Responding to Allegations of Bankruptcy Fraud or Abuse
Last month, we published an article discussing common allegations of bankruptcy fraud and how to avoid these allegations when going through the Chapter 11 reorganization process. This month, we’re shifting focus to later in the process: What if it is too late to avoid allegations of bankruptcy fraud or abuse? An experienced Miami bankruptcy lawyer at Edelboim Liberman explains:
Recap: Common Allegations of Bankruptcy Fraud and Abuse in Chapter 11 Cases
Before we discuss how to respond to allegations of bankruptcy fraud or abuse in a Chapter 11 case, we should first recap the various forms these allegations can take. As we discussed last month, common fraud and abuse allegations in Chapter 11 cases include:
- Concealing assets from the bankruptcy court
- Concealing revenue from the bankruptcy court
- Fraudulent conveyances and preferential transfers
- Omitting creditors or failing to provide notice to creditors
- Misrepresenting future business prospects or investments
All of these allegations can present substantial risks for companies that are pursuing reorganization under Chapter 11. Depending on the nature, scope, and veracity of the allegations at issue, facing allegations of bankruptcy fraud or abuse can potentially trigger a variety of sanctions, and, in some cases, it can lead to denial of relief through the bankruptcy process.
How Companies Can (and Should) Respond to Fraud and Abuse Allegations in Chapter 11 Bankruptcy Cases
With this in mind, how can (and should) companies respond to fraud and abuse allegations in Chapter 11 bankruptcy cases? Here are some key practical, strategic, and legal considerations:
Investigating the Veracity of the Allegations at Issue
When facing allegations of bankruptcy fraud or abuse, informed decision-making is essential. Making informed decisions starts with assessing the veracity of the allegations at issue.
Thus, if a secured creditor, the bankruptcy trustee or another interested party alleges fraud or abuse during the Chapter 11 bankruptcy process, it will be important to quickly investigate the allegations to determine what defenses the company has available. Are the allegations substantiated? Are they misguided? Or, does the representation, omission or transaction at issue fall into a grey area where there is not a clear answer to these questions? All three scenarios are possible, and understanding which scenario your company is facing will be critical for executing an informed and strategic defense. Gaining this understanding will require a careful review of all pertinent internal records, court filings, and any other documentation that is available.
Gathering and Preserving Relevant Documentation
In any scenario, when facing allegations of fraud or abuse, it is important to gather and preserve all relevant documentation. Not only is this important for evaluating the allegations and identifying available defenses, but it is also important for avoiding allegations of spoliation or intentional destruction. These allegations, if proven, can lead to sanctions in Chapter 11 bankruptcy cases and ancillary court proceedings as well.
For many companies, preserving relevant documentation will involve not only avoiding manual deletion and destruction but also pausing automated deletion and destruction protocols. Even if the loss of a relevant document is inadvertent or the result of activities in the normal course of business, the loss can still lead to sanctions.
Understanding the Potential Implications of the Allegations at Issue
After investigating the veracity of the allegations at issue and ensuring the preservation of all relevant documents, the next step is to assess the allegations’ potential implications. If proven, what would the allegations mean for the company’s Chapter 11 bankruptcy case? Are the allegations severe enough that they could potentially have legal implications outside of the bankruptcy court as well?
These are extremely important questions, and the answers should inform the company’s next steps. Facing substantiated allegations and facing allegations that are clearly unwarranted are two very different scenarios, and they will typically call for very different responses.
Targeting an Informal Resolution (Including Settlement When Necessary)
With that said, in many cases, it will make sense to target an informal resolution regardless of the veracity of the allegations of bankruptcy fraud or abuse against the company. Targeting an informal resolution generally keeps dispute resolution costs down, and, in cases involving substantiated allegations, focusing on settling the allegations will often (though not always) be the best approach.
There are various ways to approach the informal dispute resolution process in these cases, and companies facing allegations of bankruptcy fraud or abuse will want to work closely with their Miami bankruptcy lawyer to pursue a strategic path forward. Unless and until the issue gets resolved, it will be important to keep the possibility of litigating the dispute open as well.
Disputing the Allegations in Court (When Necessary)
While it will often make sense to target an informal resolution, in some cases, it will be in a company’s best interests to dispute a creditor’s or other party’s bankruptcy fraud or abuse allegations in court. There are several potential defenses to all types of bankruptcy fraud and abuse allegations, and if a company has defenses available, litigating could ultimately prove to be the best approach. Determining whether to pursue litigation is a decision that must be made on a case-by-case basis, taking into account the specific legal and factual circumstances of each case.
Remaining Focused on the Company’s Financial Needs and Ultimate Goal
Finally, while allegations of bankruptcy fraud and abuse cannot be ignored, it is also important for companies that are facing these allegations to remain focused on their financial needs and the ultimate goal of reorganizing their debts through the Chapter 11 bankruptcy process. In the vast majority of cases, a path forward will be available, and working with the company’s legal counsel to find this path will be in the company’s best long-term interests.
Request a Call with a Miami Bankruptcy Lawyer at Edelboim Lieberman
If you need to know more about how to effectively respond to allegations of bankruptcy fraud or abuse during the Chapter 11 reorganization process, we invite you to get in touch. To request a call with an experienced Miami bankruptcy lawyer at Edelboim Lieberman, give us a call at 305-768-9909 or request a free consultation online today.
