Category: Litigation

Nukote International Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process

Yesterday in the Middle District of Tennessee Bankruptcy Court, the Trust created in the Nukote International, Inc. bankruptcy began the process of filing adversary proceedings to recover preferences. So far, about 40 cases have been filed.

This is a process that generally happens after a Chapter 11 Plan is confirmed, in which the post-confirmation entity takes action on the various lawsuits it held as of the bankruptcy filing.

Here, the lawsuits make claims under 11 U.S.C. 547, which is a provision of the Bankruptcy Code that, under certain circumstances, allows a trustee to recover payments made to creditors within 90 days of the bankruptcy filing.

The basic theory is that, the debtor is presumed to be insolvent during those 90 days, and any payments made during that period were selective disbursements (a.k.a. preferential payments) to certain preferred creditors. By these actions, the trustee recovers these preference payments, puts the money into a big pot, and then distributes it evenly to all creditors.

Sounds pretty fair in theory, right? Well, in practice, these actions drive creditors crazy. “Not only did this company bankrupt on the debt, now, two years later, they’re suing me to take back some of the last money they paid me?” My response? “Yes.”

There are a number of defenses to these actions (see 11 USC 547(c)), and I’ll touch on those in a later post. Right now, I’m going to go look at the dockets to see who all is getting sued.

Bankruptcies Fall in 2010, but Expect Record Numbers in 2011

Welcome back after a long holiday break. Of course, it’s always great to have your blog go stagnant at the same time the blog gets featured in a great Nashville Business Journal article, “Standing out on the Web: Tips to help your clients find your business online.”

The big news in the new year is that Bankruptcy filings are down nationwide, particularly in Tennessee and the south. In the article, one attorney says the decrease is an indication that the economy has turned the corner (or that everybody who was going to file bankruptcy has already filed).

I’m not so sure.  Throughout 2010, we learned that banks were reluctant to foreclose, either as a result of issues with their paperwork, being adverse to taking properties into REO, or being hopeful that the mortgage modification programs would help.

As we ended 2010, we learned that none of those factors were a long-term issue that would prevent foreclosure. I expect foreclosures to crank back up in the next few months. Plus, as more second and other junior lienholders come to the realization that their collateral lacks value, 2011 will bring more lawsuits on the underlying debt.

The rise in foreclosures, coupled with more deficiency lawsuits on unpaid debt, will likely make 2011 another strong year in Bankruptcy Filings.

Losses, Both Financial and Emotional, Continue to Mount in Madoff Matter

This past weekend, two stories in the Wall Street Journal showed the continuing reach of the Bernie Madoff fallout: one, about the Bankruptcy Trustee’s lawsuit to recover a portion of the ponzi profits from a random investor, Harry Pech; the other, a story of Madoff’s son’s suicide, which was undoubtedly linked to the schemes.

An innocent investor, Pech’s refrain is common in these cases, in which Trustees sue to recover preferences or fraudulent transfers under the Bankruptcy Code. Both actions are rooted in the theory that all similarly situated creditors should be treated (i.e. should suffer) equally.  A creditor (or investor) who receives more than his fair share is a prime target for suit.

In a scheme in which Pech lost thousands and thousands, it seems unfair that he’d be sued just because others lost more than him. But, with an eye toward fairness, that’s exactly how these actions work, and the Trustee can look back two years to examine distributions by the debtor.

How to Get a Chapter 7 Trustee’s Attention: Show Off Your Stuff on TV

In most cases, Chapter 7 Bankruptcy Trustees have far more cases than they have time to focus on each case. It’s common that there are 30-40 cases on each 2 hour docket.

But, a sure-fire way to stand out and really get the Trustee’s attention is show off your wealth on reality TV. That’s what one cast member of The Real Housewives of New Jersey did, and, now, in her individual Chapter 7, the Trustee’s scrutiny of her disclosures revealed that the debtor failed to disclose all her assets, which may allow the Trustee to contest the discharge under 11 U.S.C. 727.

A bankruptcy discharge wipes out all debt, but the price to be paid for that benefit is that a debtor must disclose everything–both debts and assets. From a creditor’s perspective, a well-informed Trustee can be the last hope for any recovery.