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• the legal line
By Ed Maldonado, Esq. |
Dear Legal Line,
I am a national distributor of calling cards, PINs and other types
of prepaid service cards. I have a few questions about some of the
things I have experienced when card providers go bankrupt. First,
I received a stay order from a federal bankruptcy court in Florida
after I had sued a provider over selling me bad cards here in my
home state. What does this really mean to my company? My attorney
said that it means the case is over as far as he is concerned. I
can’t believe this because it would be too easy for them to
escape responsibility. Our case involves fraud and a whole number
of things that I can prove. Does this really kill all my litigation
or not? I keep hearing mixed stories about it. Second, I have also
found out that the company has been doing some business in the prepaid
industry. Not as much as before, but its servicing some big names
in prepaid. Is this fraud against the court or what? Can a company
selectively go in and out of bankruptcy? I feel like I am getting
blindsided. What are your comments?
- “Getting Hoodwinked”
Dear Hoodwinked,
You definitely picked a murky subject to bring to light –
commercial litigation and bankruptcy protection. Unfortunately this
topic is common in telecom. From the sound of it, you received an
Automatic Stay Order issued by a Bankruptcy Court after a Petition
for Bankruptcy Relief was filed. This may be pursuant to either
Chapters 13, 11 or 7 depending on the filing and the review of the
Court. Check the Order your received to be clear on this.
Under the Federal Bankruptcy Code, specifically 11 USC § 362(a),
bankruptcy petitioners are afforded a broad stay against pre-petition
litigation, liens, enforcement of judgments and other efforts that
are attempts to collect pre-petition debts. It generally applies
to all persons, entities, and governmental subdivisions, including
the U.S. government, until the bankruptcy court discharges the debt
or dismisses the petition for relief. As the statute reads and is
enforced by the Court, any entity or person that continues to pursue
a pre-petition claim after notice of the Stay Order SHALL be subject
to sanctions for violating the order. This means that if you don’t
cease from continuing actions (which can be anything from litigation
to demand letters) you will be penalized and that will be an increased
loss to your claim. Most states require that the attorney for the
bankruptcy petitioner file a Notice of Suggestion of Bankruptcy
in all ongoing cases. This places the proceedings on hold until
the Bankruptcy Court dismisses the petition, requires re-organization,
or grants a Super-Discharge wiping out your claim in a settlement
of debt. The Stay Order does not apply to criminal proceedings or
criminal restitution judgments, be they for local crimes, proceedings
by the state attorney generals, or indictment by the federal government.
The Stay Order also does not apply to a narrow realm of ministerial
acts, such as certain state and federal regulatory filings. However,
in most contractual cases (or those involving the Uniform Commercial
Code and invoices) concerning pure debt issues, the Stay Order signals
the end of the road as your claim will likely be encompassed in
the Bankruptcy Court’s final ruling for relief.
While this Automatic Stay Order protection is broad, it is not absolute
and without exceptions for those in litigation. This may be a topic
to explore with your attorney before throwing in the proverbial
towel on your case, because if applicable, there is a ten (10) day
limit on filing relief. These exceptions are found under Section
362(d) of the Code that allows the Court to grant relief from the
automatic stay by terminating it or modifying it “for cause.”
Unfortunately, the Code fails to identify or define what constitutes
“for cause.” For someone with existing litigation, this
may be a point of venture because the Bankruptcy Court is a court
of Equity — meaning they can consider the equality of the
issues before them, as opposed to just pure legal remedies.
There are a number “causes” that the Court has recognized
that would apply to telecom: 1.) Lack of adequate protection of
the creditor in the assets to be re-organized; 2.) The Action is
being done to thereafter recover loss against insurance; 3.) The
filing of bankruptcy is being done “in bad faith” to
avoid litigation or for some other financial motive; 4.) There is
a clause in the contract between the debtor and bankruptcy petitioner
in which the petitioner agrees not to contest any Relief to the
Automatic Stay. Now, you mentioned aspects of your case that contained
elements of fraud to which you say you have proof. This may be an
important point to re-evaluate with your local counsel. Another
consideration is the local court itself. Merely filing a Notice
of Suggestion of Bankruptcy does not require that the Court must
find the Stay applicable to the case. A local court could rule,
in accord with the “for cause” rationales found in the
federal bankruptcy code, that the facts or circumstances in your
particular case separate it from those afforded typical commercial
claims. Strong evidence showing fraud could qualify. This is definitely
a point to further investigate with your attorney after reviewing
ALL the particulars of your case. Thereafter, he or she can tell
you if the case is really dead-in-the water or not.
As for your question about the petitioner company still operating,
this may not be a fraud upon the court as you suggested. I think
more information is needed about the bankruptcy proceeding. Many
times, particularly when the company is going to liquidate its assets
entirely, the trustee will evaluate the company in light of “ongoing
concerns”. This is a term used to isolate the ongoing business
value apart from fixed assets that may be worth less. An example
is your own business. Distribution businesses usually have few hard
assets as opposed to the value of their receivables should they
continue business. If a trustee sees that the value of hard assets
of the petitioner is practically nothing, he may opt for keeping
the business running in order to maximize the businesses value to
pay its creditors. Before calling this a foul on the part of the
petitioner, it may be wise to do some more footwork and assess whether
the trustee is operating the business. If the trustee is not operating
the business, bring it to the attention of your attorney because
this can be used as a part of a “for cause” relief claim
or that the petition was filed in “bad faith”. Both
moves could remove your case from discharge in the final bankruptcy
decision.
Good Luck and Success in the Industry
TELECOM‘S 2004 BANKRUPTCY QUOTE FOR THE RECORD:
“This settlement says a lot about Gary Winnick's character.
Clearly, he does feel badly about all those who were hurt by Global
Crossing's collapse both shareholders and employees.”
- Mr. Howard J. Rubenstein — a spokesman for Gary Winnick
founder and chairman of Global Crossings who sold $123 million worth
of GC stock as the company spiraled toward one of the biggest bankruptcy
filings in U.S. history and who now agreed pay $55 million in settlement
after commencement of SEC investigation. March 20, 2004
LEGAL HISTORY QUOTE:
“They do things better with logarithms.”
- Hon. Benjamin N. Cardozo, on the Certainty of the Law, Paradoxes
of Legal Science, 1928
•• Ed Maldonado is a principal of Maldonado & Glenn,
a telecom legal firm. He can be reached at info@4counsel.net.
Send all of your Legal Line questions to legalline@prepaidpress.com.
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