HK Int'l Funds Invs. (USA) v. Despins (In re Ho Wan Kwok)

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In re: HO WAN KWOK, et al., Debtors.

HK INTERNATIONAL FUNDS INVESTMENTS (USA) LIMITED, LLC, Plaintiff v. LUC A. DESPINS, CHAPTER 11 TRUSTEE FOR THE ESTATE OF HO WAN KWOK, Defendant.

LUC A. DESPINS, CHAPTER 11 TRUSTEE FOR THE ESTATE OF HO WAN KWOK, Counter-Plaintiff v. HK INTERNATIONAL FUNDS INVESTMENTS USA) LIMITED, LLC, and MEI GUO, Counter-Defendants.

Re ECF Nos. 1, 36, 146

No. 22-50073 (JAM)

Adv. P. No. 22-05003 (JAM)

United States Bankruptcy Court, D. Connecticut

March 30, 2023

Chapter 11

(Jointly Administered)

Luc A Despins Avram E. Luft G. Alexander Bongartz Paul Hastings LLP, Douglass S. Skalka Patrick R. Linsey Neubert, Pepe &amp Montieth and Nicholas A. Bassett (argued) Paul Hastings LLP Counter-Plaintiff Luc A. Despins, Chapter 11 Trustee for the Estate of Ho Wan Kwok, and Counsel

Lee Vartan Chiesa Shahinian & Giantomasi PC, Aaron Romney John L. Cesaroni James M. Moriarty Zeisler & Zeisler P.C. and Sam Della Fera, Jr. Melissa F. Wernick (argued) Chiesa Shahinian & Giantomasi PC Counsel for Counter-Defendants HK International Funds Investments (USA) Limited, LLC, and Mei Guo

SUPPLEMENTAL MEMORANDUM OF DECISION IN SUPPORT OF ORAL RULING GRANTING MOTION FOR PARTIAL SUMMARY JUDGMENT

JULIE A. MANNING, UNITED STATES BANKRUPTCY JUDGE

I. INTRODUCTION

The Court issues this Supplemental Memorandum of Decision in support of its March 27, 2023, oral ruling granting the Motion for Partial Summary Judgment on First Counterclaim (ECF No. 146,^[1] the "Motion for Summary Judgment") of Luc A. Despins, in his capacity as Chapter 11 trustee (the "Trustee") for the estate (the "Estate") of Mr. Ho Wan Kwok (the "Individual Debtor") and the subsequently entered Order Granting Motion for Partial Summary Judgment (ECF No. 172, the "Summary Judgment Order"). The Trustee, the Defendant in the above-captioned adversary proceeding, filed several counterclaims against Plaintiff HK International Funds Investments (USA) Ltd., LLC ("HK USA") and Ms. Mei Guo, the Individual Debtor's daughter and the sole member of HK USA (together with HK USA, the "HK Parties"). (ECF No. 36, in pertinent part, the "Counterclaims.") Pursuant to 11 U.S.C. §§ 541 and 542, the Trustee's first counterclaim (the "First Counterclaim") seeks a declaratory judgment that the yacht named the Lady May is property of the Estate and an order requiring HK USA to deliver the Lady May to the Trustee. (Id. at ¶¶ 105-11.) For the reasons stated on the record and below, the Court granted the Motion for Summary Judgment.

II. BACKGROUND

The Individual Debtor filed a voluntary Chapter 11 petition in this Court on February 15, 2022. (Main Case ECF No. 1.) The Individual Debtor's case is jointly administered with two affiliated corporate Chapter 11 cases. (Main Case ECF Nos. 970, 1141.) For the reasons set forth therein, on June 15, 2022, the Court entered a memorandum of decision and order appointing a Chapter 11 trustee. (Main Case ECF No. 465.) In re Kwok, 640 B.R. 514 (Bankr. D. Conn. 2022). On July 8, 2022, Mr. Despins was appointed as the Trustee. (Main Case ECF No. 523.)

Main Case Proceedings Regarding the Lady May

The subject of the instant adversary proceeding is the yacht known as the Lady May, which had been the subject of contention since before the Individual Debtor's Chapter 11 case was filed.

Less than two weeks after the Individual Debtor's Chapter 11 case was filed, Pacific Alliance Asia Opportunity Fund L.P. ("PAX") filed a motion to either confirm inapplicability of the automatic stay or, alternatively, relief from the automatic stay. (Main Case ECF No. 57, the "Stay Relief Motion"). In the Stay Relief Motion, PAX sought relief from the automatic stay to continue proceedings in the Supreme Court of New York in the case of Pacific Alliance Asia Opportunity Fund, L.P. v. Kwok Ho Wan, Index No. 652077/2017 (N.Y. Sup. Ct. Feb. 9, 2022) (the "New York Action"). (Main Case ECF No. 57.) PAX sought to pursue the enforcement of prior rulings in the New York Action, including Justice Ostrager's contempt Decision & Order, Kwok Ho Wan, Index No. 652077/2017 (N.Y. Sup. Ct. Feb. 9, 2022), NYCEF No. 1181 (the "Final Contempt Decision"), and to compel the return of the Lady May to New York's navigable waters. (Main Case ECF No. 57.)

On April 11, 2022, HK USA appeared in the Individual Debtor's Chapter 11 case and opposed the Stay Relief Motion. (Main Case ECF Nos. 201-03.) In opposing the Stay Relief Motion, HK USA stated:

21.PAX claims that all it seeks by its Stay Relief Motion is the return of the Lady May through the enforcement of the Order of Civil Contempt entered on February 9, 2022, by the Supreme Court of the State of New York (Justice Ostrager presiding) (the "New York Action"). (Stay Relief Motion at 1-3.) PAX represents that it does not seek the immediate payment of money by the Debtor through such enforcement or a levy upon the Lady May. (Id. at 3 & 18.)

22.In response, HK USA proposes that this Court enter-and HK USA consents to the entry of-an order compelling it to return the Lady May as set forth in the Proposed Order.

(ECF No. 203 ¶¶ 21-23 (emphasis added).) HK USA further stated:

By having this Court enter such an order, the parties involved avoid further protracted litigation concerning the contempt proceeding in the New York Action and, most significantly, the imposition of penalties designed to coerce the Debtor's performance2 which may severely prejudice the Debtor and the creditors in this bankruptcy case-such as would occur if the Debtor was incarcerated.

(Id. ¶ 28 (emphasis added).) Footnote 2 stated:

Although Judge Ostrager held that the Debtor had the ability to control the Lady May, the Debtor continues to dispute this finding and that determination is the subject of an appeal. Entry of the Proposed Order avoids this controversy entirely because HK USA is the registered owner of the Lady May and the party who contracted directly with the Lady May's yacht management company, Yachtzoo.

(Id. ¶ 28 n. 2.) HK concluded by stating:

Finally, HK USA intends to commence an adversary proceeding against the Debtor and PAX before this Court in this bankruptcy case seeking a declaratory judgment determining that the Lady May is not property of the Debtor's bankruptcy estate. This Court has exclusive jurisdiction to make such determination. Having this Court control the whereabouts of the Lady May while it hears whether the Lady May constitutes property of this bankruptcy estate avoids any inconsistencies and inefficiencies that may result from separate forums deciding each of these matters independently.

(Id. ¶ 31 (emphasis added).)

PAX, the Debtor, and HK USA resolved the Stay Relief Motion before a hearing was scheduled to be held. On April 29, 2022, the Court entered a stipulated order, which, inter alia, compelled HK USA to deliver the Lady May to the navigable waters of Connecticut on or before July 15, 2022. (Main Case ECF No. 299, the "Stipulated Delivery Order;" see Main Case ECF No. 318, at 97:4-103:15 (Attorney Kindseth appearing for HK USA and reporting to the court about the to-be-filed stipulation).) As part of the stipulation, HK USA placed $37 million into an escrow account (as subsequently drawn down in accordance with the Stipulated Delivery Order, further orders, and the escrow agreement, the "Escrowed Funds") to secure its delivery obligation. (Main Case ECF No. 299.) The Escrowed Funds can only be transferred upon the Court's order and/or completion of a certification process (the "Certification Process") set forth in the Stipulated Delivery Order. (Id.) The Stipulated Delivery Order required HK USA to "maintain and pay for insurance in the limits and amounts that it has secured prior to the commencement of this case." (Id. ¶ 6 (emphasis added).).

On October 7, 2022, the Court entered a consent order establishing a $4 million repair reserve (the "Repair Reserve") for the Lady May (Main Case ECF No. 930, the "Repair Reserve Consent Order"), which was established from the Escrowed Funds. (Main Case ECF No. 932). The Trustee holds the Repair Reserve in escrow, pending repair of the Lady May. (Main Case ECF Nos. 930, 932.) On December 9, 2022, the HK Parties moved to modify the Repair Reserve Consent Order to allow for payments of upkeep and personnel costs - including insurance deductibles (Main Case ECF No. 1216, the "HK Motion to Modify Repair Reserve."). Before a hearing on the HK Motion to Modify Repair Reserve was scheduled, the Repair Reserve Consent Order had been twice modified through further consent orders to allow certain payments of upkeep and personnel costs from the Repair Reserve. (Main Case ECF Nos. 1255, 1377.) The HK Parties withdrew the Motion to Modify Repair Reserve on March 17, 2022, two days after the Individual Debtor was indicted in a criminal proceeding in the United States District Court for the Southern District of New York and six days before an evidentiary hearing was to be held. (Main Case ECF No. 1551.)

As the circumstances surrounding this adversary proceeding and the Individual Debtor's Chapter 11 case have continued to develop, the Trustee filed a Motion to Modify the Repair Reserve Consent Order seeking much of the same relief sought in the HK Motion to Modify Repair Reserve. (Main Case ECF No. 1588, the "Trustee Motion to Modify Repair Reserve.") After orally granting the Motion for Summary Judgment, the Court orally granted the Trustee Motion to Modify Repair Reserve. On March 28, 2023, the Court entered an order modifying the Repair Reserve Consent Order for a third time, incorporating the changes to the Order requested by the HK Parties. (Main Case ECF No. 1608.)

Instant Adversary Proceeding

On April 11, 2022 - the day HK USA appeared in the Individual Debtor's Chapter 11 case, HK USA...