Published on:

Music Mogul’s Chapter 11 Bankruptcy Plan Causes Controversy

Backstreet_Boys_Concert_2The trustee has filed a proposed Chapter 11 bankruptcy plan in the case of Lou Pearlman, a music mogul currently serving a prison sentence for various fraud offenses. In re Pearlman, No. 6:07-bk-00761, Chapter 11 trustee’s plan (Bankr. M.D. Fla., Jun. 12, 2013). Investors and creditors, whose allowed claims exceed a quarter of a billion dollars, have already voiced objections to the plan. One of the musical groups Pearlman created, the Backstreet Boys, says that the plan does not adequately compensate them for losses they suffered due to alleged criminal activities by Pearlman. The trustee has stated that Pearlman often mixed his fraudulent activities with his other business affairs, making the bankruptcy estate particularly difficult to manage.

Pearlman is primarily known as the creator of “boy bands” like the Backstreet Boys in the 1990s He also created the group N’Sync and several others. His legal troubles began in 2007, when state officials in Florida seized two businesses that he operated under the name “TransContinental” in Orlando. They alleged that the companies existed only on paper, and that Pearlman was operating a Ponzi scheme to cheat investors by selling stock in those companies. The scheme included a fake accounting firm that generated fake financial statements to show to investors, and ultimately cost investors, over $300 million. He fled the country in January 2007, and was arrested in Bali, Indonesia that June. He pleaded guilty to charges including conspiracy and money laundering in March 2009, and is currently serving a twenty-five-year prison sentence.

Three banks filed an involuntary Chapter 11 bankruptcy petition against Pearlman in the Middle District of Florida on March 1, 2007, with claims totaling more than $21 million. More creditors submitted claims to the court, and the eventual total exceeded $1.6 billion. The trustee, Soneet R. Kapila, has reportedly filed over seven hundred lawsuits seeking to recover about $100 million allegedly owed to Pearlman, and has recovered around $30 million. The estate reportedly has about $14.3 million in cash and some other assets, but creditors still expect to recover pennies on the dollar at most.

The trustee’s Chapter 11 bankruptcy plan, filed with the court on June 12, 2013, includes proposals for the disbursement of about $37 million. Up to $25 million reportedly goes towards attorneys’ fees, and about $10 million will be used to pay unsecured creditors. The trustee reported that the IRS agreed to subordinate its claim, and will receive about $100,000 instead of the millions it claimed was owed. Victims of the Ponzi scheme will receive some amount of restitution. Kapila rejected claims submitted by the Backstreet Boys for about $3.5 million, as well as claims from other artists Pearlman formerly represented, saying that they did not have enough supporting evidence. Investors and creditors must approve the plan by a vote, and the bankruptcy court must approve it at a hearing set for mid-July.

The bankruptcy system can offer relief to people in financial distress by allowing them to restructure their bills, with new payment plans and the opportunity to discharge certain debts. Bankruptcy attorney Devin Sawdayi has helped clients in the Los Angeles area through the process of personal bankruptcy for the past sixteen years with dignity and respect. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.

Web Resources:

In re Pearlman (PACER subscription required), No. 6:07-bk-00761, Bankruptcy Court, Middle District of Florida

More Blog Posts:

Illness or Other Misfortune Often Leads to Bankruptcy, as Shown by a Los Angeles Chapter 13 Case, Los Angeles Bankruptcy Lawyer Blawg, June 25, 2013

Los Angeles Bankruptcy Court Dismisses Tech Entrepreneur’s Case Because of Missed Deadline, Los Angeles Bankruptcy Lawyer Blawg, June 19, 2013

Celebrities in Los Angeles and Elsewhere Seek Bankruptcy Protection, Too, Los Angeles Bankruptcy Lawyer Blawg, June 7, 2013

Photo credit: By Anirudh Koul [CC BY 2.0], via Wikimedia Commons.