642 B.R. 224
Bankr. S.D.N.Y.2022Background:
- Debtor: Corinthian Communications, Inc., a closely held S-corporation owned 100% by Larry Miller, provides bookkeeping/payroll for three affiliated non-debtors (the Corinthian Enterprise).
- Petition filed April 4, 2022 under Subchapter V; U.S. Trustee appointed a Subchapter V Trustee (Eric Huebscher).
- U.S. Trustee moved to remove the Debtor as debtor-in-possession under 11 U.S.C. §1185(a) alleging fraud (PPP disclosures), gross mismanagement, conflicts, and lack of transparency; landlord joined.
- Debtor (Miller) opposed, arguing insufficient clear-and-convincing proof, that funds were properly used, that informality reflects small-business reality, and that removal would destroy the business.
- Subchapter V Trustee reported continued incomplete disclosure, unexplained cash swings, and potential intercompany claims; court worried removal might collapse the business.
- Court declined immediate removal but found cause to expand the Subchapter V Trustee’s duties under 11 U.S.C. §1183(b)(2) to authorize an investigation under §1106(a)(3); further relief (removal, conversion, dismissal) may follow depending on results.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether there is cause to remove the debtor as debtor-in-possession under §1185(a) | U.S. Trustee: fraud (PPP misstatements), gross mismanagement, conflicts, lack of transparency | Debtor/Miller: no clear-and-convincing proof; PPP funds used properly; corporate informality typical; removal would devastate business | Court did not remove now but treated allegations as sufficient cause to expand trustee duties and continue the removal motion |
| Whether the court may expand Subchapter V Trustee’s powers under §1183(b)(2) (including sua sponte) | U.S. Trustee/Subchapter V Trustee sought expansion to investigate intercompany issues | Debtor argued expansion premature and that disclosure issues were cured | Court concluded it may (and did) expand duties under §1183(b)(2) to permit investigation under §1106(a)(3) |
| Whether lack of intercompany agreements and incomplete disclosure justify investigation | U.S. Trustee/Subchapter V Trustee: absence of agreements, unexplained transfers, and disclosure gaps raise potential estate claims and conflicts | Debtor: funds flow to Debtor only, no commingling, amended schedules cure disclosure problems | Court found these facts amount to cause to investigate potential intercompany claims and the debtor’s affairs |
| Whether appointing a trustee or removing DIP would imperil reorganization | U.S. Trustee/Subchapter V Trustee: replacement could preserve estate and allow investigation; outcome uncertain | Debtor: removal would cause employees/customers to leave and likely destroy the business | Court was concerned removal might collapse the business and therefore chose the less drastic step of expanding trustee powers first |
Key Cases Cited
- In re Marvel Ent. Grp., 140 F.3d 463 (3d Cir. 1998) (appointing trustee appropriate when debtor would have conflict investigating its own claims)
- In re The 1031 Tax Grp., 374 B.R. 78 (Bankr. S.D.N.Y.) (standard for removing debtor-in-possession requires clear-and-convincing evidence)
- In re Ozcelebi, 639 B.R. 365 (Bankr. S.D. Tex. 2022) (significant questions about debtor’s finances and disclosures can justify expanded trustee investigation)
- In re Pittner, 638 B.R. 255 (Bankr. D. Mass. 2022) (court may sua sponte consider expanding Subchapter V trustee duties)