Source: http://apps.americanbar.org/buslaw/blt/content/2012/06/article-05-rhodes.shtml
Timestamp: 2019-09-16 12:04:53
Document Index: 578856917

Matched Legal Cases: ['§ 981', '§ 853', '§ 981', '§ 78', '§ 303', '§ 541', '§ 981', '§ 853', '§ 9', '§ 547', '§ 544', '§ 853', '§ 503']

Coordination Agreements in Parallel Forfeiture and Bankruptcy Proceedings
By Hon. Steven W. Rhodes
When a Ponzi scheme collapses, the result is often two or three parallel proceedings--a forfeiture action filed by the Department of Justice, a civil securities enforcement action filed by the Securities and Exchange Commission, and a bankruptcy proceeding. Each has procedures for compensating the victims of the scheme, but the procedures are different and conflicting. Resolving those conflicts through litigation can result in significant expense and delay in compensating victims. Recognizing this, and in an effort to use the more advantageous aspects of each process, the DOJ and bankruptcy trustees often negotiate coordination agreements that divide and assign the responsibilities for recovering and distributing assets.
Competing Processes for Compensating Ponzi Victims
The DOJ initiates the asset forfeiture process, whether civil or criminal, as a part of its prosecution of the crimes that the Ponzi perpetrator has committed, which may include mail fraud, wire fraud, securities fraud, money laundering, and conspiracy, just to name a few. In the forfeiture process, the DOJ seizes the property that the perpetrator used in the commission of these crimes and the proceeds of these crimes, as provided in 18 U.S.C. § 981. The DOJ then uses the forfeited assets to compensate the victims of the perpetrator's fraud through its remission and restoration process under 21 U.S.C. § 853(i)(1) (relating to the disposition of criminal forfeiture proceeds) and 18 U.S.C. § 981(e)(6) (relating to the disposition of civil forfeiture proceeds). Remission is the means by which forfeited property is distributed to crime victims. Restoration is the means by which forfeited property is used to satisfy a criminal restitution order for crime victims. This distribution process is done entirely within the DOJ and in the discretion of the attorney general.
At the same time, the Securities and Exchange Commission may also file a civil enforcement action under 15 U.S.C. § 78u(d). The district court may then immediately appoint a receiver over the perpetrator's property for the benefit of the scheme's victims.
Finally, the perpetrator may also face bankruptcy, which can happen in any of three ways. The perpetrator itself may file a voluntary bankruptcy petition. Or, through an involuntary bankruptcy proceeding under 11 U.S.C. § 303, the victims of the scheme may obtain bankruptcy relief and the appointment of a trustee. Or, the receiver appointed through the SEC civil enforcement action may file a petition for the perpetrator. In any event, under 11 U.S.C. § 541(a), all of the perpetrator's property becomes property of the bankruptcy estate, excepting forfeited property under the "relation back" doctrine, discussed below.
Experience suggests that conflicts between receivership proceedings and forfeiture proceedings are rare, perhaps because receivers may be more inclined than bankruptcy trustees to defer to the government's desire to liquidate and distribute forfeited assets. Whatever the reason, because conflicts between bankruptcy and forfeiture are much more common, this article is limited to those conflicts and their resolution through coordination or cooperation agreements.
It is important to note that the forfeiture proceedings and the bankruptcy proceedings are filed in two different courts, with two different judges presiding. The bankruptcy court hears all matters relating to the bankruptcy case, while the district court presides over the forfeiture proceedings. Each court applies a different set of rules to its respective processes.
Both forfeiture and bankruptcy have procedures for compensating victims by (1) marshaling the perpetrators' assets, (2) liquidating those assets, (3) fixing victims' claims to the proceeds of those assets, and (4) distributing those proceeds to victims. There are, however, significant differences in these four key aspects of these procedures. As a result of these differences, each system has advantages and disadvantages, proponents, and critics.
Those who favor the forfeiture process argue:
Often the criminal investigation has proceeded for a substantial period of time before the bankruptcy process gets underway, and has uncovered and preserved substantial assets from which victims can be compensated.
The forfeiture process is more expeditious than the bankruptcy process.
The forfeiture process is less costly than the bankruptcy process.
The applicable statutes establish a priority for the forfeiture process over the bankruptcy process that must be respected. This priority results from the "relation back" doctrine by which property is deemed forfeited to the government at the time of the commission of the crime and is therefore not property of a subsequently filed bankruptcy estate. 18 U.S.C. § 981(f); 21 U.S.C. § 853(c).
On the other hand, the proponents of the bankruptcy process argue:
In bankruptcy, there is judicial review and oversight of the entire process, but in the forfeiture process, there is judicial review of only the asset marshaling process, which is accomplished by the identification of the forfeited property in the forfeiture order.
In bankruptcy, commercial creditors who were left unpaid when the scheme collapsed are entitled to a pro rata distribution on the same priority as the direct victims of the perpetrator's fraud, but in the forfeiture process, they receive no distribution because they are not considered "victims" under 28 C.F.R. § 9.6(a).
In bankruptcy, the proceeds of avoidance actions such as preference claims under 11 U.S.C. § 547(b) and fraudulent transfer claims under 11 U.S.C. §§ 544 and 548 are available for distribution to creditors, but in the forfeiture process there are no such actions.
In the Ponzi case of United States v. Frykholm, 362 F.3d 413, 417 (7th Cir. 2004), the Seventh Circuit agreed with the proponents of the bankruptcy process for compensating victims:
[An involuntary bankruptcy petition] would have provided a superior way to marshal [the perpetrator's] remaining assets and distribute them to her creditors. Although § 853(n)(1) allows the Attorney General to use forfeited assets for restitution, it does not create a comprehensive means of collecting and distributing assets. Bankruptcy would have made it pellucid that [one victim] cannot enjoy any priority over the other victims and cannot reap a profit while [the perpetrator's] other creditors go begging. Moreover, bankruptcy would have enabled the trustee to recoup the sums distributed to the first generation of investors, who received $5 million or so against $2.5 million paid in. Those payments could have been reclaimed under the trustee's avoiding powers and made available to all of the bilked investors.
The courts came to similar conclusions in SEC v. Madoff, 2009 U.S. Dist. LEXIS 30712, at *3 (S.D.N.Y. Apr. 10, 2009), and in	United States v. Petters, 2010 U.S. Dist. LEXIS 55040, at *14-15 (D. Minn. June 3, 2010).
Fortunately for Ponzi victims, in many recent cases, the DOJ and bankruptcy trustees have been able to negotiate coordination agreements. These agreements recognize that coordination of the parallel proceedings, to whatever extent, better serves the victims and creditors of a Ponzi scheme than litigation or stalemate.
Nevertheless, the flexibility of negotiating coordination agreements on a case-by-case basis carries significant costs. First, because the bankruptcy trustee's attorneys fees for negotiating the agreement are entitled to administrative priority in the bankruptcy case under 11 U.S.C. §§ 503(b)(2) and 507(a)(2), their payment will reduce the proceeds available to creditors. This administrative expense can be significant unless the parties reach an agreement promptly.
Second, the time that the trustee and the DOJ take to conclude an agreement delays the trustee's work in marshaling and liquidating whatever assets the coordination agreement assigns to the trustee. Because of depreciation, this time delay can reduce the value of those assets. In any event, it certainly delays the ultimate distribution to creditors.
Recently, parties successfully negotiated coordination agreements in these Ponzi cases:
Picard v. Picower (S.D.N.Y. Case No. 09-1197, Docket Nos. 25 (Dec. 17, 2010) & 43 (Jan. 13, 2011)).
United States v. Dreier, 682 F. Supp. 2d 417 (S.D.N.Y. 2010); In re Dreier LLP, 429 B.R. 112, 126 (Bankr. S.D.N.Y. 2010).
United States v. Petters, 2010 WL 4736795 (D. Minn. Nov. 16, 2010); In re Petters Co. Inc., 440 B.R. 805 (Bankr. D. Minn. 2010).
United States v. DeMiro (E.D. Mich. Case No. 10-20594).
These agreements are available at: ThePonziBook.com/coordination_agreements.
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