In re: ART & ARCHITECTURE BOOKS OF THE 21st CENTURY,
a California corporation, Reorganized Debtor.
Case No. 2:13-bk-14135-RK
UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION
December 6, 2019
Chapter 11
MEMORANDUM DECISION ON: (I) MOTION OF DOUGLAS CHRISMAS FOR ORDER PURSUANT TO BANKRUPTCY RULE 2004 AND BANKRUPTCY CODE SECTIONS 105 AND 1142; AND (II) MOTION OF PLAN AGENT SAM S. LESLIE FOR PROTECTIVE ORDER RE: 2004 EXAMINATION REQUESTED BY DOUGLAS CHRISMAS
Pending before the court are: (1) the Motion of Douglas Chrismas ("Chrismas") for Order pursuant to Bankruptcy Rule 20041 and Bankruptcy Code2 Sections 105 and 1142 ("Rule 2004 Motion"), filed on January 29, 2019, Electronic Case Filing ("ECF") Number 2423; and (2) the Motion of Plan Agent Sam S. Leslie ("Plan Agent") for Protective Order Re: 2004 Examination requested by Douglas James Chrismas ("Protective Order Motion"), filed on April 17, 2019, ECF 2445. The court has held multiple hearings on these motions, which were ongoing. The last scheduled hearing was for November 21,
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2019, which the court vacated upon application of the Plan Agent, which is further discussed below.
In the Rule 2004 Motion, Chrismas requested the entry of an order compelling the Reorganized Debtor Art and Architecture Books of the 21st Century to produce documents in response to his 22 requests for production and the Plan Agent to appear for oral examination. Chrismas requested the order on grounds that as a party in interest3, he is entitled to relevant information about the performance of the Reorganized Debtor under the confirmed reorganization plan. According to the Rule 2004 Motion, Chrismas seeks information about the post-confirmation Debtor to make an informed decision whether to "give up on the plan" and/or pursue other options, such as moving to remove the Plan Agent, converting the case, or exercising his right under the plan to move for approval of a "Transaction"4 in lieu of continuing post-confirmation operations of the Reorganized Debtor by the Plan Agent5.
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On February 5, 2019, the Plan Agent filed a written opposition to the Rule 2004 Motion, requesting that the motion be denied in its entirety and arguing that the motion was filed to harass or burden the Reorganized Debtor and not to propose any legitimate transaction in the best interests of creditors. ECF 2426. Specifically, the Plan Agent argued that the Rule 2004 Motion was an attempt by Chrismas to stop the Plan Agent's fraud litigation against him in pending adversary proceedings6 and to obtain confidential sales information in furtherance of his efforts to compete with the post-confirmation Debtor. Id. at 1. The Plan Agent also argued that Chrismas's counterclaims in the fraud litigation, ECF 2425, mooted the motion because those claims addressed post-confirmation administration of the Reorganized Debtor by the Plan Agent, and his discovery could proceed in the adversary proceeding. Id. at 3-4. On February 5, 2019, Eric Wilson and his companies7 filed a joinder in the Plan Agent's opposition to the Rule 2004 Motion. ECF 2428.
On February 12, 2019, Chrismas filed a reply to the Plan Agent's opposition, stating that he would limit his request for documents in a "reduced request" of 8 requests for production. ECF 2433 at Schedule A. The "reduced request" asked that the Reorganized Debtor produce: (i) inventories and schedules of assets; (ii) with respect to any assets sold or gifted by the Reorganized Debtor on or after the effective date of the confirmed reorganization plan, invoices and other documentation sufficient to evidence any such sale or gift; (iii) documents sufficient to evidence the validity, priority and extent
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of secured claims; (iv) accountings and reconciliations relating to artist and consignor claims; (v) documents relating to the post-confirmation Debtor's relationship with Eric Wilson and his companies; and (vi) documents relating to the Plan Agent's and LEA Accountancy LLP's8 relationships with the Reorganized Debtor.9
After conducting two discovery dispute conferences, the parties filed a joint statement on March 13, 2019, regarding their outstanding disputes concerning the Rule 2004 Motion and the "reduced" list of 8 requests for production of documents. ECF 2443.10
At the hearing on the Rule 2004 Motion held on April 3, 2019, the court and the parties discussed scheduling of further proceedings, and the Plan Agent indicated that he intended to move for a protective order. In a stipulated order, filed and entered on April 16, 2019, the court ordered that the Plan Agent was to file and serve his motion for a protective order by April 17, 2019. ECF 2444 at ¶ 1. To address Chrismas's request in the Rule 2004 Motion for information about the status of post-confirmation performance of the Reorganized Debtor under the Plan, the court also ordered the Plan Agent to file a detailed status report by May 31, 2019, providing the court and all parties in interest with detailed information concerning the financial state of the Reorganized Debtor and its post-confirmation operations and affairs. Id. at ¶ 6. The court further ordered an evidentiary hearing on the status of the post-confirmation performance of the Reorganized Debtor under the administration of the Plan Agent, set for July 19, 2019, at which time the Plan Agent and other witnesses would be available to testify and be cross-examined by parties in interest, including Chrismas. Id. at ¶ 7.
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In the Protective Order Motion, the Plan Agent requested the issuance of a protective order to quash the discovery requested by Chrismas in the Rule 2004 Motion. ECF 2445. The Plan Agent argued that the Rule 2004 motion was brought for improper purposes and that the discovery sought is burdensome, harassing and detrimental to the Reorganized Debtor, alleging that Chrismas seeks the commercially confidential business records of the Reorganized Debtor in an effort to undermine the Debtor and Plan Agent. Id. 1-3, 34. However, in the Protective Order Motion, the Plan Agent offered to share with Chrismas the following information subject to appropriate measures in a protective order: (i) the Plan Agent would produce a copy of the inventory of artworks that are owned outright by the Reorganized Debtor to be maintained in the possession of Jonathan Shenson, Chrismas's counsel, but could be viewed by Chrismas in Shenson's office; (ii) to the extent that the court would not be satisfied with the disclosures in the Plan Agent's status report to be filed on May 31, 2019, the Plan Agent would provide further information to the court for in camera review, which information would be produced to Chrismas or creditors if the court determined that there would be a proper interest justifying such production; and (iii) if there would be a legitimate investor who is willing to fund a transaction to pay all creditors in full or any other material transaction that would fall within the Plan Agent's right to propose under 11 U.S.C. § 1127, the Plan Agent would agree to provide appropriate information to such investor following execution of a nondisclosure agreement. Id. at 33-34.
At the hearing on the Rule 2004 Motion and the Protective Order Motion on May 29, 2019, the court sua sponte raised the issue of applicability of the equitable doctrine of unclean hands to Chrismas's Rule 2004 Motion, and it requested the parties to address whether the doctrine applied to Chrismas and warranted denial of his Rule 2004 Motion. Transcript of Hearing on Rule 2004 and Protective Order Motions, May 29, 2019, ECF 2483 at [page:line] 40:08 - 42:08. As a result, the court directed the parties to file briefing
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on the applicability of the doctrine. Id. at 53:01 - 57:06. In June and July 2019, Chrismas and the Plan Agent filed briefing11 on the applicability of the doctrine of unclean hands.12
On May 31, 2019, the Plan Agent filed his status report on the post-confirmation performance of the Reorganized Debtor under the plan and his declaration in support thereof, as previously ordered by the court. ECF 2478. On July 19, 2019, the court conducted the evidentiary hearing on the status of administration of the post-confirmation Debtor, at which hearing the Plan Agent testified. Transcript of Evidentiary Hearing, July 19, 2019, ECF 2513. The hearing lasted a full day, but was not completed, and the court continued the hearing to September 12, 2019. Id. at 293:24 - 294:08. During the hearing on July 19, 2019, the Plan Agent indicated during his testimony that he was going to amend and supplement the financial data and spreadsheets that accompanied his status report filed on May 31, 2019.
On August 19, 2019, the Plan Agent filed an update to his status report filed on May 31, 2019, which included supplemental financial data and spreadsheets addressing inventory value reconciliation, secondary sales of artwork owned by Eric Wilson and presentation of the estimated recovery on the pending adversary litigation. ECF 2517. In a memorandum filed on the same date, August 19, 2019, the Plan Agent stated his position that the initial evidentiary hearing on the status of post-confirmation performance of the Reorganized Debtor and the scheduled further hearing were "beyond anything" to which Chrismas, given his own conduct, was entitled, urging that the Rule 2004 motion should be summarily denied.13 ECF 2518.
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On September 6, 2019, the Plan Agent filed a motion for continuance of the hearing set for September 12, 2019, which the court granted, continuing the hearing from September 12, 2019 to October 24, 2019. ECF 2532. The hearing was further continued from October 24, 2019 to November 21, 2019, by stipulation and order filed and entered on September 27, 2019. ECF 2536.14
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On November 6, 2019, the court entered an order granting an application of the Plan Agent to vacate the continued evidentiary hearing set for November 21,...
