Here is the entire text of the ruling. It is under 7/27
NONE LISTED -
Courtroom Deputy:
This is a hearing on the court’s sua sponte Orders to Show Cause filed in both pending cases,
8:07-12347TA (‘first case”) and in 8:11-39429 EC filed in the Los Angeles Division, renumbered
as 8:11-19915TA and transferred to this court (“second case”).
There has been a confirmed plan in the first case since 6/10/2010. The deep misgivings recited
in the court’s Statement of Decision on Plan Confirmations entered 4/07/2010 about feasibility of
that plan have unfortunately proved all too prescient. Apparently, the millions in sales of
PreHistin® projected by debtor to be realized by now have not come to pass, not even nearly.
Instead, as reported by YA Global Investments, L.P. (“YA Global”) and verified in the record,
debtor has defaulted on most of the monthly installment payments due escrow (on account of YA
Tentative Ruling:
7/26/2011 4:58:18PM Page 35 of 52
Judge Theodor Albert, Presiding
Courtroom 5B Calendar
United States Bankruptcy Court
Central District of California
Santa Ana
Wednesday, July 27, 2011 Hearing Room 5B
10:00 am
Cont.... Cobalis Corporation Chapter 11
Global’s disputed claim), usually to be cured at the very last moment in the grace period, just before
immediate foreclosure by YA Global was permitted under the plan. Nothing at all has been paid to
other unsecured creditors. Although no reliable reports have been presented, because no post
confirmation status reports have been recently filed, it would appear that much of the funding to
date has come from yet additional investments from Chaim Stern. Some sales of PreHistin®
through drugstore chains have reportedly occurred but these are obviously far too few and too late
(reportedly $707,821 to date with another $225,309 reportedly ordered). Mr. Marion’s declaration
adds very little that is new except now it develops that retail sales did not even commence until
December of 2010, at least six months after confirmation. He continues the “just around the
corner” predictions which have been offered many times before but sound rather hollow now. The
point is this is too little and far too late and are not, in any event, nearly enough to support the plan.
Moreover, under debtor’s litigation strategy, the amounts owed the secured creditor, YA Global,
have now increased dramatically, so any future prospect that debtor can earn its way out of this
appears all the more remote. This is not to say that pursuit of legitimate claims is not appropriate
but now, regrettably, this case has become all about “doubling down” on litigation and less about a
successful earn out. It seems to the court that a Chapter 7 Trustee can as readily evaluate whether
further pursuit of litigation makes sense in the interest of creditors. Recently, the stock was
suspended from all trading by the SEC.
Added to this lamentable failure is the flurry in the last five months of ill-advised and
unsupported motions from the debtor (and Rey Olsen dba Montengrex who appears to be acting in
tandem with debtor) trying to dismiss the first case or to amend the provisions of the plan regarding
escrowing of the YA Global payments including fees, on what can only be described as specious
grounds. When the most recent of such motions was denied July 6, 2011, the second case was filed
July 8. Curiously, debtor chose to file the second case not in this court but in the Los Angeles
Division. There is no connection between this case and the Los Angeles Division and the home
address of the current CFO is obviously no proper grounds for such venue. The debtor’s address
and headquarters has always been 16795 Von Karman, Irvine. One can only conclude that there
was some nefarious purpose in filing in the Los Angeles division, such as to buy yet another few
weeks of time through the inevitable delay required by a transfer from that division to this court.
Counsel’s argument that the filing in Los Angeles was proper, or at least innocent or designed
merely to accommodate his somewhat closer office, is nonsense. He well knows that this is a
related case and would inevitably be transferred to this court under the “low-number” rule. That
7/26/2011 4:58:18PM Page 36 of 52
Judge Theodor Albert, Presiding
Courtroom 5B Calendar
United States Bankruptcy Court
Central District of California
Santa Ana
Wednesday, July 27, 2011 Hearing Room 5B
10:00 am
Cont.... Cobalis Corporation Chapter 11
filing in wrong venue, however, has had quite another effect. In so doing debtor’s management
forfeited whatever small credibility they might still have possessed.
Failure to consummate a confirmed plan within a reasonable time and/or default under terms of
a plan is clearly “cause” for conversion. 11 U.S.C. §1112(b)(4)(M) and (N); Pioneer Liquidating
Corp. v. U.S. Tr. (In re Consol. Pioneer Mortg. Entities), 264 F. 3d 803, 807 n.2 (9th Cir. 2001); In
re Mobile Freezers, Inc., 146 B.R. 1000, 1004 (Bankr. S.D.Ala. 1992). Failure to meet sales
projections, which prevent the reorganized debtor from meeting plan payments, is likewise grounds
for conversion for default. Greenfield Drive Storage Park v. Cal. Para-Prof’l Servs., Inc., (In re
Greenfield Drive Storage Park), 207 B.R. 913, 917 (9th Cir. BAP 1997). Filing in bad faith is also
cause for conversion or dismissal. Chu v. Syntron Bioresearch Inc. (In re Chu), 253 B.R. 92, 95
(Bankr. S.D.Cal 2000). Moreover, the court may consider a second bankruptcy filing during the
pendency of a Chapter 11 case when evaluating bad faith. In re Studio Five Clothing Stores, Inc.,
192 B.R. 998, 1007 (Bankr. C.D. Cal. 1996); In re Delaware Valley Broadcasters Ltd., 166 B.R.
36, 39 (Bankr.Del .1994). Debtor offers the dubious argument that this second case lacks some of
the hallmarks of a bad-faith filing because: (1) unlike many real estate cases, there is not a single
property which is the centerpiece of the case and (2) there was no true serial filing because the first
case began as an involuntary petition. So, the argument goes, debtor only really has one strike, not
two. Neither argument holds any water. This is about a single asset, the PreHistin® technology
and monies from sales of that product, and/or investments therein, which are now escrowed under
the terms of the plan. Even less persuasive is the argument that there is not a serial filing. The
debtor most clearly determined to have a go at a reorganization effort in 2007 during the first case
by stipulating to relief and simultaneously converting to Chapter 11. If there is any practical
difference between that and a voluntary filing, the court does not see it.
It is obvious to the court that the second case was a bad faith attempt to prolong the inevitable
foreclosure by YA Global by improperly invoking a second automatic stay after the confirmed plan
had gone into default. Further, the attempt to extract even more delay by an improper filing in the
Los Angeles Division strips this management of any remaining veneer of good faith and compels
the court to take immediate remedial action.
Only one point made by the debtor has any traction. Further to FRCP 1017, the court is
concerned that all interested parties should have notice before the case is converted. It is not
7/26/2011 4:58:18PM Page 37 of 52
Judge Theodor Albert, Presiding
Courtroom 5B Calendar
United States Bankruptcy Court
Central District of California
Santa Ana
Wednesday, July 27, 2011 Hearing Room 5B
10:00 am
Cont.... Cobalis Corporation Chapter 11
inconceivable that one or more interested parties may come forward to present some reason (such
as a cash buyout) that might inure to the benefit of some party in interest other than YA Global.
The Certificate of Notice accompanying the OSC in the first case shows mailing by the court to
only about ten parties. The court is under the impression that there are quite a few more parties in
interest than that. A brief continuance to accommodate notice of about two weeks is therefore
indicated, and the parties must cooperate in ensuring that a comprehensive notice is sent.
Convert first case unless compelling reason is presented after about two-week notice and
hearing. Dismiss second case.
AI
