A Mount Vernon electronics company that has pioneered in high definition audio-visual electronics has filed for Chapter 11 bankruptcy as its main supplier claims it was duped into keeping the business afloat.
Key Digital Systems Inc. had agreed to respond to a lawsuit filed by Tonlyware Technology Co. by March 3, after missing two previous court deadlines in U.S. District Court, White Plains, but instead filed for bankruptcy protection in U.S. Bankruptcy Court on that date.
On March 17, Key Digital declared about $2 million in assets and $7.2 million in liabilities.
Mikhail Tsinberg, an engineer born in Ukraine, trained in Russia, and previously employed by the Toshiba and Phillips electronics companies, formed Key Digital in 1999.
He holds more than 40 patents for electronics, according to the company’s website, and he developed the first high-definition television transmission system and the first consumer digital high-definition TV VCR.
Key Digital designs and engineers audio-visual products at its Mount Vernon headquarters. It employs 17 people, including Tsinberg’s wife, Faina, director of operations; daughter, Masha, chief operating officer; and son, Leon, business development manager.
On Dec. 8, Tonlyware Technology of Shenzen, China, sued Key Digital in White Plains federal court, claiming it was owed $2.6 million for electronics delivered to the Mount Vernon company to be sold under the Key Digital brand.
Tonlyware’s affiliate, Hongkong Corenex Technology Limited, sued Key Digital on Feb. 24 for $1.9 million in cash and credits that the Chinese company claims that Key Digital failed to repay.
Tonlyware says it was Key Digital’s primary electronics supplier from 2018 to 2021.
In 2019, Key Digital allegedly defaulted on payments for orders that had been received and sold. But Tonlyware says it continued to supply products based on Tsinberg’s pledge that Key would make good on the payments.
Meanwhile, Tsinberg allegedly persuaded Hongkong Corenex to invest in the Mount Vernon company.
Key Digital allegedly received $1.2 million in cash and nearly $700,000 in trade credits for Tonlyware products. Hongkong Corenex received a promissory note that could be converted into a 25% equity stake in a new entity that would hold Key Digital’s assets.
Tsinberg allegedly represented that Key Digital was expanding and that the financing would be used to establish his company as a worldwide distributor of audiovisual and multimedia products.
But Tsinberg’s representations were false, the Chinese companies claim, and were made to keep the products coming and to prop up the business.
“Key Digital needed Tonlyware’s products to maintain its market share and to keep its business operational,” according to the Tonlyware complaint, but instead used the products and financing “to conceal what is now evident: Key Digital has for years operated a failing business that has no ability to pay its debts.”
Key Digital’s formal answer to the accusations was due on Jan. 3. On Feb. 1, both businesses stipulated that the answer would be filed by Feb. 17. On Feb. 21 they extended the deadline to March 3.
On March 8, the court issued a certificate of default against Key Digital.
Key Digital lists more than $4.5 million in unsecured debt to Tonlyware and Hongkong Corenex but characterizes the claims as disputed.
It also lists a $400,000 for a JP Morgan Chase Bank loan, $500,000 to the U.S. Small Business Administration, and $1 million to Digital Hifi Inc., the company that formerly owned Key Digital’s headquarters at 521 East Third St., Mount Vernon.
Digital Hifi is related to Key Digital, according to a bankruptcy filing, “to the extent of overlapping equity ownership.”
Key Digital sold the property to an undisclosed but unrelated party, the bankruptcy filing states. That entity then leased the property to Digital Hifi which in turn sublets it to Key Digital.
According to Westchester property records, Digital Hifi sold the property last April to ACE MV Realty LLC, of New Hyde Park, for $4.15 million, and Tsinberg signed the deed as Digital Hifi’s president.
