In re Hawkeye Entm't

1

In re: HAWKEYE ENTERTAINMENT, LLC Debtor.

No. 1:23-bk-11501-MB

United States Bankruptcy Court, C.D. California, San Fernando Valley Division

April 8, 2024

NOT FOR PUBLICATION

Chapter 11

MEMORANDUM DECISION RE: MOTION TO DISMISS CHAPTER 11 CASE AND MOTION FOR RELIEF FROM THE AUTOMATIC STAY

Martin R Barash United States Bankruptcy Judge

Hawkeye Entertainment, LLC ("Debtor") is the lessee under a lease of commercial property in downtown Los Angeles. Smart Capital Investments I, LLC, Smart Capital Investments II LLC, Smart Capital Investments III, LLC, Smart Capital Investments IV, LLC, and Smart Capital Investments V, LLC (collectively, "Smart Capital") is landlord under that lease. Smart Capital has moved the Court: (i) to dismiss this chapter 11 case pursuant to Bankruptcy Code section 1112(b), Case Dkt. 44 (the "Dismissal Motion"), and (ii) for relief from the automatic stay pursuant to Bankruptcy Code section 362(d) to proceed with an unlawful detainer action against Debtor and to assert counterclaims against Debtor, which is the plaintiff in a civil action pending in the California Superior Court ("Superior Court") against Smart Capital. Case Dkt. 48 (the "RFS Motion," and together with the "Dismissal Motion," the "Motions"). The gravamen of both Motions is that Debtor filed this case in bad faith.

The Motions were filed on December 19, 2023, and set for hearing on January 9, 2024. On January 9, the Court held an initial hearing on the Motions, and thereafter continued the hearings to permit the parties to cross-examine each other's declarants. That evidentiary hearing was originally scheduled for January 24 but, by stipulation of the parties, was rescheduled for February 14, 2024. On February 14, 2024, the Court heard live cross examination of declarants Michael Chang and Adi McAbian, as well as oral argument. At the conclusion of the February 14 hearing, the Court continued the hearing until February 21.

On February 16, 2024, the Court issued an order providing the parties an opportunity to supplement the record and continuing the hearings further, to facilitate the receipt of such additional evidence. Case Docket No. 105. The order canvassed the parties' arguments with respect to the good faith of Debtor's bankruptcy filing and identified areas in which the Court believed that additional evidence would be helpful. The Court also continued the hearing scheduled for February 21 to March 14.

The parties thereafter submitted additional declaration testimony and documentary evidence, in support of and in opposition to the motions. On March 14, 2024, the Court held a second evidentiary hearing at which it heard live cross-examination of declarants David Weintraub Michael Ayaz, Elizabeth Peterson-Gower and Fadi Rasheed. The Court also heard additional legal argument.

On March 29, 2024, the Court held a continued hearing to announce: (i) its finding that Debtor filed the case in good faith, (ii) that the Court would deny the Dismissal Motion (iii) that the Court would deny Smart Capital's request for relief from stay to pursue an unlawful detainer action against Debtor, and (iv) that the Court was inclined to grant Smart Capital limited relief from the automatic stay to permit Smart Capital to file counterclaims against Debtor in the pending Superior Court action (the "State Court Action"), provided such counterclaims were limited to the liquidation of any damage claims Smart Capital might have against Debtor.

On the last of these issues, the Court engaged in a colloquy with the parties' counsel regarding the practicalities and efficiencies of permitting Smart Capital to assert counterclaims in the State Court Action, where it appears that some of the issues underlying those claims-which were not specifically identified in the RFS Motion-probably would be litigated first in this chapter 11 case. Accordingly, at the conclusion of the March 29 hearing, the Court indicated it would withhold judgment on the question of permitting Smart Capital to assert counterclaims in the State Court Action but would issue a written memorandum explaining its other rulings. This is the promised memorandum. It constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052 which is applicable to these contested matters under Bankruptcy Rule 9014.

I. JURISDICTION, ADJUDICATIVE AUTHORITY &VENUE

The Court has jurisdiction over the Motions pursuant to 28 U.S.C. § 1334(b), because they arise under provisions of the Bankruptcy Code, namely sections 362(d) and 1112(b). As such, the motions pertain to statutorily and constitutionally core matters, that have been properly referred to this Court by the district court, and over which this Court has the adjudicative authority to enter a final order. See Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665 (2015). The Court also finds that venue is proper under 28 U.S.C. § 1409(a) because the Motions were filed in the court where Debtor's chapter 11 case is pending.

II. FACTUAL AND PROCEDURAL BACKGROUND

Debtor is lessee under a lease of a portion (the "Premises") of the commercial property located at 618 South Spring Street, Los Angeles (the "Lease"), which is commonly known as the Pacific Stock Exchange Building. Debtor subleases the Premises to its subtenant, W.E.R.M. Investments, LLC ("WERM") which operates a popular dance club and event venue on the Premises, commonly known as "Exchange LA". Smart Capital is the current landlord of the property. The principal of Smart Capital is Michael Chang. The predecessor owner of the property and prior landlord was an entity called New Vision Horizon, LLC ("New Vision"), whose principal is also Michael Chang. New Vision acquired the property by foreclosure from the previous owner and landlord, Pax America. Debtor's lease of the Premises originated in 2009, when Pax America was the owner and landlord.

Since that acquisition, Debtor and its landlords-New Vision, and thereafter Smart Capital-have been at loggerheads. Between 2009 and 2013, Debtor withheld nearly $1 million in rents under the Lease, alleging the landlord failed to make certain improvements required by the Lease. Debtor filed two lawsuits against New Vision - one in 2011 and one in 2013. On September 20, 2013, New Vision responded with a notice of default for failure to pay the withheld rental amount and five days to cure the deficiency. On September 30, 2013, Debtor filed its first chapter 11 bankruptcy case, which was assigned to my colleague, Hon. Maureen Tighe, in this division. Case No. 1:13-bk-16307-MT.

The disputes between Debtor and New Vision ultimately were resolved, and the Lease assumed, pursuant to a comprehensive settlement agreement, which was approved by order entered in the first chapter 11 case, on September 12, 2014. Among other things, the settlement agreement voided certain amendments to the Lease, implemented certain other amendments to the Lease and conferred mutual releases on the parties. On June 20, 2016, the Court entered an order confirming a chapter 11 plan for Debtor, which order also "confirmed" the assumption of the Lease. The Clerk of the Court entered a final decree in, and closed, Debtor's first bankruptcy case on April 28, 2017.

The peace achieved pursuant to the settlement agreement in the first case, however, was short-lived. On August 5, 2019, Smart Capital delivered a letter asserting non-monetary defaults under the Lease. Despite Debtor's efforts to address and obtain more specific information on the nature of the alleged defaults, Smart Capital thereafter issued a three-day notice to quit the premises. Not long after, on August 21, 2019, Debtor commenced its second chapter 11 case, Case No. 1:19-bk-12102-MT. In that case, Debtor moved to assume the Lease pursuant to Bankruptcy Code section 365 and Smart Capital opposed. After a multi-day trial, the Court approved Debtor's assumption of the Lease. The Ninth Circuit Court of Appeals later affirmed that decision. Smart Cap. Invs. I, LLC v. Hawkeye Ent., LLC (In re Hawkeye Ent., LLC), 49 F.4th 1232 (9th Cir. 2022). Debtor confirmed a chapter 11 plan in its second case, by order entered on August 6, 2021. That case has not yet been closed. On January 23, 2024, the case was reassigned to the undersigned and redesignated as Case No. 1:19-bk-12102-MB.

Unfortunately, the conflict between Debtor and Smart Capital has continued. On September 20, 2021, Debtor commenced an adversary proceeding in its second bankruptcy case, alleging various breaches of the Lease by Smart Capital, including efforts to interfere with Debtor and WERM's use and quiet enjoyment of the Premises. Adv. No. 1:21-ap-01064-MT. Judge Tighe, however, dismissed that adversary proceeding on jurisdictional grounds, concluding that the Court's post-confirmation jurisdiction in the second case did not include the disputes alleged in Debtor's complaint. See Adv. Dkt. 24, 30. The dismissal order was without prejudice to Debtor refiling its claims with a court of competent jurisdiction. On August 29, 2022, Debtor and WERM filed the State Court Action in the Superior Court, which action seeks a variety of relief for alleged breaches of the Lease by Smart Capital. The State Court Action remains pending.

One of the ongoing disputes between Debtor and Smart Capital surrounds the efforts of WERM to renew its conditional use approval by the City of Los Angeles for the sale of alcoholic beverages (the "CUB"). Among other licenses, WERM is required by Los Angeles ordinance to maintain a CUB to sell alcoholic beverages at the Premises. The sale of alcoholic beverages is essential to WERM's operation of the Premises as a successful nightclub and event venue. To renew its existing...