A Real Life Monty Brewster: Can You Spend $30 Million To Escape From the IRS?

Author: Dan Stroh, Associate Member, University of Cincinnati Law Review

A current circuit split poses an imperative question: Can a hypothetical multi-millionaire, like Monty Brewster, spend his millions frivolously without fear of a tax penalty following him through bankruptcy?[1] The United States Bankruptcy Code generally allows debtors to discharge all debts arising prior to filing of bankruptcy.[2] One exception to this general rule prohibits a debtor from discharging any tax debt “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”[3] However, the Ninth and Tenth Circuits disagree on the debtor’s degree of culpability required to deny a discharge of indebtedness under this exception.[4] Continue reading “A Real Life Monty Brewster: Can You Spend $30 Million To Escape From the IRS?”

Bankruptcy Discharges: Why Courts Should Discharge the Civil Contempt Standard for “Refusals”

Author: Stephen Doyle, Associate Member, University of Cincinnati Law Review

Because of the Great Recession beginning around 2008, the number of bankruptcy filings increased by nearly 150% between 2008 and 2010, before leveling off in recent years.[1] With the increased caseload on bankruptcy courts came increased confusion about some of the Bankruptcy Code’s provisions. Recently, courts have split over the requisite level of intent when a debtor “refuses” to comply with an aspect of the case as the term applies to revocation of a discharge of debt.[2] The Fourth, Ninth, Tenth, and Eleventh Circuit Courts of Appeal have held that the party seeking revocation of a discharge must demonstrate willful or intentional misconduct on behalf of the debtor,[3] while all but one of the bankruptcy courts in the Sixth Circuit have held that the standard mirrors that of civil contempt.[4] The former application—the willfulness standard—is more appropriate to such refusals given the purpose of the Bankruptcy Code and the meaning of the word “refuse.”

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Robbing Peter to Pay Paul: Irving Picard’s Quest to Repay Bernie Madoff’s Victims

Author: Dan Stroh, Associate Member, University of Cincinnati Law Review

Charles Ponzi did not intend to have his name become synonymous with financial fraud; he intended to get rich quickly. While he was not the first to perpetrate such a scheme, Ponzi’s name is attached to a type of fraud in which a fund pays its first investors with the money contributed by later investors—a Ponzi scheme. In 2008, Bernie Madoff was discovered to have been running a Ponzi scheme with investments estimated at $17.5 billion[1] and claimed returns in excess of $65 billion.[2] While Ponzi’s name is still mentioned frequently, many people now view Madoff as the face of Ponzi schemes due to his decades-long run as a famous investment professional all while never actually investing client funds.

When Madoff’s scheme unraveled, Irving Picard was assigned as trustee for Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act (SIPA) and was given the task of attempting to recover as much money as possible to repay the initial investments of Madoff clients.[3] Six years later, the victims of Madoff’s fraud are still seeking repayment of their initial investments.[4] Picard has successfully recovered approximately 60% of the stolen assets to distribute to victims, but he continues to seek more.[5] Recently, the Second Circuit placed a major obstacle in his path when it determined that investors who withdrew more from their accounts than they initially invested were protected by the stockbroker defense in § 546(e) of the Bankruptcy Code.[6] Picard argued that these investors profited from Madoff’s scheme and whether they knew of the scheme or not, the profits they enjoyed should be shared by all of the defrauded investors.[7] On March 17, 2015 he filed a petition for certiorari with the Supreme Court, which has the potential to increase the amount of recovered assets by at least $2 billion and possibly up to $4 billion. With the holders of these funds currently protected by the “stockbroker defense” under the Second Circuit’s ruling,[8] Picard hopes that the Supreme Court will take the case and rule that this defense should only apply when actual securities are involved, not fictitious ones as is the case with Ponzi schemes. While some see the efforts of Picard as simply robbing Peter to pay Paul,[9] the return of these funds would allow for all defrauded investors to be treated equally and fairly without conveying benefits on those who were lucky enough to withdraw their money from Madoff’s Ponzi scheme first.

Continue reading “Robbing Peter to Pay Paul: Irving Picard’s Quest to Repay Bernie Madoff’s Victims”

Filing Time-Barred Claims in Bankruptcy Subjects Creditors to FDCPA Sanctions in the Eleventh Circuit (and Maybe the Seventh)

Author: A.J. Webb, Articles Editor, University of Cincinnati Law Review

Another clash between the Fair Debt Collection Practices Act[1] and the Bankruptcy Code[2] is on the horizon. A recent decision by the Eleventh Circuit Court of Appeals might lead to additional liabilities against creditors seeking to collect on debts from consumers who file for bankruptcy. In July, the Eleventh Circuit held that debt collectors are barred from filing proofs of claims in bankruptcy when those claims are based on unenforceable consumer debts under state law.[3] This issue is likely to be addressed by the Seventh Circuit Court of Appeals in a separate proceeding currently underway in the District Court of the Southern District of Indiana.[4] In order to fulfill the policy aims of the FDCPA and protect consumer debtors from abusive and deceptive debt collection practices, the Seventh Circuit should follow suit and adopt the holding of the Eleventh Circuit.

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Don’t Let the Door Hit You on the Way Out: Smith v. Robbins (In re IFS Financial Corporation) [1]

Author: A.J. Webb, Articles Editor, University of Cincinnati Law Review

In November 2011, W. Steve Smith traveled to New Orleans, Louisiana, to attend a bankruptcy hearing for IFS Financial, for which he served as a bankruptcy trustee in a chapter seven liquidation.[2] While the hearing lasted only one day, Smith extended his stay by three additional days. This decision ultimately cost him his job as a trustee on all of his bankruptcy cases.[3] The Bankruptcy Court for the Southern District of Texas removed Smith as a trustee under Bankruptcy Code (Code) § 324, a provision that allows the court to remove a trustee for cause after notice and a hearing.[4] The District Court for the Southern District of Texas recently affirmed this decision.[5] The decision by the district court highlights three important issues with regard to bankruptcy trustees. First, it demonstrates the willingness of courts to remove trustees for relatively minor improprieties. Second, it demonstrates the fundamental principle of a trustee’s job in bankruptcy: to protect estate assets and ensure their distribution to creditors. Finally, it raises the question as to whether trustees have a “right” to their job under the Code or the United States Constitution.

Continue reading “Don’t Let the Door Hit You on the Way Out: Smith v. Robbins (In re IFS Financial Corporation) [1]”