The AG’s Verdict: No Escape from New York

The AG’s Verdict: No Escape from New York

Much is being made of whether or not a bankruptcy will be filed, with regard to the recent large judgment issued by the Supreme Court of New York, the Hon. Arthur Engoron, against the former president and his company.

Much has also been made as to whether this will cause a certain amount of delay in the collection of the judgment.

The Complaint filed by Attorney General Letitia James against Donald Trump, his children and associates, and various corporate organizations associated with him, consisted of various allegations of fraud: Count 1- persistent and repeated fraud; Count 2- falsifying business records; Count 3- conspiracy to falsify business records; Count 4 – illegally issuing false financial statements;  Count 5 – conspiracy to falsify false financial statements; Count 6 – insurance fraud; Count 7 – conspiracy to commit insurance fraud.

In other words, the Attorney General’s complaint, and the verdict rendered thereunder, are explicitly and overwhelmingly devoted to fraudulent actions against the defendants. Fraud is the gravamen of the case.

Furthermore, the Bankruptcy Code, 11 USC Section 523(a)(2)(A), explicitly states that there is no bankruptcy discharge for “money, property, services, or an extension, renewal, or refinancing credit, to the extent obtained by false pretenses, a false representation, or actual fraud . . . “

Because the New York Supreme Court has adjudicated the statements made by the defendants to be fraudulent, they would appear to be no question but that the discharge in bankruptcy would not apply to the attorney general’s judgment made against Trump and his co-defendants. The judgment would remain collectible after the bankruptcy proceedings conclude.

Therefore, a Chapter 7 or Chapter 11 bankruptcy filed by Trump or any of his co-defendants would appear doomed to ultimate failure: there would be no discharge for debts connected to fraud, and all of the debts in this case are connected to fraud.

Of course, the Bankruptcy Court is a federal court, and a separate jurisdiction. Theoretically, there could be a delay in enforcement of the judgment, while the Attorney General files and prosecutes what is known as an “adversary proceeding,” in the bankruptcy court, to seek a holding that the debts in question are based upon fraud, and non-dischargeable under the Bankruptcy Code.

The ultimate result would not appear in question, although no one can ever predict the outcome of litigation. However, given the factual and legal findings of the New York Supreme Court, it seems exceedingly unlikely that a bankruptcy court would find that the Attorney General’s judgment, and this collectible debt, is not connected to fraud.

Additionally, as Mr. Giuliani has found out in his bankruptcy proceedings, the debtor is required to submit truthful information regarding his/her/its holdings, and this has been something that Mr. Trump and his associates have found very difficult to do. Statements regarding assets are under penalty of perjury, and failure to make truthful statements could only further endanger the declarant with the Federal authorities.

Thus, even though there may be an upside for anyone filing bankruptcy related to this judgment, in causing a small amount of delay, the downside would be that any debtor who files bankruptcy with regard to debts that are already adjudicated as fraudulent will risk further prejudicing himself, herself, or itself, if any statements made to the bankruptcy court are anything but 100% true and accurate.

 

THIS ANALYSIS IS A COMMENTARY AND NOT LEGAL ADVICE

 

FINANCIAL TECHNOLOGY: FTX’s Crypto Blizzard

FINANCIAL TECHNOLOGY: FTX’s Crypto Blizzard

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!! 

 

BANKRUPTCY LAW: Where Action is Filed

BANKRUPTCY LAW: Where Action is Filed

A debtor may file a bankruptcy case where the debtor resides, is domiciled, or has its principal place of business or principal assets. But a debtor can claim exemptions only under the law of the debtor’s domiciliary state. 28 U.S.C. § 1408; In re Larsen, Case No. BAP No. NV-20-1133-FBG (Unpublished) Bankruptcy Appellate Panel, 9th Circuit, filed November 3, 2020.

BANKRUPTCY LAW: Denial of Discharge for Failure to Maintain Books and Records

BANKRUPTCY LAW: Denial of Discharge for Failure to Maintain Books and Records

A debtor who seeks discharge, for himself or for a business, must maintain adequate financial books records to allow the bankruptcy Court to determine the debtor’s true financial condition. For example, pursuant to 11 USC §727(a)(3), the  debtor is not entitled to a chapter 7 discharge if that debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case[.]” The statute has the consequence of making the discharge dependent on the debtor’s true presentation of his or her financial affairs, and complete disclosure is a condition precedent to the granting of the discharge.

 

Caneva v. Sun Cmtys. Operating Ltd. P’ship (In re Caneva), 550 F.3d 755, 761-62 (9th Cir. 2008), cited in In re: Frank Daniel Kresock, Appeal from the United States Bankruptcy Court for the District of Arizona, BAP No. AZ-20-1270-BSL  (Filed December 22, 2021; Unpublished)

BANKRUPTCY LAW: Finding of Fraud in State Court Prevented Discharge of the Associated Debt

BANKRUPTCY LAW: Finding of Fraud in State Court Prevented Discharge of the Associated Debt

Where Debtor had a judgment entered against him by California state court for fraud and elder abuse, this judgment was not discharged (cancelled) by his Chapter 7 bankruptcy discharge. Debtor’s and Debtor’s counsel’s strategic absence from court at the time of the trials did not eliminate the legal effect of the judgment. The debt was non-dischargeable, pursuant to 11 USC §523(a)(2)(A).
In re: Robert Edward Zuckerman,
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT; BAP No. CC-19-1200-TaFS
Argued and Submitted on February 27, 2020, Pasadena, California [Published Opinion]

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