Ponzi Lost Profits Paid Before Late-Filed Claims for Principal

Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...

By Daniel Gill

Timely filed claims for lost profits from a failed Ponzi scheme will be paid before late-filed claims for lost principal, a Hawaii bankruptcy judge ordered ( In re Maui Indus. Loan & Fin. Co. , 2017 BL 317147, Bankr. D. Haw., No. 10-00235, 9/7/17 ).

The Sept. 7 opinion of Judge Robert D. Faris, of the U.S. Bankruptcy Court for the District of Hawaii, is a stark reminder of the importance of timely proofs of claim, a document submitted by a creditor laying out what is owed by the debtor.

Lloyd Kimura admitted in a federal plea agreement that he operated Maui Finance Company as a Ponzi scheme for about 23 years. The company sought bankruptcy in 2010 after a state regulator ordered it to stop doing business.

The trustee appointed to administer the debtor for the benefit of its creditors moved early in the case for the court to separate investor claims into two classes. One would be for lost principal invested and the second for lost profits resulting from the illegal Ponzi scheme. It’s appropriate in Ponzi scheme cases to compensate lost principal claims before making any payments for claims for lost profits.

The trustee succeeded in recovering significant funds to distribute to creditors. He asked the court for instructions on handling distributions on account of late filed claims. He proposed without advocating that perhaps he should make distributions to claimants who filed late proofs of claim for lost principal before making distributions for timely claims for lost profits.

The court held otherwise. Under Section 726 of the Bankruptcy Code, timely filed claims are to be paid before late-filed claims. The court found no basis to deviate from the statutory priority of claims and held that all allowed timely filed claims—including to the extent they sought recovery of lost profits—must be paid before holders of late-filed claims received distributions. This was true even for proofs of claim filed as little as ten days late.

The court determined the order of priority to be all timely claims for principal, then timely filed claims for lost profits, then tardily-filed claims for principal, and lastly to late-filed claims for lost profits.

Dane S. Field, the trustee, was represented by Elizabeth A. Kane, Honolulu. The debtor was represented by Chuck C. Choi, Honolulu.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Bankruptcy Law News on Bloomberg Law