by Herbert Wiggins | Apr 20, 2023 | bankruptcy
Dischargeability, Criminal Behavior, & FTX Trading, Ltd.
A debtor in bankruptcy, whether individual, joint, or corporate, is/are looking to end his/her/its responsibility for pre-petition, unsecured debts. Those are debts that have no collateral. 11 USC Sec. 727, 1228 & 1328.
In bankruptcy parlance, the concept of ending a debt is a “discharge.” However, not all unsecured debts are “dischargeable.”
In other words, a discharge is not a discharge when the US Code says, “No.”
For example, the “discharge” and “dischargeability” will be front and center in the FTX Trading Ltd. bankruptcy proceedings in Delaware, Case No. 22-11068-JTD, in which the former CEO, Sam Bankman-Fried, will be a focus, not only as the brains behind the operation (he went to MIT), but also for his alleged criminal activity. There will likely be allegations that FTX itself was connected to Bankman-Fried’s alleged crimes.
The basic concepts of the discharge are described as follows:
The court’s determination that the debtor no longer owes the debt. The official cancellation or termination of the debt. In re Ybarra, 424 F.3d 1018, 1022 (9th Cir. 2005); see, US Bankruptcy Court for the District of New Jersey, “Glossary of Terms.”
The eligibility for the debt to be discharged. Typically, these consist of credit cards, hospital bills, and other unsecured promises to pay debts, which are considered dischargeable, with some notable exceptions. 11 U.S.C. §§ 727(b), 523(a).
There are certain categories of debts which cannot be discharged. That is because the debts are incurred for the benefit of another person, or are the result of other court proceedings, such as a verdict of fraud, certain criminal convictions, or other indications of fraudulent conduct. For example, debts which are attributed to fraudulent or malicious criminal conduct are not dischargeable. 11 U.S.C. §727(a), (b), and e.g., §523(a)(4) [fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny], (6) [willful and malicious injury by the debtor to another entity or to the property of another entity], (19), (20); In re Zelis, 66 F.3d 205, 209 (1995).
Additionally, for individuals, spousal support and child support are not dischargeable, for obvious reasons. The bankruptcy court does not want to end the parental or spousal support duties of the debtor. 11 USC Sec. 523 (a)(5).
As to FTX, Bankman-Fried was initially arrested in Nassau by the Royal Bahamas Police, and charged with wire fraud, securities fraud, money laundering, and other crimes. He was released on a $250 MM bond, and extradited to the United States. Additional criminal charges were levied against him in the US. CNN, “FTX founder Sam Bankman-Fried indicted on new criminal charges, including campaign finance violations,” February 23, 2023.
Consequently, the “exceptions to discharge” will be especially important in the FTX bankruptcy. For example, it seems likely that the US Government or multiple creditors will challenge the dischargeability of some or all of FTX’s debts through dischargeability complaints, based on 11 U.S.C. Sec. 727(a), (b), and the exceptions to discharge stated in 11 USC Sec. 523(a)(4), (6), (19), (20). In re Albert-Sheridan, 960 F.3d 1188 (9th Cir. 2020). The government and creditors will likely contend that FTX seeks a discharge connected to fraudulent or bad-faith criminal conduct.
The FTX bankruptcy, because the sum of money involved, (over $8 billion), will garner a lot of attention. Additionally, it should also generate opportunities for the Bankruptcy Court and the Court of Appeal to further explain how alleged criminal conduct will deny a discharge to an individual or corporate debtor.
by Herbert Wiggins | Apr 6, 2023 | bankruptcy, BANKRUPTCY LAW
Ninth Circuit Court of Appeals reversed the bankruptcy court and held that a disbarred attorney’s obligation to repay victims of his misconduct was dischargeable, while simultaneously upholding the bankruptcy court’s ruling that the cost of the disbarred attorney’s disciplinary proceedings were not dischargeable, and had to be repaid to the California State Bar.
Kassas v. State Bar of California
United States Court of Appeals, Ninth Circuit.
Argued and Submitted April 12, 2022 @ San Francisco, California.
Filed August 1, 2022
by Herbert Wiggins | Mar 23, 2023 | bankruptcy, Real Estate
Whether a real estate agent sold her rights to her commission, or received a loan in that amount from the factor financer was a question to be determined by the facts of the case. Here, where factoring company sought payment from the realtor during her bankruptcy, the factor was liable and contempt for violating the automatic stay. The factor was seeking repayment as the holder of a loan, rather than as recipient of a sale, and at the time the factor sought payment, it was barred by the automatic stay from doing so.
Furthermore, the objective standard of the Supreme Court in Taggart v. Lorenzen required that the factor be held liable, because the factor could not have believed in good faith belief that the automatic stay did not apply.
In re Jill Suzann Medley, Ninth Circuit Bankruptcy Appellate Panel Case No. BAP No. CC-22-1167-FLC, Filed February 13, 2023
by Herbert Wiggins | Mar 14, 2023 | bankruptcy, Crypto
Although it is not alone in its financial woes, the bankruptcy filing of cryptocurrency giant FTX Trading, Ltd., has probably gotten the most attention of the cryptocurrency firms that are in deep financial distress (“the Crypto Winter”).
This article discusses the basic structure of the Chapter 11 bankruptcy filing, as well as some interesting questions that will arise in the administration of this case. This article is not intended to be an exhaustive discussion of Chapter 11 bankruptcy, nor an exhaustive recitation of everything that is going to happen in this FTX proceeding. There are likely to be many twists and turns, in bankruptcy court as well as criminal court.
FTX was founded in 2019 by Sam Bankman-Fried, who earlier founded a firm called Alameda Research. FTX was described in its Forbes magazine profile as follows:
One of the largest crypto trading exchanges in the world, it handles some 11% of the $2.4 trillion in derivatives traded each month. (It) raised $1.5 billion in private funding last year (2022), jolting its valuation from $1.2 billion to $25 billion.
However, as its obligations grew, and the cryptocurrency market began to contract, contracted, Bankman-Fried continue to live a lavish lifestyle, and FTX continued to recruit celebrity evangelists. Unfortunately, it appeared to more and more observers that FTX was nothing more than a Ponzi scheme. Fortune, December 3, 2022; The Guardian, December 17, 2022.
On November 11, 2011, FTX filed for bankruptcy protection in Delaware. Meanwhile, Bahamian authorities sought to exercise jurisdiction on that island and in New York. The Bahamian and US authorities have now agreed to have the case heard in the Delaware District of the United States Bankruptcy Court. FTX Trading Ltd., Case No. 22-11068 (JTD)
Additionally, in December 2022, Mr. Bankman-Fried was arrested in Nassau by the Royal Bahamas Police Force, and charged with wire fraud, securities fraud, money laundering, and other crimes. He was released on a $250 MM bond, and extradited to the United States.
One commentator compared Bankman-Fried to Bernie Madoff. Financial Historian Diana Henriques, quoted in The Guardian, 12/17/2022.
In late February 2023, a superseding indictment in the US charged Bankman-Fried with bank fraud, operating an unlicensed money transmitter, modified campaign-finance law violations, and conspiracy to make unlawful political contributions. Coindesk, February 23, 2023.
FTX and its founder face significant legal jeopardy.
Now back to bankruptcy. A chapter 11 bankruptcy differs from a chapter 7 business liquidation, in the sense that the Chapter 11 debtor is not going out of business. It is reorganizing its debts. For example, the Los Angeles Dodgers General Motors, and Delta Airlines, all went through Chapter 11, to reorganize their debts.
The purpose of the chapter 11 bankruptcy is to allow the management of the debtor company to continue to manage and operate the company, pursuant to strict supervision by the United States Trustee. Quarterly reports are generated to show revenue and expenses. The goal is to maximize assets available for the plan of reorganization. The company, now known as a “debtor in possession,” is not allowed to waste, or misuse assets.
Eventually, the company will propose a plan of reorganization to its creditors, the largest of which organize themselves into a creditor’s committee. The creditors committee and the debtor in possession will haggle over the details of the plan, for example, to cut the debt by 20-, 30-, or 40%, or to stretch the debt out over an additional number of years, or some combination of both debt reduction and new repayment terms. Elizabeth Warren & Jay L. Westbrook, “The Success of Chapter 11: A Challenge to the Critics,” 107 Mich. Law Review 603 (2009).
If the parties cannot agree on a plan of reorganization, then the court has to decide whether it will force the debtor in possession and creditors to come up with another plan, or whether it will cram the debtor plan down the throat of the creditors (known as a “cram down hearing”).
Additionally, the Chapter 11 debtor-in-possession, with certain important exceptions, is entitled to the cancellation (“discharge”) of certain debts after the plan of reorganization is approved. 11 USC Sec. 1141(d)(1)
The Bankman-Fried criminal charges, however, throw in a different wrinkle: if for example FTX was operating as an alter ego of its founder, and not following all corporate formalities, some creditors may argue that FTX was a fraudulent enterprise, and is not entitled to bankruptcy relief. 11 USC Sec. 523(a)(2)(4) & (a)(4) [debts involving fraud not dischargeable]; 523(a)(6) [debts related to malicious conduct not dischargeable]; 11 USC Sec. 523 (c). Or, in the alternative, certain types of claims may be brought against the company, such as those dealing with fraud, which are not resolved as part of the plan of reorganization. The recent conviction of the Trump Organization on fraud charges in New York City provides an example of a prosecution that could result in a non-dischargeable debt, and could saddle FTX with significant fines and penalties.
In other words, the criminal charges against Bankman-Fried, and the eventual evidence showing the relationship between him and the company, may have a lot to do with what type of relief FTX eventually receives from the bankruptcy court, even assuming a very business friendly Delaware bankruptcy judge.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE!! PLEASE CONSULT AN ATTORNEY!!
by Herbert Wiggins | Mar 9, 2023 | Equal Credit Opportunity Act
The Equal Credit Opportunity Act (Title 15 United States Code, Sec. 1691), which has been law since 1974, is intended to curb discrimination in “credit transactions.” Specifically, it protects racial minorities, women, religious minorities, and others who might otherwise be the subject of discrimination in these transactions through institutions that are regulated by the Federal government.
“Credit transaction,” in turn, refers to “every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to, information requirements; investigation procedures; standards of creditworthiness; terms of credit; furnishing of credit information; revocation, alteration, or termination of credit; and collection procedures).” 12 CFR 2002.2.
The Courts, the Office of the Comptroller of the Currency, and other regulators interpret 15 USC Sec. 1691 to include as illegal discrimination conduct that has a more negative effect upon minorities, such as defined above, than upon the “average white male” (who, presumably, is usually in the position of lender, or who owns the lender, or who is generally not the target of such discrimination; reference redlining, or restrictive covenants in real estate). In other words, if the effect of a particular lending practice, collection practice, or credit extension practice, has a more negative effect upon minorities than upon a white man, the policy is presumed discriminatory, and the lender must show some good faith justification for it.
For example, if a bank has a policy only lending to those who earn over $200,000 per year, data compiled by the US Department of Labor show that only a very small percentage of African Americans and Latinos have such earnings. Thus, the loan might be available to 30% of whites, but only 2% of African Americans. This policy would be presumed discriminatory, based upon the “disparate impact” or “effects” test. Office of the Comptroller of the Currency, “Fair Lending” (2010), pp. 6-8.
Recently, the Consumer Financial Protection Bureau (CFPB) has sought to expand the reach of the ECOA and similar anti-discrimination statutes through its Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) examination manual, a workbook or guide that regulators may use to determine if a particular institution is engaging in discrimination. Institutions contacted for such an examination must respond to questions and provide statistics to ensure that they are in compliance with the law.
According to one commentator, the expanded UDAAP “allows (the CFPB) to address discriminatory conduct in the offering of any [consumer] financial product or service.” Leonhardt, Naimon & Coleman, “CFPB Revises UDAAP Manual to Include Discriminatory Practices,” 139 Banking Law Journal 431 (July-August 2022).
According to this update, ECOA could potentially reach non-credit transactions, or non-lending practices of financial institutions.
This might include bank depositing practices, or bank product offerings. Could it also reach annuities, precious metal IRA’s, and cryptocurrency exchanges? These will have to be decided.
While the reach of the CFPB’s new regulation is unclear, it is certain that there will be political friction over the CFPB’s attempt to increase its regulatory purview. For example, in 2013, Pres. Obama announced that car dealer financing transactions would fall under the guidance of ECOA; minorities often pay significantly more in interest on these dealer-financed loans. The Department of Justice and CFPB successfully litigated discrimination claims pursuant to this guidance. “Justice Department and Consumer Financial Protection Bureau Reach Settlement to Resolve Allegations of Auto Lending Discrimination by Fifth Third Bank,” US DOJ Press Release, September 18, 2015.
This guidance was undone during the following Administration. “Trump Reverses Obama-era Rule Designed to Prevent Racial Bias by Car Dealers,” The Independent, May 21, 2018.
Thus, the question remains whether the reach of ECOA and other anti-discrimination laws can now be successfully applied to enforce the policy of non-discrimination to any number of consumer financial products. This will certainly be the subject of congressional hearings, and will likely be hotly contested in the courts.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY!!