In re Corinthian Commc'ns, Inc.

642 B.R. 224

IN RE: CORINTHIAN COMMUNICATIONS, INC., Debtor.

Case No. 22-10425 (MG)

United States Bankruptcy Court, S.D. New York.

Signed August 3, 2022

A.Y. Strauss LLC, Counsel for the Debtor, 101 Eisenhower Parkway, Roseland, NJ 07068, By: Heike M. Vogel, Esq., Eric H. Horn, Esq., Jordan M. Engelhardt, Esq.

Huebscher & Co., Subchapter V Trustee, 301 East 87^th Street, 20e, New York, NY 10128, By: Eric M. Huebscher

Office of the United States Trustee, Region 2, Representative for the U.S. Trustee, U.S. Federal Office Building, 201 Varick Street, Room 1006, New York, NY 10014, By: Susan A. Arbeit, Esq.

Morrison Cohen LLP, Counsel for 500 Eighth Avenue LLC, 909 Third Avenue, New York, NY 10022, By: David J. Kozlowski, Esq., Andrew Simpson, Esq.

Kudman Trachten Aloe Posner LLP, Counsel for Larry Miller, 800 Third Avenue, 11^th Floor, New York, NY 10022, By: Paul Aloe, Esq., David N. Saponara, Esq.

MEMORANDUM OPINION EXPANDING SUBCHAPTER V TRUSTEE'S DUTIES PURSUANT TO 11 U.S.C. § 1183(b)(2) OF THE BANKRUPTCY CODE

MARTIN GLENN, CHIEF UNITED STATES BANKRUPTCY JUDGE

The Small Business Reorganization Act ("SBRA" or "Subchapter V," codified as new 11 U.S.C. §§ 1181 – 1195 ) has been a remarkably successful addition to Chapter 11 of the Bankruptcy Code. It was designed to allow a small business debtor to file bankruptcy in a timely, cost-effective manner, that hopefully allows the debtor to restructure and remain in business, thereby benefiting the owners, employees, suppliers, customers, and others. Subchapter V provides for the appointment by the United States Trustee ("U.S. Trustee") of a non-operating trustee ("Subchapter V Trustee") who provides oversight of the debtor in possession and helps facilitate negotiation of what will hopefully be a consensual reorganization plan. See 11 U.S.C. § 1183. In this Court's experience, Subchapter V Trustees are the "honest brokers," who through their efforts have provided credibility in evaluating the debtor's business's prospects for a successful reorganization and facilitated negotiation of a plan of reorganization with the debtor's stakeholders, thereby enabling a small business to reorganize.

The success of a Subchapter V case depends in large part on the openness and transparency of the debtor with the Subchapter V Trustee, the U.S. Trustee, creditors, and with the Court. Where the debtor fails to meet its obligations of openness and transparency, the Bankruptcy Code provides the Court with remedies, ranging from dismissal of the case, conversion of the case to a case under Chapter 7, or removal of the debtor as the debtor in possession and substituting the Subchapter V Trustee as the operating trustee. But removing the debtor as debtor in possession of a small business may make it considerably more difficult, if not impossible, for the debtor successfully to reorganize. It is often the debtor's owner who built the business—developing and maintaining relationships with employees, customers and vendors that give the debtor a chance at successfully reorganizing. Remove the owner's authority to manage the business as a debtor in possession, and the debtor is more likely to fail.

As explained below, the debtor's owner in this case has so far failed to meet the standards of openness and transparency imposed by the Bankruptcy Code and expected of him by this Court. While denied by the owner, his derelictions have been obvious to the Court, the U.S. Trustee, and the Subchapter V Trustee. The U.S. Trustee, supported by the Subchapter V Trustee, filed a motion to remove the debtor as debtor in possession. Unless this "ship gets righted" quickly, removal of the debtor as debtor in possession or conversion to Chapter 7 will be required.

Where questions remain about the conduct and affairs of a small business debtor, Subchapter V of the Bankruptcy Code provides the Court another alternative to removing the debtor as debtor in possession, namely expanding the powers of the Subchapter V Trustee to investigate the affairs of the debtor and to report to the Court. Has this debtor properly conducted its business? Were all payments and transfers among the debtor, its affiliates and principal proper and properly recorded? Is there a business that can and should be given one last chance to reorganize? In short, does the debtor deserve a chance to reorganize after a rocky start to this case?

At a hearing on July 21, 2022, the Court decided, instead of immediately removing the debtor as debtor in possession, to expand the Subchapter V Trustee's powers to investigate and report. The Court made clear that if the debtor's management fails to provide complete cooperation and transparency then, at a minimum, the debtor will be removed as debtor in possession. The Order expanding the Subchapter V Trustee's powers was entered on July 22, 2022. ("Order," ECF Doc. # 68.)

I. BACKGROUND

A. The Motion to Remove the Debtor as Debtor in Possession

The U.S. Trustee filed a motion ("Motion," ECF Doc. # 37) for the entry of an order removing the debtor, Corinthian Communications, Inc. (the "Debtor"), as the debtor in possession pursuant to 11 U.S.C. § 1185(a). The Subchapter V Trustee in this Subchapter V Chapter 11 case, Eric Huebscher, filed a declaration in support of the Motion. ("Huebscher Declaration," ECF Doc. # 37-1.)¹ The Debtor's landlord, 500 Eighth Avenue LLC (the "Landlord"), filed a joinder to the Motion. ("Joinder," ECF Doc. # 44.) The Debtor filed an opposition to the Motion ("Objection," ECF Doc. # 47) supported by the declaration of the Debtor's President and sole owner, Larry Miller ("Mr. Miller") ("Miller Decl.," ECF Doc. # 47-1), and the declaration of the Debtor's accountant, Michael Block (ECF Doc. # 47-2).

On July 18, 2022, the Subchapter V Trustee submitted a status report regarding his efforts to obtain more information about the Debtor. ("Status Report," ECF Doc. # 62.) On the same day, the U.S. Trustee filed a supplemental brief in further support of the Motion ("Supp. Brief," ECF Doc. # 63), and the Debtor filed a supplemental brief in further opposition to the Motion ("Supp. Objection," ECF Doc. # 60).

The Court held hearings on the Motion on July 7, 2022 (the "July 7 Hearing") and on July 21, 2022 (the "July 21 Hearing"). At the conclusion of the July 21 Hearing, the Court stated it would enter an order expanding the Subchapter V Trustee's duties under section 1183(b)(2) of the Bankruptcy Code and indicated that it would issue a written opinion explaining the order. ("July 21 Hr'g Tr.," ECF Doc. # 69 at 23:1–3, 16–18.) The Order was entered the following day. As explained in this Opinion, the Court FINDS there is cause to expand the Subchapter V Trustee's duties under section 1183(b)(2) to include an investigation of "the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuation of such business ...." 11 U.S.C. § 1106(a)(3).

B. The Debtor's Business

The Debtor is an S corporation that was founded in 1974 and is 100% owned by Mr. Miller, who is the Debtor's President and sole director. (See Motion ¶ 3; see also Declaration of Larry Miller Pursuant to Local Bankruptcy Rule 1007-2 ("Miller Rule 1007-2 Decl."), ECF Doc. # 5 ¶¶ 1–2, 14.)² The Debtor provides bookkeeping and payroll for three of its non-debtor affiliates (the "Affiliates"): Corinthian Trading Inc. ("Trading"), Corinthian Media Inc. ("Media"), and Broadcast Buying Services ("Broadcast Buying").³ (Motion ¶ 4 (citing Huebscher Decl. ¶ 2).) Each of the Affiliates is 100% owned by Mr. Miller. (Id. )

The Affiliates earn revenue from outside sources, and these funds flow to the Debtor. (Id. ¶ 5 (citing Huebscher Decl. ¶ 5).) However, there is no intercompany agreement in place setting forth shared liabilities or monthly flow of funds from the Affiliates to the Debtor. (Id. (citing Huebscher Decl. ¶ 6).)

C. The Debtor's Bankruptcy Filing

On April 4, 2022 (the "Petition Date"), the Debtor filed a voluntary petition in this Court under Title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code"). (Id. ¶ 1.) The Debtor elected to proceed under Subchapter V of Chapter 11 and the U.S. Trustee appointed the Subchapter V Trustee in the Debtor's bankruptcy case pursuant to section 1183(a) of the Bankruptcy Code. (Id. ¶¶ 2–3.)

On the Petition Date, the Debtor also filed its Schedules of Assets and Liabilities ("Schedules," ECF Doc. # 1 at 13–23) and Statement of Financial Affairs (ECF Doc. # 1 at 24–30). On Schedule E/F of the Debtor's Schedules, Mr. Miller was listed as having a nonpriority unsecured claim in the amount of $1,236,350.00 ("Miller Claim," ECF Doc. # 1 at 20). On June 7, 2022, the Debtor filed an amended Schedule E/F ("Amended Schedule E/F," ECF Doc. # 30) that removed the Miller Claim.

On May 5, 2022, Mr. Miller testified on behalf of the Debtor at the meeting of creditors pursuant to section 341(a) of the Bankruptcy Code (the "Initial 341 Meeting"). (Motion ¶ 6.) On June 9, 2022, Mr. Miller testified again on behalf of the Debtor at the adjourned meeting of creditors (the "Adjourned 341 Meeting," and collectively with the Initial 341 Meeting, the "341 Meetings").⁴ (Id. )

At a hearing held on June 7, 2022, the Debtor's counsel informed the Court for the first time that the Debtor "provides payroll and accounting services" for other entities that have "common ownership with respect to the [D]ebtor's principal." ("June 7 Hr'g Tr.," ECF Doc. # 49 at 4:16–19.) The Debtor's counsel also informed the Court that a trust owned by Mr. Miller's children owns 20 percent of the building in which the Debtor leased its office space. (Id. at 7:19–25.) The U.S. Trustee informed the Court that it was asking for documentation on the Miller Claim that was reflected in the Schedules. (Id. at 9:1–4.)

The Court stated that the Miller Rule 1007-2 Declaration provided no indication that the Debtor was affiliated with the Affiliates and...