647 B.R. 457
Bankr. D. Del.2022Background:
- Debtors (ComedyMX, Inc. and ComedyMX, LLC) operate channels hosting classic Looney Tunes content and monetize via ad revenue on streaming platforms.
- Prepetition litigation: Beyond Blond sued the debtors and owner Edward Heldman III in C.D. Cal., obtaining a preliminary injunction, sanctions, and an order barring threatening/harassing communications and transfers of assets; plaintiffs allege fraudulent DMCA takedowns.
- Heldman, the 100% owner and sole officer/employee, sent repeated vulgar, racist, and threatening emails after filing bankruptcy and boasted he would "demonetize" the debtors and defy court orders.
- Debtors filed Subchapter V chapter 11 petitions (Nov. 14, 2022). Beyond Blond moved to de-designate to regular chapter 11 and to remove DIP or authorize the Subchapter V trustee to run the business; the U.S. Trustee moved to remove DIP under §1185 or dismiss under §1112(b).
- After an evidentiary hearing, the court found Heldman unfit to serve as a fiduciary, concluded cause to remove the debtors in possession under §1185, authorized the Subchapter V trustee to operate the business under §1183(b)(5), denied de-designation, and dismissed the U.S. Trustee’s dismissal motion as moot.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court may de-designate a Subchapter V case under Rule 1009(a) so a party in interest can convert to regular chapter 11 | Beyond Blond: Rule 1009(a) permits a party in interest to move to amend the petition to de-designate and allow appointment of a chapter 11 trustee | Debtors: §103(i) vests election to proceed under Subchapter V with the debtor; Rule 1009 was not intended to let creditors override that choice | Court: Question is close; even if court has authority, it would not exercise it here — denied de-designation |
| Whether there is "cause" under §1185 to remove the debtors as debtors in possession | Beyond Blond & U.S. Trustee: Heldman’s emails, threats to sabotage revenue, and defiance of injunctions show fraud, dishonesty, incompetence, or gross mismanagement | Debtors: Proposed business manager (Pinglora) said he limited Heldman’s access and sought bank restrictions; debtor urged preservation of Subchapter V benefits | Court: Found cause under §1185 based on Heldman’s conduct and inability to act as fiduciary — removal granted |
| Effect of removal in a Subchapter V case: whether trustee can operate business and/or file a plan | Beyond Blond: removal should permit appointment of a trustee with full chapter 11 powers (including filing a plan) | Debtors: Subchapter V limits trustee powers; only debtor may file a plan and removal should not strip that right | Court: Removal under §1185 allows the Subchapter V trustee to operate the business under §1183(b)(5) but does not give trustee plan-filing rights; debtor retains right to file a plan |
| U.S. Trustee’s alternative request to dismiss under §1112(b) | U.S. Trustee: cause exists to dismiss or convert due to inability to manage and bad-faith/egregious conduct | Debtors: Case should proceed under Subchapter V with trustee operating business; dismissal is too drastic | Court: Dismissal motion rendered moot by granting removal under §1185; U.S. Trustee’s dismissal request denied as moot |
Key Cases Cited
- Chicago Board of Trade v. Johnson, 264 U.S. 1 (U.S. 1924) (bankruptcy estate’s rights are subject to prepetition limitations under non-bankruptcy law)
- Mission Product Holdings, Inc. v. Tempnology, 139 S. Ct. 1652 (U.S. 2019) (the estate cannot possess more than the debtor possessed prepetition)
- Isbrandtsen Co. v. Johnson, 343 U.S. 779 (U.S. 1952) (statutory references to established common-law duties import fiduciary/trust principles)