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: 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.
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.
The entities in charge of the 1818 Market Street location for the Marathon Grill Philadelphia restaurant chain, 1818 Market Street Marathon Grill, Inc. and its general partner 1818 Market Street Marathon Grill Associates , filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Pennsylvania (Philadelphia) on October 9, 2013. 1818 Market Street Marathon Grill, Inc. is the corporate entity for the 1818 Market Street location and has been assigned to the Honorable Judge Magdeline D. Coleman under case number 2:13-bk-18861. 1818 Market Street Marathon Grill Associates, the partnership in charge of the location filed separately and has been assigned to the Honorable Judge Eric L. Frank under case number 2:13-bk-18863. (Please click the hyperlinks for docket summaries). Motions for Joint Administration of both cases were filed by each entity on October 9, 2013. The debtors listed the same creditors with the exception that 1818 Market Street Marathon Grill, Inc. also lists NNN 1818 Market, LLC, the building management company in charge of 1818 Market St.
The Marathon Grill began as a 10-seat hamburger restaurant in Northeast Philadelphia in 1984. It eventually grew into a six location restaurant chain before shrinking back down to operating three locations at 1818 Market St., 19th & Spruce St., and 16th & Sansom St. The bankruptcies affect the 1818 Market St. location, the largest of the three restaurants. The filings were made in response to learning that the landlord intended to take possession of the restaurant space over an ongoing dispute over unpaid back rent and fees of approximately $540,000.
1818 Market Street Marathon Grill Associates declared assets between $500,000 and $1 million with liabilities between $100,000 and $500,000. 1818 Market Street Marathon Grill, Inc. declared assets between $50,000 and $100,000 with liabilities between $1 and $10 million. The debtors entities are represented by Aris J. Karalis and Robert W. Seitzer of Maschmeyer Karalis P.C. The bankruptcies do not affect the other Marathon Grill locations and the debtors have pledged that the 1818 Market St. location will remain open during the bankruptcy proceedings.
Salene: In my younger years as a lawyer at Weir & Partners LLP in Philadelphia (2002-2004), I used to grab many late dinners at the Marathon Grill location at Sansom Street. It was hip, for sure. What is the formula for sustainability in the restaurant industry?
The first 30 days of a Chapter 11 bankruptcy case often are like water spewing violently out of a fire hydrant. Fast. Furious. Urgent. Many issues being thrown at the Debtor, its employees, and its lawyers at one time.
According to the Pre-Bankruptcy Planning for the Commercial Reorganization: A Brief Guide for the CEO, CFO/COO, General Counsel and Tax Advisor, written by the Reorganization and Restructuring Group of Squire, Sanders & Dempsey, LLP (2nd edition, 2008), a whopping 83 percent of chapter 11 reorganizations that are filed generally “die on the vine” and are never confirmed.
I purchased this Brief Guide at the American Bankruptcy Institute that I attended this past Spring and I thought I would write a few blog posts integrating my experience with the concise content of the book. As set forth on Appendix A to the Guide, generally certain matters must be addressed within the first 30 days of a case.
- Petition filed
- Filing of list of 20 largest creditors
- Applications for retention of professionals (attorneys, accountants, turnaround professionals, valuation specialists, real estate brokers). A Debtor cannot pay a professional unless the retention of the firm is first approved by the Judge and the professional files a fee application on the docket, to which parties may review and/or object.
- Filing of ”first day” motions (seeking authority to pay wages, use pre-petition bank accounts, pay deposits for utilities, use of cash collateral, payment of interim compensation to professionals)
- Filing of schedules of assets and liabilities and statement of financial affairs. Getting correct addresses and dollar amounts owed for every single creditor often is a daunting task. Once the Schedules are filed, a creditor matrix is generated. The Bankruptcy Court and parties in interest use this address list to mail or “serve” important pleadings in the case. If the matrix is enormous, certain limited servicing lists can be authorized by the Court. In mega-cases, servicing agents are employed by the Debtor to handle only this aspect of the case, i.e., proper service.
- Filing of Corporate Resolution authorizing the Chapter 11 filing
- Negotiation of debtor in possession financing
- Hearing on use of cash collateral and adequate protection
- Negotiation with trade creditors regarding reclamation claims and/or reestablishment of trade terms.
The first few weeks of a case can be exhausting and dramatic. Often, by the time a petition is filed, a debtor runs out of money and payroll has not been paid (therefore employees are angry and morale is low), bank accounts frozen, the utilities have been shut off, and/or the front doors have been padlocked by a creditor. Once a case is filed, a creditor may immediately file a motion to dismiss the case.
The filing of the petition and related schedules requires a financial autopsy of a business and all of its related entities. In order to avoid confusion down the road, Debtor’s counsel should try to obtain as much factually accurate information as possible during this time. The process requires persistence, diligence and coordination with the Debtor’s employees, who basically become your co-workers for as long as the case is open, which could be 18 months or longer.
During this critical time, management and key employees must be counseled regarding what to do and not do, now that the actions of the Debtor are under close scrutiny by not only a Judge but also a U.S. Trustee as well as the creditor body. Employees should be clear regarding what transfers may or may not be made without court approval. Also, at the same time, the U.S. Trustee’s Office dictates that a debtor comply with its financial reporting requirements (hence the required “Monthly Operating Report”), and the filing of insurance and bank account information. Lack of compliance may lead to a dismissal of the case or a conversion to a Chapter 7. Often the debtor must close pre-petition bank accounts and open new ones.
Keeping all constituencies informed is an important part of the role of Debtor’s counsel. Creditors may include key lenders and critical vendors who will want to know what the turnaround strategy is for the company. Once creditors receive the “Notice of Suggestion of Bankruptcy”, they too will be scurrying around to hire bankruptcy lawyers if the size of their claims warrants such an expense.
On April 23, 2013, Debtor Mike’s Open Face Breakfast, Inc. of 107 W. Chelten Avenue, Philadelphia, PA 19144 filed a Chapter 11 bankruptcy petition in the Bankruptcy Court for the Eastern District of Pennsylvania (Philadelphia), Case No. 13-13583-elf. Debtor’s counsel is Hae Yeon Baik, of Baik & Associates, PC, 2333 Fairmount Avenue,1st Floor Left, Philadelphia, PA 19130. The case has been assigned to Honorable Chief Judge Eric L. Frank. The Debtor’s assets are less than $50,000 and the liabilities are less than $50,000. The Debtor has yet to file a full set of schedules and a statement of financial affairs. The Debtor will have 15 days from the Petition Date in which to do so, unless the Debtor’s counsel seeks and extension of such a deadline.
A summary of the docket for this Chapter 11 can be viewed here.
Mike’s Open Face Breakfast operates as a breakfast and lunch spot in the Germantown area of Philadelphia, just outside of one of my old stomping grounds Chestnut Hill, Pennsylvania (got my first post-law school apartment there).
Notably, Mike’s Open Face Breakfast filed as a “small business debtor case” filed by a “small business debtor”. Pursuant to Bankruptcy Code 101, in order to be a “small business debtor”, a debtor must have aggregate noncontingent liquidated, secured and unsecured debts as of the date of the petition in an amount not more than $2,190,000 (excluding debts owed to 1 or more affiliates or insiders). 11 U.S.C. ss 101(51D). The debtor must be engaged in commercial or business activities (other than primarily owning or operating real property). Also, the case must be one in which a U.S. trustee has not appointed a creditors’ committee, or the court has determined that the creditors’ committee is insufficiently active and representative to provide oversight of the debtor. 11 U.S.C. ss 101(51D).
What is the impact of the “small business debtor case” designation? The most obvious benefit is that typically the case proceeds more quickly, but at that same time the debtor is subjected to more U.S. trustee oversight and is required to comply with more procedural filing requirements. For a great article re: “small business debtor cases”, click here.