Thought Leaders Global Elite – Asset Recovery (GIR 2019)

Who’s Who Legal says: Edward Davis Jr is one of the foremost lawyers in our research this year. Sources note, “He is particularly strong at identifying key issues and strategizing in ways that take those key issues into consideration.”

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Asset Recovery Magazine – Florida Leads the Way in Development of Chapter 15 Jurisprudence

By Leyza F. Blanco, Andrew B. Dawson and Greg S. Grossman

Chapter 15 of the Bankruptcy Code has become a powerful asset recovery tool, and the Florida bankruptcy courts have been leading the way in this development. The Southern District of Florida has seen more Chapter 15 lings than any court other than the Southern District of New York, and many of these Florida Chapter 15 cases have been focused on assisting foreign trustees and liquidators track down and recover assets in the United States. Our team at Sequor Law in Miami has alone led over forty chapter 15 cases.

While Chapter 15 is not a new tool—it is approaching its fourteenth birthday—it is, like many a teenager, under-appreciated and at times misunderstood. This is in part because Chapter 15 is not really “bankruptcy” in the sense that it does not create a bankruptcy estate or appoint a trustee. Instead, Chapter 15 provides a procedure to assist trustees administer foreign insolvency cases whose cross- border estates reach into the United States. The underappreciation also stems in part because Chapter 15’s substantive contours remain unknown, as it is primarily a procedural vehicle with minimal substantive constraints.

Finally, because Chapter 15 requires U.S. bankruptcy courts to interface with foreign insolvency proceedings, there has been a great deal of uncertainty as to how open courts would be to cooperating with foreign insolvency proceedings, particularly when those foreign proceedings involve insolvency laws that are importantly different from U.S. bankruptcy law in substance and process. One common concern when Chapter 15 was rst enacted in 2008 was that U.S. bankruptcy courts might be reluctant to cooperate with foreign proceedings—or that they would cooperate inconsistently—in the face of foreign insolvency laws.

Florida bankruptcy courts have in recent years played a key role in the development of Chapter 15. It is perhaps no surprise that courts here have been leaders in this arena, particularly as to cross-border insolvencies originating from Latin and South America. These courts have played important roles in establishing precedent for inter- American cooperation and assistance in this still-developing area of law. This article will discuss three recent decisions that highlight developments that may be of particular interest in asset recovery efforts.

Chapter 15: A Bankruptcy without a Bankruptcy Estate
Chapter 15 of the U.S. Bankruptcy Code provides a powerful tool kit for bankruptcy trustees and liquidators, but it is not itself a “bankruptcy” case. It does not open a full bankruptcy proceeding or create an estate, as would happen in a typical corporate bankruptcy case. Instead, Chapter 15 creates a process to assist the representative of a foreign proceeding, whether that be a debtor- in-possession, trustee, monitor, or other official. Chapter 15 permits that foreign representative to open a case in the bankruptcy court in order to seek assistance within the United States, with that assistance ranging from discovery orders to asset turnover orders. The bankruptcy court’s threshold function is to determine whether to recognize foreign proceeding, either a foreign main proceeding (i.e., one led where the debtor has its “center of main interests”) or foreign nonmain proceeding (i.e., one led where the debtor has an establishment). The court then has discretion to fashion assistance.

Thus, there is no actual “debtor” in the Chapter 15 case and no estate is created. Whereas a traditional bankruptcy case can be a cost-intensive and disruptive endeavor—trustees are appointed, claims must be processed, assets liquidated and distributed, etc. —Chapter 15, in contrast, is not a traditional bankruptcy case. Rather, it is an ancillary case in aid of the foreign bankruptcy proceeding. It is thus more exible and less onerous than a traditional bankruptcy case.

The main questions in these ancillary cases concern what aid is available to the trustees of the foreign insolvency cases. Chapter 15 provides some very speci c procedures designed to facilitate that cross-border assistance, e.g., authorizing judge-to-judge communications, and it provides a non-exclusive list of relief the U.S. bankruptcy court can grant to the foreign representative. As with any relatively new legislation, there is a lot of uncertainty as to the extent of that relief and to the standards for granting that relief. The uncertainty in Chapter 15 has an additional complicating factor due to its cross-border nature: would U.S. bankruptcy courts extend relief to foreign bankruptcy proceedings that differ from U.S. bankruptcy law and procedures?

Three Florida cases brought by Sequor Law on behalf of foreign representatives, illustrate these issues and show how the Florida bankruptcy courts have helped fashion answers and standards.

Who is the Foreign “Debtor”: In re Petroforte
The first case is by now well known in the cross-border insolvency world so will receive only a cursory treatment; however, it would be remiss to exclude the case altogether as it has had important rami cations throughout the Chapter 15 jurisprudence.

Petroforte was one of Brazil’s largest gas and ethanol distributors before entering bankruptcy. That liquidation had uncovered evidence of fraudulent transfers made to several entities, which provided the basis for the Brazilian court to enter ex parte an order extending the bankruptcy case to include the transferees. The Brazilian trustees commenced a Chapter 15 proceeding in the Southern District of Florida to seek discovery to assist the Brazilian liquidation. Some of these discovery targets objected on two main grounds: first, the argued that the Chapter 15 court should refuse to recognize the Brazilian extension order on public policy grounds; second, they argued that the foreign representative could not use Chapter 15 to order discovery against the transferees because they were not “debtors”.

In what is now a widely-cited case (In re Petroforte Brasileiro de Petroleo Ltda., 542 B.R. 899 (Bankr. S.D. Fla. 2015)), Judge Robert Mark rejected the first argument. He noted that U.S. courts grant a similar type of relief under the equitable remedy of substantive consolidation, and thus the Brazilian extension order was not substantively offensive as a matter of public policy. As to the ex parte nature of the proceedings, he acknowledged that this differs from U.S. procedure, which would have provided the remedy of substantive consolidation only upon an open hearing; however, he noted that the parties had the opportunity to be heard at the appellate level in Brazil. Consequently, the Brazilian proceeding did not offend U.S. public policy.

As to the scope of discovery assistance under Chapter 15, the court had to interpret the scope of “debtor” under section 1521(a)(4), which provides that a court may authorize the “the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities.”

Judge Mark held that the entities that were subject to the Brazilian extension order were “debtors” subject to section 1521’s discovery powers. As to third parties who were not subject to the Brazilian extension order, the bankruptcy court in Petroforte held the trustee may be entitled to broad discovery to the extent the debtor is a majority stockholder in the non-debtor discovery target. Such broad discovery “allows the Trustee to determine whether the stock, which is an asset of the estate, has sufficient value to induce the Trustee to take control of the entity, and attempt to derive value by selling or liquidating the entity.”

Broad Discovery Relief: In re SAM Industrias, S.A.
In re SAM Industrias, S.A., 2019 WL 1012790 (Bankr. S.D. Fla. March 1, 2019), built upon the foundation laid in Petroforte. In Petroforte, Judge Mark also suggested an alternative basis for ordering broad investigation into third party transactions in situations in which the third parties were actually involved in the fraudulent transfer or had otherwise engaged in wrongdoing: “The Trustee’s Supplemental Response failed to establish any actual involvement in the Plant Transaction or any wrongdoing by any of the Third Party Targets.” The court, though, did not further discuss this alternative ground.

The issue arose in SAM Industrias when the foreign representative of the Brazilian liquidation led a Chapter 15 in the Southern District of Florida to investigate potential fraudulent transferees identified by the Brazilian courts. The Brazilian courts had found that the debtor had undisclosed interests in certain corporate entities, which he had concealed by transferring to family members. The foreign representative, accordingly, sought the Chapter 15 court’s assistance in examining these family members, who were not themselves debtors in Brazil, and in examining certain non-debtor corporate entities.

The debtor objected to this assistance, arguing that the requested discovery assistance falls outside the scope of Chapter 15’s relief because the discovery targets were not debtors in Brazil. As to the family members, the Chapter 15 court examined the Brazilian court record carefully and concluded that discovery was appropriate as to those family members identified as transferees of the debtor’s property. The foreign representative, accordingly, was entitled to discover information related to the transferees’ corporate and financial affairs.

As to the non-debtor corporate entities, the foreign representative was entitled to broad discovery not only as to those entities in which the debtor had a majority interest but also in those entities found to have participated in the debtor’s asset concealment scheme. Again, in defining the scope of relief available to the foreign representative, the Chapter 15 court examined the findings of the Brazilian courts. The Brazilian courts had found that the debtor had concealed assets through certain corporate pass- throughs owned and controlled by the debtor. The foreign representative was thus entitled to discovery related to these corporate pass-throughs. The foreign representative, though, was not entitled to discovery related to the non-debtor entities whose connections to the debtor had not yet been established in the Brazilian courts. Accordingly, the court concluded that the foreign representative is not entitled to “carte-blanche in his inquiries of non-debtors,” but that he is entitled to obtain information narrowly tailored “to discover ‘the legal entities created in purely fictional form’ which are part of a ‘complex corporate structure’ obscuring” the debtor’s ownership of corporate assets.

The Foreign Revenue Rule: In re Dixon
In re Dixon (Case No. 16-bk-02453, M.D. Fla. March 23, 2016) illustrates Chapter 15’s exibility, as it required the court
to consider a novel application of the Foreign Revenue Rule to a Canadian trustee’s request for assistance. The Canadian debtors commenced proceedings in Canada under the Bankruptcy and Insolvency Act. The foreign representative subsequently led a Chapter 15 proceeding in the Middle District of Florida, seeking discovery assistance related to the debtor’s assets in the United States. When the foreign representative sought authorization to sell the debtors’ U.S. property in aid of the Canadian liquidation, the debtors led their own bankruptcy case under Chapter 13 of the Bankruptcy Code and later sought to dismiss the Chapter 15 proceedings. They argued that the Chapter 15 petition would violate the Foreign Revenue Rule.

The Foreign Revenue Rule is “a long- standing common law rule that prevents the courts of one sovereign from enforcing or adjudicating tax claims from another sovereign.” Here, the debtors’ principal obligations were unpaid tax debts owed in Canada. Republic of Honduras vs. Philip Morris Companies, Inc., 341 F.3d 1253, 1260 (11th Cir. 2003). The issue, as urged by the debtors, was whether a Chapter 15 court could order to liquidate U.S. property for the purpose of satisfying Canadian tax claims.

Judge Caryl Delano noted that the application of the Foreign Revenue Rule in the Chapter 15 context was a matter of first impression. Traditionally, in non- chapter 15 contexts, courts would refuse to permit a U.S. proceeding (whether in bankruptcy or not) to adjudicate tax claims under foreign laws. Section 1513(b)(2)(A) states that the language in subsection (a) and paragraph (1) “do not change or codify present law as to the allowability of foreign revenue claims or other foreign public law claims in a proceeding under this title.”

Section 1513(b)(2)(B) goes on to say “[a]llowance and priority as to a foreign tax claim or other foreign public law shall be governed by any applicable tax treaty of the United States, under the conditions and circumstances specified therein.”

The bankruptcy court ruled that the Revenue Rule did not apply because it was not being asked to “adjudicate or rule upon the validity or priority of the Canadian taxing authorities’ claims.” That matter, the court noted, would have to be decided in the Canadian proceeding. Second, the court noted that as a general matter, Chapter 15 courts are not in the business of adjudicating the validity of foreign claims. Finally, the court held that the case did not touch on any fundamental U.S. public policies, as it was simply a dispute as between the debtors and the foreign representative. In fact, the court found that it was promoting the public policies underlying not only Chapter 15 but the U.S.-Canada tax treaty. As an aside, the court noted that, to the extent the Canadian case involved more than just tax claims, that would further support its conclusion that the Foreign Revenue Rule does not apply.

Conclusion
These three Florida case descriptions illustrate how Chapter 15 of the Bankruptcy Code has elements of both bankruptcy law and more traditional asset recovery tools. When considering whether Chapter 15’s toolbox could help in the asset recovery effort, it appears the sun is shining in Florida’s bankruptcy courts.

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Selling Assets in Chapter 15 Matters: Practical Considerations in Cross- Border Insolvencies

Asset sales under § 363 of the U.S. Bankruptcy Code [1] have become a critical component of the bankruptcy practitioner’s arsenal, and a preferred avenue of monetizing a debtor’s assets.

The process is generally straightforward, and the Bankruptcy Code provides the framework of how sales should proceed. U.S. practitioners have become well versed in the § 363 sale process and how to address recurring issues; however, chapter 15 of the Bankruptcy Code [2] adds an additional layer of complexity that must be observed and resolved carefully.

When the U.S. adopted chapter 15, it codified the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (“Model Law”). [3] Chapter 15 aimed to facilitate U.S. recognition of foreign insolvency proceedings and increase international cooperation among courts in cross-border insolvency cases. [4] However, the Model Law is a generic template for countries around to world to incorporate into their existing

insolvency laws. [5] Therefore, chapter 15’s adoption has created both conflicts and gaps as to how practitioners utilize the Bankruptcy Code to aid and facilitate cross-border insolvencies.

This article highlights how the application of and compliance with § 363 is an example of these conflicts and gaps, and it provides some thoughts on what to look out for and how to address some of these issues.

First: Is Relief Under § 363 Available?

Chapter 15 proceedings fork into two paths: one for foreign main proceedings and the second for foreign non-main proceedings. [6] Under § 1520 of the Bankruptcy Code, foreign main proceedings automatically obtain rights under a number of other Bankruptcy Code sections immediately upon recognition. [7] Section 1520, however, only applies to foreign main proceedings; foreign non-main proceedings do not receive any sort of automatic applications.

One of the sections automatically applied to foreign main proceedings is the right to sell property under § 363. [8] Therefore, if your proceeding is a foreign main proceeding, you are automatically entitled to utilize § 363 wherever and whenever appropriate.

Although § 363 is not automatically applied to non-main proceedings, it is still available, but it requires additional steps. Specifically, once a foreign non-main proceeding is recognized, relief must be sought from the court to authorize the application of § 363 to the proceedings. This request for relief is presented to the court under § 1521. Once the court grants the requested relief, the § 363 sale process becomes available to the non-main proceeding.

Section 1521 is a broad section of chapter 15 that allows the court, upon recognition of the proceedings, to provide additional relief to the foreign representative subject to limitations of the Bankruptcy Code and U.S. laws. [9] As such, the section can be used to utilize other provisions of the Bankruptcy Code that are not explicitly adopted or automatically applied in chapter 15, if that is necessary to assist the foreign representative.

Second: Which Assets Can Be Sold, and Which Court Approves the Sale?

Section 541 of the Bankruptcy Code is largely inapplicable in a chapter 15 proceeding. [10] An estate is never created in a typical chapter 15 proceeding. Section 363 contemplates the sale of property of the estate, so which assets are allowed to be sold under § 363 in chapter 15 proceedings? [11]

Section 1520’s adoption of § 363 modifies the section so that it applies to transfers of any interest of the debtor in property that is within the territorial jurisdiction of the U.S. to the same extent that the section would apply to property of an estate. [12] Therefore, the assets that can be sold under chapter 15 appear to be broader than in other bankruptcy contexts because it is not limited to the estate. Could this mean that a foreign representative could sell property of the debtor in the U.S., even if the debtor would have claimed it exempt, if the case were a domestic case? To date, there do not appear to be any cases deciding this point.

In Fairfield Sentry, [13] the Second Circuit analyzed what chapter 15 means by “transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States.” [14] Fairfield Sentry LLC was a BVI investment fund that filed customer claims in the SIPA liquidation of the Bernard L. Madoff Investment Securities LLC (BLMIS). Fairfield Sentry invested approximately 95 percent of its assets with BLMIS when Bernard Madoff’s Ponzi scheme became public. [15] As a consequence, Fairfield Sentry was placed into liquidation in the BVI in 2009, and in 2010 the U.S. Bankruptcy Court for the Southern District of New York recognized the foreign main proceeding. [16]

Fairfield Sentry ultimately decided it would sell the SIPA claims and entered into an agreement with Appellee Farnum Place, LLC to sell the claims for 31.125 percent of their value. [17] However, days after the parties entered into the agreement, the trustee for the BLMIS liquidation announced that he had entered into a settlement agreement that would increase the value of Fairfield Sentry’s SIPA claims from 32 percent to 50 percent of the total amount claimed. [18]

This substantial increase created tension between Fairfield Sentry’s liquidators and Farnum. The liquidators sought to cancel the sale, and

Farnum sought to enforce it. The BVI court approved the sale over the liquidators’ objections, but instructed the liquidators to question the U.S.

Bankruptcy Court as to whether § 363 applied and whether the section required disapproval of the sale. [19] Thereafter, the U.S. Bankruptcy Court rejected the liquidators’ application for disapproval of the proposed sale, and the district court affirmed.

However, the Second Circuit reversed the decisions of the lower courts on appeal, finding that the “property” in this case was the SIPA claims and that the SIPA claims were located in New York, “where the property could be assigned or transferred,” [20] and therefore that § 363 applied. The Second Circuit made clear that a bankruptcy court’s “principal responsibility … is to secure for the benefit of creditors the best possible bid,” and the sale of the SIPA claims was ultimately disapproved. [21]

Fairfield Sentry solidified that § 363 applies in chapter 15 whenever the asset to be sold is within the U.S. Moreover, Fairfield Sentry also set a line on the extent that comity will have in chapter 15 proceedings, and § 363 sales in particular. The Second Circuit rejected Farnum’s arguments that deference to the BVI decision was required, and the opinion makes clear that the court of the jurisdiction where the asset to be sold is located is the court with the ultimate approval of the sale.

Third: How Do I Give Notice, and Where Are Objections Heard?

One of the trickiest portions of utilizing § 363 in chapter 15 proceedings may be complying with the procedural requirements of the sale — specifically, notice to creditors and the hearing requirement. [22]

Whereas a creditor matrix is easily accessible in domestic bankruptcy proceedings, it is not always the case in cross-border proceedings. Chapter 15 does not require any schedules, a creditor matrix or a claims register. A chapter 15 case requires nothing more than an application, statement identifying the foreign proceedings, and evidence of the existence of the foreign proceeding and appointment of the foreign representative. [23]

In addition to the lack of traditionally relied-upon creditor information, some foreign jurisdictions make it difficult to locate the necessary creditor information. Also, the foreign representative might not always be the trustee of the foreign main proceedings, and therefore might not have direct access to the list of creditors. Every foreign jurisdiction is unique, and there are many factors that could lead to delays in utilizing § 363 in chapter 15 proceedings. You must prepare as best as possible to avoid any such delays.

Complicating matters further, sometimes the notice requirements in the foreign main jurisdiction might not comply with the requirements of the U.S. How, then, does one go about notifying the creditors, and what is considered sufficient notice?

In In re Banco Santos S.A., [24] a chapter 15 case filed in the Southern District of Florida, Hon. Laurel M. Isicoff addressed the issue of notice in the context of approving a settlement in a chapter 15 proceeding, which may be applied in the context of a § 363 sale. There were two separate instances where notice was required in Banco Santos. In the first instance, the foreign representative requested a bar order in favor of certain settling parties, and in the second instance, the foreign representative did not. [25] The court considered the nature and implications and the requests of the foreign representative for each instance. In the first instance (which requested a bar order), the court determined that directly mailing to each creditor in Brazil would be required, and in the second instance (which did not require a bar order), the court determined that notice via publication in the Brazilian Gazette, which is sufficient under Brazilian law, was sufficient despite the fact that notice by publication is generally insufficient in domestic proceedings. [26]

Judge Isicoff highlights in Banco Santos that in a chapter 15, the court has the ability and duty to look at the requests made and the nature and implications of the requests before making a determination. Ultimately, the more burdensome the request, the more stringent the notice requirement should be.

Similar to Fairfield Sentry, the property and assets to be sold in Banco Santos were located within the territory of the U.S. Therefore, to ensure compliance with the notice and hearing requirements of § 363, Judge Isicoff conditionally approved the pending sale and ordered any objections thereto be filed in the U.S. Judge Isicoff also ordered the foreign representative to request an order in the foreign main proceedings instructing any creditor with an objection to file them in the U.S. [27] This process created a simplified procedure to obtain approval of a sale while consolidating all objections into the appropriate jurisdiction.

Fourth: Who Can Assist in the Sales Process?

More often than not, professional persons need to be retained to assist in a sales process (an appraiser, auctioneer, realtor, etc.). The Bankruptcy Code lays out a clear process for how to go about hiring professional persons, and provides limitations on their compensation. [28] However, none of the relevant sections, including §§ 329 and 330, were adopted in chapter 15.

What recourse does the foreign representative have in situations where they enter into a bad deal with a professional person? Is the court then authorized to disapprove any agreements or appointments?

Ideally, § 1521 would allow the court to adopt any section of the Bankruptcy Code necessary, but what happens in a situation where the appointment of a professional person and their compensation is approved in the foreign main jurisdiction, but the appointment and compensation (while acceptable in the foreign main jurisdiction) would normally be considered unconscionable in the U.S.? It follows that the rationale in Fairfield Sentry will also apply here, but this is another situation that has not yet been challenged.

There are many benefits to the adoption of the Model Law through chapter 15, and utilization of chapter 15 has been steadily increasing since the chapter was enacted. This article addresses some of the methods of dealing with the gaps and conflicts created by chapter 15 and the general requirements of the Bankruptcy Code in the context of § 363 sales, although the dueling nature of two insolvency proceedings arising in two separate jurisdictions necessitates that bankruptcy practitioners be twice as diligent in their cases.

[1] Title 11 of the U.S. Code (the “Bankruptcy Code”). [2] 11 U.S.C. §§ 1501-1532.
[3] 11 U.S.C. § 1501.
[4] See generally 11 U.S.C. § 1501.
Help Center
[5] See www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html .
[6] “Foreign main proceeding” means a foreign proceeding pending in the country where the debtor has the center of its main interests. 11
U.S.C. § 1502 (4).
“Foreign non-main proceeding” means a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment. 11 U.S.C. § 1502 (5).
[7] See generally 11 U.S.C. § 1520.
[8] 11 U.S.C. § 1520(a)(2)-(3).
[9] See 11 U.S.C. § 1507(a); see also § 1521(a)-(b).
[10] Section 541 is only discussed in chapter 15 in relation to concurrent proceedings and in authorizing a representative of a domestic bankruptcy to act abroad; see 11 U.S.C. §§ 1528 (commencement of a case after recognition of foreign main proceeding) and 1505 (authorization to act in foreign country).
[11] 11 U.S.C. § 363(b)(1). (the “trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate…” (emphasis added); see also infra footnote 14.
[12] 11 U.S.C. § 1520(a)(2).
[13] In re Fairfield Sentry Ltd., 768 F.3d 239 (2d Cir. 2014).
[14] See Fairfield Sentry, 768 F.3d at 244; see also § 1520(a)(2).
[15] Id. at 241.
[16] Id.
[17] Id. at 242.
[18] Id.
[19] Id. at 243.
[20] Id. at 244.
[21] Fairfield Sentry, 768 F.3d at 246-47, quoting In re Fin. News Network Inc., 980 F.2d 165, 169 (2d Cir. 1992). [22] 11 U.S.C. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease…”) (emphasis added). [23] 11 U.S.C. § 1515.
[24] In re Banco Santos S.A., Case No. 10-47543-BKC-LMI.
[25] Banco Santos, Case No. 10-47543-BKC-LMI [D.E. 170, 184, 185].
[26] Id.
[27] Id. [D.E. 170, 185].
[28] 11 U.S.C. §§ 327, 328.

June 2019 Quarterly Newsletter

IWIRC announces 2019 founders award winners

By Benjamin Clarke

Award winners: Leyza Blanco, Eloise Fardon and IWIRC’s London network co-chair Sonya Van de Graaff

The International Women’s Insolvency & Restructuring Confederation (IWIRC) has announced the recipients of its 2019 founders awards, with winners in Miami, Hong Kong and London.

Asset recovery column: The long arm of the liquidating trustee – Madoff trustee reaches offshore transferees

Christina Vicens Beard and Andrew Dawson / Sequor Law

Sequor Law attorney Cristina Vicens Beard and of counsel Andrew Dawson consider the implications for non-US entities of the US Second Circuit’s recent ruling that international comity principles should not stop clawback actions by the trustee of Bernie Madoff’s investment firm.

Inside the scheme that allegedly used fake debt to steal $360 million from investors in Maryland and Virginia

By Aaron Gregg

Cameron Jezierski was stoic but offered his attorney a brief smile as proceedings wrapped up at the federal courthouse. This wasn’t where he’d expected to land. He’d imagined that before he was 30, he’d be a millionaire.

Instead, the 28-year-old from Texas had signed a plea agreement with federal prosecutors this month that cast him as a minor player in a sprawling $360 million Ponzi scheme that bilked hundreds of investors in Maryland and Virginia. Prosecutors said it was dreamed up by his employers. When Jezierski walked out of court, he would be an admitted felon for life.

At the courthouse, Assistant U.S. Attorney Joyce McDonald described a scheme led by two others — Kevin Merrill of Towson, Md., and Jay Ledford of Texas — in promoting “investor confidence that they could entrust their funds to what was really a criminal enterprise.”

Jezierski faces a $116,435 fine and a maximum sentence of 20 years in prison, though his term could be much less because of the plea agreement. Merrill, 53, and Ledford, 55, both face civil and criminal charges. Attorneys in the criminal and civil cases have filed motions to dismiss the charges.

Jezierski admitted in his signed plea agreement to participating in “a scheme and artifice to defraud and to obtain money and property from investors by materially false and fraudulent promises” and that he “knowingly and willfully” worked with other people to do so. The scheme affected investors including doctors, retirees, accountants and current and former professional athletes.

An attorney for Jezierski did not respond to requests for comment. Merrill did not have a lawyer listed in court documents.

Jim Jamison, an attorney representing Ledford in the civil case brought by the Securities and Exchange Commission, described his client as “a very small player” in the alleged fraud.

“There was no conspiracy,” he said. “Merrill was involved in buying consumer debt, but he has not been for quite some time.”

According to a copy of the plea agreement obtained by The Washington Post, Jezierski participated in the scheme for about 10 months, culminating in a set of indictments in September 2018.

The three men are accused in court papers of duping more than 400 investors with “an elaborate web of lies” to give the impression that they were running a successful investment operation profiting from student and consumer debt. In reality, prosecutors say, the men fraudulently diverted investors’ money to maintain a criminal operation in which funds were cycled from one investor to the next.

The trio offered investors the chance to profit from consumer debt portfolios ― in this case car, student loan and credit card debts that people have defaulted on, with assets that could be eligible for seizure. Prosecutors alleged the defendants were diverting the payments they received for those investments into their own pockets and to pay off earlier investors. They say investors were cheated out of more than $360 million.

Arnoldo Lacayo, a partner at the firm Sequor Law who specializes in financial fraud, said the idea of so-called “fake debt” is a common thread in Ponzi schemes, which leverage a real or perceived economic crisis to lend an air of credibility to an otherwise dubious investment opportunity, he said.

“A lot of Ponzi schemes will have some sort of current event that is part of what entices people to get involved,” Lacayo said. “We hear all the time about the coming calamity in student loans, about people defaulting on car loans. . . . If you’re presented an investment opportunity to get ahead of that trend, it might not sound far-fetched.”

Ledford and Merrill used the proceeds of their fraud to enrich themselves and sustain lavish lifestyles, prosecutors said. According to court documents, the two men together bought more than 20 high-end automobiles, including Porsches, Ferraris and Rolls-Royces; mansions in Florida, Maryland, Texas and Las Vegas; more than $8.3 million in fancy watches, jewelry and collectibles; a boat; and an interest in a private jet. They blew $25 million gambling in casinos, according to documents.

Prosecutors said Jezierski began working for Ledford as a financial data analyst at Riverwalk Financial in Texas in October 2014.They said Jezierski learned if he submitted financial statements that did not meet certain targets, Ledford would be angry. Jezierski began submitting false information and setting up fake companies, the prosecutor said, to satisfy Ledford and defraud investors.

“Jezierski’s trend lines based on actual operations were not satisfactory to Ledford because the trend lines did not show sufficiently robust collection results,” according to the plea agreement.“Jezierski had to falsify data to create reports that matched Ledford’s directions,” the plea agreement says.

Over time, Jezierski became an important participant in a scheme that predated his involvement and benefited his employers, according to the deal. Jezierski became chief operating officer in 2017 and was drawn into the scheme.

According to text messages cited in court documents, Ledford at one point texted Merrill, “Cameron is working on it too. I have him with the program. He gets it.”

Ledford allegedly pressed Jezierski to hide his activities, at one point telling him via text message, “Need all of this to be discreet. . . . we do not want anyone to know details,” according to the plea agreement. Jezierski responded: “I got your back. No one knows anything nor will they.”

While working for Ledford, Jezierski had a salary of $80,000 but made significantly more in bonuses, the plea agreement states. Ledford had told Jezierski he would make him a millionaire before his 30th birthday and dangled the goal in front of him as the pair finalized a purported investment deal weeks before the Justice Department charged them.

“Almost 30. I am confident you will reach your goal we discussed,” Ledford said in September. Jezierski had hoped to progress even further: “I have your back like always and this is just the beginning,” Jezierski told Ledford after receiving a $50,000 bonus, according to the plea agreement.

The scheme was uncovered when an undercover FBI agent was offered the opportunity to invest $10 million by Merrill, the Maryland-based defendant, last summer. At a meeting in Dallas involving all three defendants, Jezierski offered the undercover FBI agent financial documents about the business that the plea agreement notes were “fraudulent.”

Prosecutors say the criminal activity did not end when the three men were charged. Using coded phone calls and handwritten notes held up to the glass wall separating prisoners and visitors where he was held, Merrill told his wife to retrieve wads of cash from their white-gated waterfront mansion in Naples, Fla., which the two referred to as “the restaurant,” according to documents.

Jezierski’s sentencing is Aug. 12, a month after Merrill and Ledford are scheduled to stand trial.

Asset recovery column: Recognition of an individual debtor’s insolvency proceeding – beware the perils

Ed Davis, Leyza Blanco and Juan Mendoza

Shareholders Edward Davis Jr and Leyza Blanco, and attorney Juan Mendoza from Sequor Law in Miami discuss the things to watch out for when seeking recognition of an individual debtor’s foreign insolvency proceedings in the US.

Recognition of a foreign insolvency proceeding in the United States allows the use of an arsenal of asset recovery weapons for a cross-border practitioner, including the opportunity to obtain discovery relating to the financial condition of the debtor, and to commence actions to collect property and liquidate claims. This arsenal may be particularly effective in situations where an individual debtor flees the jurisdiction of his or her pending bankruptcy case to the United States.

Such a change of circumstances may disturb the debtor’s ties with the jurisdiction of the pending insolvency, however, and alter the foreign trustee’s ability to obtain recognition of the foreign insolvency in the United States. This column discusses the nuances a practitioner must consider when pursuing recognition of an individual debtor’s foreign insolvency under Chapter 15.

To obtain recognition of a “foreign main proceeding” under Chapter 15 – the United States’ analogue to the Model Law on Cross-Border Insolvency – a foreign representative of the foreign insolvency proceeding must show, among other things, that the foreign proceeding is pending in the country where the debtor has his or her centre of main interests (COMI). An individual debtor’s COMI is defined as the debtor’s “habitual residence”. The foreign representative may also obtain recognition of the foreign proceeding as a foreign non-main proceeding if the debtor has an “establishment” in the country where the foreign proceeding is pending. “Establishment” is defined as a place of operations where a debtor carries out non-transitory economic activity.

As the determination of an individual debtor’s COMI or establishment is a fact-intensive inquiry, the operative date for the determination of COMI or establishment could be pivotal in obtaining recognition. US courts are split on the operative date for the determination of the COMI. Some courts have noted that the operative date to determine the COMI is the date on which the Chapter 15 petition was filed. However, several US courts have held that the operative date for determining a debtor’s COMI or establishment is the date on which the foreign insolvency commenced.

Though this split of authority is yet to be specifically addressed in the text of Chapter 15, UNCITRAL’s revision to the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency in 2013 clarified that the date of the commencement of the foreign proceeding is the operative date to determine the COMI. It would be up to the US Congress to pass an amendment to Chapter 15 to conform it to this development, which to date remains an open issue for US courts.

In a situation where an individual debtor moves to the United States after the commencement of the initial insolvency proceeding and establishes residence and financial ties in the US, the determination of the COMI or establishment – and possibility of recognising the foreign insolvency proceeding – is a function of whether the operative date for the determination of COMI or establishment is the date of the filing of the initial proceeding or the Chapter 15 proceeding.

If the operative date were the commencement of the foreign proceeding, as clarified by the Guide to the Model Law, the individual debtor’s habitual residence would likely be located in the foreign jurisdiction. This would likely result in the finding that the debtor’s COMI or establishment was the jurisdiction of the foreign proceeding. The opposite is true if the operative date is the date of the Chapter 15 filing, as the individual debtor may have developed close ties to the United States, such as changing address, opening new bank accounts and establishing other signs of permanency.

Once the operative date is established, the court must analyse the debtor’s circumstances to determine the debtor’s COMI or establishment. As habitual residence is not defined by the bankruptcy statute, it raises yet another level of uncertainty. Though there is no definition for the term habitual residence, courts seem to equate habitual residence with domicile, a concept typically used in the bankruptcy context in the analysis of venue and exemptions to discharge.

Like domicile, habitual residence refers to both an individual debtor’s physical presence, or residency, and the debtor’s intent to remain at that residence. The former consideration may seem like a straightforward one since it is hard to dispute a debtor’s physical presence. Yet situations arise where a debtor travels between two separate countries, which makes the analysis of physical presence more difficult.

The latter consideration of intent requires an inquiry relating to the debtor’s state of mind, which involves both objective and subjective considerations. To assist with the analysis of the debtor’s state of mind, courts consider the location of a debtor’s family, the debtor’s reasons for moving, the length and continuity of the debtor’s residence, the stability and continuity of the debtor’s employment, and apparent intentions to remain at his or her residence. Courts also consider documents filed with governmental agencies, such as immigration documents, to discern whether a debtor intended to remain in a certain place.

As every individual has different circumstances, the factual scenarios regarding the debtor’s habitual residence are endless. Consider the following examples: a businessperson who travels between offices in different countries with family in both countries; a couple that move to the United States on an investor visa but leave their children in their home country; and a person with no family who moves to the United States as a permanent resident but is incarcerated for a significant period. Each scenario would entail a unique analysis regarding the debtor’s state of mind.

A Florida decision displays the factual complexity that may complicate an individual debtor’s Chapter 15 COMI analysis. In Richardson, the court analysed the habitual residence of an individual debtor who was in the process of moving to Florida from the UK under an investor visa, shortly after the commencement of an insolvency proceeding against him in the UK.

Analysing the debtor’s COMI as of the commencement of the UK insolvency proceeding, the bankruptcy court noted that as of that date, the debtor no longer owned a home in the UK or operated a business in the UK, but retained his UK passport, UK pension account, UK email address, and immediate and extended family in the UK. Importantly, the court emphasised the debtor’s investor visa documentation, which contained a sworn statement that he fully intended to return to Great Britain upon the expiration of his visa term. Accordingly, the court held that the UK was the debtor’s habitual residence and COMI, and granted recognition of the debtor’s UK insolvency proceeding.

Practitioners must be aware of the uncertainty in the case law with respect to the operative date for the determination of an individual debtor’s COMI or establishment, and the lack of uniformity presently employed by US courts in assessing an individual debtor’s habitual residence. Most importantly, practitioners must be prepared to make factual assessments of the debtor’s circumstances and face challenges presented by such factors required to prove an individual debtor’s habitual residence.

 

References

Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency (2013 revision), section 141.

In re Richardson, Case No. 9:14-bk-04875-FMD, DE 120 (Bankr. M.D. Fla. 1 June 2016).

In re Loy, 380 B.R. 154 (Bankr. E.D. Va. 2007).

In re Ran, 607 F.3d 1017 (5th Cir. 2010).

In re Kemsley, 489 B.R. 346 (Bankr. S.D.N.Y. 2012).

United Nations Commission on International Trade Law (UNCITRAL), Model Law on Cross-Border Insolvency, 10, U.N. Gen. Assembly, UNCITRAL 30th Sess., U.N. Doc. A/CN.9/442 (1997), available at www.uncitral.org/uncitral/en/commission/sessions/30th.html.

German filmmaker’s estate files Florida Chapter 15

Funds in a Florida bank account belonging to the late German filmmaker and Federico Fellini collaborator Gideon Bachmann are at the centre of a new Chapter 15 application, two years after he died seemingly bankrupt in Germany.

Peter Jost, a partner at Jost Rechtsanwälte in Stuttgart, applied to the Tampa division of the US Bankruptcy Court for the Middle District of Florida for recognition as foreign representative of Bachmann’s estate on 13 March.

Represented by Sequor Law, Jost is seeking US$495,000 held in two Bank of America accounts in Bachmann’s name to pay off debts Bachmann owed to eight creditors at his death.

In the Chapter 15 application, under which Bachmann is referred to by his birth name of Hans Werner Bachmann, Jost says the filmmaker’s creditors have US$12,617 in claims against him, an amount easily exceeded by the amount in the Bank of America account.

Bachmann, who died in Karlsruhe, a city in the south west German region of Baden-Württemberg, on 24 November 2016 at the age of 89, was born to a Jewish family in Germany in 1927 before emigrating to Tel Aviv in 1936 after the rise of the Nazi party.

He initially worked as a journalist for Haaretz, returning to Germany in 1947 to document concentration camps left by the Nazi regime.

The following year he began to study under the celebrated Dadaist film director Hans Richter in New York, moving in the 1960s to Italy, where he was a close friend of Federico Fellini, even creating a documentary film about the Italian director, Ciao, Federico!, in 1970. He also performed in a number of Fellini’s films.

His film output also included Underground New York, a 1967 portrait of the underground film movement in which he was a player, which featured rare films of Andy Warhol, Shirley Clarke and Allen Ginsberg. That moved him to direct A Camera Is Not a Molotov Cocktail in 1977, in which he explained his belief that film’s purpose was not to “convince the unconvinced” but to provide solidarity for people of shared views.

He also performed in films, including for Fellini and his own 1983 film Peppermint Peace.

He returned to Germany in 1996, and in his latter years worked as a film critic for a US radio programme, also establishing and editing periodical magazine Cinemages.

The District Court of Karlsruhe appointed Jost as liquidator over Bachmann’s estate in November 2018, two years after his death.

In the US Bankruptcy Court for the Middle District of Florida

  • Chief Judge Michael Williamson

Counsel to Jost

  • Sequor Law

Partner Gregory Grossman and attorney Amanda Finley in Miami

March 2019 Quarterly Newsletter