Patterson Belknap Webb & Tyler LLP

“Messrs. Woods and Wu are fraudsters,” Judge Christopher S. Sontchi declared in the opening salvo of his scathing opinion.  According to the former Chief Judge of the U.S. Bankruptcy Court for the District of Delaware, Woods and Wu fraudulently obtained a Paycheck Protection Program (“PPP”) loan on behalf of Urban Commons Queensway, LLC, which indirectly operates the Queen Mary, a cruise ship turned hotel docked near Long Beach, CA.  Woods and Wu then “absconded with the proceeds, leaving either the Debtor or the United States to pay back the lender.” 

Previously, Judge Sontchi had granted Urban Commons Queensway’s (the “Debtor” or “Plaintiff”) motion for a preliminary injunction, barring 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 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, Judge Sontchi found that “Mr. Woods knowingly or recklessly made false statements to obtain an SBA PPP loan by signing an SBA PPP loan application on behalf of Plaintiff without Plaintiff’s knowledge or consent.”  After obtaining the funds, the Defendants “transferred them to . . . an entity they wholly owned, and then caused the funds to disappear.”  According to the court, these actions demonstrated “willingness to flaunt the law, use entities and transfers to avoid paying money wrongfully obtained, and a lack of remorse for so doing.”  Id.

Despite the preliminary injunction (the “PI Order”), the Defendants failed to sufficiently account for the funds.  After significant delay, they provided a “Preliminary Accounting.”  But according to the court, “[n]othing in the Preliminary Accounting [was] sufficient for the purposes of the PI Order.”  It simply traced the funds’ purported use by the third-party manager of the Plaintiff and did not “identify and preserve (for Plaintiff’s benefit) $2,437,500 in cash or other assets from any source,” as required.  The court also took issue with the Defendants’ statement that “they ha[d] no other assets,” which would include “no house, no car, no bank accounts, [and] no personal property.”  Judge Sontchi found the unsworn statement especially dubious because the Defendants had recently “provided a $10 million deposit in connection with their unqualified bid for certain of the [Plaintiff]’s assets.”  Id. at *4-5.

Given the Defendants’ failure to abide by the PI Order, Judge Sontchi considered how to proceed.  The Plaintiff requested “temporary confinement,” arguing that “monetary sanctions would be insufficient to compel Defendants’ compliance with the PI Order.”  Considering the request, Judge Sontchi noted that there was “no question that the Court has the power to incarcerate” the Defendants as part of its contempt authority.  However, before doing so, Judge Sontchi scheduled an in-person hearing for November 19, 2021, “to determine the least coercive sanction reasonably calculated to win compliance with the PI Order.”  Id. at *6-9.

Evidently, Judge Sontchi found a less coercive measure than locking up the Defendants: the continuing threat of incarceration.  Despite finding “neither the testimony of Mr. Woods nor Mr. Wu was credible,” Judge Sontchi declined to issue an order of commitment after the hearing.  Instead, on November 22, 2021, he ruled that the court would “immediately and without further notice to Defendants issue an Order of Commitment for Civil Contempt . . . upon the filing of a Certification of Counsel by Plaintiff’s counsel with supporting evidence attached thereto as to any of the following:”

  1. The Defendants transferred, encumbered, or otherwise disposed of assets in the aggregate amount of more than $50,000.00 on or after November 22;
  2. Plaintiff is in possession of reliable evidence that the Defendants intend to transfer, encumber, or otherwise dispose of assets in the aggregate amount of more than $50,000.00; or
  3. By December 6, 2021, Defendants fail to satisfy their obligation to provide an accounting, as required by the PI Order.

EHT US1, Inc., Debtors. Urb. Commons Queensway, LLC, 21-10036, Order at 4, ECF No. 1686 (Bankr. D. Del. Nov. 22, 2021).

Judge Sontchi is not the first bankruptcy judge to address the issue of improperly obtained COVID-19 relief funds.  As we reported previously, Judge Gargotta (Bankr. W.D. Tx.) found that a nursing home could not use funds allocated by the U.S. Department of Health and Human Services, in error, to pay off creditors in chapter 11 proceedings.  Unlike the debtor in that case, however, the Defendants here failed to abide by the court’s orders.  Defendants thus risked (and continue to risk) incarceration while providing a useful reminder that in bankruptcy court, it is often better to ask for permission than forgiveness.

×