Tag Archives: GMX Resources

Can I Get Sued in a Bankruptcy?

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Most people think of filing for bankruptcy to stop lawsuits, but it is possible to get sued in a bankruptcy – or to do the suing. I’ve written recently about people who have been sued in the GMX Resources bankruptcy for fraudulent transfers for receiving dividends on preferred stock and people who have been sued for the recovery of what are called preferential transfers; but there is a lot more litigation than just this going on at the bankruptcy court.

For most people who file for bankruptcy the process looks a lot more administrative than it does judicial. Most people who file never see their Judge, for instance. No, the person who presides over the First Meeting of Creditors is NOT a Judge. Some standard rules of thumb – if there is no court room, no black robe and no standing when the person enters and leaves the room – you are probably not dealing with a Federal Bankruptcy Judge.

Just because most debtors never see them, doesn’t mean that the Judges aren’t staying busy. Bankruptcy litigation comes in two flavors: Adversary Proceedings and Contested Matters. An Adversary Proceeding is essentially a full-scale lawsuit filed within the context of a Bankruptcy case. It begins with a Complaint and a Summons, followed by an Answer, discovery, motions, evidentiary hearings and finally concludes with a trial.

Adversary Proceedings are required to determine the nature or extent of a lien, revoke a discharge or plan confirmation, object to a discharge, recover property of the estate, provide injunctive relief, declaratory relief or subrogation; and certain sales of property must be approved by an Adversary. Essentially anything else in the Bankruptcy Court where two people are arguing or disagreeing qualifies as a Contested Matter, which is quite useful; because in a contested matter you have full access to discovery and other litigation tools that are generally considered part of a lawsuit rather than just a motion hearing.

Some things can be the subject of either an Adversary Proceeding or a Contested Matter. A violation of the automatic stay, for instance, may be brought by either procedure. A violation of the discharge, however, generally is brought by a Contempt Citation, which is a Contested Matter.

So, what is the difference? Adversary Proceedings have greater procedural and due process protections built into them. They must be served like a lawsuit. They have a longer answer time. They have more structure to them which helps to manage greater complexity, a larger number of parties, more witnesses, more complicated issues. Contested Matters are procedurally more flexible. A Contested Matter may be a simple motion – motion with brief filed, fourteen days later a response with brief is filed, hearing set and heard generally in an hour or less. Of course, a Contested Matter may also have a long period of discovery, with related motions filed and culminate in a day or multi-day trial with lots of witnesses and exhibits. So, Contested Matters are inherently more flexible. The Court is expected to adapt procedures to fit the matter at hand. Adversaries are expected to be complex issues and so are treated that way automatically.

For something like a violation of the automatic stay, which may be brought in either form, I consider the following in making my choice: has the defendant appeared in the case, otherwise, the formal service procedures of the Adversary Proceeding will afford greater due process protections. How many facts will be in dispute? What is the nature of my client’s damages? How much post petition discovery will I want? How much time will I want to prepare the case? Even after considering all of these things, I may still file a case and have the Judge adapt the procedures for it as if it were the other. Judges can do that, and they will if they think it is necessary either for due process considerations, to protect the rights of a party or to make the case easier to manage.

So, there you have it. Bankruptcy lawyers may not empanel a jury too often (or ever), but they are still litigators.

Elaine

In Bankruptcy – Everybody Loses

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Most of my clients come to me concerned about losing stuff – house, cars, one woman was terrified that the Trustee would take her hopelessly spoiled Yorkie. Generally, those fears are not well founded – especially the Yorkie. Yes, sometimes debtors file for bankruptcy with assets that are not exempt, and they do have to turn them over to the Trustee. In Oklahoma that is fairly rare, and the Debtor should know it will happen before the case is filed and his lawyer should discuss with him ways to protect those assets. Still, there are times when filing anyway is still the best option.

Of course, there are other things that debtors lose when they file for bankruptcy – privacy, some pride, the ability to easily incur debt to start a business or buy a house. Although in many cases I think the greatest loss is one of a sense of self-sufficiency. For most people it is a great loss to ask the government for help – for protection, to use a Bankruptcy Code term.

These are things my clients think about. They don’t generally think about what other people are losing when a bankruptcy is filed. Sure, they know that their creditors won’t get paid. Of course, generally those creditors aren’t getting paid anyway; but for most institutional creditors, bankruptcy is an accepted cost of doing business. For smaller creditors and other people connected with a bankruptcy that isn’t as true; and a bankruptcy filing can be a huge loss.

I have recently undertaken the representation of some preferred stock holders in GMX Resources, Inc. GMX Resources, Inc. was a small, publicly traded, oil and gas company based in Oklahoma City that filed a Chapter 11 Bankruptcy two years ago. My clients are being sued to recover dividends that they were paid as stock holders in the period leading up to the GMX bankruptcy filing. You can find a discussion of the relevant cause of action, here. In most cases, my initial contact with these former stock holders is that they lost their entire investment in the company, they shouldn’t have to lose anything else! In fact, several people have told me they almost threw the Summons and Complaint in the trash and done nothing. If they had done so, the Trustee would have taken default judgments against them. Instead, I believe that I can successfully defend these cases.

Of course, on an emotional level I completely understand my clients’ initial reactions. One of the truths of human nature is that it is harder to give up something we have received than to have not received it in the first place or not gain it in the future. Once it is ours, it is OURS!.

On the other hand, if the preferred stock dividends at issue here are actually stock dividends (and I think they were more analogous to debt payments, but that is a conversation for another day), then they should not have been paid if it left the corporation unable to pay its bills. Stock dividends are to be paid out of surplus, not necessary operating funds. The creditors should have had access to that money before the bankruptcy was filed, instead, the creditors weren’t paid, the shareholders were; and the company filed for bankruptcy.

The company filed a bankruptcy to reorganize, but it wound up liquidating. Its general, unsecured creditors (people who had provided goods, services, loans) were owed over $81 MILLION when the case was filed. Most of those creditors will never be paid. Sure, there are a lot of institutional creditors for whom it is an expected part of doing business; but among the long list of creditors is a woman in a suburb of Oklahoma City doing business as a caterer. She was owed over $7,000 – money she will never see. To her, that must have been a catastrophic loss.

Then, there are the ongoing losses. GMX’s employees lost their jobs. The attorneys and accountants and contract firms who did business with GMX all lost a client and valuable source of business. The local economy lost part of its tax base. The business community lost a significant local player.

Everybody lost. That is the price of failure. In personal bankruptcies you have an offsetting win. A personal bankruptcy takes someone who has more debt than he can pay, and converts him into a participating member of the economy again. A personal bankruptcy takes someone who can’t care for himself and his family and converts him into someone who can. A personal bankruptcy creates the freedom to try and to succeed, because without the freedom to fail, no one could ever afford to try. One of the real benefits of the American bankruptcy system is that it isn’t punitive. It allows people to fail and try again. That is the beauty of our fresh start. If Walt Disney had not been able to file for Bankruptcy and try again, central Florida would look very different today!

Corporate bankruptcies can be wonderful things when a company successfully reorganizes. Jobs are saved, assets are made more productive, a valuable member of the business community is restored. Unfortunately, that doesn’t always work; and when it doesn’t – everybody loses.

Elaine

More GMX Resources Lawsuits

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Last week I wrote about stockholders in GMX Resources who were being sued as part of its bankruptcy for the recovery of dividends that they received prior to the bankruptcy filings. There are a ton of those cases filed. I haven’t spent a lot of time with the consolidated docket, but it looks like there were just under 200 Adversary Proceedings filed to recover property or payments of some kind in this Bankruptcy. About half of those were filed against owners of Preferred Stock, and I wrote about those last week. It appears that the other half were filed against people, or more frequently companies, who had received what are called Preferential Transfers; and I thought I this would be a good excuse to explain preferential transfers.

Preferential transfers are the product of two policies: 1. To make sure that when someone files for bankruptcy all creditors who have similar legal rights wind up getting treated essentially the same way; and 2. To encourage creditors to give debtors a bit of room to get back on their feet when they start to show signs of financial trouble.

Here are two examples of that. There is a natural inclination when you know you are sinking fast to want to repay loans from people you care about rather than those you might not. So, when that tax refund comes in, and you know you need to file for bankruptcy, are you going to repay the loan from your Mom or a credit card account? Well, yea, of course you are; but in terms of good policy, it isn’t fair for Mom to get better treatment than any other creditor.

This leads us directly into the next reason. If one creditor can get paid when no one else does and that creditor gets to keep the money, then at the first sign of trouble there will be a rush to squeeze money out of the Debtor – a virtual feeding frenzy if you will. Now, consider this in the context of a small business. Something bad happens. The business falls behind on paying its bills. At the first sign of trouble, all of its creditors take immediate steps to make sure that they get paid. The business collapses, because it lacks sufficient cash flow to keep the doors open.

Whereas, if the creditors had given the business 60 or 90 days to find its feet, the business might have stabilized, paid all its creditors, stayed in business, and continued providing an income for its employees and its owner. When you think about it, this kind of thing happens in the life of virtually all small businesses; and as it happens, creditors usually do give businesses time to get back on their feet – but they aren’t doing that at the risk that someone else will be less understanding and wind up with all the money and no one else will get anything. No. Creditors give debtors a chance to get back on their feet, because they know that if someone else doesn’t and the business files for bankruptcy, the money the greedy creditor got will be taken back and distributed out equally.

The tool for recovering those funds? Why an avoidance action to recover a preferential transfer, of course. This is a tool that bankruptcy trustees use frequently. If a Debtor’s wages are garnished in the 90 days before a bankruptcy? Well, that is one creditor getting paid and making sure no one else does. The trustee can take that money back. This is actually kind of nice when a debtor is being garnished and he owes recent taxes. When the trustee takes the garnished wages back, the first creditor he pays is the taxing authority.

There are defenses to preferential transfers, just like there are to fraudulent transfers. There are also times when it can be in a debtor’s best interests to have a Trustee recover preferential transfers. The nice thing about preferential transfers from the Debtor’s perspective is that the window for the transfer is generally quite short. Unless the transfer was made to (or benefited) an insider (like family), the transfer has to have been made within 90 days of the bankruptcy filing. That is a time period that can usually be waited out if necessary. Of course, if the transfer was to a family member, then the look back period is a year. That can be harder to wait out, although I have done it twice in the recent past.

The worst thing you can do about any type of transfer if you are getting ready to file for bankruptcy is to not tell your lawyer about it. I promise you, what he doesn’t know will hurt you.

Elaine

GMX Resources, Fraudulent Transfers, Corporate Dividends and Bankruptcy

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A bunch of people are getting sued in an Oklahoma bankruptcy court, because they received dividends paid to them as holders of priority stock in GMX Resources, Inc. which subsequently filed for Bankruptcy. I have to admit that when I heard this even I scratched my head a bit. This case is so strange that it took me a while even to figure out who the Plaintiff, one John P. Madden as Trustee of the GMX Resources Creditors Trust, was and what the heck he had to do with this. It took me a little while longer to figure out why I think that these cases should all be defensible by the stock holders. My defense strategy is complicated, but I am making sure that it is cost effective for even relatively small stock holders. So, if you have received a Summons and Complaint from John P. Madden – contact me or another attorney well versed in fraudulent transfer defense soon. As is generally the case when you get sued, time is not on your side.

The cause of action involved in these cases is a poorly named concept, “fraudulent transfer”. There are a number of varieties of a fraudulent transfer, some of which involve actual fraud; but the most common (and the one at issue here) doesn’t usually involve real fraud. To boil it down to its most basic elements, this variety of fraudulent transfer is:

  • A transfer of an asset (cash dividend);
  • Made for less than fair consideration (i.e., akin to a gift, no value received in exchange);
  • At a time when the transferor (GMX Resources) was insolvent; and
  • Made within two years (four years under the State law Uniform Fraudulent Transfers law) of the time the transferor (GMX Resources) filed for Bankruptcy.

Basically, the idea is that you don’t want people transferring assets without getting fair value back in return (kind of, giving stuff away) if they can’t afford to pay their creditors. In the context of a typical consumer fraudulent transfer case, why should a debtor give his old car worth $4,000 – $5,000 away to a friend when he can’t pay his creditors? Shouldn’t he have sold the car and paid his bills? So, the Bankruptcy Code allows for his Bankruptcy Trustee to get the car back, sell it and distribute the money out to the creditors. That fact scenario seems less offensive – unless, of course, you are the friend who was given the car!

What makes fraudulent transfers so much fun is that it is relatively easy for a Trustee to make what is called a prima facie case that the transfer should be avoided. Basically, that means a case that on its face is sufficient to support the cause of action. That is not the same thing as saying that the Trustee should automatically win. There are a number of defenses to fraudulent transfer actions, several of which I think are applicable to the case at bar.

One of the things that I think the Trustee is counting on in this case is that at first blush it looks like defending these cases is going to be outrageously expensive. I respectfully disagree.

Any lawyer who has been out of school for more than six months will tell you that any time you walk into a courtroom anything can happen. There are never any guaranties, and generally both sides are equally convinced that they are absolutely right. Still, there are some facts in this case that make the Trustee’s argument less than compelling; and if you have been sued or if you represent someone who has – give me a call. My contact information is in the right hand column.

Elaine