- July 19, 2015
- Thomas Adam
- Bankruptcy
Former business partners, multi-million dollar lawsuit settlements, and offshore accounts sounds like a recipe for a complex bankruptcy action, right? All were involved in the In Re Daniel W. Allen, Sr. bankruptcy action. Yet, in the words of the deciding judge, the case’s “ultimate resolution involve[d] nothing more exotic than interpretation of the Bankruptcy Code.” 
The underpinnings of the case began in 1989 when Daniel Allen, Sr. and Gary Carpenter formed a company, ATN, that resold long distance phone service. The relationship soured and Allen was terminated from his employment with ATN in 1996. Allen promptly sued. ATN agreed to pay Allen and his brother $6.25 million to settle the lawsuit and it did in two payments: one for $250,000 and subsequent in 1999, payment for $6 million.
In 2003, ATN filed for bankruptcy in Florida and things got interesting. ATN sought to avoid the $6 million as a fraudulent transfer pursuant to 11 USC 544 and 550. Ultimately, ATN succeeded on this argument and the court issued a recovery order pursuant to 500. However, during the proceedings, the Allen brothers managed to transfer the money to a trust in the Cook Islands, a notorious offshore financial haven. The bankruptcy court ordered the return of the funds to the US multiple times. The Allens disobeyed, multiple times even after being held in contempt of court.
Allen decided to make things even more interesting and filed his own bankruptcy action in New Jersey. Remember, that typically when a bankruptcy action is filed an automatic stay goes into effect that prevents the debtor’s (Allen here) creditors from attempting to recover moneys owed which is what ATN was working hard to do in its Florida bankruptcy action.
ATN asked the court to find that it’s bankruptcy was not stayed because it wasn’t attempting to collect a debt owed by Allen, it was trying to collect property that was part of its own bankruptcy estate. Allen argued that opposite, that the property was part of his bankruptcy estate. It’s an interesting question that has been answered differently by different courts. The New Jersey bankruptcy court favored Allen, but was reversed on appeal by the 3rd Circuit.
The crux of both arguments was based on the Bankruptcy Code’s definition of the bankruptcy estate as including “any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723” of the Code. Remember, Florida bankruptcy court had issued a recovery order pursuant to 550 but the Allens had been unable to actually obtain the $6 million. The New Jersey Bankruptcy Court reasoned that because ATN did not have physical possession of the $6 million, it had not recovered it within the meaning of the statute.
The 3rd Circuit found this definition to be too narrow finding instead that ATN did recover the funds when it received the order from the Florida bankruptcy court pursuant to 550. In support of its opinion it cited the introduction to the definition of the bankruptcy estate found in 11 USC 541(a). That introductory sentences states, “all of the following property wherever located and by whomever held…” The third circuit astutely pointed out that if the lower bankruptcy court’s definition of recover would render the “by whomever held” language meaningless.
Moral of the story: A bankruptcy action can be tricky; multiple bankruptcies, even trickier. The bankruptcy focused experience of the Jacksonville bankruptcy attorneys at Adam Law Group allows the firm to effectively represent clients in all types of bankruptcy matters, personal and business alike.