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INRE:
UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION www.flmb.uscourts.~ov
KN'OWLES SYSTEMS, INC.
CASE NO.: 3:18-bk-1307
CHAPTERll
Debtor. _______________ / CHAPTER 11 CASE MANAGEMENT SUMMARY
Ki~OWLES SYSTEMS, INC. ("Debtor" or "KSI"), by and through its undersigned
counsel, and pursuant to Administrative Order FLMB 2009-1 , files this Chapter 11 Case
Management Summary, and states as follows:
I. Description of Debtor's Business
1. On April 20, 2018, Debtor filed a voluntary petition for relief under chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court for the Middle District of Florida,
Jacksonville Division. No trustee has been appointed and Debtor continues to operate its business
and manage its property as a debtor-in-possession under§§ l 107(a) and 1108 of the Bankruptcy
Code.
2. KSI is a privately held Delaware corporation formed in 2015 by Lynette Robbins and
Theodore "Ted" Leutz. KSI provides individualized consultation services designed to educate
consumers and assist them to identify opportunities available which are consistent with their
financial goals.
3. KSI's principal place of business is located at: 731 Evans Way, The Villages, Florida 32162.
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II. Events Leadine to Debtor's Bankruptcy Filine
4. In 2015, KSI worked with several individuals who referred consumers to KSI
through a leads and marketing program. One such person is Jordan Goodman ("Goodman"), a
nationally- recognized expert on personal finance commonly referred to as "America's Money
Answers Man" (according to his website)1. Mr. Goodman discussed products that produced 6%
for consumers, including the use of First Position Commercial Mortgages ("FPCM or FPCMs").
Through FPCMs consumers become secured lenders on income producing real estate. One of the
companies specializing in the sale of FPCMs was a California-based firm known as Woodbridge
Group of Companies, LLC ("Woodbridge").
5. KSI and Woodbridge started a business relationship whereby KSI provided certain
generic information to consumers who, upon request, would be introduced to Woodbridge. In
exchange for the leads, KSI received 3% of any amount advanced to Woodbridge from FPCM
lenders. In turn, KSI paid out 1 % of new money and .50% on reorder business to the influencers who
introduced leads to KSI. This arrangement proved to be particularly beneficial to Debtor's business
generating over $7 million or nearly two-thirds of KSI' s total revenue. Unfortunately, the success of
this arrangement was short- lived as Woodbridge became the subject of an action by the Securities
and Exchange Commission ("SEC").
6. Under a FPCM loan transaction, Woodbridge was to make short-term loans to third-
party borrowers using money from FPCM lenders. Thereafter, the FPCM lenders were to receive
monthly interest pursuant to the terms of a promissory note from Woodbridge. The notes carried
interest of 6 percent for lending the minimum $25,000.00. The typical Woodbridge FPCM
1 http://www.moneyanswers .com/bio.html 2
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transaction consisted of a short-term promissory note from a Woodbridge Fund, a loan
agreement, and a non-exclusive assignment of the Woodbridge Fund's security interest in the
collateral securing the underlying loan extended to a third-party borrower. The SEC has alleged some
of Woodbridge's FPCM transactions were not structured in this manner.
7. As Debtor would later learn through SEC filings and media coverage, the SEC alleges
that nearly all of the purported third-party borrowers Woodbridge lent to with FPCM loans were
shell companies affiliated with Woodbridge's owner and operator, Mr. Robert H. Shapiro. The SEC
further alleges that the shell companies had no revenue, no bank accounts, and no ability to make the
monthly interest payments under the FPCM notes.
8. In November 2016, the SEC launched an investigation of Woodbridge's FPCM
business. The investigation carried on for over a year resulting in formal charges being filed against
Woodbridge in December 2017, but before those charges were filed, Woodbridge declared
bankruptcy in Delaware2 after failing to make interest payments to the FPCM lender.
9. The fallout from the SEC investigation and subsequent failure of Woodbridge had a
detrimental effect on KSI's business and reputation.3 On March 27, 2018, KSI was served with
process in a multi-plaintiff civil lawsuit commenced in the United States District Court for the
Southern District of Florida (the "Class Action").4 The Class Action has multiple plaintiffs and one
such plaintiff is a lender who contacted Knowles. The Class Action seeks class status and damages
from all the firms that provided leads to Woodbridge. Although KSI denies it was negligent in pro-
2 Delaware Bankruptcy Case No: 17-12560 (KJC). 3
KSI has worked around the clock to keep investors fully infonned on all issues pertaining to Woodbridge. 4 Case No: 9:18-cv-80019-DMM.
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viding leads to Woodbridge, the lawsuit exposes KSI to a multi-million judgment. Debtor cannot
properly defend the suit with its limited cash flow. To make matters worse, pleadings filed in the
Woodbridge bankruptcy also suggest that Woodbridge may pursue claims against KSI for the
recovery of referral fees paid.
10. With two-thirds of its revenue generating activities eliminated by the Woodbridge
bankruptcy, KSI realized it would be a matter of time before it would be out of business if it elected
to retain counsel and defend itself against Woodbridge and the Class Action. As a result, KSI filed
this case to continue operations and preserve the going concern value ofits operations for the benefit
of its customers and creditors. KSI intends to utilize the bankruptcy process to liquidate claims while
operating and pay such claims pursuant to a plan of reorganization from future revenue.
III. Debtor's Ownership Structure
11. Debtor's equity interests are held by Lynette Robbins (Chief Executive Officer)
(50.00%) and Theodore ("Ted") Leutz (Director) (50.00%).
IV. Debtor's Annual Gross Revenue
12. Debtor's gross revenue for the fiscal year 2015 was approximately $1 ,400,000;
13. Debtor's gross revenue for the fiscal year 2016 was approximately $4,000,000.
14. Debtor's gross revenue for the fiscal year 2017 was approximately $3,100,000.
15. Debtor's gross revenue for the First Quarter 2018 was approximately $300,000.00.
V. Amounts Owed to Various Classes of Creditors
16. Obligations owed to Secured Creditors.
As of the Petition Date, Debtor had no secured creditors.
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17. Obligations owed to priority creditors.
Debtor owes $8,052.76 (net of withholding taxes and benefits in the amount of
$1,013 .77) to its employees for the week of work performed prior to the Petition Date, however, this
amount is the subject of Debtor's emergency motion to pay pre-petition wages and officer
compensation.
Debtor believes it is current on its state and federal tax obligations.
18. Amount of unsecured claims.
Debtor does not know the amount of unsecured claims as, thus far, the Woodbridge
threat of an avoidance action is just general in nature.
VI. General Description and Approximate Value of Debtor's Current and Fixed Assets
19. The Debtor's assets include approximately $90,970.00 in cash on hand, and
approximately $10,000 in computers and miscellaneous office equipment.
VII. Number of Employees and Amount of Wages Owed as of the Petition Date
20. As of the Petition Date, Debtor employed (4) 1099 subcontractors and (1) W-2
employee (the "Employee"). The Subcontractors are paid weekly, for services performed during the
prior week. Contemporaneously with the filing of this summary, Debtor is seeking to pay
prepetition compensation for the one week pay period from April 16, 2018 through April 20, 2018,
which is scheduled to be paid on April 25, 2018. No single employee is believed to be owed more
than the $12,850.00 limit set forth in 11 U.S.C. § 507(a)(4)(A). Debtor owes employee wages and
benefits in the amount of $8,052.76 (net of withholding taxes and benefits in the amount of
$1,013.77) for the payroll period ending immediately prior to the Petition Date.
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VIII. Anticipated Emergency Relief to be Requested with 14 Days from the Petition Date
21. Debtor anticipates seeking: (i) authority to pay prepetition wages and officer
compensation; and (ii) authority to pay affiliate officer salaries.
RESPECTFULLY SUBMITTED this 23 rd day of April, 2018.
Isl R. Scott Shuker. R. Scott Shuker, Esq. Florida Bar No. 0984469 [email protected] Daniel A. Velasquez, Esq. Florida Bar No. 0098158 [email protected] LATHAM, SHUKER, EDEN & BEAUDINE, LLP [email protected] 111 N. Magnolia Ave., Suite 1400 Orlando, Florida 32801 Telephone: 407-481-5800 Facsimile: 407-481-5801
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