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:
- Debtors conceal assets to avoid having to forfeit them;
- Individuals intentionally file false or incomplete forms (underreporting income, overstating liabilities);
- Individuals file multiple times using false information or real information in several states;
- 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.”
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.
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!
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.
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.
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 23rd, 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.
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.
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.
As is almost always the case, principals of a distressed business have personally guaranteed the debt on a credit line or property or equipment lease. When a business files bankruptcy, an automatic stay is imposed against any adverse actions taken against the business entity, the Debtor. But what about the owners of the business? Often, I find myself seeking to extend the automatic stay injunction to those principals. This issue came up in a recent case we had pending in the Fourth Circuit. We were compelled to find case law regarding the standard for relief.
A factual example would be as follows: A distressed business ABC Recylcing owns a building, and the building has a mortgage on it in favor of Meanie Bank, N.A. The business falls behind on payments. Meanie Bank initiates a foreclosure action to set an auction to sell the building. Jake, the owner of the business had to sign a guaranty in order for ABC Recycling to get the loan with Meanie Bank. ABC Recycling still operates with the faint hopes of reorganizing through a Chapter 11 bankruptcy. Once the Chapter 11 is filed, the foreclosure action is stayed as to ABC Recycling, but now the Meanie Bank is going after Jake. Help, my clients say.
ISSUE: Pursuant 11 U.S.C. §105 and §362 of the Bankruptcy Code, is a court likely to grant an injunction to protect the principal of a bankrupt business?
CONCLUSION: Where the principal Jack is a primary guarantor of the mortgage and Meanie Bank now intends to secure a judgment against the principal, the principal will only be able to obtain an injunction by demonstrating a mutuality of identity with the Debtor such that allowing Meanie Bank to proceed against Jake will substantially deprive the Debtor of a primary asset (its owner’s time and attention). In Plain English, how important is the principal Jake to the Debtor’s operations? A four-part test is employed to make that determination.
While automatic stay proceedings are usually only available to the Debtor, under unusual circumstances, the Fourth Circuit has held that the Bankruptcy Court can enjoin proceedings against third parties. In re F.T.L. Inc., 152 B.R. 61 (Bankr. E.D. Va. 1993). However, where no compelling or unusual circumstances exist, then under §362 the Debtor’s guarantors must file their own bankruptcy petition in order to be protected by the Bankruptcy laws. Id. at 63. (this also happens often).
A court is only likely to grant an injunction to a third party non-debtor principal in the unusual circumstance that it is evident that the identity of the debtor and the non-debtor third party is so interconnected that it is clear that the creditor is proceeding against the debtor. Under such circumstances, the court may apply a four-part test and equitably grant an injunction where the court finds that:
- the plaintiff principal has a greater likelihood of succeeding on the merits;
- plaintiff principal has shown that lack of relief will result in irreparable injury;
- an injunction will not substantially harm other interested parties, and;
- preserving the status quo until the merits of the controversy is decided will serve public interests. Id.
In re F.T.L., the primary secured creditor to a car wash company debtor, secured a judgment lien against the debtor’s guarantors, the plaintiffs. Plaintiffs are the primary owners and guarantors of the car wash and the creditor perfected its lien against plaintiffs’ personal residence. Id. at 62. Noting that the collection activities against the owners arose from the car wash’s debt to the creditor, the court applied the four-part test and found that the debtor was likely to succeed on the merits by proposing a confirmable chapter 11 plan; the debtor’s chapter 11 plan would be impossible if the owners were forced to file their own chapter 11 petition; very little harm was likely to come to the creditor if it was enjoined from collection activities against the owner, and; lastly the creditors as a whole were best served if the debtor were allowed to propose a plan for reorganization. Id. The Court extended the injunction to the owners.
If you own a business and are wondering the same questions, you should review the facts and circumstances of your workout with your attorney. I think, by and large, the automatic stay is difficult to extend in Bankruptcy Court. You have to make a really compelling argument that the principal will be so consumed with his or her own bankruptcy that the Chapter 11 reorganization will suffer.
In the beginning of 2014, I was asked by the WV Attorney General’s office to participate in a town hall meeting to discuss issues impacting the WV economy. As a business and bankruptcy lawyer, I wanted to do my diligence. I asked my clients and colleagues what they believed were significant factors. Here was a punch list of the issues identified by them and those at the town hall meeting:
- retention and attraction of young talent
- scarcity of livable downtown spaces in major WV cities, Weirton, Wheeling, Huntington, Charleston, Martinsburg, Morgantown
- healthcare reform proving costly for new businesses
- business and Occupancy taxes
- rampant drug addiction
- revitalization of old industry to attract new industry.
- deterioration of main streets
- oil and gas industry presence.
Prior to the town hall meeting, I also asked Justin Saporito, my law clerk to take to google to research this topic.
Justin found a 2014 Outlook Report (Report) for WV’s economy, produced by West Virginia University’s College of Business and Economics (one of my alma maters).
The economy of West Virginia has grown steadily over the past year with Gross Domestic Product (GDP) growing by 3.3% over the past year, ranking it tenth (10th) among U.S. states in real GDP growth. This growth was the result of several factors such as the addition of 3,000 new jobs over the past year, a state unemployment rate that has remained 1% below the national average for the past five years, and increased exports. Exports accounted for 16% of state economic output in 2012 compared with only 5% in 2000. The housing and automotive sectors of the economy, important indicators of economic health, have also seen increases. Home sales in WV are on par with home sales during the 2004-2005 housing boom and auto sales are at pre-recession levels.
According to the report, the key drivers of the economy in 2012 were coal mining, natural gas, healthcare, tourism, electrical power manufacturing, and chemical manufacturing. The Report predicted that annual job growth would increase in the healthcare services, wholesale and retail trade, construction, and professional and business service sectors every year through 2017.
A shining light for WV’s economy has been the city of Morgantown. Morgantown boasts an unemployment rate that is 3% below the national average with job growth above the national average with an estimated annual job growth rate of 2% in the coming years.
It is not all good news for WV however as it is ranked 47th among the 50 states in per capita income. Another major concern is the declining and aging population. WV’s median age is 5 years above the national average. Another concern is the state budget, ¼ of which comes from coal tax revenue and lottery revenue. With coal production predicted to fall through 2017, the state will have to find additional sources of revenue in the coming years. Despite these looming issues, WV is expected to have revenue growth of 3.5% for 2014.
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 9th, 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.
DragonFire, Inc. filed a voluntary petition for Chapter 11 bankruptcy in October 25th, 2013. The petition was filed in the United States Bankruptcy Court for the Western District of Pennsylvania and has been assigned case number 2:13-bk-24517. Debtor’s Disclosure Statement, Balance Sheet, Declaration of Schedules, and other documents were due by November 8th, 2013. For a complete list of the documents due please refer to the document summary.
Debtor is the corporate entity for DragonFire Japanese Steakhouse and Sushi Bar located at 1500 Washington Rd. in the Gallery Mall in Mt. Lebanon, Pennsylvania. As the name suggests, DragonFire specializes in hibachi and sushi. For those unfamiliar with hibachi, it is a rectangular Japanese style barbecue grill. Customers often sit at a counter that spans three sides of the grill. The chef stands at the fourth side and prepares the meal (which typically consists of fried rice, vegetables, and various meats) with much fanfare. DragonFire also boasts a robata grill, a traditional Japanese slow grilling method. For more information about DragonFire, you can visit their website here.
Debtor has declared between $50k and $100k in assets with between $500k and $1 million in liabilities with approximately 20 creditors listed in the petition. Debtor is represented by Donald R. Calaiaro of Calaiaro & Corbett, P.C.