Bankruptcy of Diplomat Caught in Ponzi Scheme Survives

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By Daniel Gill

Sept. 21 — A former U.S. Ambassador to Ecuador and State Department official can remain in bankruptcy despite a dismissal motion brought by the receiver for the notorious Stanford Financial Group, a Maryland bankruptcy judge ruled Sept. 19 ( In re Romero, 2016 BL 307861, Bankr. D. Md., No. 15-23570-TJC Chapter 7, 9/19/16 ).

Former diplomat Peter Romero can remain in Chapter 7, Judge Thomas J. Catliota of the U.S. Bankruptcy Court for the District of Maryland held. The court determined that even though the bankruptcy was filed in response to an adverse judgment of more than $1.25 million obtained by the receiver, it was not an improper use of relief in bankruptcy.

After 24 years of what the court called “an exemplary career” in the U.S. Foreign Service, Romero entered the private sector around 2001, the court said.

Among other ventures, the debtor worked as a consultant for Stanford Financial Group for about seven years, advising on overseas markets, politics and policy. He cut ties with Stanford “the day he learned” about the infamous 20 year fraud and Ponzi schemes of Stanford and the federal court appointment of Ralph S. Janvey as receiver, the court said.

A Ponzi scheme is a “phony investment plan in which monies paid by later investors are used to pay artificially high returns to the initial investors, with the goal of attracting more investors” ( Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir. 2000)).

Receiver Gets Judgment Against Debtor

Janvey sued Romero to recover money paid to him by Stanford, and a jury found in favor of the receiver. The court awarded a judgment against the debtor for more than $788,000 for the fraudulent transfers under Texas law, plus another $320,000 for legal fees.

That judgment was later affirmed by the Fifth Circuit Court of Appeals.

The debtor attempted to settle the judgment with the receiver and sent him a list of his assets available to satisfy a judgment, to help facilitate those discussions, the court said. But the receiver would make no deal.

The debtor claimed that the receiver had a “strategic interest” in pursuing Romero to the fullest extent possible, apparently to demonstrate to other similarly situated defendants the extent to which the receiver was prepared to litigate, “to force and leverage settlements” in those other cases, the court said.

The receiver began to try to enforce the judgment — including by seeking to garnish Romero's Individual Retirement Accounts administered by Wells Fargo Bank in an action in California, although the debtor holds no assets and has no other connections with the state, the court said. The debtor contended that the receiver chose California as his venue because the state's laws are “the most favorable to a creditor seeking to collect a debt from pension funds,” the court said.

Romero filed his Chapter 7 case on Sept. 30, 2015. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

The debtor filed his bankruptcy case “so that any challenge to his exemptions or the dischargeability of the judgment could be addressed in one court,” the court said.

The court noted that neither the trustee appointed in the case, nor Janvey (or anyone else), objected to the debtor's discharge or the dischargeability of the receiver's judgment. Instead, Janvey filed a motion to dismiss the bankruptcy case, on the grounds that it was filed in bad faith.

The essence of the case, then, was ”whether the debtor should be able to obtain a discharge of the judgment and his other debts considering his sizeable exempt assets,” the court said. These exemptions included his IRAs and pensions that were exempt under applicable laws, and real property that was exempt because title to the parcels was held with his wife as tenants by the entirety. In Maryland, a property held by the entireties with a non-debtor spouse is exempt from collections for a debt against the debtor only.

No Bad Faith

Noting that there is a split among courts as to whether bad faith constitutes “cause” for dismissing a bankruptcy case, the court answered the question in the affirmative. But it declined to find bad faith in the case.

The court noted the following facts that demonstrated a lack of bad faith: the debtor was candid in his disclosures filed in his bankruptcy case; he surrendered his non-exempt assets to the trustee (and waived a claim of exemption for at least one such asset, a boat); he paid for docking fees for the boat until the trustee could sell it, although he was not obligated to do so; and his living expenses were not exorbitant or extravagant.

In fact, consideration of one of the bad faith factors — engaging in “procedural gymnastics” to frustrate creditors — applied more against the receiver than the debtor, the court said. “To the extent anything could be characterized as ‘procedural gymnastics' it would be the Receiver's effort to challenge the debtor's pension exemption in California,” where the debtor had no assets or other connection.

The court noted that because of the judgment against him, the debtor was unable to get work, and his attorney wife had become completely disabled as the result of a bacterial brain infection she suffered in Colombia.

“In light of the debtor's wife's illness and the debtor's inability to find work, they will be required to live off the exempt assets going forward,” the court said. “The debtor's filing to preserve the exempt assets is not evidence of bad faith.”

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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