In re ComedyMX, LLC

647 B.R. 457

IN RE: COMEDYMX, LLC, et al., Debtors.

Case No. 22-11181 (CTG) (Jointly Administered)

United States Bankruptcy Court, D. Delaware.

Signed December 16, 2022

Jeffrey M. Carbino, Leech Tishman Fuscaldo & Lampl, Wilmington, DE, Sandford L. Frey, Leech Tishman Fuscaldo & Lampl, Pasadena, CA, Lori A. Schwartz, Leech Tishman Robinson Brog, PLLC, New York, NY, for Debtor.

Linda Richenderfer, Office of the US Trustee, Wilmington, DE, for U.S. Trustee.

Alan Michael Root, Archer & Greiner P.C., Wilmington, DE, for Trustee William A. Homony.

Related Docket Nos. 32, 33

MEMORANDUM OPINION

CRAIG T. GOLDBLATT, UNITED STATES BANKRUPTCY JUDGE

The debtors in these cases assert that they hold trademarks imprinted on various classic Looney Tunes cartoons.¹ Their business is to make these cartoons available on video streaming platforms, such as YouTube. The debtors derive revenue based on the viewership of advertisements on the platform. These bankruptcy cases, filed under subchapter V of the Bankruptcy Code, were precipitated by litigation arising out of a dispute the debtors have with a business rival, Beyond Blond Productions.²

While the debtors’ underlying business is based on the distribution of classic cartoons, the dispute that is now before this Court is anything but funny. The issue is that the debtors’ principal, Edward Heldman III, who is the owner of the debtors and their only officer and employee, has sent emails that make it abundantly clear that he cannot serve in a fiduciary capacity to this bankruptcy estate. Beyond Blond has moved (a) to de-designate the case to a regular chapter 11 and to appoint a chapter 11 trustee, or alternatively, (b) to remove the debtors as debtors in possession under § 1185 and to authorize the subchapter V trustee, under § 1183(b)(5), to operate the debtors’ business.³ The U.S. Trustee has moved (a) to remove the debtor in possession under § 1185 or, alternatively, (b) to dismiss the cases "for cause" under § 1112(b).

For the reasons described below, the Court concludes that the question whether it has authority to de-designate the cases filed under subchapter V to regular chapter 11 cases (which would permit the appointment of a regular chapter 11 trustee with the full range of trustee powers, including the authority to file a plan) to be a close one. In the end, the Court need not resolve that question, because even if the Court had that authority, it would not exercise it under the circumstances of this case. The Court will, however, remove the debtor in possession under § 1185, which removal operates to expand the subchapter V trustee's powers under § 1183(b)(5). That relief obviates the need to consider the U.S. Trustee's alternative request to dismiss the bankruptcy cases.

Factual and Procedural Background

The debtors and Heldman are parties to an action brought against them in the U.S. District Court for the Central District of California by Beyond Blond.⁴ The gravamen of Beyond Blond's complaint was that Heldman sent fraudulent "takedown notices" under the Digital Millennium Copyright Act⁵ to Beyond Blond's streaming partners, causing Beyond Blond's content to be removed from those streaming partners’ sites.

The district court in that lawsuit entered a preliminary injunction directing Heldman and the debtors to withdraw the takedown notices, an order sanctioning the defendants for failing to comply with the preliminary injunction, and an order that both enjoined Heldman from sending threatening or harassing emails to Beyond Blond's principal or its outside counsel and from "transferring or encumbering any assets."

These bankruptcy cases were filed on November 14, 2022. Even after the petition date, however, Heldman has sent dozens of emails to Beyond Blond's principal and outside counsel. The emails are repugnant and undoubtedly violate the district court's injunction. The most striking features of Heldman's communications are their vulgarity, racism, misogyny, and homophobia. That much is plain from the emails themselves, which are part of the record before this Court. The Court will not undertake to persuade the reader of the truth of that assertion by quoting the emails in this Memorandum Opinion, aside from those portions that bear directly on the present motions. There are, however, two aspects of these emails that are important to the motions now before this Court. First , Heldman repeatedly threatens to "demonetize" the debtors, meaning that he will take action that would entitle the debtors’ streaming partners to stop paying the debtors for their content, thus causing the debtors’ revenue to dry up. Second , Heldman trumpets his willingness to defy court orders, telling Beyond Blond's principal and outside counsel that they "cannot defeat someone who doesn't give a damn about the law."

While the petitions were filed on November 14, 2022, the debtors did not file motions seeking substantive first-day relief until December 5, 2022, when they moved for authority to maintain their existing bank accounts⁶ and to use cash collateral.⁷ At the debtors’ request, those motions were heard on December 9, 2022.

Beyond Blond objected to both motions,⁸ not on the ground that it had an interest in the cash collateral that warranted protection, but rather on the ground that Heldman was not fit to manage the debtors’ cash and that the relief sought would violate the injunction entered by the district court in California. The U.S. Trustee also objected to both motions. It argued that the request to use cash collateral should be denied because there was no perfected security interest in the debtors’ cash that required adequate protection and that the debtors failed to address the effect of the California district court's injunction.⁹ The U.S. Trustee objected to the cash management motion on the ground that it would be inappropriate for Heldman to have access to the debtors’ cash.¹⁰

At the first-day hearing, the Court observed that nothing in the relief sought would or could operate to override the district court's injunction. Property owned by a debtor prepetition comes into the bankruptcy estate subject to whatever restrictions or limitations exist under non-bankruptcy law.¹¹ The Court accordingly was prepared to grant the debtors some (but not all) of the first-day relief that it sought.¹² The Court noted, however, that to the extent Beyond Blond and the U.S. Trustee had concerns about the case proceeding with the debtors’ current management remaining in possession, they would need to seek appropriate relief under the Bankruptcy Code rather than oppose the debtors’ ordinary efforts to advance the bankruptcy case. Under the circumstances, the Court directed that the matter proceed on a highly expedited schedule. The Court ordered that any such motion be filed by December 12, 2022 and that responses be filed by December 13, 2022.

The Court held an evidentiary hearing on the motions on December 14, 2022. At that hearing, the debtors presented the testimony of Raymond Pinglora, who had also served as the debtors’ first-day declarant. Pinglora is Heldman's cousin. While he is not an officer or employee of the debtors, Pinglora testified that his company provided accounting services to the debtors and that he was personally engaged to serve, on a contract basis, as the business manager.

Pinglora testified that he had taken steps since the first-day hearing (when he had been questioned on this issue) to have the debtors’ bank restrict Heldman's ability to draw on the companies’ bank account. While he did not dispute that Heldman, as the debtors’ owner and sole officer, would have the corporate authority to remove whatever restrictions he had imposed, Pingolora testified that Heldman played only a "creative" role with the debtors and lacked the practical or managerial skills necessary to access the debtors’ bank account. Pinglora made no effort to defend the emails that Heldman had sent. Indeed, at the first-day hearing, Pinglora testified that he agreed that the emails were harassing and thus violated the California district court's order. At the hearing on the present motions, Pinglora added that he believed that Heldman's conduct was attributed to substance abuse. Importantly, Pinglora did not claim that he would have any ability to prevent Heldman from effectively sabotaging the debtors’ business by following through on his threat to "demonetize" the companies’ channels.

Beyond Blond presented the testimony of Milford Keshishian, the company's litigation counsel in the California district court litigation. Keshishian described the emails he had received from Heldman.

Those emails, as well as the various orders of the California district court, were admitted into evidence.

Jurisdiction

The Court has subject-matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b). As a case within the district court's bankruptcy jurisdiction, it has been referred to this Court under 28 U.S.C. § 157(a) and the district court's standing order of reference.¹³ The parties’ motions for removal under § 1185(a), the trustee's motion to dismiss under § 1112(b), and Beyond's motion for relief under Federal Rule of Bankruptcy Procedure 1009(a) are core proceedings under § 157(b)(2) which may be heard and decided in this Court.

Analysis

I. The question whether the Court has the power to remove the debtors’ small business designation is a close one, which the Court need not resolve in light of its determination that it would not, in any event, grant such relief here.

Certain small business debtors may elect to reorganize under subchapter V of chapter 11, a proceeding intended to be simpler and less expensive than a traditional chapter 11. This subchapter "provides a streamed-down procedure that allows the self-employed to hold on to their small businesses."¹⁴ Only the debtor may file a plan of reorganization,¹⁵ and because § 1104 does not apply in a case filed under subchapter V,¹⁶ the Court may not...