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(Reuters) - Two shareholders of a Singaporean hotel real estate trust could face jail time following what a Delaware judge called a fraudulent scheme to obtain a loan through the government's program to help small businesses during the COVID-19 pandemic.
U.S. Bankruptcy Judge Christopher Sontchi, who is overseeing the Chapter 11 process of U.S. units of the trust, on Monday called the pair, Howard Wu and Taylor Woods, “fraudsters” and held them in contempt for failing to freeze certain funds and adequately account for the proceeds of the loan.
He ordered them to appear for a hearing on Friday, where he will decide how to sanction them, including whether to place them "in custody.”
A lawyer for Wu and Woods, Bruce McCullough of Bodell Bové, did not immediately respond to a request for comment.
The U.S. branch of Singapore’s Eagle Hospitality Real Estate Investment Trust, established in 2019 to lease out hotels under various American hotel brand names, filed for bankruptcy in January.
One of the U.S. entities, Urban Commons Queensway LLC, operates a California hotel and alleged earlier this year that Wu and Woods took out a Payment Protection Program loan in its name without approval and spent the money themselves.
“Woods and Wu are fraudsters,” Sontchi agreed in Monday’s decision. “They fraudulently obtained a PPP loan on behalf of the Debtor without authority and absconded with the proceeds, leaving either the Debtor or the United States to pay back the lender.”
In August, Sontchi ordered them to freeze $2.4 million, the amount of the PPP loan, and to provide an accounting of the money. But Urban Commons said it has not received any indication that they have frozen the funds.
The pair said in court papers that they used the loan to cover Urban Commons’ expenses, but the judge deemed that explanation inadequate.
On Monday, Sontchi found them in contempt for failing to comply with his August order.
Orders for incarceration are unusual in bankruptcy but they can occur in rare instances. Sontchi said in his opinion that he will “not take such a drastic action without conducting an evidentiary hearing” on the appropriate punishment but that there is “no question that the Court has the power to incarcerate Messrs. Woods and Wu for civil contempt, if necessary.”
The U.S. units will seek approval of a proposed liquidation plan in December.
The case is In re EHT US1 Inc, U.S. Bankruptcy Court, District of Delaware, No.21-10036.
For the debtors: Luc Despins, Nicholas Bassett and Alexander Bongartz of Paul Hastings; and Seth Van Aalten, David Dean and Justin Alberto of Cole Schotz
For Wu and Woods: Bruce McCullough of Bodell Bové
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