In re Raphael Mense & Cottonsmith, LLC

509 B.R. 269

In re Raphael MENSE and Cottonsmith, LLC, Debtors.

No. 2:14–bk–11195–PC.

United States Bankruptcy Court,

C.D. California,

Los Angeles Division.

Heared April 2, 2014.

Signed April 15, 2014.

David L. Neale, Juliet Y. Oh, Levene, Neale, Bender Yoo & Brill L.L.P., Los Angeles, CA, for Fred Kayne, Individually and as Trustee of the Fred & Lenore Kayne Family Trust.

Douglas M. Neistat, Yi Sun Kim, Greenberg & Bass, LLP, Encino, CA, for Debtor.

Kenneth G. Lau, Office of the United States Trustee, Los Angeles, CA, for U.S. Trustee.

MEMORANDUM DECISION

PETER H. CARROLL, Chief Bankruptcy Judge.

Before the court are two motions filed by creditor, Fred Kayne (“Kayne”): (1) Motion by Judgment Creditor Fred Kayne for Relief from the Automatic Stay under 11 U.S.C. § 362 (Action in Non–Bankruptcy Forum) (“Kayne's Stay Relief Motion”); and (2) Motion by Judgment Creditor Fred Kayne for Entry of Order Dismissing Debtors' Chapter 11 Cases (“Kayne's Dismissal Motion”). Debtors, Raphael Mense (“Mense”) and Cottonsmith, LLC (“Cottonsmith”) oppose the motions. Having considered the motions and oppositions thereto, the replies, the evidentiary record,¹ and arguments of counsel, the court will grant the relief requested by Kayne based upon the following findings of fact and conclusions of law made pursuant to F.R.Civ.P. 52(a),² as incorporated into FRBP 7052 and applied to contested matters by FRBP 9014(c).

I. STATEMENT OF FACTS

Cottonsmith is a limited liability company. Mense is the managing member of Cottonsmith, and owns 90% of the outstanding shares of the corporation. The remaining 10% of Cottonsmith is owned by the Fred and Lenore Kayne Family Trust (the “Trust”). Prior to July 2011, “Cottonsmith was in the business of manufacturing and importing so-called ‘blank’ tee shirts for sale to customers who dye and/or screen print them according to customer specifications.” ³ Kayne was also the majority owner of Cottonsmith's primary customer, Fortune Fashion Industries, LLC (“FFI”). Pursuant to an agreement between the parties, Kayne advanced $750,000 from the Trust to Cottonsmith in approximately September 2010, to be used solely for the purpose of purchasing fabric to fulfill FFI's orders. The advance was to be repaid by proceeds from the sale of the fabric or tee shirts made by FFI with the fabric. By July 2011, however, Cottonsmith had ceased doing business and had liquidated its assets. Kayne demanded that Cottonsmith repay the advance and disburse his capital account at Cottonsmith which at the time was in excess of $700,000. Cottonsmith refused and Kayne sued.

On August 24, 2011, Kayne filed a complaint against Mense and Cottonsmith in Case No. BC468228, Kayne v. Mense, et al., in the Superior Court of California, County of Los Angeles, seeking, among other things, damages for alleged breach of contract, breach of fiduciary duty, and treble damages under Cal.Penal Code § 496(c). On June 12, 2013, following a four-week trial, Kayne obtained a jury verdict against Mense and Cottonsmith on all counts. The next day, the jury awarded Kayne punitive damages against Mense in the amount of $750,000. After seven months of haggling over the form and substance of the judgment, a Third Amended Judgment was entered in the state court action on January 27, 2014, awarding (1) judgment for Kayne against Mense and Cottonsmith, jointly and severally, the sum of $2,997,698, plus prejudgment interest of $132,227; and (2) judgment for Kayne against Mense in the amount of $750,000, plus prejudgment interest of $35,881.77.⁴ Five days before entry of the judgment, however, Mense and Cottonsmith filed their respective bankruptcy petitions.

Cottonsmith

On January 22, 2014, Cottonsmith filed a voluntary petition under chapter 11 in Case No. 2:14–bk–11194–PC, In re Cottonsmith, LLC, Debtor. Cottonsmith is no longer engaged in business. It has no employees and no income. In its schedules filed on February 26, 2014, Cottonsmith disclosed that its sole asset is the balance on deposit in a “business checking account” at Wells Fargo Bank which was $1,400,000 on the petition date. Cottonsmith has no creditors, except two creditors listed in Schedule F: (1) Kayne; and (2) Horvitz & Levy LLP, the holder of a disputed unsecured nonpriority claim for attorneys' fees in the amount of $12,142.58.

Mense

On January 22, 2014, Mense filed a voluntary petition under chapter 11 in Case No. 2:14–bk–11195–PC, In re Raphael Mense, Debtor. In his schedules filed on February 26, 2014, Mense disclosed assets totaling $20,096,615.49, consisting of interests in real property valued at $10,375,000 and personal property valued at $9,721,615.49.⁵ Mense has debts totaling $6,613,888.58, composed of $5,498,746.00 in secured claims and $1,115,142.58 in unsecured nonpriority claims.⁶ In his Statement of Financial Affairs, Mense disclosed adjusted gross income in 2012 of $–249,097.⁷ Mense receives monthly income from Social Security of $1,698 according to Schedule J. ⁸ His non-filing spouse receives monthly wages of $6,000. While their combined monthly income does not exceed $7,698, their monthly expenses are quite significant. Mense's monthly expenses itemized in Schedule J exceed $26,000, and include:

Mense stated in Schedules I and J that he does not anticipate any increase in income or decrease in expenses in the next 12 months.

Joint Administration

On February 19, 2014, the court entered an order directing joint administration of the Cottonsmith and Mense cases under Case No. 2:14–bk–11195–PC. On March 6, 2014, Mense and Cottonsmith filed an Amended Status Report pursuant to the court's Order to (1) Disclose Single Asset Real Estate; (2) File Status Report; (3) Attend Status Conference; and (4) File Monthly Interim Statements and Operating Reports entered in each case on February 12, 2014. In a declaration attached to the Amended Status Report, Mense stated under penalty of perjury:

I am not an insolvent Debtor, even if required to pay the judgment. I explored the possibility of pledging real estate and other assets to raise the funds necessary to purchase an appeal bond, but was told that this would require a lengthy underwriting period with no assurance or guaranty that a bond would ultimately issue. Based on the speed with which Kayne was able to execute on my assets, the only viable option was to seek the protection of the Bankruptcy Court and the imposition of the automatic stay, for the duration of the period necessary to complete the appeal.¹⁰

In response to the court's inquiry regarding the type of plan to be proposed, Mense responded in the Amended Status Report:

There are only a few possible scenarios that can follow from the present situation:

a) The Appeal is successful with a reversal of the judgment. In this event, I will file a motion to dismiss the Chapter 11 cases and no further relief will be required.

b) The Appellate Court orders a new trial. In this event, the matter will be retried. If re-trial is not successful, I would need to liquidate the assets necessary to pay all allowed claims.

c) The Appeal is denied and the judgment is upheld. In this instance, I would have to liquidate those assets necessary to pay all allowed claims. ¹¹

The court also inquired whether any proposed plan would require the sale of assets after confirmation. Mense reiterated in the Amended Status Report:

The extent to which assets may need to be sold in this case will turn on the outcome of the appeal. In the event that the decision of the trial court is upheld, or if the matter is retried to the same result, assets will need to be liquidated to meet the burden imposed by the judgment. I rely on my real estate assets and believe that in the event liquidation should be necessary, on an orderly basis, this can be accomplished. In the event that the verdict of the Los Angeles Superior Court is reversed, then no sale of any assets will be required at all.¹²

On March 10, 2014, the court granted relief from the automatic stay under § 362(d)(1) to permit Mense and Cottonsmith to appeal the judgment obtained by Kayne in the state court action.¹³ The court also annulled the stay to the petition date so that actions taken by the parties to enter the Third Amended Judgment in the state court after the petition date did not constitute a violation of the stay. The court prohibited enforcement of the judgment pending further order of the court. At the hearing on March 5th, Mr. Douglas Neistat, counsel for the debtors in possession, advised the court that “$7 million of cash or cash equivalent would have to be posted in order for Mr. Mense to obtain the bond necessary to stay ... enforcement of the judgment pending appeal.” ¹⁴ However, the parties' dispute regarding the appeal bond was left for another day. Cottonsmith and Mense were advised by the court that they were “free to exercise all of [their] rights with respect to an appeal of the judgment ... [a]nd that include[d] if the Debtor[s were] willing and able to do so, posting a supersedeas bond under state law to prevent collection on the judgment.” ¹⁵ Kayne's request for stay relief to enforce his judgment, having been made in opposition to the Debtors' motion, was denied without prejudice pending a properly noticed motion.¹⁶

On March 12, 2014, Kayne filed Kayne's Dismissal Motion and Kayne's Stay Relief Motion. Cottonsmith and Mense filed written opposition to each of the motions on March 19, 2014, to which Kayne replied on March 26, 2014. After a hearing on April 2, 2014, the matters were taken under submission.

II. DISCUSSION

This court has jurisdiction over these contested matters pursuant to 28 U.S.C. §§ 157(b) and 1334(b). The matters are core proceedings under 28 U.S.C. § 157(b)(2)(A), (G) and (O). Venue is appropriate in this court. 28 U.S.C. § 1409(a).

A. Lack of Good Faith is “Cause” for Dismissal of the Case and Relief from the Automatic Stay

Good faith is required in the commencement and prosecution of a ...