Wednesday, July 29, 2009

Backstreet’s Back (In Court) - Bankruptcy Beat - WSJ

The Backstreet Boys launched my favorite, and yours, music revolution in the late 90's, the "boy band."  Now, the Backstreet Boys are trailblazing again, this time with regard to preference actions in Ponzi schemes. By way of background, Lou Pearlman, the manager of, among other groups as the BSB and N'Sync, was charged and convicted of criminal fraud in the form of a Ponzi scheme, and was sentenced to 25 years in jail.  An involuntary Chapter 11 bankruptcy ensued.

Now, the trustee in the bankruptcy case is pursuing fraudulent conveyance actions for all payments that were made to investors in Pearlman's ventures.  This is more than a novelty, as it could signal how other Ponzi schemes, such as Maddof and Petters, will be treated. It has been argued that as a Ponzi venture is by nature illegitimate, all payments to investors in those schemes are deemed in furtherance of the fraud.  This allows a trustee to pursue those payments as fraudulent conveyance, either under Bankruptcy Code Section 548 (with a two year look back), or under state court fraudulent conveyance statutes (most likely the adoption of the Uniform Fraudulent Conveyance Act), which can have a much longer look back (as much as 8 years). 

To make matters worse for the investors, these statutes do not necessarily require the showing of an action intent to defraud.  Instead, what is generally required is proof that the transfer was made without adequate consideration while the debtor was insolvent.  As the payments were not paid pursuant to a valid investment, it can be argued that no consideration was paid for the transfer--insolvency is easy.

If the Trustee is successfully in this case, expect this to embolden other trustee's across the country in similar schemes.  So it is possible that the BSB will be breaking hearts in both decades.

Backstreet’s Back (In Court) - Bankruptcy Beat - WSJ

Monday, July 27, 2009


As the foreclosure rate continues to climb, Senate Democrats are taking a second look at a failed proposal to allow the modification of troubled borrowers' mortgages in chapter 13, Dow Jones Daily Bankruptcy Review reported today. At the hearing before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts today, Sen. Richard Durbin (D-Ill.) called on the Senate to adopt the proposal he's been championing since 2007 that was defeated in the Spring of 2008 and then in the Senate earlier this year: allowing bankruptcy judges the power to cram down the mortgages of homeowners in chapter 13 bankruptcy. Subcommittee Chairman Sheldon Whitehouse (D-R.I.) warned that failing to allow cramdowns this time around would exacerbate the economic downturn. Yet opponents of cramdowns, including Ranking Member Sen. Jeff Sessions (R-Ala.), argued that allowing cramdowns would create troubling consequences both for lenders and for future borrowers. ABI Resident Scholar Prof. Adam Levitin of Georgetown University Law countered that lenders wouldn't punish borrowers with higher prices as long as cramdowns didn't cause them to lose more than they would in a foreclosure. However, this isn't possible, he said, because bankruptcy law requires that creditors recover at least the same amount of their claims in a bankruptcy as they would in a liquidation or foreclosure. Mark A. Calabria, director of financial regulation studies at the Cato Institute, said such efforts wrongly assume that the foreclosure crisis was caused by predatory lending practices that created so many subprime borrowers. Rather, he claims that the crisis was actually caused by the combination of falling home values and what he called "negative income shock," including job losses.

As all my loyal readers know, I am a big fan of mortgage cramdown legislation, as it allows owner occupied real estate to be maintained by the homeowner. While this creates a short term loss for the banks, it forces them to have their books reflect reality. Good Senator Durbin! Let's get this done.

Portions of this post were contributed by David Asmus, Esq. from the Hinshaw & Culbertson, St. Louis Office.

Wednesday, July 15, 2009

Cubs Bankruptcy illustrates efficacy of a 363 sale.

The Cubs prospective bankruptcy is a good illustration of how Section 363 of the Bankruptcy Code can assist in complicated and multi-dimensional businesses.  The Cubs is a good business and makes money.  The ivy covered walls of Wrigley Field are a beautiful backdrop to a great baseball experience, and occasionally, I say occasionally, good baseball.  The bad news is that the Cubs are owned by the same company that owns the Chicago Tribune, which while a great paper, is not a profitable business.  To make matters worse, there are bank loans of the Tribune Company which  secures the Cubs.  So, how can you sell the Cubs without either paying off all the secured claims of the Tribune Company or getting the secured creditors consent?

Section 363. 

Section 363 allows a debtor to sell assets over existing liens if the Court approves the sale. 

Section 363 (f) provides that: The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

In the case of the Cubs, like most 363 sales, the sale would most likely be approved under section (5), which is really a "catch all."  Also, Court's find "bona fide" disputes often.  Regardless, the Tribune Company would be able to sell their most valuable asset.  In fact, the threat of bankruptcy, will most likely force the secured creditor to consent. 

So, have a valuable asset that you need to sell over excessive liens.  Can't get the secured lender to consent.  Use section 363 to leverage the secured lenders, or if they won't agree, file bankruptcy and sell the business in a bankruptcy court authorized sale.

And I didn't ever use any baseball metaphor.

Could Chapter 11 Help the Chicago Cubs Turn the Page? | Bleacher Report

Sunday, July 12, 2009

GM pledges 'new beginning' as it exits Chapter 11 - MarketWatch

Sometimes I feel like Obama supporters, me included, expected him to be the next political Babe Ruth, but instead he turns out to be the next Wade Boggs; the greatest singles hitter of all time.  I mean this man seems incredibly efficient, but sometimes without imagination and passion. 

Take, for instance, GM's recent emergence from bankruptcy.  As a bankruptcy attorney I am amazed at the efficiency and effectiveness of the quick exit of GM from it's Chapter 11 bankruptcy.  It is clear that the entire bankruptcy was well conceived and perfectly executed.  It was a classic bootstrap restructure, where the secured obligations, including the government, were converted to equity, and the unsecured debt, to the tune of about 40 billion, was essentially extinguished.  This will fit neatly into a bankruptcy textbook one day. 

That is the good news.  The bad news is that GM is essentially the same company now that it was when it filed Chapter 11.  Not in terms of it's debt structure, which is imminently improved, but in it's technology.  There was no "Manhattan Project" for a new propulsion system, no green mandates(all of the talk of a green GM is really nothing more than a marketing piece), nothing risky, challenging or controversial.  In fact, the talking heads on Fox News, which find fault in his Harvard Educated diction, had nothing to say.  Why, because it was without incident.  The Obama administration has simply fixed the broken company. 

Maybe I shouldn't complain.  For now, 3 million auto related jobs are safe.  This is another shelf placed underneath a falling economy.  This was a solid single against arguably the best pitcher in baseball (the figurative disaster of an economy and the administrative morass of one of the largest companies in the world), but I was hoping for a big swing, and maybe a home run. 

GM pledges 'new beginning' as it exits Chapter 11 - MarketWatch

Wednesday, July 8, 2009

Strike three for Lenny Dykstra: Former Met files for Chapter 11 bankruptcy protection

In a fairly sad story that barely made the major newspapers, former Met and Phillies outfielder, and stock prognosticator, Lenny Dykstra was forced to file a Chapter 11 bankruptcy to shield his already dwindling assets.  This wasn't a shock to anyone with a premium cable channel, who saw the Real Sports exclusive in which Lenny tried to convince Bernard Goldberg that he wasn't broke as he had almost $1,000.00 in his wallet.  It was really a sad visual image, one of a former professional athlete taken down by the real world of finance.

This story would not be novel or shocking if Lenny Dykstra had just been a former athlete.  The sad truth, is that former athletes are prone to financial troubles, and one report had over 70% of former NBA players filing bankruptcy within 10 years of the end of their career.

But Lenny Dykstra wasn't your average former athlete, as  had a second career, one after baseball, that of a high finance, stock picking extraordinare.  Yes, the hard-nosed instinctual ball-player, was a regular on CNBC, regularly extorting his genius as a finance guru.  This part of his life, interestingly enough, got no mention in the news today, and I doubt, will get little comment on CNBC.

This, my friends, is the real story.  Lenny Dykstra, as with Jim Cramer, got sucked into the finance porn vortex--albeit from different universes.   As entertainment and business news blurred to an indiscernible pulp in the 1990's, Lenny Dykstra was the perfect front man.  Articulate in the Joe the Plumber type of way, forcefully, certain, and believing in stocks with a faith-based furry, he was Everyman who wanted to make a million.  And he did it, first with car-washes, then with stocks, and melding personality and instincts all in one, finally, as a celebrity.  As a commentator he was perfect, all financial machismo, without the momentary glimpses of humanity and reason you get with Jim Cramer; you know, the every once in a while where he recognizes he is an emperor without clothes.

Now, with his financial life in ruins, the cameras forgetting he even existed, and even his wife gone, he gets to face the financial world like everyone else.  That is, with confusion, fear and uncertainty.  I would hope that this is a lesson to all, that entertainment and money don't mix, but doubt that other than this rather unread blog, anyone will comment on it.  In fact, rather than use this as an example, I am sure that CNBC, FOX or some other channel that claims to give you the inside scoop on the world of finance is desperately searching for the next instinct based, charismatic, former athlete to add to it's day-time lineup.  Where is Dennis Rodman anyway?  




Strike three for Lenny Dykstra: Former Met files for Chapter 11 bankruptcy protection