In view of the conduct of two PPP “frauds”, the bankruptcy court bares its teeth but refuses to bite (for now)


“MM. Woods and Wu are fraudsters, ”Judge Christopher S. Sontchi said in the opening salvo of his scathing notice. According to the former Chief Justice of the United States Bankruptcy Court for the District of Delaware, Woods and Wu fraudulently obtained a Paycheck Protection Program (“P3”) loan on behalf of Urban Commons Queensway , LLC, which indirectly operates the Queen Mary, a cruise ship-turned hotel docked near Long Beach, California. Woods and Wu then “ran away with the proceeds, leaving either the debtor or the United States to pay the lender.”

Previously, Sontchi J. granted Urban Commons Queensway (the “debtor” or “plaintiff”) the motion for a preliminary injunction, prohibiting the defendants Woods and Wu (the “defendants”) from “transferring, encumbering or otherwise disposing of 2,437,500 $ or assets of equivalent value and requiring each defendant to account for such funds or assets to the plaintiff. ” EHT US1, Inc., Accounts receivable. Urb. Commons Queensway, LLC, v EHT Asset Mgmt., LLC, Taylor Woods and Howard Wu, 21-10036, 2021 WL 5286297, at * 2 (Bankr. D. Del. November 15, 2021). So ruling, Sontchi J. concluded that “Mr. Woods knowingly or recklessly made misrepresentation to obtain a PPP SBA loan by signing an SBA PPP loan application on behalf of the applicant without the knowledge or consent of the applicant. . After obtaining the funds, the defendants “transferred them to. . . an entity they owned 100% and then wiped out the funds. According to the court, these actions demonstrated “a willingness to break the law, to use entities and transfers to avoid paying money wrongly obtained, and a lack of remorse for it”. Identifier.

Despite the preliminary injunction (the “PI Order”), the defendants did not sufficiently account for the merits. After a significant delay, they provided a “Preliminary Accounting”. But according to the court, “[n]nothing in Preliminary Accounting [was] sufficient for the purposes of the PI ordinance. He simply traced the alleged use of the funds by the claimant’s third-party manager and failed to “identify and retain (for the benefit of the claimant) $ 2,437,500 in cash or other assets from any source”, as required . The court also challenged the defendants’ statement that “they have[d] no other assets ”, which would include“ no house, no car, no bank account, [and] no personal property. Sontchi J. found the affidavit particularly dubious because the defendants had recently “provided a deposit of $ 10 million as part of their unqualified offer for some of the [Plaintiff]the assets of. Identifier. at * 4-5.

In view of the defendants’ failure to comply with the PI Order, Sontchi J. considered how to proceed. The plaintiff requested “temporary containment”, arguing that “financial penalties would be insufficient to compel defendants to comply with the PI order”. Considering the claim, Sontchi J. noted that there was “no doubt that the Court has the power to incarcerate” the defendants within its authority for contempt. However, before doing so, Judge Sontchi scheduled an in-person hearing for November 19, 2021, “to determine the least coercive sanction reasonably calculated to secure compliance with the PI Order.” Identifier. to * 6-9.

Obviously, Sontchi J. found a less coercive measure than locking up the defendants: the prosecution threatens incarceration. Although he concluded that “neither Mr. Woods’ nor Mr. Wu’s evidence was credible,” Judge Sontchi refused to issue a recognizance order after the hearing. Instead of, on November 22, 2021, he ruled that the tribunal would like “Immediately and without further notice to the defendants, issue an order of recognizance for civil contempt. . . when filing a lawyer certificate by the applicant’s lawyer with supporting documents as to one of the following: ‘

  1. The Defendants transferred, encumbered or otherwise disposed of assets in an aggregate amount of more than $ 50,000.00 on or after November 22;
  2. The plaintiff is in possession of reliable evidence that the defendants intend to transfer, encumber or otherwise dispose of assets totaling more than $ 50,000.00; Where
  3. By December 6, 2021, the Defendants do not meet their obligation to report, as required by the PI Order.

EHT US1, Inc., Accounts receivable. Urb. Queensway Commons, LLC, 21-10036, Ordinance at 4, ECF n ° 1686 (Bankr. D. Del. 22 Nov. 2021).

Justice Sontchi is not the first bankruptcy judge to address the issue of inappropriately obtained COVID-19 relief funds. Like us previously reported, Judge Gargotta (Bankr. WD Tx.) found that a retirement home could not use funds allocated by the US Department of Health and Human Services, by mistake, to pay the creditors in the Chapter 11 proceedings. Unlike the debtor in this case, however, the defendants in this case did not comply with the court orders. The defendants thus risked (and continue to risk) imprisonment while usefully reminding that in bankruptcy court, it is often preferable to ask permission than forgiveness.


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