Attorneys for Thomas F. Lennon, District Court Receiver and Responsible Natural Person for Learn Waterhouse, Inc., Debtor in Possession

Transcription

1 0 DAVID L. OSIAS (BAR NO. 0) JEFFREY R. PATTERSON (BAR NO. ) TED FATES (BAR NO. 0) ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP 0 West Broadway, th Floor San Diego, California 0- Phone: () - Fax: () - Attorneys for Thomas F. Lennon, District Court Receiver and Responsible Natural Person for Learn Waterhouse, Inc., Debtor in Possession UNITED STATES BANKRUPTCY COURT Southern District of California 0 In re RANDALL T. TREADWELL, Debtor. Case No JM Chapter MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS BANKRUPTCY CASE Date: April, 00 Time: :00 p.m. Dept: Judge: Hon. James W. Meyers 0.0/SD

2 TABLE OF CONTENTS Page I. BACKGROUND FACTS... II. RELIEF REQUESTED... III. ARGUMENT... IV. CONCLUSION /SD (i)

3 TABLE OF AUTHORITIES 0 Cases Page(s) Business Information Co. (In Re) B.R., (Bankr. W.D. Pa. )... Eastman v. Eastman (In re Eastman) B.R., - (th Cir. BAP )... Michael S. Starbuck, Inc. (In Re) B.R., (Bankr. S.D.N.Y. )..., O'Neil Village Personal Care Corp. (In Re) B.R., (Bankr. W.D. Pa. )..., Sun World Broadcasters, Inc. (In Re) B.R., - (Bankr. M.D. Fla. 0)..., Statutes U.S.C. 0(a)..., Treatises Collier on Bankruptcy 0.0[] (th ed. rev. 00) /SD (ii)

4 0 0 Thomas F. Lennon, District Court Receiver and Responsible Natural Person ("Receiver") for Learn Waterhouse, Inc. ("LWI"), submits this Memorandum of Points and Authorities in support of his Motion to Dismiss Bankruptcy Case. I. BACKGROUND FACTS On October, 00, the SEC commenced an action entitled SEC v. Learn Waterhouse, Inc., Randall T. Treadwell, et. al., Case No. 0-CV-0 W (LSP) ("Receivership Action") in the United States District Court for the Southern District of California, the Hon. Thomas J. Whelan presiding ("District Court"). Thomas F. Lennon was appointed temporary receiver for LWI, and temporary injunctive relief, including a freeze of all assets, was granted against the defendants. Shortly thereafter, on October, petitioning creditors Cecil Starnes, Gregory Trigg and Faye Chancey ("Petitioning Creditors") filed involuntary chapter petitions against LWI and Treadwell in the United States Bankruptcy Court for the Northern District of Texas. On November, 00, the Receiver was confirmed as permanent receiver and the temporary restraining order was converted into a preliminary injunction. In addition, an order of the District Court explicitly confirms what was implicit in the receivership orders, that is, that the Receiver is the responsible natural The Receiver has consistently asserted that the filing of the involuntary petitions violated the terms of the October, 00 temporary restraining order and that the cases were not validly commenced. 0.0/SD -

5 0 0 person for LWI, including for purposes of LWI's actions in any bankruptcy case. Arguing that venue for the cases was improper in the Northern District of Texas and that, due to the pending Receivership Action, venue was more appropriate in the Southern District of California, the Receiver moved to transfer the cases to San Diego. By orders entered November, 00, the bankruptcy judge in the Northern District of Texas transferred these cases to San Diego. The cases were opened and assigned Southern District of California case numbers on November, 00. No order for relief under any chapter of the Code has been entered in either case. The orders transferring the cases each provide, "all deadlines and statutory periods pending in LWI and Treadwell are tolled pending further order of the Bankruptcy Court for the Southern District of California." On December, 00, the Receiver moved to suspend the bankruptcy cases due to the pending Receivership Action and to avoid unnecessary duplication of administrative expenses ("Suspension Motion"). The Receiver requested suspension rather than dismissal, noting that upon further investigation the Receiver or another party in interest might determine that there is an advantage to having the chapter cases proceed. The Docket Index. 0.0/SD --

6 0 0 Receiver recognized that bankruptcy courts are uniquely accustomed to handling large, collective insolvency proceedings. 0.0/SD The Petitioning Creditors opposed the Suspension Motion on January 0, 00, and the Receiver replied on January, 00. On February, 00, the Court entered an order granting the Suspension Motion ("Suspension Order"). -- The Suspension Order suspended the bankruptcy cases for 0 days and gave the Receiver the discretion to extend the suspensions for consecutive 0-day periods by filing notices before expiration of the applicable suspension periods. The Suspension Order also provides that all deadlines and time periods in the bankruptcy cases are tolled during the suspensions and all extensions thereof. The suspensions automatically expire if the Receiver fails to file notices of extension during the applicable quarter. Additionally, any party in interest may move to terminate the suspensions at any time. The Receiver continued his investigation and accounting of LWI under the District Court's supervision. A claims process was approved by the District Court, including a claims bar date of August, 00. The Receiver processed and reviewed claims submitted by LWI creditors. Where appropriate, he objected to claims. After giving claimants the opportunity to respond, the District Court determined the proper amount of all disputed Docket Index. The cases are currently suspended through March, 00. The suspension will terminate if the Receiver does not file a notice of extension on or before that date.

7 0 0 claims. Pursuant to the Suspension Order, the Receiver extended the suspension of the bankruptcy cases by filing notices of the same in March, June and September of 00. On September, 00, the individual defendants in the Receivership Action, Randall Treadwell, Rick Sluder, Larry Saturday and Arnulfo Acosta, were indicted on federal criminal charges of conspiracy and wire fraud. The criminal proceedings were designated as United Stated District Court, Southern District of California, Case No. 0 CR 0 W. The criminal case was also assigned to Judge Whelan. In light of the criminal indictment against him, Treadwell moved to stay the Receivership Action pending the conclusion of the criminal proceedings. On November, 00, the District Court granted Treadwell's motion ("Civil Stay"). The Civil Stay order permitted the Receiver to continue administration of the receivership estate, but prohibited him from distributing estate assets. The Receiver's subsequent effort to pursue affirmative claims for recovery of receivership estate property from third parties was denied without prejudice by the District Court due to the Civil Stay. The Receiver determined that the bankruptcy cases should remain suspended during the Civil Stay in order to preserve the possibility of activating the cases for the purposes of distributing estate assets to claimants, pursuing affirmative claims against third parties, or both. After a very lengthy 0.0/SD --

8 0 0 pretrial period, the criminal case was tried before a jury in May 00. Guilty verdicts were entered against defendants Treadwell, Sluder and Saturday (Acosta having pled guilty prior to trial). Treadwell and Acosta were sentenced in December 00, and Sluder and Saturday were sentenced in January 00. After all defendants were sentenced, the District Court lifted the Civil Stay on January, /SD In the meantime, all claims submitted to the Receiver by creditors of LWI have been determined by the District Court and all assets of significant value have been liquidated by the Receiver. Were it not for the unresolved affirmative claims against third parties, the Receiver would be in a position to distribute the assets of the estate to holders of allowed claims and close the receivership estate. The SEC has recently filed a motion for summary judgment against Treadwell and the other individual defendants, including arguing that the criminal convictions collaterally estop the defendants from opposing judgment against them in the Receivership Action. Additionally, the Receiver has recently filed a motion in the District Court for an order approving a plan of distribution and authorizing an interim distribution to holders of allowed claims. These matters are both set to be heard by the District Court next month. Treadwell was sentenced to 00 months in prison and ordered to pay $ million in restitution to the victims of the LWI scheme. --

9 /SD II. RELIEF REQUESTED Now that the Civil Stay has been lifted, and due in large part to the advanced stage of the proceedings in the Receivership Action, the Receiver has determined that the administrative expenses associated with activating the bankruptcy cases outweigh any corresponding benefit to the receivership estate and its creditors. Over the lifespan of the civil and criminal cases, Judge Whelan has become intimately familiar with the facts, circumstances and legal issues associated with LWI, the individual defendants, their creditors and those potentially liable to the receivership estate. The Receiver believes that it is in the best interest of the receivership estate and its creditors to proceed with the Receivership Action, including pursuit of claims against third parties and distribution of estate assets to holders of allowed claims. Accordingly, the Receiver requests dismissal of the bankruptcy cases. The LWI receivership estate is a creditor of Treadwell. While operating the company in violation of securities laws, Treadwell misappropriated LWI monies for his own personal benefit, including purchasing various pieces of real estate, a luxury sky box at the Jacksonville Jaquars football stadium, a yacht and a luxury automobile. Nevertheless, to the extent the Court has concerns about the Receiver's standing to seek dismissal of the Treadwell case, the suspension will terminate at the end of March 00, and of course, the Court can dismiss the case on its own motion. The Receiver is not aware of any intentions of the Petitioning Creditors regarding either bankruptcy case. The Receiver has been notified that one of the Petitioning Creditors, Faye Chancey, has herself filed bankruptcy in the Middle District of Alabama. As noted above, Treadwell has been sentenced to 00 months in prison and ordered to pay $ million in restitution to the victims of LWI. Treadwell is currently incarcerated, has not made an appearance in connection with either bankruptcy case, does not --

10 /SD III. ARGUMENT A bankruptcy court may dismiss or suspend a bankruptcy case and all proceedings therein if "the interests of creditors and the debtor would be better served by such dismissal or suspension..." U.S.C. 0(a); Eastman v. Eastman (In re Eastman), B.R., - (th Cir. BAP ). The decision to dismiss or suspend under section 0(a) is discretionary and must be made on a case by case basis. In re O'Neil Village Personal Care Corp., B.R., (Bankr. W.D. Pa. ); In re Business Information Co., B.R., (Bankr. W.D. Pa. ). Economy and efficiency of administration are primary considerations in deciding whether to dismiss or suspend a bankruptcy case. O'Neil Village, B.R. at 0; Business Information, B.R. at ; In re Michael S. Starbuck, Inc., B.R., (Bankr. S.D.N.Y. ). Accordingly, many courts have granted relief under section 0(a) where, as here, there is a proceeding already underway in another forum that will adjudicate the rights of the parties. See, e.g. O'Neil Village, B.R. at 0; In re Sun World Broadcasters, Inc., B.R., - (Bankr. M.D. Fla. 0); Business Information, B.R. at ; Michael S. Starbuck, B.R. at. Indeed, an involuntary bankruptcy petition filed against a debtor already in receivership is a common trigger for suspension have counsel in the Receivership Action or bankruptcy cases, and therefore is unlikely to take any action. --

11 0 0 or dismissal under section 0. Michael S. Starbuck, B.R. at ; Sun World, B.R. at -; see also O'Neil Village, B.R. at -0 (bankruptcy filed by former officers of debtor in receivership without authority from the board of directors). The legislative intent behind section 0(a) is "to prevent the commencement and continuation of disruptive involuntary cases although its provisions are not limited to involuntary cases." Collier on Bankruptcy 0.0[] (th ed. rev. 00). In Michael S. Starbuck, the SEC filed an action against the debtor in district court and obtained an order appointing a receiver. Certain creditors then filed an involuntary petition against the debtor. The bankruptcy court abstained, finding that the receivership was an alternate means of achieving an equitable distribution of assets and that allowing the bankruptcy case to continue "would result in a terrible waste of time and resources." Michael S. Starbuck, B.R. at. The court commented on the additional expenses without a corresponding advantage: Many services, already rendered in the administration of the receivership estate, would have to be repeated at additional expenses to the estate. No advantage would accrue to creditors if this matter were to proceed in the bankruptcy court. Rather, their best interest will be served by the continued administration of the equity receivership. Id. See also Sun World, B.R. at 0- (bankruptcy case would result in waste of receiver's substantial efforts); O'Neil Village, B.R. at 0 (involuntary bankruptcy case after 0.0/SD --

12 0 0 receiver's appointment would be "a clear case of duplicative effort"). Here, over the last four years and four months, the District Court has supervised the administration of the LWI receivership estate. A claims process was approved by the District Court, claims were reviewed by the Receiver, and disputed claims were determined by the District Court. The District Court has also supervised the liquidation of receivership estate assets, and reviewed and approved thirteen interim reports from the Receiver and five interim fee applications of the Receiver and his professionals. During the same time, the District Court presided over the criminal case against Treadwell and the other individual defendants. The case was tried before a jury and all four defendants have been sentenced. As noted above, the only substantial work remaining to be done in the Receivership Action is to pursue claims for recovery from third parties. When the Receiver's pursuit of such claims is complete, the assets of the receivership estate will be distributed to holders of allowed claims and the Receivership Action will be closed. Activating the bankruptcy cases would necessarily result in duplication of the substantial administrative work performed in the Receivership Action. The District Court, having presided over both the civil and criminal cases, is in the best position 0.0/SD --

13 0 to determine the remaining issues in the Receivership Action, supervise the distribution of estate assets and close the case. Accordingly, dismissal of the bankruptcy cases is in the best of interests of LWI, Treadwell and their creditors. IV. CONCLUSION For the foregoing reasons, the Receiver requests an order dismissing the LWI and Treadwell bankruptcy cases. 0 Dated: March, 00 By:/s/ Ted Fates TED FATES ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP Attorneys for Thomas F. Lennon, District Court Receiver and Responsible Natural Person for Learn Waterhouse, Inc., Debtor in Possession 0.0/SD -0-