“Messrs. Woods and Wu are fraudsters,” Decide Christopher S. Sontchi declared within the opening salvo of his scathing opinion. In response to the previous Chief Decide of the U.S. Chapter Court docket for the District of Delaware, Woods and Wu fraudulently obtained a Paycheck Safety Program (“PPP”) mortgage on behalf of City Commons Queensway, LLC, which not directly operates the Queen Mary, a cruise ship turned lodge docked close to Lengthy Seaside, CA. Woods and Wu then “absconded with the proceeds, leaving both the Debtor or america to pay again the lender.”
Beforehand, Decide Sontchi had granted City Commons Queensway’s (the “Debtor” or “Plaintiff”) movement for a preliminary injunction, barring Defendants Woods and Wu (the “Defendants”) from “transferring, encumbering or in any other case disposing of $2,437,500 or property of equal worth and requiring every Defendant to account for such funds or property to Plaintiff.” EHT US1, Inc., Debtors. Urb. Commons Queensway, LLC, v. EHT Asset Mgmt., LLC, Taylor Woods, & Howard Wu, 21-10036, 2021 WL 5286297, at *2 (Bankr. D. Del. Nov. 15, 2021). In so holding, Decide Sontchi discovered that “Mr. Woods knowingly or recklessly made false statements to acquire an SBA PPP mortgage by signing an SBA PPP mortgage software on behalf of Plaintiff with out Plaintiff’s information or consent.” After acquiring the funds, the Defendants “transferred them to . . . an entity they wholly owned, after which triggered the funds to vanish.” In response to the courtroom, these actions demonstrated “willingness to flaunt the legislation, use entities and transfers to keep away from paying cash wrongfully obtained, and an absence of regret for therefore doing.” Id.
Regardless of the preliminary injunction (the “PI Order”), the Defendants did not sufficiently account for the funds. After vital delay, they offered a “Preliminary Accounting.” However in accordance with the courtroom, “[n]othing within the Preliminary Accounting [was] enough for the needs of the PI Order.” It merely traced the funds’ purported use by the third-party supervisor of the Plaintiff and didn’t “establish and protect (for Plaintiff’s profit) $2,437,500 in money or different property from any supply,” as required. The courtroom additionally took challenge with the Defendants’ assertion that “they ha[d] no different property,” which would come with “no home, no automotive, no financial institution accounts, [and] no private property.” Decide Sontchi discovered the unsworn assertion particularly doubtful as a result of the Defendants had lately “offered a $10 million deposit in reference to their unqualified bid for sure of the [Plaintiff]’s property.” Id. at *4-5.
Given the Defendants’ failure to abide by the PI Order, Decide Sontchi thought of find out how to proceed. The Plaintiff requested “short-term confinement,” arguing that “financial sanctions could be inadequate to compel Defendants’ compliance with the PI Order.” Contemplating the request, Decide Sontchi famous that there was “no query that the Court docket has the facility to incarcerate” the Defendants as a part of its contempt authority. Nevertheless, earlier than doing so, Decide Sontchi scheduled an in-person listening to for November 19, 2021, “to find out the least coercive sanction moderately calculated to win compliance with the PI Order.” Id. at *6-9.
Evidently, Decide Sontchi discovered a much less coercive measure than locking up the Defendants: the persevering with risk of incarceration. Regardless of discovering “neither the testimony of Mr. Woods nor Mr. Wu was credible,” Decide Sontchi declined to challenge an order of dedication after the listening to. As a substitute, on November 22, 2021, he dominated that the courtroom would “instantly and with out additional discover to Defendants challenge an Order of Dedication for Civil Contempt . . . upon the submitting of a Certification of Counsel by Plaintiff’s counsel with supporting proof connected thereto as to any of the next:”
- The Defendants transferred, encumbered, or in any other case disposed of property within the combination quantity of greater than $50,000.00 on or after November 22;
- Plaintiff is in possession of dependable proof that the Defendants intend to switch, encumber, or in any other case get rid of property within the combination quantity of greater than $50,000.00; or
- By December 6, 2021, Defendants fail to fulfill their obligation to offer an accounting, as required by the PI Order.
Decide Sontchi shouldn’t be the primary chapter choose to deal with the difficulty of improperly obtained COVID-19 reduction funds. As we reported beforehand, Decide Gargotta (Bankr. W.D. Tx.) discovered {that a} nursing residence couldn’t use funds allotted by the U.S. Division of Well being and Human Providers, in error, to repay collectors in chapter 11 proceedings. Not like the debtor in that case, nevertheless, the Defendants right here did not abide by the courtroom’s orders. Defendants thus risked (and proceed to danger) incarceration whereas offering a helpful reminder that in chapter courtroom, it’s usually higher to ask for permission than forgiveness.
