Coming on the heels of Davila’s February 2021 Chapter 7 bankruptcy filing, one of the company’s creditors has filed a motion with a Texas bankruptcy court to halt the proceedings — alleging that the company had acted in bad faith and improperly used project funding in recent construction work, resulting in the alleged embezzlement of $189,210.40.
Davila General Contractors, LLC, was hired by Salon Suites Memorial Gateway, LLC, on October 19, 2020, for work on a Phenix Salon Suites location in Houston, Texas. Davila had agreed to serve as the general contractor in order to “complete the finish out of an existing tenant space.”
However, just after two months following the signing of this contract, on December 29, 2020, Davila informed its clients that it would be shutting down its operations.
Salon Suites claims that “[the] conduct of Davila General Contractors, LLC… was egregious and warrants the extreme relief of dismissal,” claiming in court documents that “[Davila General Contractors], who regularly touted its success to clients, underbid a construction contract knowing that it had no intention of completing the Project.”
Salon Suites’ allegations extend to stealing, as well. Despite signing a contract noting that all funds received from progress payments were to be used to pay all “laborers, subcontractors, materialmen, and suppliers” in full, Salon Suites notes that “After convincing Salon Suites to sign the contract and to pay $227,160.40, [Davila] paid one subcontractor and then ran off with $189,210.40.”
The company added that “Within a matter of five to six weeks, the cash was gone and [Davila] was in bankruptcy,” reinforcing its claim that “Instead of making payments to subcontractors, the Debtor took the money and ran.”
“Of the $189,210.40 in funds that [Davila] received from Salon Suites that was not used to pay subcontractors, none of it remains,” the company noted. “[Davila’s] Schedules reflect that [the company] merely had $9,609.17 in its various checking accounts on the Petition Date. Thus, in a matter of weeks, [Davila] spent or transferred the entirety of the money it stole from Salon Suites and then conveniently filed bankruptcy with little to no assets.”
Beyond the embezzlement, Salon Suites is seeking to bring to light aspects of Davila’s bankruptcy filing that it considers to be untrue as part of the dismissal, saying that “to add insult to injury, [Davila] listed the amounts allegedly owed by Salon Suites under the Second Payment Request in the…accounts receivable [section of its bankruptcy filing].”
[Davila’s] actions and/or omissions equate to negligence, negligent misrepresentations, breach of contract, breach of implied warranties, breach of express warranties, causes of actions under the Deceptive Trade and Practices, breach of fiduciary duty, fraud and conversion,” Salon Suites noted in its petition. “Additionally, [Davila’s] intentional failure to pay the subcontractors for work and/or material purchased for the Salon constitutes not only breach of the Construction Agreement, but also constitutes a misapplication of trust funds.”
“Instead of making payments to subcontractors, the Debtor took the money and ran.”
Davila continued trying to collect payment — even while only days away from shutting down
Evidence from the case shows that Davila attempted to continue to obtain payment from Salon Suites throughout October, November, and December 2020 — even as it was only days away from shutting down its business operations.
Davila made payment requests on November 2, 2020, and December 7, 2020 — while also sending a follow-up message on December 10, 2020, requesting payment. However, on December 29, 2020, Davila infomed Salon Suites that it would be ceasing its operations.
“The dramatic drop in business due to the pandemic and the lack of sufficient future projects have made our business unsustainable,” claimed Davila in its December 29, 2020, letter to Salon Suites.
“While we have tried to increase revenue through a variety of efforts, we have been unsuccessful and have finally reached the point where we can no longer afford our current expenses…Unfortunately, we have been unable to find any other alternative [to shutting down] given the current business climate and our insufficient cash reserves,” Davila’s letter added.
However, this abrupt shutdown notice came with significant problems for Salon Suites, as only one subcontractor had been paid on the project.
“After [Davila] abruptly cancelled its involvement with the Project, Salon Suites discovered that of the $227,160.40 that it paid [to Davila] only one subcontractor was paid in the amount of $37,950.00,” said Salon Suites. “All other subcontractors required immediate payment and threatened to file mechanic liens on the Project.”
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This turn of events put significant pressure on Salon Suites to satisfy contractual agreements — despite having already paid Davila to satisfy them. Additionally, liens were filed on the project and later released, with at least one originally filed for $24,250.18 on January 22, 2021, by Holes Incorporated.
“In order to minimize the construction delays and risk of liens being placed on the Project due to non-payment to subcontractors (which would result in default with Salon Suite’s landlord), Salon Suites contacted the subcontractors directly and paid all amounts owed to them [by Davila],” the company specified.
Davila may have ‘drastically underbid’ project & misrepresented costs
Salon Suites also notes in court documents that it believes Davila deliberately used its bid to manipulate the company in its dire financial state, significantly underbidding the work it planned to do.
As per the company, “In addition to having to come out of pocket twice for the same work, Salon Suites later discovered that the work required to complete the Project pursuant to the Construction Contract was grossly underestimated.”
Salon Suites claims that “Based on discussions with other reputable general contractors, it was determined that the Debtor underbid the project by approximately $170,000.”
According to court documents, Davila had added 18 additional charges that were not agreed to in the construction contract, with work ranging from insulation and waterproofing to plumbing and electrical installations. All in all, these additional charges came to $167,276.02.
Davila’s bankruptcy filing showed significant problems that were kept from its construction partners
Davila General Contractors originally filed for bankruptcy on February 9, 2021, shortly over a month after the company’s original shutdown notice. However, the company’s financial situation was dire at the time of its petition — the company claimed $1,014,412.19 in assets and $5,187,543.06 in liabilities, with only $9,609.17 left in its checking accounts.
Additionally, the company claimed a significant sum as accounts receivable, with $400,007.17 being listed as 90 days old or less, and $585,121.54 being listed as over 90 days old — coming to a total of $985,128.71.
However, this sum’s veracity is not assured after Salon Suites’ claims against Davila. Salon Suites notes that $227,160.40 of its payments were added to Davila’s accounts receivable claim in its bankruptcy petition — an allegation that could cast doubt upon the accuracy of the rest of Davila’s accounts receivable claims.
Whether or not Salon Suites’ petition is successful is significant for Davila and its creditors, as Davila is currently in line to simply liquidate its assets. Normally, Chapter 7 bankruptcy is considered “liquidation” bankruptcy, as it doesn’t allow for a structured plan of repayment — instead, the filing debtor is required to sell off its non-exempt property in order to pay off its creditors.