UNITED STATES BANKRUPTCY COURT Hearing Date: March 22, 2011 SOUTHERN DISTRICT OF NEW YORK 11:00 A.M. Chapter 11 SONJA TREMONT-MORGAN, Case No.: 10-16132 (SCC) Chapter 11 STAM LLC, Case No.: 11-10090 (SCC) Debtor. a “x. DEBTORS’ JOINT OPPOSITION TO MOTION OF HANNIBAL PICTURES, INC. SEEKING TO DISMISS OR CONVERT DEBTORS’ CASES OR, IN THE ALTERNATIVE, TO APPOINT A CHAPTER 11 TRUSTEE Sonja Tremont-Morgan (“Ms. Morgan”), an individual, and STAM LLC (“STAM”), her personal limited liability company, (together, the “Debtors”), by and through their attomeys, Goldberg Weprin Finkel Goldstein LLP, hereby submit this opposition to the motion of Hannibal Pictures, Inc. (“Hannibal”) seeking to dismiss or convert Debtors’ cases or, alternatively, to appoint a Chapter 11 Trustee, and respectfully allege and represent as follows: PRELIMINARY STATEMENT 1. Hannibal’s motion unfairly portrays Ms. Morgan in the worst possible light and attributes sinister motive to a legitimate exercise of legal rights designed to preserve asset values while various litigations unfold. Unfortunately, Ms, Morgan found herself being pulled in multiple directions and sought Chapter 11 to implement one of its primary purposes: to obtain a temporary breathing spell and theopportunity for a fresh start, through the use of the automatic stay. See, In re Zarnel, 619 F.3d 156, 171 (2d. Cir, 2010) 2. Disregarding her obvious need for relief, Hannibal's motion to dismiss is predicated entirely on its narrow view that Ms. Morgan acted in bad faith by choosing to address her financial situation through Chapter 11, rather than simply paying the judgment held by Hannibal against her, even though an important appeal is currently pending. Ms. Morgan’s use of Chapter 11 to protect her assets, including cash and unencumbered real property worth well in excess of the debt owed to Hannibal, while she pursues an appeal of the judgment and prosecute other litigation, can hardly be said to be a bad faith filing, regardless of the spin put on these events by Hannibal. 3. Nor is Ms. Morgan using her Chapter 11 case merely to delay. In fact, Ms. Morgan is actively moving on several fronts, as the appeal from the underlying judgment held by Hannibal is currently scheduled for oral argument before the Ninth Circuit Court of Appeals on April 15, 2011. Moreover, Ms. Morgan has spent several weeks in California prosecuting a malpractice claim against her former attorneys who represented her in the Hannibal litigation. The matter first went to mediation and then a formal arbitration proceeding was conducted in California, All testimony has been completed and the parties are preparing post-trial memoranda for submission in mid-May. 4. Hannibal also completely misses the mark in asserting that grounds exist for the alternate relief of the appointment of a Chapter 11 trustee. The purported misconduct cited by Hannibal is a question of interpretation, and no matter what may be involved, all funds in question being retained by STAM, an entity wholly under the 2control of Ms. Morgan, and subject to the jurisdiction of this Court, as well as the prior state court, 5. That Ms. Morgan exceeded monthly limits set on her spending on two occasions due to atypical circumstances does not merit imposition of the drastic remedies suggested by Hannibal. This is particularly true in light of the subsequent Chapter 11 filing by STAM, which places all of the assets of both Debtors within the jurisdiction and supervision of this Court. In fact, even without the separate Chapter 11 filing for STAM, Ms. Morgan treated this entity and its holdings as a part of her individual bankruptcy estate, and all litigation claims against it were stay by virtue of the individual filing. See Queenie, Ltd, v. Nygard Intern,, 321 F.3d 282 (2d. 2003). 6. The conventional bankruptcy process in Chapter 11 provides ample safeguards to monitor the Debtors’ use of funds. Between the monthly operating reports and other disclosures required by this Court, in combination with the fiduciary obligations imposed on Ms. Morgan and her counsel, Hannibal's rights are fully protected without the need to interject a Chapter 7 or Chapter 11 operating trustee into these cases. BACKGROUND FACTS 7. The relevant facts regarding Mr. Morgan’s transfers are set forth in her local rule 1007-2 statement and the accompanying affidavit which speaks to pre- bankruptcy disposition of funds. However, for the Court’s convenience, a short recitation of the background is repeated below. 8. Until her fairly recent marital and financial difficulties, Ms. Morgan lived what many consider a charmed life. A successful businessperson, Mr. Morgan 3enjoyed considerable assets of her own, including multiple homes, before she met and married John Adams Morgan in 1998. 9. In 2006, Hannibal sued Ms. Morgan in the United States District Court for the Southern District of California for alleged damages arising out of a failed movie production, and on September 1, 2009, judgment in favor of Hannibal was entered after trial in the sum of $7,066,294 (the “Hannibal Judgment”), 10. In the meantime, in 2008, Ms. Morgan and her husband began a bitter divorce litigation after ten years of marriage. 11. Despite these set backs, she has fought to protect her rights in the divorce, and is rebuilding her life, having found employment as a “Real Housewife of New York City” on Bravo TV, as well as recently negotiating for the publication of a cookbook. 12, Ms. Morgan has substantial assets, including interests in real property in Colorado, France, and her ownership of a townhouse in New York City, bank accounts totaling almost $2 million, and an award of $3 million from her former spouse that is currently the subject of an appeal. 13. Notwithstanding these efforts to get on with her life and protect her income and her assets, Ms. Morgan continued to be the target of motion practice in the divorce action, while the entry of the Hannibal Judgment resulted in vigorous judgment enforcement proceedings. 14. As part of the pre-bankruptcy enforcement proceedings, Hannibal commenced a turnover proceeding against Ms. Morgan, STAM, and others, in the 4Supreme Court, New York County. A stipulated TRO was entered by the Court, which inter alia barred Ms. Morgan and STAM from “directly or indirectly removing. assigning, selling, disposing, pledging, mortgaging, transferring, hypothecating, utilizing or encumbering” their assets, It also limited Ms. Morgan to $45,000 a month in living expenses. Formalistically, there was nothing in the TRO which precluded transfers as between the various respondents. 15. Following entry of the TRO, Hannibal sought a contempt citation against Ms. Morgan and STAM, alleging that she transferred $1,807,362.02 from her personal accounts to STAM, and that she twice exceeded the monthly limit on her expenses. 16. As is set forth in Ms, Morgan’s affidavit, the transfer of funds between bank accounts was after consultation with other counsel. At all times, the owners of the subject accounts were either Ms. Morgan or STAM, both of which were respondents in the state court enforcement action and thus subject to the jurisdiction of the Supreme Court that issued the TRO, so that no monies were ever transferred outside of the supervision of that Court. 17. Further in her affidavit, Ms. Morgan explains that she twice exceeded her monthly limit on expenses by making pre-payments on her American Express bill for periods that Ms. Morgan knew she would be out of the country. By virtue of these pre-payments, Ms. Morgan understands that she was under the cap during the subsequent months so on a net aggregate basis Ms. Morgan believes that she complied with the budget.ARGUMENT A. Dismissal Or Conversion Is Not Warranted 18. The crux of the argument made by Hannibal for dismissal is that it was “bad faith” on the part of Ms. Morgan and STAM to file their Chapter 11 petitions rather than paying the Hannibal Judgment. 19. While it is well established that a Chapter 11 petition is subject to dismissal for cause if not filed in good faith, Hannibal has utterly failed to meet its burden of showing sufficient facts to justify a finding that the Debtors lacked good faith in filing their respective petitions. See Matter of Woodbrook Assoc, 19 F.3d 312, 317 (7th Cir. 1994) (“Where a motion to dismiss for cause if opposed, the movant bears the burden of proving by a preponderance of the evidence that cause exists for dismissal of the debtor’s bankruptcy case.”). 20. Importantly, absent compelling justification, courts are generally reluctant, especially early in a Chapter 11 case, to order conversion or dismissal and thereby abort the bankruptcy process and the statutory confirmation process. See Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 1989); In re 68 West 127 St.. LLC, 285 B.R. 838, 844 (Bankr. S.D.N.Y. 2002) (noting that dismissal on the ground of lack of good faith “is to be used sparingly to avoid denying bankruptcy relief to statutorily eligible debtors except in extraordinary circumstances”); In re Chris-Marine U.S.A., 262 B.R. 118 (Bankr. M.D. Fla. 2001). The U.S. Supreme Court has recognized two key policies underlying Chapter 11 as preserving going concerns and maximizing property available to satisfy creditors, Bank of Am. Nat. Trust and Say. Ass’n. v. 203 North LaSalle St, P’ship, 6526 U.S. 434, 453 (1999), and bankruptcy courts have recognized that a conversion or dismissal should not be granted where continuing the Chapter 11 case would promote those two goals. In re Orienta Co-op. Ass'n, 256 B.R. 508, 511 (Bankr. W.D. Okla. 2000). 21, Remarkably, while simply alleging, based on a partial picture of the Debtors’ financial situation, that Debtors’ Chapter 11 petitions should be dismissed or converted for bad faith, Hannibal proffers no meaningful discussion as to the appropriate test for bad faith in this Circuit, and neglects to mention the actual principles and parameters of bad faith as set forth by Second Circuit in In re Cohoes Indus. Terminal Inc., 931 F.2d 222 (2d Cir. 1991) and In re'C-TC 9" Ave. P’ship, 113 F.3d 1304 (2d Cir. 1997). See also 68 West 127 St. LLC, 285 B.R. 838, at 842-46 (providing a good synthesis of the “bad faith” standard under Second Circuit case law). 22. As set forth in those decisions, the prevailing test combines an analysis of objective futility and subjective bad faith to determine whether a reasonable possibility exists that the debtor will emerge from bankruptcy, See 68 West 127 St. LLC, 285 B.R. at 846 (noting that bad faith exists if it is clear on the filing date that there is no reasonable likelihood that the debtor intended to reorganize and the debtor has no probability to emerge from bankruptcy); C-TC 9" Ave, P’ship, 113 F.3d 1304, 1309-10 (noting that Chapter 11 petition may be “frivolous” if “the debtor has no reasonable probability of emerging from the bankruptcy proceedings and no realistic chance of reorganizing” and clearly stating that the test for a bad faith filing is whether “it is clear that on the filing date there was no reasonable likelihood that the debtor intended to 7reorganize and no reasonable probability that it would emerge from bankruptcy proceedings”) (quoting Cohoes Indus. Terminal, 931 F.2d at 227); In re RCM Global Long Term Corp. Appreciation Fund, 200 B.R. 514, 520 (Bankr. S.D.N.Y. 1996) (*...a petition will be dismissed if both objective futility of the reorganization process and subjective bad faith in filing the petition are found .... But a court should reach the conclusion that there is no demonstrable ability to reorganize only upon the strongest evidentiary showing”) (emphasis added). Accord Carolin Corp., 886 F.2d 693; In re Sylmar Plaza, L.P., 314 F.3d 1070 (9% Cir. 2002). Further, in determining whether a petition was filed in good faith, courts should consider the totality of the circumstances. In re Cedar Shore Resort, Ine., 235 F.3d 375 (8th Cir. 2000). 23. Thus, despite Hannibal’s contentions to the contrary, a finding of bad faith requires more than a determination that a Chapter 11 petition was filed under pressure from a judgment creditor. Rather, the test of good faith in this Circuit is whether the debtor has a reasonable intention to reorganize and a reasonable possibility to emerge from bankruptcy. 24, Ms. Morgan easily meets these standards, as she possesses sufficient assets to confirm a plan even if the appeal goes against her and can emerge from Chapter 11 under any circumstances, The facts of this case show that the Debtors entered bankruptcy in order to reorganize their financial affairs and protect their substantial income and assets, and that, through the prosecution of the malpractice claim and the upcoming oral argument on the appeal of the Hannibal Judgment, have, in fact, been actively pursuing the pre-requisites for such a reorganization. Indeed, the Debtor has just 8spent several weeks away from home pursuing the malpractice claim through mediation and arbitration in California. 25. In its motion, Hannibal attempts to manufacture outrage at the fact that the filing for bankruptcy protection purportedly frustrated execution on the Hannibal Judgment. However, the filing of bankruptcy frustrates creditors in most cases. That is neither a proper ground for dismissal nor even an indicia of bad faith. Cohoes Indus. Terminal, 931 F.2d at 228 (plainly stating that “[f]iling a bankruptcy petition with the intent to frustrate creditors does not by itself establish an absence of intent to seek rehabilitation”). 26. Nor do the cases cited by Hannibal support its position. In one, 15375 Memorial Corp. v. BEPCO. L.P., 589 F.3d 605 (3d Cir. 2009), the Third Circuit upheld the dismissal of a Chapter 11 case as a bad faith filing on the basis that the debtor had no prospects for reorganization where the debtor had ceased operating years earlier, and had no assets other than litigation claims to liquidate under a plan. Here, Ms. Morgan has both assets and income which exceed the Hannibal Judgment, and the issue is whether, and to what extent, the claim will be upheld on appeal. 27. Hannibal further chastises Ms. Morgan for filing her petition after Hannibal moved for contempt, quoting In re Chris-Marine U.S.A., Inc., 262 B.R. 118, 124 (Bankr. M.D.Fla. 2001) (citations omitted): [An attempt by a Debtor to circumvent or escape the consequences of a contempt judgment issued by a court of competent jurisdiction was never a legitimate aim to be achieved by use of the rehabilitation provisions of this chapterand without doubt constitutes an impermissible use of Chapter 11 of the Bankruptey Code. 28. Hannibal, however, fails to cite the balance of the Court’s analysis, which goes on to state firmly that: However, a bankruptcy court should not dismiss a Chapter 11 case solely because a commercially viable debtor seeks to survive the ruinous effects of a single large judgment, whether it is grounded on contempt or on some other malfeasance. See In re Double W Enterprises, Inc., 240 B.R. 450, 454 (Bankr.M.D.Fla.1999). “[T]he purpose of a chapter 11 case should be ‘to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors and produce a return for its stockholders.” ” Id. (quoting In re SGL Carbon Corp., 233 BR. 285, 288 (D.Del.1999)). The fact that a debtor's threatened inability to continue operating for the benefit of its various constituencies is the result of a civil judgment, the result of a civil contempt fine, or the result of contractual liabilities is less probative to the dismissal determination than the fact that a debtor actually has a prospect of reorganizing in order to serve those constituencies in the future. Id. at 124-25 (emphasis added). 29, In short, the proper emphasis of the Court’s analysis is not on the enforcement efforts by Hannibal, but on whether the Debtors have both the need and the ability to reorganize. On both accounts, they do, and dismissal is not warranted. B. Appointment Of A Trustee Is Likewise Unwarranted 30. Hannibal also seeks the alternative relief of a Chapter 11 Trustee based on the alleged violations of the TRO. 31. Courts consider the appointment of a trustee as an extraordinary remedy as there is a “strong presumption that the debtor should be permitted to remain in 10possession and control of its business.” In re 4 C Solutions. Inc., 289 B.R. 354, 370 (Bankr. C.D. Ill, 2003); Petit v. New England Mort. Servs. Inc., 182 B.R. 64, 68 (D. Me. 1995) (describing an appointment of a trustee as an “extraordinary” act”) (quoting In re Ionosphere Clubs, Ine., 113 B.R. 164, 167 (Bankr. $.D.N.Y. 1990); Rivermeadows Assocs., Ltd, 185 B.R. 615, 617 (Bankr. D. Wyo. 1995) (“extraordinary step”); In re Heck"s Properties, Inc., 151 BR. 739 (S.D. W.Va. 1992); In re Deena Packaging Indus. Inc,, 29 B.R. 705, 706 (Bankr. $.D.N.Y. 1983). 32. Further, courts have stated that “[aJbsent fraud or some other compelling reason, it is preferable to have the Chapter 11 debtor’s current management operate the debtor's business, rather than to appoint a trustee.” 4 C Solutions, 289 B.R. at 370; In_re Madison Mgmt, Group, Inc., 137 B.R. 275 (Bankr. N.D. Ill. 1992); In_re Sharon Stee] Corp., 871 F.2d 1217, 1225 (3d Cir. 1989) (appointment of a trustee “should be the exception, rather than the rule”). Similar to a determination on whether to convert or dismiss a Chapter I1 case, the decision whether to appoint a trustee involves a fact- sensitive examination made on a case-by-case basis. 4 C Solutions Inc., 289 B.R. at 370; In re Ontario Entm’t Corp., 237 B.R. 460 (Bankr, N.D. Ill. 1999). 33. Here, of course, we have the practical situation that there is no business per se to operate, and an operating trustee would serve little utility. If more oversight is needed, there are many other ways to deal with this issue short of the appointment of a trustee for an individual. 34, While Hannibal cites multiple cases in support of its motion to appoint a Chapter 11 trustee, none of the cases are particularly relevant to this case. In In ure Lowenschuss, 171 F.3d 673 (9th Cir. 1999), for example, the Court appointed a trustee not merely because the debtor was transferring assets from one bank account to another, but because the debtor was transferring assets out of state and personally fleeing to another state (from Pennsylvania to Nevada) in order to avoid the jurisdiction of state courts. Here, funds were transferred from Ms. Morgan’s personal bank account to STAM’s account. As she controls STAM, and STAM was a party in the enforcement proceedings, there clearly was no effort to move assets beyond the jurisdiction of the Supreme Court. 35. The dishonest conduct resulting in appointment of a trustee in In re Intereat, Inc., 247 BR. 911 (Bankr. $.D. Ga, 2000) was actually detrimental to parties involved, something not true of the alleged transgressions committed by Ms. Morgan. In Intereat, the debtor's management engaged in acts that resulted in a $22 million judgment against the debtor, improper compensation payments, and improper charges to debtor for management's purely personal travel expenses. Here, monies were moved between bank accounts, but were always viewed as a potential source of funding of the Hannibal Judgment as necessary. 36. In In re Rivermeadows Assoc’s. Ltd., 185 B-R. 615 (Bankr. D. Wyo. 1995), cited by Hannibal to be of “particular note” because a trustee was appointed due to debtor's disregard of court orders, the Court actually based its decision on a finding of numerous questionable business practices of the debtor corporation's management, the least of which was failure to appear at court hearings, as well as more serious violations of failing to document multiple transactions and financial dealings involving the debtor. 1237. In this instance, Ms. Morgan consolidated bank accounts, made payments on account to her credit cards because of overseas travel commitments, and paid her homeowner's insurance to preserve assets. These actions hardly rise to the level of gross misconduct and fraud required by Section 1104 as the predicate for the appointment of an operating trustee. 38. Notably, in addition to reviewing the factual allegations, the Court must balance the insufficient evidence of misconduct presented by Hannibal against the administrative costs associated with appointment of a Chapter 11 trustee, including the professional fees related to such an appointment. See e.g., In re Ionosphere Clubs, Inc. 113 BR. 164, 168 (Bankr. $.D.N.Y. 1990) (stating that one of the factors courts consider when determining whether to appoint a trustee is “the benefits derived by the appointment of a trustee, balanced against the cost of the appointment”) (citing In re Microwave Prod. of Am.. Inc., 102 B.R. 666 (Bankr. W.D. Tenn. 1989)). Hannibal fails even to address this important consideration. 39. In sum, the facts of these cases simply do not justify the appointment of Chapter 11 trustee. To the contrary, appointment of a trustee may be harmful to the bankruptcy case by imposing additional administrative costs that are unwarranted and unnecessary. 1BWHEREFORE, for the reasons set forth herein, Hannibal’s motion should be denied consistent with the foregoing, together with such other and further relief as is just and proper. Dated: New York, New York March 21, 2011 Goldberg Weprin Finkel Goldstein LLP Attorneys for Sonja Tremont-Morgan and STAM LLC 1501 Broadway, 22™ Floor New York, New York 10036 (212) 221-5700 By: /s/ Kevin J. Nash, Esq. TO: Robert N. Michaelson The Michaelson Law Firm Co-Counsel for Hannibal Pictures, Inc. 11 Broadway, Suite 615 New York, New York 10004 Serene Nakano, Esq. Office of the United States Trustee 33 Whitehall Street, 21% Floor New York, NY 10004 ginal Tere oq Dang MORSO20 SB andre Nan 214 doe 14