Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
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 email@example.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.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)