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Case 3:18-bk-01307-PMG Doc 11 Filed 04/23/18 of 9

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.


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


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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