 22 virtual meeting of creditors, James and his attorney, John M. McAuliffe, the creditors questioned James about financial records he could not produce and about three intertwined businesses.
James said he was the principal in an e-commerce business, CrimsonBikes, LLC, formed first in 2015 as a student bike program when James was a Harvard University student. He later formed a brick-and-mortar business, BeSpoke, and a bicycle-importing business formed last year called CrimsonBikes Imports. He revealed that CrimsonBikes LLC had recently laid off most of its employees but said they were offered work through BeSpoke. CrimsonBikes LLC is currently the only business named in the bankruptcy filings.
Soon after that meeting, creditors including SmartEtailing, Giant, and CVI-TCB asked the court to appoint a trustee, saying transfers between the business entities appeared fraudulent and that James' inability to produce financial records was evidence of "prolonged gross mismanagement."
James filed a response explaining the purpose of each of the businesses. He said all three operated under the tradename "CrimsonBikes" but they are separate and distinct entities and all transactions are recorded for each entity.
Jamers' also said he maintained detailed records but was hampered in producing them by the involuntary bankruptcy and the pandemic. He said he would make all necessary records available by the end of July.
At a video hearing last Friday US Bankruptcy Judge Janet E. Bostwick considered the motion to appoint a trustee. McAuliffe said his client did not oppose the appointment but said it was "critical" that the trustee consider restructuring the business rather than liquidate it.
Bostwick agreed with the creditors that James' multiple business entities were troubling. "There's a clear conflict of interest for Mr. James. He's wearing three hats, he's moving property among the debtors and affiliates ... even if it's appropriate it gives rise to (concerns about) what's in the best interest of the creditors," Bostwick said.
However, Bostwick said she would leave it to a trustee to investigate the situation. She also said the trustee would determine whether a liquidation or reorganization was in the best interest of the creditors.
On Thursday she approved the appointment of Massachusetts attorney John J. Aquino as trustee.
Besides Giant and SmartEtailing, CrimsonBikes' unsecured industry creditors include Bikeco (owed $44,000), Bern ($3,000), and Tifosi Optics ($1,100).
According to a summary of assets and liabilities filed with the court June 15, CrimsonBikes has property worth $745,000. Claims secured by property total $597,000. Priority unsecured claims total $50,000 and non-priority unsecured claims total $1.8 million.
