Can “Dance Mom” Star Dance Her Way Out of Bankruptcy Fraud?: Bankruptcy Fraud Basics

By Daniel Hart, Paralegal  and Salene Mazur Kraemer, Esquire.

In October 2015, every Pittsburgh local news outlet and national entertainment magazine reported on the bankruptcy fraud story of Abby Lee Miller.  We have previously written here about her Chapter 11 Case:  “Dance Mom” Instructor Abby Lee Miller Files for Chapter 11 Protection: Public Disclosure of Private Facts:   Abby is the controversial star of the reality television show, “Dance Moms”.  Her often abrasive personality is in contrast to the glitter of dance and beauty of her young dancers.  She is quick to throw scathing insults at any of the children and their sometimes overly zealous Dance mothers.

Abby Lee filed for Chapter 11 bankruptcy in 2010, in Bankruptcy Court here in Pittsburgh.  After some television surfing by a local bankruptcy judge and a subsequent investigation by local authorities, Abby may have committed bankruptcy fraud.

What is bankruptcy fraud?  It is a white-collar crime that generally has taken four general forms:

1. Debtors conceal assets to avoid having to forfeit them;
2. Individuals intentionally file false or incomplete forms (underreporting income, overstating liabilities);
3. Individuals file multiple times using false information or real information in several states;
4. Debtors bribe a court-appointed trustee.

Nearly 70% of all bankruptcy fraud involves the first form, the concealment of assets.  At the 341 meeting of creditors in each bankruptcy case, a debtor is required to testify under oath as to the accuracy of his or her bankruptcy petition and schedules.  A bankruptcy trustee appointed by the United States Department of Justice probes each debtor about the facts and circumstances surrounding each case.

A bankruptcy trustee can only liquidate unexempt assets that are a part of the debtor’s “bankruptcy estate”.  If the asset is not listed on the debtor’s schedules or the debtor does not reveal the asset, it can fly under the radar.

I tell each of my bankruptcy clients always to “tell the truth, reveal everything, err on the side of caution.”  “You don’t want to end up in jail over this filing.”

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The effects of bankruptcy fraud are often passed on to businesses, financial institutions, and the general consumer in the form of higher interest rates, greater loan fees, and higher taxes.

Bankruptcy fraud is a criminal offense.  When a bankruptcy trustee suspects fraud but does not have enough evidence, he/she can compel testimony and document production from just about anyone through a Bankruptcy Rule 2004 examination.  If fraud is suspected, the trustee refers the case to the Federal Bureau of Investigation (FBI).  The agency will undergo its own investigation.  A debtor guilty of bankruptcy fraud faces stiff penalties as outlined at 18 U.S.C. §152 which can result in a fine up to $250,000 for each count of fraud, or up to a five-year prison sentence, or both.

Getty Images

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  A  federal grand jury indicted Abby Miller on 20 counts of bankruptcy fraud, alleging she concealed about $755,000 in assets and made false bankruptcy declarations.  Federal Bankruptcy Judge Thomas Agresti nearly approve Miller’s Chapter 11 reorganization plan but then he was channel surfing one night and saw commercials for the new season of “Dance Moms”.  Miller claimed in her bankruptcy reorganization plan that she did not have a signed contract for a new season and that her income from the show was “volatile.”

It is alleged that Abby did in fact, have a signed contract and steady income.  During the past three years while the the bankruptcy proceeding was pending, as required by the Department of Justice for all debtors, Miller was required to deposit her income into a special DIP (Debtor in Possession) account and report that income to the court on a monthly basis.  Instead, it is alleged that she set up other bank accounts and funneled her income from the TV show and other ventures into those accounts.

If found guilty, Abby Lee faces up to five years in prison, not to mention outrageous fines given 20 counts.  The surprising twist in this case is that Abby’s bankruptcy plan, we believe, provided for a 100% payout to unsecured creditors (a rarity); it appears that she would have had no need to hide assets; she was obligated to pay unsecured creditors 100% anyway!  We shall see!

Sources: http://triblive.com/news/adminpage/9263325-74/bankruptcy-miller-prosecutors#axzz3psRPmrWl

Don’t Touch the Please Touch Museum While It Remains Under Chapter 11 Bankruptcy Protection

By: Daniel Hart and Salene Mazur Kraemer

On September 11, 2015, the Please Touch Museum in Philadelphia filed for Chapter 11 bankruptcy (Bankruptcy Case no. 15-16558) in the United States Bankruptcy Court for Western District of Pennsylvania, thus triggering an automatic stay or injunction pursuant to 11 U.S.C. 362 of the Bankruptcy Code that halts actions by creditors, with certain exceptions, to collect debts from the debtor who has declared bankruptcy.   “Don’t Touch the Debtor”.

The museum intends to remain as a debtor-in-possession and continue operating during the pendency of the Chapter 11 Case.  The museum’s mission is to enrich the lives of children by creating learning opportunities through play.  It aims to achieve this mission by creating meaningful interactive play-based experiences within the museum and beyond its walls for all young children and their families.  The museum has been nationally recognized for its lasting impact.

The museum filed for protection under Chapter 11 bankruptcy because it borrowed more money then it could pay back to renovate a new home in Fairmount Park’s Memorial Hall.  Sources say the bankruptcy filing has two main objectives: (i) to shed the majority of the $60 million it owes holders of its debt, and (ii) to negotiate a deal whereby the museum turns over maintenance and repairs of Memorial Hall to the city, which owns it.

The museum owes about half of its debts to a group of bondholders.  It formulated a plan to pay back these bondholders about $11.5 million of the $60 million debt.  Filing for bankruptcy was a tactic used to get this bondholder group to agree to the plan.  Also, the museum is launching a $10 million fund-raising rescue plan. In addition to paying off the debt, the museum intends to use the money to pay professional fees associated with the bankruptcy and to make some exhibit upgrades.  It remains to be seen whether this strategy will solve the museum’s problems.

Source: http://www.philly.com/philly/entertainment/20150912_Please_Touch_Museum_files_for_Chapter_11.html

Lights Out at Your Local Hospital: Patient Ombudsman Appointments in a Chapter 11 Case

by Salene Mazur Kraemer, Esquire and Matthew Smith, Associate 

Your loved one is in a hospital or nursing home that just filed for Chapter 11 bankruptcy.   Should you be concerned about care?

A patient ombudsman will be appointed any time a “health care business”(i.e., a hospital or nursing home facility) files for bankruptcy.   Specifically, Rule 2007.2 of the Federal Rules of Bankruptcy Procedure provides that the bankruptcy court “shall order the appointment” of the ombudsman unless a party in interest or the United States trustee files a motion within 21 days of the commencement of the case (unless the court sets another deadline).   See Fed. R. Bankr. Proc. 2007.2.

It is questionable whether some facilities are classified as “health care businesses”.

The Bankruptcy Code defines “health care business at 11. U.S. C. § 101 (27A):

The term “health care business”—

`(A) means any public or private entity (without regard to whether that entity is organized for profit or not for profit) that is primarily engaged in offering to the general public facilities and services for—   (i) the diagnosis or treatment of injury, deformity, or disease; and  (ii) surgical, drug treatment, psychiatric, or obstetric care; and 

 (B) includes—   (i) any—   (I) general or specialized hospital;  (II) ancillary ambulatory, emergency, or surgical treatment facility;   (III) hospice;   (IV) home health agency; and   (V) other health care institution that is similar to an entity referred to in subclause (I), (II), (III), or (IV); and  (ii) any long-term care facility, including any—   (I) skilled nursing facility;   (II) intermediate care facility;  (III) assisted living facility;   (IV) home for the aged;   (V) domiciliary care facility; and   (VI) health care institution that is related to a facility referred to in subclause (I), (II), (III), (IV), or (V), if that institution is primarily engaged in offering room, board, laundry, or personal assistance with activities of daily living and incidentals to activities of daily living.

A patient ombudsman is appointed to ensure the quality and continuity of medical care provided and to represent the interest of patients. During a chapter 11 bankruptcy of a health care business, Section 333(a)(1) requires the Court to appoint an ombudsman to monitor the quality of patient care “unless the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case.”   Such a finding is largely a factual determination, and should be made only after an evidentiary hearing. See generally, In re Alternate Family Care, 377 B.R. 754, 758, 58 Collier Bankr. Cas.2d 1531 (Bankr. S.D. Fla. 2007).

The Alternate Family Care Court laid out “nine salient factors” for examining whether a patient ombudsman was required. Id. These factors have subsequently been adopted by other courts. In re Valley Health System, 381 B.R. 756, 761 (Bankr. C.D. Cal. 2008); In re North Shore Hematology-Oncology Associates, P.C., 400 B.R. 7, 11 (Bankr. E.D.N.Y. 2008). Some of these salient factors include: ”

• the cause of the bankruptcy
• debtor’s past history of patient care
•  the ability of patients to protect their rights;
• the presence and sufficiency of internal safeguards to ensure appropriate level of care
• the impact of the cost of an ombudsman on the likelihood of a successful reorganization.”

In re Alternate Family Care, 377 B.R. at 758.

Other factors include:

• adequate internal protocols for protecting patient information.
• revenue projections through the bankruptcy would allow for a maintaining of the current quality of patient care
• additional administrative cost of an ombudsman was not justified as it may impair the ability of debtor to reorganize. Id.
• whether current operations were very limited.

See In re William L. Saber, M.D., P.C., 369 B.R. 631, 637–38 (Bankr. D. Colo. 2007)(avoiding appointment of ombudsman where sole practitioner filed for bankruptcy as a result of contractual dispute with a former employee).  See also In re Banes, 355 B.R. 532, 536 (Bankr. M.D.N.C. 2006) (court declined to appoint patient care ombudsman where debtor had ceased operations and closed her dental practice).

If your local hospital files for Chapter 11 bankruptcy and you have any concerns regarding patient care, contact the attorney for the debtor.  His or her information will be listed on the docket which should appear in a google search of the name of the debtor.  Or, call the Bankruptcy Court in which the case is pending.

Movie Financier Hedge Fund Files for Chapter 11 Over Increasing Litigation Costs

by Justin A. Saporito, Law Clerk

Aramid Entertainment Fund, Limited filed for Chapter 11 protection in the Bankruptcy Court for the Southern District of New York on June 13, 2014.  Debtor has declared assets of $237.3 million and consolidated debt of $11.5 million.  Debtor was assigned case number 1:14-bk-11802, a judge has yet to be assigned.  Approximately 96 creditors were listed in the petition; among them are several other Aramid entities including Aramid Liquidating Trust, Ltd. and Aramid Entertainment, Inc. which jointly filed with the Debtor and were assigned consecutive case numbers.

                    Aramid Entertainment Fund, Limited is part of Aramid Capital Partners, LLP, a London based hedge fund that specializes in financing movies.  According to their website, Aramid Capital has provided financing for thirty-two (32) movies including Paranormal Activity, W., and How to Lose Friends & Alienate People.  Please click here for a list of their productions.

                   Debtor filed for Chapter 11 protection due to the cost of ongoing litigation against several of its borrowers who failed to repay loans or violated film-financing agreements.  One such suit began in February 2012 and is over an alleged $44 million in losses.  Debtor invested $22 million in a financing deal between Relativity Media, LLC and Sony Pictures.  Debtor alleges that executives from Fortress Investment Group, LLC used Aramid’s confidential information, which was allegedly obtained during a 2010 portfolio review as part of a proposed purchase of Debtor’s assets, to make a deal with Sony that destroyed Debtor’s investments.

                     Debtor and its affiliates are represented by James C. McCarroll, a partner at Reed Smith, LLP who specializes in Financial Industry, Commercial Restructuring, and Bankruptcy.

NJ Janitorial Firm Bradford and Byrd Tries to Clean House with a Chapter 11

By: Justin A. Saporito, Law Clerk

Bradford & Byrd Associates, Inc. filed for voluntary Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of New Jersey on May 23^rd, 2014.  The case has been assigned to the Honorable Christine M. Gravelle under case number 3:14:bk-20478.

Debtor claims assets of less than $50,000 with liabilities ranging between $500,000 and $1 million.  Among debtor’s 21 creditors are the Internal Revenue Service, New Jersey Department of Labor, New York State Workers Compensation Board, Mercedes Benz, and several other companies and private individuals.  Debtor is represented by Bunce Atkinson of Atkinson & DeBartolo, PC from Red Bank, New Jersey.

Debtor is a janitorial firm that was founded in 1989 and headquartered in Freehold, New Jersey.  Debtor provides janitorial services clients in New York, New Jersey, Pennsylvania, Georgia, and North and South Carolina.  Some of debtor’s more notable clients include UPS, the Social Security Administration Headquarters, and Public Service Electric and Gas Company.  In debtor’s more than 20 years in business, it has achieved some noticeable accomplishments including servicing the Statue of Liberty in 1996 and being contracted to clean vintage chandeliers at West Point Military Academy in 2001.

Pittsburgh Riverhounds Stumble as They Declare Chapter 11 Bankruptcy

By:  Justin A. Saporito

The  Riverhounds Event Center, L.P. and Riverhounds Acquisition Group, L.P., the limited partnerships that own and operate Highmark Stadium and the Pittsburgh Riverhounds Professional Soccer Club respectively,  jointly declared voluntary Chapter 11 bankruptcy on March 26, 2014.  Debtors filed in the United States Bankruptcy Court for the Western District of Pennsylvania, assigned case numbers 2:14-bk-21180 and 2:14-bk-21181 respectively.  Both cases have been assigned to the Honorable Jeffery A. Deller.

The Riverhounds Event Center, L.P. owns and operates the newly constructed Highmark Stadium located in the South Side area of Pittsburgh and claims assets ranging from $1 million to $10 million with liabilities between $10 million and $50 million.  Of those liabilities, $7.2 million is mortgage debt and $1.5 million in bank loans.  

The Riverhounds Acquisition Group, L.P. is the limited partnership that owns the Pittsburgh Riverhounds minor league soccer team and claims assets ranging from $500,000 to $1 million with liabilities between $1 million and $10 million.  The Pittsburgh Riverhounds  was founded in 1999 and currently plays in the United Soccer Leagues.  Much of the debt leading up to the bankruptcy was incurred in 2012-2013 during the construction of Highmark Stadium.  The bankruptcy is not expected to affect the 2014 season.

Debtors share some creditors such as Shallenberger Construction, Inc.,  First National Bank of Pennsylvania, and Urban Redevelopment Association of Pittsburgh.  Both debtors are represented by John M. Steiner of Leech Tishman Fuscaldo & Lampl, LLC.

Quiznos Turns to Bankruptcy Amidst Increased Competition

By: Stephen Krug, Law Clerk

The various entities that comprise the Quiznos sandwich chain (“debtors”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware on March 14, 2014.   A motion filed by debtors for joint administration of the cases was granted on March 17, and the case has been assigned to the Honorable Peter J. Walsh.

While debtors’ liabilities range from $500 million to $1 billion, the assets are only estimated to fall between $0 and $50,000.  However, Debtors maintain that, although assets are low and 10,001 to 25,000 creditors exist, funds will be available for distribution to unsecured creditors. U.S. Bank National Association, as administrative agent and collateral agent under debtors’ second lien financing facility, is the largest unsecured claimant with a claim for approximately $174 million.  Horizon Media Inc., MG-1005, LLC, and ESPN Inc. also hold substantial unsecured claims.

Debtors have proposed a pre-packaged reorganization plan that would slash debt by more than $400 million and would permit the handful of company-owned sandwich shops to remain operational.  Sandwich stores operated by franchisees are not part of the bankruptcy proceedings and thus are not provided for in the pre-packaged plan.

Debtors hope to emerge from bankruptcy more viable than ever. Moving forward, debtors hope to reduce food costs and place more of an emphasis on advertising.

Debtors are represented by Mark D. Collins of Richards, Layton & Finger, P.A. 

Billing Services Company Penn Data Services, Inc. Makes a 2nd Trip to Bankruptcy Court

By:  Justin A. Saporito, MAZURKRAEMER Law Clerk and Salene Kraemer, Esquire

Penn Data Services, Inc. filed a voluntary petition for Chapter 11 bankruptcy protection on October 1^st, 2013 in the Bankruptcy Court for the Western District of Pennsylvania (Pittsburgh).  The case has been assigned to the Honorable Judge Carlota M. Bohm under case number 2:13-bk-24153.  A summary of the docket can be found here.

This is the debtor’s 2^nd consecutive voluntary filing for Chapter 11 bankruptcy protection, having previously filed over a year ago on August 21^st, 2012 (that is referred to as a “Chapter 22” by those in the industry).  That case was assigned case # 2:12-bk-24156 and was also overseen by Judge Bohm.  The 2012 case was dismissed on August 30^th, 2013 for failure to timely file a Chapter 11 Plan and Disclosure Statement.  A docket summary of the initial filing for the 2012 case can be found here.

Penn Data Services, Inc. is a billing services company founded in 1996 and located in Natrona Heights, PA.  The debtor claims assets of less than $50,000 with liabilities between $50,000 and $100,000.  Christopher M. Frye of Steidl & Steinberg P.C. is again representing the debtor, having been debtor’s counsel for the 2012 case.

Affairs Afloat, Inc. Takes On Water With Chapter 11 Filing

By:  Justin A. Saporito, MAZURKRAEMER Legal Clerk

Affairs Afloat, Inc. voluntarily filed for Chapter 11 bankruptcy relief on October 15^th, 2013.  The petition was filed in the Bankruptcy Court for the Southern District of New York.  The case has been assigned to the Honorable Judge Burton R. Lifland, under case number 1:13-bk-13356. (Click case number for docket summary.)

The debtor is a river cruise operator that operates in New York City out of Pier 78 on West 38^th Street.   Affairs Afloat, Inc. was established in 1988 and provides services through its two river cruise ships, The Queen of Hearts (pictured right) and The Star of Palm Beach.  The Queen of Hearts is a three level ship that is Coast Guard certified for 450 guests plus staff and crew.  The Star of Palm Beach is a two level ship and is Coast Guard certified for 380 guests plus staff and crew.

Affairs Afloat hosts various cruises on specified dates in addition to its weekly cruises such as its Shadow Nightclub on Tuesday nights, Cruise Brasil on Wednesday nights, Candela Cruise on Thursday nights.  Debtor also holds a Kiddie Cruise on Sunday afternoons.  Debtor offers group packages for many of its events and its services are also available for private events.  For more information about debtor’s programs and services please visit their website here.

Debtor claimed assets and liabilities of between $1 and $10 million with HSBC Bank, the Internal Revenue Service, the Security Exchange Commission.  It appears that the Chapter 11 filing has not affected debtor’s operations as it is accepting reservations for cruises for Halloween and New Year’s Eve.  Affairs Afloat, Inc. is represented by Jonathan S. Pasternak of DelBello Donnellan Weingarten Wise & Wiederkehr, LLP.

Freedom Industries, Inc. Files for Chapter 11 Bankruptcy Following Historic WV Chemical Spill

By: Justin A. Saporito, MAZURKRAEMER Law Clerk

The following case is of particular interest to Salene since she is  originally from Weirton, West Virginia and attended West Virginia University.

Freedom Industries, Inc. filed a voluntary petition for Chapter 11 bankruptcy on January 17, 2014 in the United States Bankruptcy Court for the Southern District of West Virginia.  The case has been assigned to the Honorable Ronald G. Pearson.  Both assets and liabilities are estimated to be between $1 and $10 million.  Approximately 700 creditors are listed in the petition including multiple WV state agencies, service companies, and private individuals.  Multiple motions were filed along with the petition including motions to allow payments to essential trade vendors and to pay $2.4 million in unpaid taxes to the IRS.  A summary of debtor’s filings can be found here.

Debtor is a specialty chemicals manufacturer founded in 1986 and located in Charleston, WV.  It manufactures chemicals for the mining, steel, and cement industries and is wholly-owned by Chemstream Holdings, Inc.  The Charleston chemical plant is located along the Elk River and has recently been widely publicized as the cause of a chemical spill that contaminated the Elk River on January 9^th, 2014 which led to state and federal states of emergency being declared.  The spill left 300,000 residents without running water for several days.  The chemical that leaked into the river is used in coal processing.  The local water supply is currently said to be safe for residents in the nine affected counties except for residents in certain towns.  Additionally, pregnant women in the affected areas are advised to drink only bottled water at this time.

Debtor is represented by Mark E. Freedlander of McGuire Woods LLP and Stephen L. Thompson from Barth & Thompson.  Debtor also filed a motion to Employ Pietragallo, Gordon, Alfano, Bosick, and Raspanti, LLP as Special Litigation Counsel.