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 | Feb 23, 2023 | bankruptcy, Fair Lending, mortage, Real Estate
Where homeowner lost property to non-judicial foreclosure, Arizona’s “anti-deficiency law” meant that the junior mortgage, which was unsecured following the foreclosure, had been “abolished,” pursuant to previous Arizona Supreme Court ruling. Therefore, the lender’s reporting of the junior mortgage as a “charge off,” rather than an abolished loan, was inaccurate and misleading. The former homeowner/borrower had a colorable claim against the junior lender, pursuant to the Fair Credit Reporting Act, 15 U.S.C. §§1681, 1681a–1681x. The trial court’s erroneous decision to dismiss borrower’s lawsuit was reversed.
Gross v. Citimortgage, Inc., Citibank, NA, Equifax Information Services LLC, Experian Information Solutions, Inc., & Trans Union LLC (9th Circuit, 2022), 33 F.4th 1246
United States Court of Appeals, Ninth Circuit.
Argued and Submitted 11/17/2021 at San Francisco, California.
Opinion Issued 5/16/2022.
by Herbert Wiggins | Nov 29, 2022 | bankruptcy, student loans
On August 24, 2022, President Joe Biden announced a proposed plan, through the Department of Education, to forgive a portion of student loan debt owed by millions of Americans. The plan proposed to allow cancellation of up to $10,000 for certain loan recipients, and up to $20,000 for Pell Grant recipients. This forgiveness would be given only to holders of federal loans, and would not guarantee full cancellation of all debt owed by every borrower, such as those who owe more than $20,000 in Pell grants. The program also does not apply to those whose loans come from private lenders, such as Sallie Mae.
As of this writing, over 26 million borrowers have applied for relief, and the Biden Administration has approved certain applicants for relief. But no loan relief has been granted.
No relief has been granted because several Republican Attorneys General, from Nebraska, Missouri, Kansas, Iowa, Arkansas, and South Carolina, sued to stop the program (Eastern District of Missouri, Case No. 4:22CV1040, filed 9/29/2022). Briefly, the States claimed that the loan relief would harm them financially, based on lost loan repayments (the States apparently did not discuss how they might benefit from increased tax payments if the borrowers were not tied to low-wage jobs to make their current payments; nor did the States discuss how much more money they would receive through the federal infrastructure bill).
Eastern District of Missouri Judge Autrey threw the case out, based on lack of “standing” (i.e., lack of an actual harm that the States had suffered), but the 8th Circuit Court of Appeals, which oversees several Midwestern states, placed this loan relief program on hold, pursuant to an injunction. State of Missouri, et al. v. Joseph R. Biden, etc., et al., Case No. 22-3179, published 11/14/22
Unfortunately, the 8th Circuit’s logic, particularly on the issue of immediate, actual harm (“standing”) appears disingenuous, and suggests a political motive behind the decision. For example, the 8th Circuit ruled that the state of Missouri has standing, because a loan fund created by the state of Missouri would potentially lose money if some of the loans granted through that fund were reduced or forgiven. That no relief has yet been granted means that no funds have yet been lost. And thus the state of Missouri has no standing. Lujan v. Defenders of Wildlife (1992) 504 US 555, 575-578 [opinion of Scalia, J].
Even more worrisome is the court’s assertion that because a federal decision causes a state to lose money, the state can sue to stop that program. Taken to its logical extreme, if the federal government decides from year to year to spend less money on highway repair for roads in Ohio than in Kansas, Ohio can sue and stop the program. Or if, year to year, the federal government decides to grant more funds for cancer research to universities in Minnesota than in California, California can sue to stop the program. This is the sort of chaos that Scalia warned against; the courts would assume day to day authority over the acts of a co-equal branch of government. Lujan v. Defenders of Wildlife (1992) 504 US at 577.
In other words, the 8th Circuit Court’s reasoning leads to chaos, and no federal spending program could ever be approved, because by definition, some agency, state, or individual will receive less money than another.
Additionally, how these States might benefit eventually from the improved financial health of borrowers apparently played no role in the 8th Circuit’s decision.
The Biden Administration has asked the US Supreme Court to intervene and overturn the 8th Circuit. (SCOTUS Blog, 11/18/2022) However, given the Court’s extreme conservative nature, as well as its willingness to disregard long-established precedent, a favorable ruling is not assured.