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10-11-10 Doc 139 SPNG Notice to Convert CH 11 to CH 7

10-11-10 Doc 139 SPNG Notice to Convert CH 11 to CH 7

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SILVERMANACAMPORA LLP Attorneys for Kenneth P. Silverman, Esq.

, Chapter 11 Trustee 100 Jericho Quadrangle - Suite 300 Jericho, New York 11753 (516) 479-6300 Anthony C. Acampora Brett S. Silverman

Hearing Date: November 4, 2010 Time: 10:00 a.m. Objection Date: October 27, 2010 Time: 4:00 p.m.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------------x In re: SPONGETECH DELIVERY SYSTEMS, INC., Debtor. -----------------------------------------------------------------x

Chapter 11 Case No. 10-13647 (SMB)

MOTION OF THE CHAPTER 11 TRUSTEE FOR AN ORDER CONVERTING THE DEBTOR’S CHAPTER 11 CASE TO A CASE UNDER CHAPTER 7 TO: THE HONORABLE STUART M. BERNSTEIN UNITED STATES BANKRUPTCY JUDGE Kenneth P. Silverman, Esq., the chapter 11 trustee of the estate of Spongetech Delivery Systems, Inc. (the "Debtor"), by his attorneys, SilvermanAcampora, LLP, submits this motion (the "Motion") seeking the entry of an order pursuant to 11 U.S.C. §§105(a) and 1112(b) (the “Bankruptcy Code”), converting the Debtor’s chapter 11 case to a case under chapter 7 of the Bankruptcy Code, and granting the Trustee such other, further and different relief as this Court deems just and proper, respectfully represents the following: Preliminary Statement 1. Conversion of this case under Bankruptcy Code § 1112 is necessary and in the best

interests of the Debtor, the Debtor’s estate and the Debtor’s creditors because there is no possibility that the Debtor can rehabilitate or reorganize. The liquidation and sale of all of the assets of the Debtor’s manufacturing subsidiary, Dicon Technologies, LLC (“Dicon”) in its own bankruptcy case in Georgia1 (which the Trustee vigorously opposed)2 irreparably frustrated the
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On June 18, 2010 an involuntary petition was filed against Dicon in the United States Bankruptcy Court for the Southern District of Georgia (the “Georgia Court”), Case No. 10-41275 (LWD). Thereafter on June 24, 2010, the Georgia Court entered an order directing the appointment of a chapter 11 trustee for Dicon and, on July 9, 2010, Lloyd T. Whitaker was appointed the chapter 11 trustee for Dicon (the “Dicon Trustee”). On September 16, 2010, the Trustee filed an objection to the sale of Dicon’s assets. He ad his counsel flew
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Trustee’s ability to market the Debtor as a fully integrated company with both sales and manufacturing capability. 2. Further, when the Trustee was appointed, the Debtor’s case was already hopelessly

administratively insolvent. As a result, the Trustee was forced to terminate all of the Debtor’s business operations because of, among other things, the inability to pay employees or insurance. That condition has only worsened with the passage of time and will continue to do so unabated if the case is not converted.3 3. Finally, although initially thought to have a significant sale value, because of the the

Debtor’s failure to comply with various securities laws, its continuing failure to undertake the obligation and difficulties in conforming with Bankruptcy Code §1146 filings, the Debtor’s public shell is of questionable value. Moreover, the Trustee lacks the necessary funds to investigate fully the sale of the shell, to rectify the Debtor’s filing failures or to retain qualified professionals to market and sell the public shell. 4. As a result of the foregoing, and because the administrative costs of remaining in

chapter 11 are far too burdensome it is in the best interest of the Debtor, the Debtor’s estate and the Debtor’s creditors for this case to be converted to a case under chapter 7. Background 5. The Debtor, a manufacturer and distributor of hydrophilic foam cleaning products

designed for use in the home, on automotive and maritime vehicles and for pets, is a Delaware publicly-held corporation. In May of 2010, the United States of America filed a criminal complaint in the United States District Court for the Eastern District of New York charging the Debtor’s Chief Operating Officer/Chief Financial Officer/ Chief Accounting Officer and the Debtor’s President/Chief

to Savannah, Georgia and actively participated in the Dicon sale hearing by, among other things, crossexamining the Dicon Trustee and other Dicon employees. On September 24, 2010, the Dicon Court entered an order approving the Dicon Sale. On September 30, 2010, after consultation with and approval of the United States Attorney and the Federal Bureau of Investigations the Trustee surrendered and vacated the Debtor’s corporate headquarters, located at 10 West 33rd Street, New York, New York. All documents and inventory located at the Debtor’s headquarters were transferred to a storage facility.
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Executive Officer with conspiracy to commit fraud and obstruction of justice. On the same day, the United States of America filed a civil complaint against these two officers and several others, alleging, inter alia, that they were involved in a massive “pump and dump” scheme defrauding the Debtor’s investors.4 6. Thereafter, on July 9, 2010, the Debtor filed a voluntary petition for relief under

chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Court”). No schedules were filed by the Debtor at that time. 7. By Order of the Court dated, July 19, 2010, and Notice of Appointment dated July 20,

2010, S. Gregory Hays (“Hays”) was appointed as the chapter 11 operating trustee of the estate. On August 3, 2010, by Notice of Withdrawal, Hays resigned as trustee. By order dated August 4, 2010, Hays was discharged of his duties, and Kenneth P. Silverman, Esq., was appointed as the Successor Operating Trustee. 8. On August 31, 2010, the Dicon Trustee filed a motion with the Georgia Court

pursuant to Bankruptcy Code §363 for approval for the sale of substantially all of Dicon’s assets. 9. On September 15, 2010, the Trustee filed an adversary complaint seeking the

substantive consolidation of Dicon with the Debtor chapter 11 estate.5 The Debtor’s Case Should Be Converted To A Chapter 7 Liquidation 10. The Trustee seeks conversion of this case pursuant to Bankruptcy Code §1112.6

Additional information regarding the Debtor’s business, capital structure and the circumstances leading to the filing of this case is contained in the United States Trustee’s “Motion for Order Directing the Appointment of a Chapter 11 Trustee or, in the Alternative, Converting the Case to Chapter 7 of the Bankruptcy Code”, dated July 16, 2010 (Docket No. 6) as well as in the Trustee’s Status Report dated August 24, 2010 (Docket No. 104).
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The Trustee intends to file voluntary petitions for relief and seek the substantive consolidation of the remaining seven (7) subsidiaries: SpongeTech® Europe, SpongeTech® Health & Beauty, Inc., SpongeTech® Kitchen & Bath, Inc., SpongeTech® Auto, Inc., SpongeTech® Medical, Inc., SpongeTech® Pet, Inc., and The Smarter Sponge Company™. This Court has jurisdiction to consider this matter under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b). Venue is proper before this Court under 28 U.S.C. §§ 1408 and 1409. The statutory predicates for the relief sought herein are Bankruptcy Code §§ 105(a) and 1112(b)(4)(A) and (M) and Rules 1017, 1019, 2002 and 9014 of the Federal Rules of Bankruptcy Procedure and the Court’s Local Bankruptcy Rule 9013-1(a).

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The Trustee has determined that conversion is necessary and in the best interests of the Debtor, the Debtor’s estate and the Debtor’s creditors because there is no possibility that the Debtor can rehabilitate or reorganize or file a confirmable plan now or in the near future. Cause Exists for a Finding that Conversion or Dismissal is Warranted 11. The statutory basis for a chapter 11 trustee to convert a case to one under chapter 7

is Bankruptcy Code § 1112.7 Subsection (b) of Bankruptcy Code § 1112 requires that “cause” be established in order to convert the case. See 11 U.S.C. §1112(b). Although “cause” is not a defined term in the Bankruptcy Code, Bankruptcy Code §1112(b)(4) lists a variety of factors which may constitute “cause” for the conversion of a chapter 11 case to a chapter 7 case or for the dismissal of a chapter 11 case in its entirety, of which includes: (a) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation; and (b)inability to effectuate substantial consummation of a confirmed plan. See In re Adbrite Corporation, 290 B.R. 209, 216 (Bankr. S.D.N.Y. 2003). See also 11 U.S.C. §§1112(b)(4)(A) and (M).
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Bankruptcy Code § 1112(b) provides in relevant part: (1) Except as provided in paragraph (2) of this subsection, subsection (c) of this section, and section 1104(a)(3), on request of a party in interest, and after notice and a hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause. **** (3) The court shall commence the hearing on a motion under this subsection not later than 30 days after filing of the motion, and shall decide the motion not later than 15 days after commencement of such hearing, unless the movant expressly consents to a continuance for a specific period of time or compelling circumstances prevent the court from meeting the time limits established by this paragraph. (4) For purposes of this subsection, the term ‘cause’ includes-(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation; ***** (M) inability to effectuate substantial consummation of a confirmed plan.

11 U.S.C. § 1112(b).

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12.

However, the examples of cause enumerated in §1112(b) were not intended by

Congress to be exhaustive or limited. See 11 U.S.C. §102(3). See also In re C-TC 9th Avenue Partnership, 113 F.3d 1304, 1310-11 (2d Cir. 1997); In re SGL Carbon Corp., 200 F.3d 154, 160 (3d. Cir 1999)(“But we have noted the provision that “cause” “includ[es]” the ten enumerated factors strongly suggests those factors are not exhaustive and that a court may consider whether other facts and circumstances qualify as “cause.”); In re FRGR Managing Member LLC, 419 B.R. 576, 580 (Bankr. S.D.N.Y. 2009)(“Subsection (b)(4) contains sixteen examples of events that may constitute cause. This list, however, is “not exhaustive” and courts are free to consider other factors.”); In re Tornheim, 181 B.R. 161, 163-164 (Bankr. S.D.N.Y. 1995), appeal dismissed, 1996 WL 79333 (S.D.N.Y. 1996). Moreover, the legislative history of Bankruptcy Code §1112(b) provides in relevant part that:

“[The] list [contained in § 1112(b)] is not exhaustive. The court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.” In re SGL Carbon Corp., 200 F.3d at 160 (quoting H.R.Rep. No. 595, at 406, reprinted in 1978 U.S.S.C.A.N. 5963, 6362). 13. The bankruptcy court has wide latitude and discretion when determining if cause to

convert or dismiss a case exists. See In re SGL Carbon Corp., 200 F.3d at 160. See also In re Adbrite Corporation, 290 B.R. at 215. 14. The Trustee seeks conversion of the Debtor’s case pursuant to Bankruptcy Code

§§1112(b)(4)(A) and (M). 15. Bankruptcy Code §1112(b)(4)(A) provides that a debtor’s case can be converted for

“substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” 11 U.S.C. §1112(b)(4)(A). This subsection was written in the

“conjunctive,” and thus, the movant must prove loss or diminution and that there is no likelihood of rehabilitation. See In re Adbrite Corporation, 290 B.R. at 215. 5
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16.

When determining if there is loss or diminution, a bankruptcy court must make a full

evaluation of the present condition of the debtor’s estate, not simply review of the books and records. See In re Adbrite Corporation, 290 B.R. at 215. “Courts have held that a negative cash flow postpetition and an inability to pay current expenses satisfy [this requirement].” In re Adbrite Corporation, 290 B.R. at 215. 17. Currently the Debtor is not operating, the Dicon Sale divested the Debtor of any

meaningful chance of a going concern sale, rehabilitation or reorganization. Furthermore, the Debtor has numerous administrative expenses that are accumulating with no concomitant ability to pay. There is diminimus funds in the Trustee’s account and the sale of the inventory is wrought with infringement, valuation and logistics problems, as well as the issues concerning liens over the inventory. 18. Although a reorganization of a debtor’s operations in the context of a chapter 11

proceeding can also include an orderly or complete liquidation of the debtor, rehabilitation requires that the debtor be restored to good condition and re-established on a sound basis. See In re Adbrite Corporation, 290 B.R. at 216. Rehabilitation of a debtor is a concept that indicates that the debtor will be re-established on a secured financial basis, which implies establishing a cash flow from which its current obligations can be met. See In re Adbrite Corporation, 290 B.R. at 216. Neither outcome is possible here. 19. The Debtor cannot be rehabilitated. All of its operations have been terminated, it

employees have been furloughed and its operating, distributing and manufacturing arm has been sold. Moreover, all of the licenses the Debtor was using to market some of its products have expired or were terminated by the licensor in the wake of the criminal and civil actions and investigations. 20. Without the ability to manufacture, distribute or market the product, the Trustee

cannot possibly be able to return a positive cash flow, secure the Debtor’s financial basis or reestablish the Debtor’s operations. It cannot be rehabilitated, much less reorganized. 21. Although the Trustee believes he has established “cause” under Bankruptcy Code 6
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§1112(b)(4)(A), he can also establish cause under Bankruptcy Code §1112(b)(4)(M), which provides that the Debtor be unable to effectuate a plan. “’Inability to effectuate a plan’ means that the debtor lacks the ability to formulate a plan or to carry one out.” In re Adbrite Corporation, 290 B.R. at 216. 22. The Trustee does not believe he can formulate or carry out a plan based on the

current financial status of the Debtor’s estate and no interested party, including the Debtor’s active shareholder body, has even attempted to provide the Trustee with a practicable concept that could result in a confirmable plan much less an actual plan of reorganization. Based upon his

investigation to date, the Debtor’s sustainable business is insufficient to support a confirmable plan of reorganization. 23. Continuing this case under chapter 11 will only result in increased costs that could

be avoided if the case were converted to a chapter 7 liquidation. First, the estate continues to accrue United States Trustee quarterly fees. Second, continuing the case as a liquidating chapter 11 would require the additional costs and expense associated with drafting, seeking approval of, serving and soliciting votes on a liquidating plan. A conversion would avoid those unnecessary expenses. 24. Every one of the Trustee’s remaining duties in this case can be performed within a

chapter 7 case without incurring the aforementioned costs. Given the current status of the Debtor, it is more economical and efficient for the estate to be administered under the provisions of chapter 7. 25. Based on the foregoing, this Court should find that “cause” exists to convert the

cases, and that the conversion of this case is in the best interests of the Debtor, the Debtor’s estate, and the Debtor’s creditors. 26. The Trustee is seeking conversion, instead of dismissal of the Debtor’s case. If the

movant establishes cause, the bankruptcy court needs to determine if dismissal or conversion would be in the best interests of the estate’s creditors. In re FRGR Managing Member LLC, 419 B.R. at 580; see also In re New Rochelle Telephone Corp., 397 B.R. 633, 640 (Bankr. E.D.N.Y. 7
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2008)(“if the movant establishes that ‘cause’ exists to convert the case, it is the Court’s obligation to dismiss or convert a Chapter 11 case.”); In re Adbrite Corporation, 290 B.R. at 214; In re Hampton Hotel Investors, L.P., 270 B.R. 346, 359 (Bankr. S.D.N.Y. 2001). Among the factors courts should consider when weighing conversion versus dismissal are: (a) Whether some creditors received preferential payments, and whether equality of distribution would be better served by conversion rather than dismissal; (b) The ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors; (c) In assessing the interest of the estate, whether conversion or dismissal of the estate would maximize the estate's value as an economic enterprise; (d) Whether any remaining issues would be better resolved outside the bankruptcy forum; (e) Whether the estate consists of a “single asset”; and (f) Whether a plan has been confirmed and whether any property remains in the estate to be administered. In re FRGR Managing Member LLC, 419 B.R. at 580-581. (quoting 7 Collier on Bankruptcy ¶1112.04[6]). 27. As set forth herein, the Trustee has ceased all operations of the Debtors’ business

and the Dicon Sale has frustrated the Trustee’s ability to complete a going concern sale, rehabilitation or a reorganization of the Debtor’s operations. 28. However, the Trustee believes that (a) there are potential avoidance actions that can

generate assets for the estate, (b) there is value in the Debtor’s registered trademarks, although still undetermined, (c) there are still tangible assets and accounts receivable to be liquidated, albeit limited in nature, and (d) potential assets yet to be uncovered by the Trustee that could be marshaled and liquidated for the benefit of the Debtor’s creditors, as the Trustee is still investigating the Debtor’s affairs. 29. Based on the existence of the aforementioned potential assets of the Debtor’s estate

warrant conversion of this case to chapter 7. Therefore, the Court should convert instead of 8
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dismissing this proceeding. Conclusion 30. Notice of the Motion has been served upon: (i) the Debtor’s counsel; (ii) the Office of

the United States Trustee; (iii) all federal, state and local taxing authorities; (iv) all know creditors of the Debtor’s estate; and (v) all entities that have properly served and filed Notices of Appearance in the Debtor’s case. It is submitted that such notice is appropriate under the circumstances. 31. Court. Wherefore, the Trustee respectfully requests that this Court enter an order substantially in the form annexed hereto as Exhibit “A” converting this chapter 11 case to a chapter 7 liquidation, and granting such other and further relief as may be deemed just and proper. Dated: Jericho, New York October 8, 2010 SILVERMANACAMPORA LLP Attorneys for Kenneth P. Silverman, Esq., The Chapter 11 Operating Trustee By:_s/ Anthony C. Acampora_________ Anthony C. Acampora A Member of the Firm 100 Jericho Quadrangle Jericho, New York 11753 (516) 479-6300 No prior Motion for the relief requested herein has been made to this or any other

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EXHIBIT A

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Hearing Date: November 4, 2010 Time: 10:00 a.m.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------------x In re: SPONGETECH DELIVERY SYSTEMS, INC., Debtor. -----------------------------------------------------------------x

Chapter 11 Case No. 10-13647 (SMB)

ORDER GRANTING THE MOTION OF THE CHAPTER 11 TRUSTEE FOR AN ORDER CONVERTING THE DEBTOR’S CHAPTER 11 CASE TO A CASE UNDER CHAPTER 7 Upon the Motion (the “Motion”) of Kenneth P. Silverman, Esq., the chapter 11 trustee of the estate of Spongetech Delivery Systems, Inc. (the "Debtor"), by his attorneys, SilvermanAcampora, LLP, submits this motion (the "Motion") seeking the entry of an order pursuant to 11 U.S.C. §§ 105(a) and 1112(b) (the “Bankruptcy Code”), converting the Debtor’s chapter 11 case to a case under chapter 7 of the Bankruptcy Code, and granting the Trustee such other, further and different relief as this Court deems just and proper; and notice of the Motion having been adequate and appropriate under the circumstances; and no objection to the relief requested in the Motion having been interposed; and upon the transcript of the hearing on the Motion conducted by the Court on November 4, 2010 at 10:00 a.m. (the “Hearing”), the transcript of which is incorporated herein by reference, and the Trustee having appeared at the Hearing with his counsel SilvermanAcampora LLP, and it appearing from all prior proceedings and pleadings had herein in the Debtor’s case that the relief requested in the Motion is in the best interest of the Debtor, the Debtor’s estate and the Debtor’s creditors; and after due deliberations and sufficient cause appearing in support of the Motion, it is now hereby ORDERED, that the relief requested in the Motion is granted and the Debtor’s case is hereby converted to a chapter 7 liquidation case in accordance with Bankruptcy Code §1112(b); and it is further ORDERED, that notice of the conversion of these cases shall be provided by the Clerk of the Court; and it is further

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ORDERED, that the Trustee is authorized, empowered and directed to do such things, execute such documents and expend such funds as are necessary and consistent with the terms of this order. Dated: New York, New York November __, 2010 ____________________________________ HONORABLE STUART M. BERNSTEIN UNITED STATES BANKRUPTCY JUDGE

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