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In Re v. Richard Diamond

November 7, 2012

IN RE: SMB GROUP, INC., DEBTOR. SMB GROUP, INC., APPELLANT,
v.
RICHARD DIAMOND, FORMER CHAPTER 7 TRUSTEE OF ESTATES OF UNION TRIM, INC. AND USB GROUP, INC., APPELLEE.



Appeal from the United States Bankruptcy Court for the Central District of California Bk. No. 11-30426-BR Honorable Barry R. Russell, Bankruptcy Judge, Presiding

FILED

NOV 07 2012

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on July 20, 2012, at Pasadena, California

Before: KIRSCHER, DUNN, and MARKELL, Bankruptcy Judges.

Appellant, chapter 11*fn2 debtor SMB Group, Inc. ("SMB Group"), appeals an order from the bankruptcy court denying its motion for contempt against appellee, former chapter 7 trustee Richard Diamond ("Trustee"), for his alleged violation of the automatic stay. Because the bankruptcy court did not make sufficient findings under Civil Rule 52(a) to support its decision that Trustee was entitled to judicial immunity, we VACATE and REMAND with instruction that the bankruptcy court conduct a de novo evidentiary hearing.*fn3

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Facts common to the related bankruptcy cases.

The following facts are as alleged by Jeff Shin f/k/a In Chul Shin ("Shin"), principal and sole shareholder of SMB Group. Shin is of Korean descent and speaks Korean. He speaks little English. He also does not read or write English.

SMB Group is in the business of performing trim work for the clothing industry, such as sewing buttons, collars, zippers and pockets onto garments. Shin is also the sole shareholder of USB Group, Inc. ("USB"), which was formed in 2003. Until March 18, 2011, USB was in the business of selling commercial grade sewing machinery and equipment. Shin is also one of two shareholders of another corporation called Union Trim, Inc. 2 ("Union Trim"). Union Trim apparently ceased operations in 2010 3 when the other shareholder left the business and could not be 4 located. Shin formed SMB Group to acquire all of Union Trim's 5 assets, including the right to use "Union Trim" as a trade name.

6 Shin's businesses are located in two adjoining halves of a 7 leased building at 2635 S. Main Street, Suites #A and #B, in Los 8 Angeles, California (the "Premises"). On or about June 25, 2010, 9 USB d/b/a Alpha Sewing Machine obtained a business loan from First 10 Bank. In exchange for the loan, USB executed a promissory note in 11 favor of First Bank for $233,000. The note was secured by an 12 interest in all of USB's inventory, equipment, chattel paper, 13 accounts receivable, and general intangibles. Shin personally 14 guaranteed the loan. USB defaulted on the loan after making just 15 a couple of payments. On February 17, 2011, First Bank sued USB 16 and Shin in state court for breach of contract and sought a writ 17 of possession for USB's personal property.

18 Faced with financial troubles exacerbated by USB's loan 19 default, Shin sought the advice of legal counsel. After seeing an 20 advertisement in the Korean Times for a firm offering debt relief 21 services, Shin met with attorney Gene Choe ("Choe") at Choe's 22 office on March 3, 2011, in hopes of negotiating a payment plan 23 with First Bank. According to Shin, both Choe and Choe's 24 paralegal advised Shin to file bankruptcy, but Shin declined, 25 directing Choe only to negotiate a payment plan with First Bank. 26 Choe told Shin to return the following day with retainer funds and 27 financial information. Shin returned, paid the retainer, and 28 provided Choe with financial information about himself and his 1 businesses. During this meeting, Shin was also asked to sign 2 several documents written in English. The documents were not 3 translated for Shin, and, because he considered it disrespectful 4 to do so, Shin did not ask to have the documents translated and 5 signed everything as instructed.

6 On March 4, 2011, Choe filed three separate chapter 7 7 bankruptcy cases for Shin (as an individual), for USB, and for 8 Union Trim. No case was filed for SMB Group. Trustee was 9 thereafter appointed in the USB and Union Trim cases. According 10 to Shin, he did not sign any of the petitions or authorize any of 11 the bankruptcy filings. Shin further claims he was unaware of the 12 bankruptcy filings until March 18, 2011, when Trustee's agents 13 appeared at the Premises and shut down the businesses.

14 B. The Union Trim and USB bankruptcies.

15 1. Union Trim bankruptcy case.

16 The skeletal petition filed for Union Trim listed its place 17 of business in Suite #A of the Premises. It also listed "other" 18 business names used: DBA USB Group, Inc.; DBA Alpha Sewing 19 Machine; DBA SMB Group, Inc.; DBA Union Trim. An "Electronic 20 Filing Declaration" and "Statement Regarding Authority to Sign and 21 File Petition," both of which reflected Shin's handwritten 22 signature, were included with the petition. Choe filed Union 23 Trim's schedules and statement of financial affairs on March 18, 24 2011. According to its Schedule B, Union Trim had $100,000 worth 25 of sewing machines and parts in its inventory. Union Trim listed 26 no secured creditors and only one unsecured creditor, with a 27 disputed claim in an unknown amount. A § 341(a) meeting of 28 creditors was scheduled for April 13, 2011.

Just three weeks after filing the petition, Choe moved to dismiss the Union Trim case on March 25, 2011. Trustee opposed dismissal, contending that more time was needed to investigate the case as Union Trim's schedules and financial affairs were "woefully inadequate," no one had appeared for the debtor at the § 341(a) meeting of creditors held on April 13, and, despite Union Trim's assertion that it was doing business as "USB Group, Inc.," USB had filed its own chapter 7 petition on the same date as Union Trim. Trustee noted that the relationship, if any, between Union Trim and USB was unclear, and it was not clear whether the assets listed in Union Trim's Schedule B actually belonged to it or to USB. Trustee further noted that his administrator had sent an email to Choe on March 8, before the schedules were filed, asking Choe whether any assets existed that would be of concern to the Trustee, such as cash, inventory, or equipment. After getting no response from Choe, and learning from First Bank that Union Trim was still conducting business, the administrator sent a second email to Choe on March 17 instructing Choe to inform his client that all business operations had to cease immediately. Trustee sent a similar cease and desist email to Choe later that same day. Choe quickly responded, stating that his client would comply with Trustee's demand.

The bankruptcy court denied Union Trim's motion to dismiss at a hearing on May 3, 2011. An order was entered to that effect on May 12, 2011.*fn4

1 2. USB bankruptcy case.

2 The skeletal petition filed for USB listed its place of 3 business in Suite #B of the Premises. The petition also stated 4 that USB did business as "Alpha Sewing Machine." An Electronic 5 Filing Declaration, which reflected Shin's handwritten signature, 6 was included with the petition. No schedules or statement of 7 financial affairs were ever filed for USB.

8 Just two weeks after filing its chapter 7 petition, Choe 9 moved to convert USB's case to chapter 11 on March 18, 2011. 10 Trustee opposed the motion, contending that USB had wrongfully 11 operated the business post-petition and had failed to cooperate 12 with Trustee in providing any information regarding its assets, 13 liabilities, prepetition transfers, or creditors. Therefore, 14 argued Trustee, no evidence existed showing that USB was even 15 eligible for chapter 11. Trustee again referred to the emails 16 sent to Choe on March 8 and 17 and explained that, because both 17 Union Trim and USB had failed to cease operations as instructed, 18 he was forced to send his representative, Ken Roelke ("Roelke"), 19 on March 18, 2011, to shut down their operations, padlock the 20 building, and hire 24-hour security. First Bank also opposed 21 converting the case. A hearing on the conversion motion was 22 requested but never held.

23 On April 18, 2011, USB, with new bankruptcy counsel David 24 Tilem ("Tilem"), filed a second, ex parte emergency motion to 25 convert USB's case to chapter 11. In its moving papers, USB 26 contended that Shin had not authorized its (or any other) 27 bankruptcy filing, and, other than its debt to First Bank, USB was 28 generally paying its debts as they came due. USB alleged that in Shin's individual case and USB's case, the "blank" Electronic Filing Declaration signed by Shin was first duplicated and then altered by someone to add the names of the debtors.*fn5 USB also contended that on March 18, 2011, Trustee had not only shut down USB's business, but also the business of nondebtor SMB Group, which does business as "Union Trim," but was not the same company as Union Trim, Inc. Thus, argued USB, Trustee was not only damaging the victimized debtor, but also a business which was not in bankruptcy.

In his declaration in support of USB's second motion to convert, Tilem stated that on April 6, 2011, he called Trustee's office to see if Trustee would stipulate to the conversion, but was unable to reach anyone. Tilem then sent an email to Trustee and the staff attorney assigned to USB's case, Matthew Kennedy ("Kennedy"). Tilem explained that the chapter 7 petitions filed for Shin individually, USB, "and a third business also owned by Mr. Shin - SMB" - had not been authorized, and that Tilem had been hired "to get the SMB case dismissed" and represent USB in chapter 11. Tilem stated that Shin would be unable to prepare schedules unless he was given access to the Premises. In response to Tilem's email, Kennedy stated that Trustee would not stipulate to the conversion, but he would allow Shin access to the Premises so that Shin could review USB's books and records for the purpose of preparing schedules and a statement of financial affairs. On April 15, 2011, Trustee and Tilem spoke by phone. According to Tilem, he told Trustee that the lockdown of USB was also affecting 1 the business of nondebtor, SMB Group, but Trustee responded that 2 Tilem's only evidence of this was his word. Tilem then proposed a 3 meeting with Trustee and Shin, but Trustee refused.

4 Shin stated in his declaration in support of conversion that 5 on March 18, 2011, when Trustee had shut down his businesses, he 6 went to see Choe to find out what was going on. Choe told Shin 7 about the bankruptcies, and stated that he could help Shin obtain 8 a loan or that he would personally lend him the money. Shin 9 claimed he refused Choe's loan offer, demanded a refund of his 10 retainer funds (of which he recovered $6,000 of the $8,000 paid), 11 left Choe's office, and started looking for another attorney. 12 Shin also stated that during a meeting with Tilem on April 7, 13 2011, Shin discovered a paper, written in Korean, which said that 14 Shin had completed credit counseling. Shin asserted that he never 15 received credit counseling, and the document contained what Shin 16 claimed was his forged signature. Finally, Shin stated that 17 Trustee's offer to allow him ...


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