In re Woodbridge Grp. of Cos., LLC

592 B.R. 761

IN RE: WOODBRIDGE GROUP OF COMPANIES, LLC, et al.¹ Debtors.

Case No. 17-12560 (KJC)

United States Bankruptcy Court, D. Delaware.

Signed October 26, 2018

Ian J. Bambrick, Sean Matthew Beach, Donald J. Bowman, Jr., Betsy Lee Feldman, Allison S. Mielke, Edmon L. Morton, Michael S. Neiburg, Shane M. Reil, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Jennifer L. Conn, Matthew K. Kelsey, Matthew P. Porcelli, J. Eric Wise, Gibson Dunn & Crutcher LLP, New York, NY, Daniel B. Denny, Samuel A. Newman, Gibson Dunn & Crutcher LLP, David A. Fidler, Whitman L. Holt, Samuel M. Kidder, Kenneth N. Klee, Robert J. Pfister, David M. Stern, Michael L. Tuchin, Jonathan M. Weiss Klee, Tuchin, Bogdanoff & Stern, LLP Los Angeles, CA Oscar Garza, Gibson Dunn & Crutcher LLP, Irvine, CA, for Debtors.

John A. Morris, Pachulski Stang Ziehl & Jones LLP, James H. Millar, Michael P. Pompeo, Drinker Biddle & Reath LLP, New York, NY, Richard M. Pachulski, Jeffrey N. Pomerantz, James I. Stang, Pachulski Stang Ziehl & Jones LLP, Los Angeles, CA, Maxim B. Litvak, Pachulski Stang Ziehl & Jones LLP, San Francisco, CA, Colin Robinson, Bradford J. Sandler, Pachulski Stang Ziehl & Jones LLP, Joseph N. Argentina, Jr., Patrick A. Jackson, Steven K. Kortanek, Drinker Biddle & Reath LLP, Jamie Lynne Edmonson, Venable LLP, Wilmington, DE, Timothy R. Casey, Drinker Biddle & Reath LLP, Chicago, IL, for Creditor Committee.

(Re: D.I. 2721, 2397)

OPINION ON CONFIRMATION ²

KEVIN J. CAREY, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Debtors' Motion for Approval of Certain Compromises and Settlements, Partial Substantive Consolidation, and Related Relief with Respect to the Plan (D.I. 2721) (the "Motion"), and the Debtors' request for confirmation of the First Amended Joint Chapter 11 Plan of Liquidation of Woodbridge Group of Companies, LLC and Its Affiliated Debtors (D.I. 2397) (the "Plan"), The Debtors have resolved all objections to confirmation of the Plan, except for the Objection (D.I. 2767) (the "Objection") filed on behalf of Lise La Rochelle and others (the "Dissenting Creditors").³

A hearing was held on October 24, 2018, at which a joint record was made regarding the Motion and confirmation of the Plan. The following items in support of the Motion and Plan confirmation were admitted into the record:

(i) Declaration of Bradley D. Sharp in Support of Confirmation of the First Amended Joint Chapter 11 Plan of Liquidation of Woodbridge Group of Companies, LLC and its Affiliated Debtors (D.I. 2829), along with the attached Declaration of Soneet R. Kapila;⁴

(ii) Declaration of Frederick Chin in Support of Confirmation of the First Amended Joint Chapter 11 Plan of Liquidation of Woodbridge Group of Companies, LLC and its Affiliated Debtors (D.I. 2832);⁵

(iii) Declaration of Soneet R. Kapila (D.I. 2834);

(iv) Declaration of Emily Young of Epiq Certifying the Methodology for the Tabulation of Votes on and Results of Voting with Respect to the First Amended Joint Chapter 11 Plan of Liquidation of Woodbridge Group of Companies, LLC and its Affiliated Debtors (D.I. 2836) and the Errata to the Declaration of Emily Young (D.I. 2855).⁶

Counsel for the Dissenting Creditor's cross-examined Mr. Sharp, Mr. Kapila and Ms. Young at the hearing. After argument, I took the matters under advisement. For the reasons set forth below, the Objection will be overruled, the Motion will be granted, and the Plan will be confirmed.

FACTUAL BACKGROUND

On December 4, 2017, a total of 279 Debtors commenced voluntary cases under chapter 11 of the Bankruptcy Code. Thereafter, on February 9, 2018, March 9, 2018, March 23, 2018 and March 27, 2018, additional affiliated Debtors (27 in total) commenced voluntary cases under chapter 11 of the Bankruptcy Code. The bankruptcy cases arise out of a massive, multi-year fraudulent scheme perpetrated by Robert Shapiro between (at least) 2012 and 2017.⁷

As part of this fraud, through the Woodbridge entities, Shapiro raised over one billion dollars from approximately 10,000 investors – as either Noteholder or Unitholders – and used approximately $368 million of new investor funds to pay existing investors - - a typical characteristic of Ponzi schemes.⁸

After the bankruptcy cases were filed, the SEC filed a complaint in Florida federal court against Shapiro and his affiliates, including the Debtors, detailing much of the massive fraud perpetrated by Shapiro prepetition.⁹ The SEC asked the Florida court to appoint a receiver who would displace the Debtor's management.¹⁰

On December 14, 2017, an official committee of unsecured creditors (the "Unsecured Creditors' Committee") was appointed. On January 23, 2018, the Court approved a settlement among the Debtors, the SEC and the creditor constituencies providing for the formation of an official ad hoc noteholder group (the "Noteholder Committee"), and an official ad hoc unitholder group (the "Unitholder Committee"), as well as a replacement board (the "New Board") and management for the Debtors.

Immediately following the appointment of the New Board, the Debtors focused on bringing the chapter 11 cases to a rapid consensual resolution, so as to return as much money as possible, as promptly as possible, to creditors.¹¹ In March 2018, Debtors' counsel hosted several all-day negotiating sessions attended by the parties and their professionals.¹² On March 22, 2018, the Debtors, the Unsecured Creditors' Committee, the Noteholders Committee, and the Unitholders Committee signed a Summary Plan Term Sheet that memorialized an agreement in principle containing the fundamental terms of a chapter 11 plan.¹³ The parties continued to negotiate extensively the details of a plan, and on July 9, 2018, the Debtors filed the initial versions of the Plan and Disclosure Statement.

The Ponzi Scheme Summary

The Sharp and Kapila Declarations contain detailed findings based on their separate investigations and analyses of the Debtors' prepetition operations to support their conclusions that Shapiro conducted a significant Ponzi scheme through the Debtors.¹⁴

Under Shapiro's control and during the period from August 2012 through December 1, 2017, the prepetition Debtors raised more than $1.29 billion from over 10,000 unsuspecting investors nationwide by selling those investors two primary products: five-year Units and twelve-to eighteen-month Notes.¹⁵ The prepetition Debtors claimed the Notes would be repaid based on the purported revenues the Debtors would receive from issuing short-term loans to unrelated third-party property owners.¹⁶ In reality, there was no robust and safe cash flow stream from third-party borrowers, as a very small fraction of investor money flowed form the prepetition Fund Debtors to unrelated third parties.¹⁷ Rather, Shapiro created disguised affiliates (the PropCos and MezzCos, which are defined in the Motion) to which money was loaned.¹⁸ These "borrowers" did not even have bank accounts, and they had no ability to service the required interest payments on an ongoing basis.¹⁹ In addition, they had no ability to retire the debt when due, other than through the sale of real estate, which did not appear to be contemplated and was not effectuated.²⁰ The annual cash flow from sales of real property was well below the amount of principal and interest paid by Shapiro to investors.²¹

The prepetition Debtors used funds received primarily from new investors to make payments of approximately $425 million of "interest" and "principal" to existing investors.²² Shapiro also used commingled investor money to pay approximately $80 million in commissions, primarily to sales agents who sold the fraudulent "investments" and used investor money to pay at least $30 million for the benefit of Shapiro and his wife, as well as their related entities (including, for example, purchasing luxury items, travel, wine and the like).²³ While funds from the commingled account were used to purchase the Debtors' real properties, these purchases were directly contrary to material representations made to investors.²⁴

Moreover, investments were solicited, and payments of "interest" were made to existing investors, without regard to whether such investors' investments realized value (or even existed).²⁵ For example, on certain occasions, Shapiro issued Notes for properties that the Debtor never actually acquired, including properties at 778 Sarbonne Road in Los Angeles and 53 Huron Street in Brooklyn.²⁶ And much like the famous play "The Producers," the Debtors purchased the "Owlwood Estate" (an iconic luxury residence in the Los Angeles, California area) in September 2016 for $90 million, but signed notes to the Fund Debtors for alleged borrowings in the aggregate amount of $112 million - - well above the purchase price of the property.²⁷

In late 2017, Shapiro's fraudulent scheme unraveled.²⁸ As federal and state investigations intensified and unfavorable press reports began to emerge, the prepetition Debtors found it increasingly difficult to raise new capital from investors.²⁹ When new investment dried up, the inability to make the required servicing payments on the Notes and the Units became inevitable; indeed, the prepetition Debtors were unable to make the December 2017 interest and principal payments due on the Notes, which quickly precipitated the filing of the initial Debtors' bankruptcy cases.³⁰

Plan Summary

The Plan contemplates liquidating each of the Debtors. The Debtors' assets consist largely of approximately 189 real properties, cash and the "Liquidation Trust Actions."³¹ The Plan proposes to substantively consolidate (i) the Fund Debtors³² into Woodbridge Mortgage Investment Fund 1, LLC, and (ii) the Other Debtors into Woodbridge Group of Companies, LLC ("WGC").³³

To liquidate and distribute the proceeds of the assets, the Plan provides for the creation of two entities: (i) a Wind-Down Entity, which will own many of the Debtors' assets (including the Debtors' real properties) and will sell those assets to...