ComedyMX LLC

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Chapter 11

In re:

Case No. 22-11181 (CTG)

COMEDYMX, LLC, et al.,

(Jointly Administered)

Debtors.

Related Docket Nos. 32, 33

MEMORANDUM OPINION

The debtors in these cases assert that they hold trademarks imprinted on

various classic Looney Tunes cartoons.1 Their business is to make these cartoons

available on video streaming platforms, such as YouTube. The debtors derive

revenue based on the viewership of advertisements on the platform. These

bankruptcy cases, filed under subchapter V of the Bankruptcy Code, were

precipitated by litigation arising out of a dispute the debtors have with a business

rival, Beyond Blond Productions.2

While the debtors’ underlying business is based on the distribution of classic

cartoons, the dispute that is now before this Court is anything but funny. The issue

is that the debtors’ principal, Edward Heldman III, who is the owner of the debtors

and their only officer and employee, has sent emails that make it abundantly clear

that he cannot serve in a fiduciary capacity to this bankruptcy estate. Beyond Blond

has moved (a) to de-designate the case to a regular chapter 11 and to appoint a

chapter 11 trustee, or alternatively, (b) to remove the debtors as debtors in possession

1 Debtors ComedyMX, Inc. and ComedyMX, LLC are referred to collectively as the “debtors.”

2 Beyond Blond Productions, LLC is referred to as “Beyond Blond.”

under § 1185 and to authorize the subchapter V trustee, under § 1183(b)(5), to operate

the debtors’ business.3 The U.S. Trustee has moved (a) to remove the debtor in

possession under § 1185 or, alternatively, (b) to dismiss the cases “for cause” under

§ 1112(b).

For the reasons described below, the Court concludes that the question

whether it has authority to de-designate the cases filed under subchapter V to regular

chapter 11 cases (which would permit the appointment of a regular chapter 11 trustee

with the full range of trustee powers, including the authority to file a plan) to be a

close one. In the end, the Court need not resolve that question, because even if the

Court had that authority, it would not exercise it under the circumstances of this

case. The Court will, however, remove the debtor in possession under § 1185, which

removal operates to expand the subchapter V trustee’s powers under § 1183(b)(5).

That relief obviates the need to consider the U.S. Trustee’s alternative request to

dismiss the bankruptcy cases.

Factual and Procedural Background

The debtors and Heldman are parties to an action brought against them in the

U.S. District Court for the Central District of California by Beyond Blond.4 The

gravamen of Beyond Blond’s complaint was that Heldman sent fraudulent “takedown

notices” under the Digital Millennium Copyright Act5 to Beyond Blond’s streaming

3 D.I. 32.

4 See Beyond Blond Productions v. Heldman, et al., C.D. Cal. No. 2:20-cv-05581.

5 Pub. Law 105-304 (1998), 112 Stat. 2860.

partners, causing Beyond Blond’s content to be removed from those streaming

partners’ sites.

The district court in that lawsuit entered a preliminary injunction directing

Heldman and the debtors to withdraw the takedown notices, an order sanctioning the

defendants for failing to comply with the preliminary injunction, and an order that

both enjoined Heldman from sending threatening or harassing emails to Beyond

Blond’s principal or its outside counsel and from “transferring or encumbering any

assets.”

These bankruptcy cases were filed on November 14, 2022. Even after the

petition date, however, Heldman has sent dozens of emails to Beyond Blond’s

principal and outside counsel. The emails are repugnant and undoubtedly violate the

district court’s injunction. The most striking features of Heldman’s communications

are their vulgarity, racism, misogyny, and homophobia. That much is plain from the

emails themselves, which are part of the record before this Court. The Court will not

undertake to persuade the reader of the truth of that assertion by quoting the emails

in this Memorandum Opinion, aside from those portions that bear directly on the

present motions. There are, however, two aspects of these emails that are important

to the motions now before this Court. First, Heldman repeatedly threatens to

“demonetize” the debtors, meaning that he will take action that would entitle the

debtors’ streaming partners to stop paying the debtors for their content, thus causing

the debtors’ revenue to dry up. Second, Heldman trumpets his willingness to defy

court orders, telling Beyond Blond’s principal and outside counsel that they “cannot

defeat someone who doesn’t give a damn about the law.”

While the petitions were filed on November 14, 2022, the debtors did not file

motions seeking substantive first-day relief until December 5, 2022, when they moved

for authority to maintain their existing bank accounts6 and to use cash collateral.7 At

the debtors’ request, those motions were heard on December 9, 2022.

Beyond Blond objected to both motions,8 not on the ground that it had an

interest in the cash collateral that warranted protection, but rather on the ground

that Heldman was not fit to manage the debtors’ cash and that the relief sought would

violate the injunction entered by the district court in California. The U.S. Trustee

also objected to both motions. It argued that the request to use cash collateral should

be denied because there was no perfected security interest in the debtors’ cash that

required adequate protection and that the debtors failed to address the effect of the

California district court’s injunction.9 The U.S. Trustee objected to the cash

management motion on the ground that it would be inappropriate for Heldman to

have access to the debtors’ cash.10

At the first-day hearing, the Court observed that nothing in the relief sought

would or could operate to override the district court’s injunction. Property owned by

6 D.I. 15.

7 D.I. 16.

8 D.I. 23. The opposition was supported by a declaration (D.I. 24) that included various of

the California district court orders and Heldman’s emails.

9 D.I. 25.

10 D.I. 26.

a debtor prepetition comes into the bankruptcy estate subject to whatever restrictions

or limitations exist under non-bankruptcy law.11 The Court accordingly was prepared

to grant the debtors some (but not all) of the first-day relief that it sought.12 The

Court noted, however, that to the extent Beyond Blond and the U.S. Trustee had

concerns about the case proceeding with the debtors’ current management remaining

in possession, they would need to seek appropriate relief under the Bankruptcy Code

rather than oppose the debtors’ ordinary efforts to advance the bankruptcy case.

Under the circumstances, the Court directed that the matter proceed on a highly

expedited schedule. The Court ordered that any such motion be filed by December

12, 2022 and that responses be filed by December 13, 2022.

The Court held an evidentiary hearing on the motions on December 14, 2022.

At that hearing, the debtors presented the testimony of Raymond Pinglora, who had

also served as the debtors’ first-day declarant. Pinglora is Heldman’s cousin. While

he is not an officer or employee of the debtors, Pinglora testified that his company

provided accounting services to the debtors and that he was personally engaged to

serve, on a contract basis, as the business manager.

11 See Chicago Board of Trade v. Johnson, 264 U.S. 1 (1924); Mission Product Holdings, Inc.

v. Tempnology, 139 S. Ct. 1652, 1663 (2019) (“The estate cannot possess anything more than

the debtor itself did outside bankruptcy.”)

12 The Court granted an unopposed motion to have the two debtors’ cases jointly

administered. D.I. 28. While the Court indicated that it would permit limited use of cash

collateral, the parties have not submitted an order reflecting that ruling, presumably

concluding that it would be more appropriate to await the resolution of the present motions

before taking further steps to advance the case.

Pinglora testified that he had taken steps since the first-day hearing (when he

had been questioned on this issue) to have the debtors’ bank restrict Heldman’s

ability to draw on the companies’ bank account. While he did not dispute that

Heldman, as the debtors’ owner and sole officer, would have the corporate authority

to remove whatever restrictions he had imposed, Pingolora testified that Heldman

played only a “creative” role with the debtors and lacked the practical or managerial

skills necessary to access the debtors’ bank account. Pinglora made no effort to defend

the emails that Heldman had sent. Indeed, at the first-day hearing, Pinglora testified

that he agreed that the emails were harassing and thus violated the California

district court’s order. At the hearing on the present motions, Pinglora added that he

believed that Heldman’s conduct was attributed to substance abuse. Importantly,

Pinglora did not claim that he would have any ability to prevent Heldman from

effectively sabotaging the debtors’ business by following through on his threat to

“demonetize” the companies’ channels.

Beyond Blond presented the testimony of Milford Keshishian, the company’s

litigation counsel in the California district court litigation. Keshishian described the

emails he had received from Heldman. Those emails, as well as the various orders of

the California district court, were admitted into evidence.

Jurisdiction

The Court has subject-matter jurisdiction over this proceeding pursuant to 28

U.S.C. § 1334(b). As a case within the district court’s bankruptcy jurisdiction, it has

been referred to this Court under 28 U.S.C. § 157(a) and the district court’s standing

order of reference.13 The parties’ motions for removal under § 1185(a), the trustee’s

motion to dismiss under § 1112(b), and Beyond’s motion for relief under Federal Rule

of Bankruptcy Procedure 1009(a) are core proceedings under § 157(b)(2) which may

be heard and decided in this Court.

Analysis

I. The question whether the Court has the power to remove the debtors’

small business designation is a close one, which the Court need not

resolve in light of its determination that it would not, in any event,

grant such relief here.

Certain small business debtors may elect to reorganize under subchapter V of

chapter 11, a proceeding intended to be simpler and less expensive than a traditional

chapter 11. This subchapter “provides a streamed-down procedure that allows the

self-employed to hold on to their small businesses.”14 Only the debtor may file a plan

of reorganization,15 and because § 1104 does not apply in a case filed under subchapter

V,16 the Court may not appoint a trustee or an examiner. Section 1185 permits a

court to remove the debtor from possession on a showing of cause, in which case

(under § 1183(b)(5)) the subchapter V trustee is empowered to operate the debtor’s

business. But, unlike a regular chapter 11 trustee, this action does not permit any

party other than the debtor to propose a plan. And perhaps most importantly,

subchapter V redefines “fair and equitable” such that a plan may be confirmed so long

13 Amended Standing Order of Reference from the United States District Court for the

District of Delaware, dated Feb. 29, 2012.

14 Douglas G. Baird, The Elements of Bankruptcy 20 (7th ed. 2022).

15 11 U.S.C. § 1189(a).

16 Id. § 1181(a).

as it commits the debtor’s projected disposable income over the applicable plan period

(three or five years) to repay creditors.17 The requirement that a plan satisfy absolute

priority as to any rejecting class of creditors, otherwise applicable in chapter 11 by

virtue of §§ 1129(a)(8) and 1129(b), does not apply under subchapter V.18

There is no dispute that the debtors meet the definition in § 1182(1) and are

eligible to elect to proceed under subchapter V under § 103(i). Beyond Blond,

however, seeks to redesignate the case as a traditional chapter 11 under Federal Rule

of Bankruptcy Procedure 1009(a), which would therefore permit it to seek the

appointment of a chapter 11 trustee and strip the debtors of the special protections

afforded to them under subchapter V.

Rule 1009(a) states that

“[a] voluntary petition, list, schedule, or statement may be amended by

the debtor as a matter of course at any time before the case is closed. . .

On motion of a party in interest, after notice and a hearing, the court

may order any voluntary petition, list, schedule, or statement to be

amended. . .”

Neither the Bankruptcy Code nor the Bankruptcy Rules, however, provide a

standard for assessing a motion to amend a bankruptcy petition. As Judge Gunn

noted in her opinion in In re National Small Business Alliance, “nothing in

Subchapter V discusses the revocation of election to proceed thereunder by the Court

or any other party.”19

17 Id. § 1191(c).

18 See also id. § 1129(b).

19 642 B.R. 345, 348 (D.D.C. 2022).

As Judge Gunn observed, a number of cases authorized, in the immediate wake

of the enactment of subchapter V, debtors to amend their petitions under Rule

1009(a) in order to take advantage of the new provision.20 Judge Gunn fairly pointed

out that this principle, combined with the language of the Rule quoted above

permitting any party in interest to file such a motion to amend a petition, might be

read to suggest that a case may be de-designated upon a proper showing. Indeed, the

argument can be taken a step further. Because Rule 1009(a) states that a petition

may be amended “on a motion of a party in interest,” while Rule 1009(b) permits the

statement of intention to be amended only by “the debtor,” one might draw an

inference that the Advisory Committee, at least, made an express determination to

permit parties in interest other than just the debtor move the Court to amend a

bankruptcy petition.

If the text of the Bankruptcy Code squarely addressed the question of de-

designation one way or the other, that would be the beginning and end of the matter.

But it does not, and one is therefore left to draw an inference from the sources that

are available. In addition to the text of Rule 1009, there are also sound reasons of

policy to support the conclusion reached in National Small Business Alliance.

Consider a debtor (such as, perhaps, the one in this case) that might well have going

concern value that would likely be lost either in a chapter 11 liquidation or if the

20 As one court noted, while it is true that the debtor does not have an absolute right to convert

their case, “‘[c]onversion’ is a misnomer where, as here, the Debtors do not seek to convert

the Cases to cases under another chapter of the Bankruptcy Code but, rather, seek authority

to remain in Chapter 11 and amend their petitions to elect to proceed under Subchapter V.”

In re Peak Serum, 623 B.R. 609, 616 (Bankr. D. Colo. 2020).

bankruptcy case were dismissed. If such a debtor were unwilling or unable to propose

a confirmable plan, then the only way to preserve that value would be to de-designate

the case, which would allow another party in interest (such as a chapter 11 trustee)

to propose a plan. But absent the authority to de-designate the case, a court’s only

options, under § 1112(b) of the Bankruptcy Code, would be to convert the case to one

under chapter 7 or dismiss the case, in which case the value would be at risk of being

destroyed. One might conclude that, in the absence of contrary statutory text, any

ambiguity in the Bankruptcy Code should be construed to avoid a result that is so

contrary to established bankruptcy policy.

There is, however, a serious counterargument. Under § 103(i), the decision to

proceed under subchapter V is within the exclusive province of the debtor.21 There

can be no suggestion that a creditor may move a court to amend a petition to

designate a case as one under subchapter V over a debtor’s objection. So

notwithstanding the language of Rule 1009(a), it cannot be argued that parties in

interest have carte blanche to file motions seeking to move debtors in or out of

subchapter V as they see fit. In addition, Rule 1020, which establishes the procedure

for a debtor to designate a case under subchapter V and for a party in interest to

object to such a designation, can be read to imply that the debtor’s determination to

proceed under subchapter V shall be controlling unless and until the Court

21 11 U.S.C. § 103(i) (“Subchapter V of chapter 11 of this title applies only in a case under

chapter 11 in which a debtor (as defined in section 1182) elects that subchapter V of chapter

11 shall apply.)

determines that the debtor is statutorily ineligible.22 Moreover, there is also reason

to be concerned that the argument from Rule 1009 proves too much. If a creditor may

move under Rule 1009 to amend a debtor’s position to de-designate the case as a

subchapter V, might a creditor seek to circumvent the standards for conversion from

one chapter to another by seeking to move to amend the petition? The answer to that

question must be no, which might suggest that Rule 1009 was never intended to be

such a source of substantive authority to affect the basic contours of a bankruptcy

case. And finally, a case can be made from the text of the statute itself that de-

designating a subchapter V case so that another party in interest may propose a plan

or so that a trustee may be appointed under § 1104 would be an improper end run

around the contrary provisions contained in subchapter V itself.

In the end, the Court need not resolve this question, because even if the Court

does have the authority to de-designate the case from subchapter V to a regular

chapter 11 case, it would not exercise that authority in this case. Even is such an

authority exists, the Court is persuaded (in light of the statutory contemplation that

the decision whether to proceed under subchapter V would typically be committed to

the debtor’s discretion) that any authority to override the debtor’s judgment ought to

be exercised only as a last resort, where no other mechanism is available to achieve

the objectives of chapter 11. As offensive and deplorable as the Court finds Heldman’s

emails, the debtors should not lose the benefits of subchapter V because their

22 Fed. R. Bankr. P. 1020(a) (“the status of the case as a small business case shall be in

accordance with the debtor’s statement under this subdivision, unless and until the court

enters an order finding the debtor’s statement is incorrect”).

principal sent hateful or offensive emails. Rather, even if the Court were to apply the

principles set out in National Small Business Alliance, it would be appropriate to give

the debtors an opportunity to proceed under subchapter V. Unlike National Small

Business Alliance, this case is barely at its inception. The debtors either will or will

not be able to propose a plan of reorganization that is capable of being confirmed. But

under the circumstances of this case, the Court does not believe, if it has the power

to de-designate at all, that it would be appropriate to exercise that authority before

such efforts are exhausted.

II. Cause has been shown to order that the debtors shall not be debtors

in possession.

The Court is persuaded, however, that cause has been shown to remove the

debtors from possession. Section 1185(a) states that on “request of a party in interest,

and after notice and a hearing, the court shall order that the debtor shall not be a

debtor in possession for cause, including fraud, dishonesty, incompetence, or gross

mismanagement of the affairs of the debtor, either before or after the date of

commencement of the case.”23 The statutory use of the word “including,” of course, is

“not limiting.”24

In this Court’s view, a manifest demonstration that management is unable to

conduct itself as an appropriate fiduciary for the bankruptcy estate is also “cause” to

dispossess the debtor under § 1185. Section 1184 makes plain that a debtor in

possession in a subchapter V case is required to “perform [the] function and duties …

23 11 U.S.C. § 1185(a).

24 11 U.S.C. § 102(3).

of a trustee serving in a case under this chapter.” In addition to the fiduciary duties

imposed by state law, it is implicit in the term “trustee,” which is drawn from the

common law of trusts, that these duties include managing the debtor’s business as a

fiduciary to the estate and its stakeholders.25 Based on the record developed at the

evidentiary hearing, the Court finds that the debtors in possession are poorly suited

to fulfill that statutory obligation.

Despite Pinglora’s best efforts, the fact remains that Heldman is the 100

percent owner and sole officer and employee of the debtors. Even accepting Pinglora’s

view that Heldman lacks the practical and managerial skills to remove funds from

the debtors’ account, even Pinglora acknowledged that he would have no way to stop

Heldman from making good on his threats to destroy the debtors’ business for the

purpose of harming its creditors. And Heldman’s boast that he “doesn’t give a damn

about the law,” coupled with his open defiance of the injunctions entered by the

California district court, lead this Court to conclude that the statutory purposes of

chapter 11 cannot be fulfilled with this debtor remaining in possession.

Subchapter V also provides a specific means to fill the void when a debtor is

dispossessed. Section 1183(b)(5) states that the subchapter V trustee shall, “if the

debtor ceases to be a debtor in possession … be authorized to operate the business of

the debtor.”

25 See generally Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952) (statutory reference to

“long-established and familiar” common law principles should be read to conform with those

principles).

Significantly, however, these duties do not include the authority to file a plan,

which authority is given only to the debtor.26 Accordingly, with the subchapter V

trustee managing the debtors’ business affairs and “facilitat[ing] the development of

a consensual plan of reorganization,”’2’ the debtors will retain the right to file a plan.

The debtors either will or will not be able to do so. But applying the reasoning of

National Small Business Alliance, the Court concludes that those efforts should be

exhausted before the Court considers more drastic measures.

Conclusion

For the foregoing reasons, Beyond Blond’s motion to de-designate the case to a

traditional chapter 11 will be denied; Beyond Blond’s and the U.S. Trustee’s motions

to remove the debtors in possession under § 1185 will be granted, and the U.S.

Trustee’s motion to dismiss the case will be dismissed as moot. The Court will enter

an order, consistent with the form of order submitted by the U.S. Trustee under

certification of counsel,?® so providing.

V2

Dated: December 16, 2022

CRAIG T. GOLDBLATT

UNITED STATES BANKRUPTCY JUDGE

27 Id. § 1183(b)(7).

2D.J. 43.

14