By Nick Brown
Wednesday, March 13, 2013
Coudert bankruptcy administrator shines light on unclaimed funds
Per Thomson Reuters News & Insight:
By Nick Brown
By Nick Brown
NEW YORK (Reuters) - Liquidators of defunct law firm Coudert Brothers are demanding that states turn over thousands of dollars in unclaimed funds, in a case that could help clarify how bankrupt entities recover unclaimed funds in the future.
Development Specialists Inc, the administrator of Coudert's Chapter 11 bankruptcy estate, says it has the right under federal bankruptcy laws to claim money being held on the firm's behalf in so-called "escheat" funds managed by state governments.
In a lawsuit filed on Wednesday in U.S. Bankruptcy Court in Manhattan, DSI asked a judge to order finance leaders in California, New York, Ohio, Colorado, Texas, Pennsylvania and Washington, D.C., to turn over Coudert's escheat funds.
According to the complaint, California Controller John Chiang has "repeatedly refused" to release unclaimed property on grounds that only a bankruptcy debtor itself -- not the administrator of the entity's estate -- may claim such funds.
DSI says that policy clashes with federal bankruptcy laws and the U.S. Constitution's supremacy clause.
The other states named in the lawsuit do not appear to have similar policies in place, but Bill Brandt, DSI's chief executive, told Reuters in an interview that he plans to make claims on Coudert's behalf in those states. He said he included them preemptively in the lawsuit to ensure they would not deny the claim on grounds similar to California's.
When individuals or entities who are owed money can't be paid, either because they have liquidated, moved or cannot be found, the money "escheats" into state-managed funds, where its owners can claim it later.
This scenario is common in bankruptcies, when companies liquidate and checks from customers, vendors and other sources fail to reach their destination.
Bankruptcy administrators like Brandt make it a habit to comb through escheat funds in every state where the entity did business to recover money for creditors.
Coudert is liquidating after filing for bankruptcy in 2006, but creditors have yet to see payout, with the firm's assets tied up in litigation.
Coudert's escheat funds come from a variety of sources, including funds tied to its profit-sharing plan, money related to insurance policies, and checks from companies like Xerox Corp and Ricoh.
Brandt said treasurers used to "willingly and happily" turn over money in escheat funds to bankruptcy administrators, but that changed - at least in California - after the financial crisis, when cash-strapped states began looking for ways to save money.
"Escheat funds are found money for these states," Brandt said. "It's a significant amount of off-balance-sheet income, billions of dollars in some states."
Brandt said he believes preserving that income is what is driving Chiang's policy in California to make it more difficult for bankrupt entities to recover their money.
A spokesperson for Chiang disputed the characterization.
"That's clearly not the case," spokesman Jacob Roper said on Friday, noting that Chiang administered reforms in 2008 that caused notifications to property owners to rise tenfold to 2.6 million, from 266,000 the year before.
About 1.4 million notices were sent out in 2010 in California, the most recent year for which data was available, totaling $400 million in cash, Roper said.
Roper noted that, in cases where a bankruptcy occurs prior to the escheat, administrators can claim funds in California without a court order.
But he acknowledged that, in cases where a bankruptcy occurs after the money escheats, administrators cannot claim funds on behalf of estates without a turnover order from the court.
For Brandt, that's frustrating.
"I don't want to spend the estate's money to litigate this," he told Reuters. "I have to spend money to get what I used to be able to get just by writing a letter."
In Colorado, the state will turn over funds to administrators, but only with extensive papers proving the administrator has the right to make a claim, said Patty White, the state's director of unclaimed funds.
"We require a ton of documentation," White told Reuters. "Sometimes there isn't enough."
In New York, too, administrators can make claims if they can prove entitlement, but they may be treated as creditors and have to wait on line with other claimholders, Nikki Jones, a spokeswoman for state Comptroller Thomas DiNapoli, told Reuters.
The money at stake in the Coudert case is small - not more than $25,000, Brandt estimates - but the impact of the lawsuit could be broad. If the court acquiesces to Brandt's request and forces states to turn over the Coudert funds to him, it would dictate a precedent that Brandt believes is already laid out under bankruptcy law: that administrators have the right to "collect and liquidate" a bankrupt entity's assets.
It is not the first time Chiang's resistance to such turnover has come under fire. Liquidators of Death Row Inc, the former hip hop record label, in 2010 filed a class action on behalf of all bankruptcy administrators who have filed or will file claims for escheat money in California. The case remains in mediation, its electronic docket shows.
BILLIONS OF DOLLARS
California's escheat fund is around $6.4 billion, Roper said, while, according to Jones, New York's is $12 billion.
Pennsylvania's is about $1.9 billion, while Ohio's is $1.6 billion and Texas' is $2.6 billion, spokesmen for the states' respective governments said on Friday.
A representative for Washington, D.C., had no immediate comment.
Officials who spoke to Reuters said their states generally cooperate with bankruptcy administrators. State laws in Ohio and Texas explicitly allow a receiver or trustee to make claims for a bankrupt entity, although in Texas's case, the allowance applies to corporate debtors, saying nothing of bankrupt individuals.
Pennsylvania spokesman Gary Tuma said the state's escheat money goes into its general fund until claimed. But he balked at the suggestion that the state lacks incentive to work to return money to its owners.
"Our numbers are up," Tuma said, noting that the state returned $98.9 million to owners in 2012, a 15 percent bump from before state Treasurer Rob McCord took office in 2009.
In Ohio, the state's Division of Unclaimed Funds has returned $37 million in 2013, a 12 percent increase over last year's pace, spokesman Dennis Ginty reported.
The case is Development Specialists Inc v. Chiang et al, U.S. Bankruptcy Court, Southern District of New York, No. 13-1275.
The bankruptcy is In Re Coudert Brothers LLP, in the same court, No. 06-12226....