In re Outta Control Sportfishing, Inc.

642 B.R. 180

IN RE: OUTTA CONTROL SPORTFISHING, INC., Debtor.

Case No. 22-12081-PDR

United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division.

Signed June 29, 2022

Richard R. Robles, Esq., Miami, FL, for Debtor.

ORDER GRANTING MOTION TO DISMISS

Peter D. Russin, United States Bankruptcy Judge

The Debtor filed this bankruptcy to stay a foreclosure action on a preferred ship mortgage brought by its purported lender in District Court. When a debtor files a bankruptcy petition as a result of a two-party dispute for the sole purpose of gaining an advantage in a foreclosure action by avoiding the posting of a bond in order to regain possession of an arrested vessel, the debtor has filed in bad faith, which is cause for dismissal under 11 U.S.C. § 1112. That is what happened here. For the reasons that follow, this case is dismissed.

Findings of Fact

The Debtor operates a sport fishing charter business. In 2019, the Debtor purchased a vessel, the M/V American Patriot, for $500,000 to add to its operations which at the time consisted of one other smaller vessel, the Super Sea Legs.¹ The American Patriot required significant repairs and updates. Around the time of the purchase, the Debtor's principal, Ralph Hawkins, approached Lewis Tidaldi, principal of L.E.T. Holding of Hollywood, LLC ("LET"), about a business proposal, which resulted in Tidaldi disbursing at least $2.6 million over time from the end of 2019 until sometime in 2021 (the "Purported Loan"). The proceeds were ultimately used to repair and update the American Patriot. The Debtor has made no payments to LET.²

The parties dispute the purpose of the funds and which entities controlled by Hawkins they were meant to benefit. Tidaldi testified that the money was supposed to be a short-term loan to the Debtor for repairs to the American Patriot, secured by the vessel. The Debtor and LET signed a note and a ship mortgage for the loan amount of $2.6 million, dated June 2020, but the ship mortgage was not recorded.³ The Debtor contends the documents were only signed for accounting and tax purposes for the benefit of LET and Tidaldi, and the ship mortgage was never intended to be recorded. The Debtor argues that neither party intended for the loan documents to be binding and a valid lien on the vessel, as evidenced by the parties’ purposeful omission of the vessel's official number on the documents at the time of signature, the inclusion of which is necessary to perfect the ship mortgage. Instead, Hawkins testified that the funds received from Tidaldi were consideration in exchange for stock in another Hawkins-controlled entity, Sea Legs Marina, Inc. ("Sea Legs").

On February 9, 2022, LET filed an action against the Debtor in the U.S. District Court for the Middle District of Florida to enforce the ship mortgage on the American Patriot due to Debtor's alleged default on the Purported Loan ("District Court case").⁴ The Verified Complaint alleges that LET loaned $2.6 million to the Debtor to repair the vessel and attaches the signed loan agreement, ship mortgage, and note.⁵ Upon filing the action, LET filed a Motion for Issuance of Warrant In Rem under Admiralty Rule C, arguing that "probable cause exists for the issuance of a warrant for arrest of the M/V AMERICAN PATRIOT and that all other conditions set forth in Local Rule 1.03(a) and Local Admiralty and Maritime Practice Manual Section 3 have been satisfied."⁶ The District Court granted the motion "[p]ursuant to Supplemental Rule C(1) of the Federal Rules of Civil Procedure and Section 3(a)(1)(A) of the Middle District of Florida Admiralty and Maritime Practice Manual (promulgated pursuant to Local Rule 1.03(a))," and issued the warrant for arrest.⁷ The District Court also granted LET's request to appoint a substitute custodian for the vessel.⁸ To regain possession of the vessel, the Debtor was required to post a bond.⁹

The arrest of the vessel prompted the Debtor to file for bankruptcy on March 16, 2022, to regain control and operation of the vessel after seeking relief from this Court.¹⁰ The Debtor did not respond to the complaint or attempt to litigate the matter in any way in District Court before filing the bankruptcy petition. Shortly after filing the bankruptcy petition, the Debtor filed an Emergency Motion for Turnover of Property (of the American Patriot vessel) and LET moved for relief from the automatic stay.¹¹ The Court ultimately ordered turnover of the vessel to the Debtor, conditioned on the Debtor binding insurance in the amounts determined at the hearings, and denied LET's request for stay relief and adequate protection payments.¹² LET then moved to dismiss this case as a bad faith filing ("Motion to Dismiss"),¹³ and the Court held an evidentiary hearing on the matter on May 11, 2022.

Jurisdiction

The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b). The Court has statutory authority to hear and determine this case under 28 U.S.C. § 157(b)(2)(A) and the general order of reference from the United States District Court for the Southern District of Florida. S.D. Fla. Local Rule 87.2(a). Venue is proper under 28 U.S.C. § 1408.

Conclusions of Law

Section 1112(b) of the Bankruptcy Code provides that "on request of a party in interest, and after notice and a hearing, the court shall ... dismiss a case under this chapter ... for cause ..." which includes bad faith. 11 U.S.C. § 1112(b)(1). "[T]here is no particular test for determining whether a debtor has filed a petition in bad faith." In re Phoenix Piccadilly, Ltd. , 849 F.2d 1393, 1394 (11th Cir. 1988). Instead, "the determination of cause under § 1112(b) is subject to judicial discretion under the circumstances of each case." In re Albany Partners, Ltd. , 749 F.2d 670, 674 (11th Cir. 1984) ; Chu v. Syntron Bioresearch, Inc. (In re Chu) , 253 B.R. 92, 95 (S.D. Cal. 2000) ("Bankruptcy courts have broad discretion" in determining what constitutes "cause" under § 1112(b).). Therefore, "[d]eterminations of good faith should be made on a case by case basis after evaluating the totality of the circumstances." In re Schultz , 436 B.R. 170, 176 (Bankr. M.D. Fla. 2010) ; In re Balboa St. Beach Club, Inc. , 319 B.R. 736, 740 (Bankr. S.D. Fla. 2005).

In determining bad faith, "courts may consider any factors which evidence ‘an intent to abuse the judicial process and the purposes of the reorganization provisions’ or, in particular, factors which evidence that the petition was filed ‘to delay or frustrate the legitimate efforts of secured creditors to enforce their rights.’ " Phoenix Piccadilly , 849 F.2d at 1394 (quoting Albany Partners , 749 F.2d at 674 ). These factors include the following non-exhaustive list that can serve as guidance to courts making this determination:

(i) the debtor has only one asset in which it does not hold legal title;

(ii) the debtor has few unsecured creditors whose claims are small in relation to the claims of the secured creditors;

(iii) the debtor has few employees;

(iv) the property is the subject of a foreclosure action as a result of arrearages on the debt; (v) the debtor's financial problems involve essentially a dispute between the debtor and the secured creditors which can be resolved in a pending state court action; and

(vi) the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights.

Id. at 1394–95 ; see also State St. Houses, Inc. v. N.Y. State Urb. Dev. Corp. (In re State St. Houses, Inc.) , 356 F.3d 1345, 1346–47 (11th Cir. 2004) (concluding the " Phoenix Piccadilly factors are appropriate guidelines for consideration" when evaluating bad faith but they are "non-exhaustive and not to be rigidly applied"). The facts in this case support a finding of bad faith.

I. The Debtor has very few assets and creditors, only one employee, and is party to a pending foreclosure action for nonpayment of a disputed mortgage on its vessel.

The first four Piccadilly factors support a finding of bad faith. First, the Debtor has essentially two assets: the American Patriot vessel that is the subject of its dispute with LET, and the smaller vessel Super Sea Legs.¹⁴

Second, the Debtor's only potential unsecured creditors include Marco River Marina, which filed a Proof of Claim for $0, and the IRS, which filed a Proof of Claim for $700.¹⁵ The Debtor has three secured creditors: Amberjack Cruises LLC holding a ship mortgage on the American Patriot, with a claim of $300,000; Fourchon Charters LLC holding a ship mortgage on Super Sea Legs, with a claim of $290,000; and LET holding the disputed mortgage on the American Patriot, with a claim of over $3 million.¹⁶ The only claim that is in dispute and not current is LET's.

Third, the Debtor's only employee is Hawkins, although it has about a dozen independent contractors who work on the vessels when they are operating.¹⁷

Fourth, the American Patriot is the subject of the District Court case because of the Debtor's alleged payment default on the Purported Loan. The issues regarding the disputed mortgage are before the District Court and have not been brought before this Court for determination.¹⁸ In any event, the record is clear, and the parties agree that the Debtor never made any payment to LET.¹⁹

Thus, the ultimate question is whether the disputed ship mortgage is valid and perfected, and that question is squarely before the District Court. The Debtor filed bankruptcy seemingly choosing to litigate that issue before the Bankruptcy Court instead of the District Court, and while that may under certain circumstances withstand scrutiny, in this case it does not.

II. The Debtor's financial problems entirely involve its two-party dispute with LET that can be resolved in the District Court case and the timing of the bankruptcy filing suggests an intent to forum shop.

The dominant factor that precipitated the Debtor filing bankruptcy was the filing of the District Court case and...