Unclaimed Bankruptcy Money Poses Quandary For Lawyers
By Katy Stech
Of DOW JONES DAILY BANKRUPTCY REVIEW
The corpses of companies that were too broke to pay their bills are resting on piles of cash -- and nobody agrees on what to do with it.
Businesses left for dead in bankruptcy court can leave behind pools of cash that, years later, sit forgotten in bank accounts because of a loophole in the U.S. Bankruptcy Code. The oversight leaves the final destination for the cash -- money left unclaimed by creditors or unexpected payments that trickle in long after a company's demise -- unclear to even the bankruptcy industry's leading experts.
Some attorneys and judges are trying to push this leftover money to charity instead of letting it age in banks or transferring it to pay off the national debt, where unclaimed money from most consumer bankruptcy cases goes. But that effort has raised concerns among others in the industry who are both troubled by the use of court authority to order donations to charity and unsure exactly how such a process would work.
"It's nobody's money and everybody's money," said Harlan Loeb, who became the spokesman for Texas energy company Enron Corp. after its collapse in 2001.
Final instructions to professionals in charge of winding down the estates of companies that liquidate -- rather than reorganize -- in Chapter 11 were left out of the Bankruptcy Code, which became law in 1978. Nor does the Office of the U.S. Trustee, the Justice Department arm tasked with monitoring the bankruptcy court, offer guidelines for where the money should go.
The lack of clarity differs from the exhaustive rules that govern money left over from Chapter 7 cases, which require professionals to file final reports that show where the scraps went. The scant oversight of unclaimed funds in Chapter 11, meanwhile, has raised concern among bankruptcy and restructuring professionals.
"Could there be an opportunity for mischief? Sure," said Florida bankruptcy attorney Paul Steven Singerman. "Do I think that mischief is chronic? No."
Amid the confusion, industry leaders are stepping in to steer the money. For now, much of it is put toward charity.
"It should go to poor people," said Judge Laurel M. Isicoff of the U.S. Bankruptcy Court in Miami, a witness to the crushing economic hardship faced by many Florida families. Her court added a local rule encouraging bankruptcy professionals who are writing Chapter 11 payout plans to add wording that steers leftover estate money to charities, especially legal aid groups that help individuals file for bankruptcy protection.
"We're trying to provide a convenient mechanism to do good," she said.
The bankruptcy court's most well-known opinion on the matter came after the 2001 collapse of Chicago technology consulting firm Xpedior Inc. (XPDR). Many of the company's creditors overestimated how much they were owed, leaving the estate with $842,000 once all valid claims were paid out.
The money was deemed "a true surplus that belongs to no one" by U.S. Bankruptcy Court Judge Jack B. Schmetterer in a 47-page opinion. Under the company's creditor-payment plan, any excess or unclaimed cash worth less than $15,000 was supposed to go to the local chapter of the Make-A-Wish Foundation, which ultimately ended up splitting the money with providers of legal aid.
However, Schmetterer's ruling hardly cleared up the uncertainty over what to do with leftover money. He ordered that it should go to charities that somehow benefit children or the justice system. The U.S. trustee's office agreed to back the final donation plan as long as money didn't go to religious charities.
Following that guidance, bankruptcy Judge Carol Doyle blocked a $300,000 payment from the estate of insurance and loan company Conseco Inc.'s shuttered finance unit to Vision 21 Foundation, which funnels money to charities that according to its mission statement "instill in our children those Christian values we hold true." The money instead went to legal aid.
Bankruptcy professionals who have supervised the donation of leftover money say that there's no defined method for picking the charities that would benefit from unclaimed cash, a curiously casual approach in cases in which creditors often fight hard to maximize their recoveries in the earlier stages of the process. Their only guidance comes from the legal term "cy pres" -- which, when translated from the French, simply means "as near as possible."
In keeping with that directive, the $19,000 left over from the liquidation of retailers Western Warehouse and Boot Town eventually emptied into the Justin Cowboy Crisis Fund, a Colorado charity that has provided money to more than 1,000 rodeo participants who have been injured during competition. Other money went to the Tough Enough To Wear Pink charity, which raises money in the rodeo community to fight breast cancer.
Isicoff's court in South Florida is one of several with rules that encourage donations at the end of a Chapter 11 case. But the rule is toothless, and some say for good reason. Opinions differ widely on which charities are worthy of donations, as was recently illustrated by the controversy surrounding the Susan G. Komen for the Cure's decision to revoke funding to the nonprofit Planned Parenthood, which provides abortions alongside other women's health services.
Harvey Miller, an industry veteran who leads the bankruptcy practice at law firm Weil Gotshal & Manges, pointed out that nothing exists in the Bankruptcy Code that would give a court the authority to direct proceeds remaining from a liquidating estate to charity.
"I believe that creates many problems from political and social perspectives," he said.
California bankruptcy attorney Kenneth Klee, who helped write the Bankruptcy Code as a congressional staffer in the 1970s, admits the guidelines for leftover Chapter 11 money were unclear. Chapter 11 wasn't designed to be used to liquidate companies, but it has become common practice among big corporations since the Bankruptcy Code took effect.
But Klee said that he was opposed to directing unclaimed funds to charity.
"The judiciary shouldn't be in the business of giving money to charity," said Klee, who's also a professor at the University of California, Los Angeles, School of Law. "If you start having to choose between Catholic charities and the [Muslim] Brotherhood and the Jewish Family Service, you're going to have a bloodbath on your hands."
He added that Congress should clarify the Bankruptcy Code so the money goes to the U.S. Treasury, where bankruptcy-case leftovers go in corporate and consumer Chapter 7 cases, consumer Chapter 13 cases, and farm Chapter 12 bankruptcies.
The fate of leftover money is such an afterthought that Miller and the army of professionals that spent three years carving up the estate of failed investment bank Lehman Brothers Holdings Inc. (LEHMQ), the largest Chapter 11 case in U.S. history, didn't even deal with it in the firm's $65 billion creditor-repayment plan.
John J. Ray III, the Florida specialist supervising the wind-down of Enron's massive estate, says that there won't be any extra money when he's done making the last major payment to Enron's creditors later this year. Any uncashed checks will be turned over to the state where the intended recipient listed its address.
Ray's plan avoids the controversy that could arise if victims of the Enron fraud were to later find out that the money was given away.
Loeb, the former Enron spokesman, once asked his class of aspiring lawyers at Northwestern University what they'd do with any extra money left over from Enron. Most said they'd funnel it to those hurt by the fraud. But one student suggested that the money fund a study to look into the overlooked positive contributions Enron made to the energy industry.
"There is obviously a moment in time where, in the wake of such turbulence in the corporate environment that perhaps there's some legacy that's positive," Loeb said.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy
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