Articles Posted in Celebrity Bankruptcy

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By DaniDF1995 [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia CommonsThe coach for one of the world’s most well-known mixed martial arts (MMA) fighters filed a voluntary petition for Chapter 7 bankruptcy during the summer of 2015. In re Tarverdyan, No. 2:15-bk-21909, petition (C.D. Cal., Jul. 29, 2015). The case has experienced multiple delays, with the court-appointed trustee and the debtor jointly requesting continuances on several occasions. This demonstrates many of the complicated factors sometimes found in Chapter 7 proceedings.

A Chapter 7 case allows an individual debtor to liquidate assets and use the proceeds to pay down their debts. At the end of the case, the court may grant a discharge of some or all remaining debts. Several important proceedings must take place before a court can grant a discharge. First, the trustee must hold a meeting of creditors and other interested parties “within a reasonable time” after a debtor files a voluntary bankruptcy petition. 11 U.S.C. § 341(a). This is commonly known as a “341 meeting” or “341 hearing.”

In Chapter 7 cases, the trustee must conduct an oral examination of the debtor at the 341 meeting in order to make several findings, including the “potential consequences” for the debtor of a discharge, the effect of a discharge on creditors and others, and whether the debtor could file under a different chapter. Id. at § 341(d). Once the trustee has obtained all the required information from the debtor, they must decide whether to recommend or oppose a discharge of debt based on these findings.

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Tyler [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrA bankruptcy judge recently denied a debtor’s request to convert his case from Chapter 11 to Chapter 7, finding that he had not acted in accordance with his fiduciary duties throughout the case. Most individual debtors do not find Chapter 11 to be helpful. It is much more common for business bankruptcies and individuals with very large estates. In this case, the debtor is a professional hockey player. In re Johnson, No. 2:14-bk-57104, petition (S.D. Oh., Oct. 7, 2014). When he moved for conversion to Chapter 7, the court reviewed the course of the case and issued a 150-page order denying the motion and criticizing the debtor’s conduct. Johnson, op. and order (Feb. 26, 2016). The judge’s reasoning offers an idea of the concerns that courts address in Chapter 7 cases.

A key difference between the Johnson case and a Chapter 7 or Chapter 13 case is that the bankruptcy estate had no independent trustee. The debtor was acting as trustee when he moved for conversion to Chapter 7. In Chapter 11 cases, a trustee is only appointed if requested by a party in interest or the U.S. Trustee’s Office. 11 U.S.C. § 1104. If no trustee is appointed, the debtor serves in the capacity of trustee, with all the same fiduciary duties towards creditors and others. Under Chapters 7 and 13, the Bankruptcy Code states unconditionally that a trustee “shall” be appointed. 11 U.S.C. §§ 701, 1302.

Debtors are typically allowed to convert their case from one chapter to another if they meet various criteria established in the Bankruptcy Code. A Chapter 11 debtor can convert their case to Chapter 7, with several exceptions. A bankruptcy court may not convert a case to Chapter 7 if it finds that appointment of a Chapter 11 trustee would be in the estate’s and the creditors’ best interest, or if it “identifies unusual circumstances” indicating that conversion would not be in their best interest. 11 U.S.C. § 1112(b). A Chapter 7 debtor can convert their case to Chapter 11 or Chapter 13 with the court’s permission, after establishing cause. 11 U.S.C. § 707. A Chapter 13 debtor is far less constrained in converting a case to Chapter 7. 11 U.S.C. § 1307.
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By Alex Const (originally posted to Flickr as 50 cent) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons50 Cent, the well-known rapper, producer, actor, and entrepreneur, filed a bankruptcy petition in July 2015, claiming nearly $25 million in assets and about $32 million in debt. At that time, he was involved in a civil lawsuit in New York that was about to go to trial. Within days of the bankruptcy filing, however, the plaintiff in the New York case had obtained an order from the bankruptcy court lifting the automatic stay and allowing the trial to proceed. The case is notable to us for at least two reasons. First, it demonstrates that a person does not need to be “broke,” or completely out of money, to need bankruptcy protection. It also illustrates how the automatic stay, which comes with any new bankruptcy petition, does not guarantee a lengthy respite from pending legal matters.

“Bankrupt” Does Not Equal “Broke”

Filing for bankruptcy does not necessarily mean that a debtor has no money, although this unfortunately remains a common misconception. In the present case, the debtor’s lavish lifestyle led to numerous public comments and jokes at his expense, but it is entirely possible to have millions of dollars in assets and still go bankrupt. It merely requires a large amount of debt and income that, however high it might seem to most people, is insufficient to pay that debt.

The Automatic Stay

The New York lawsuit, originally filed in 2010, included claims for intentional infliction of emotional distress, defamation, and violations of the New York statute prohibiting the use of a person’s name or likeness. This is commonly known as the “right of publicity.” See Cal. Civ. Code § 3344. The plaintiff alleged that the debtor had posted a “sex tape” of her, to which he had added his own narration, on the internet without her permission. She withdrew her defamation claim in late 2013, but the court denied a motion to dismiss the remaining claims.

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OpenClips [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe story of a film producer who finds himself in a range of financial difficulties after poor performance at the box office is not unique to Los Angeles, but Hollywood probably gives this region more examples of this tale than most cities. One producer’s story, recently covered by the Los Angeles Times, describes just how difficult the entertainment business usually is, how easy it can be to lose money, and how many ways the personal bankruptcy process can become involved in the process. Bankruptcy can be helpful to the parties involved in these types of situations, but just like the movie business, it can also get very complicated.

The debtor in this case has what the Los Angeles Times calls a “showbiz pedigree.” His uncle was a well-known Hollywood producer, and his father-in-law was part of the production company that bought Miramax from Disney in 2010. He had some successes in the early- to mid-2000’s, such as the 2005 film Lord of War starring Nicolas Cage and Ethan Hawke. By 2008, however, he had amassed several “flops,” as well as films that were never released in theaters. His production company, which he formed with a former executive of the William Morris Agency, folded that year.

In early 2009, the debtor filed for Chapter 7 bankruptcy protection. In re Eberts, No. 2:09-bk-12534, petition (Bankr. C.D. Cal., Feb. 5, 2009). His Schedule F, the list of creditors with unsecured nonpriority claims, identified more than $7.7 million in debts. These included loans for both personal and business purposes, and personal guarantys of business loans. He received a discharge of debt from the court on March 15, 2013, although that was far from the end of the legal issues.
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By Heinrich Klaffs [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsIn order to pursue a bankruptcy case, a debtor must have the legal capacity to understand the contents and meaning of the bankruptcy petition at the time of filing. The same general rules that govern a person’s capacity to enter into a contract apply in bankruptcy cases. A U.S. district court in California recently considered whether a debtor, who was known to have multiple health problems, including drug addiction, was incapacitated at the time that his bankruptcy petition was filed. In re Preston, No. 8:14-cv-00163, prop. findings of fact (C.D. Cal., Feb. 5, 2014). The trustee of a revocable trust established by the debtor claimed that the debtor was incapacitated. The court held that the trust had the burden of establishing lack of capacity, and that it failed to do so.

The court applied California law in assessing capacity. A “rebuttable presumption” that all people have the capacity to make their own decisions, and take responsibility for them, exists under California law. Cal. Prob. Code § 810(a). A “mental or physical disorder,” by itself, does not preclude entering into contracts and other major decisions. Id. at § 810(b). For a court to rule that a person is incapacitated, it must find a specific deficit in one or more mental functions, from a list provided by the Legislature, affecting a specific action or decision. Id. at §§ 810(c), 811(a). The party contesting capacity has the burden of proof to overcome the statutory presumption. Estate of Mann, 184 Cal.App.3d 593 (1986).

The debtor in the Preston case, musician Billy Preston, filed a petition for Chapter 11 bankruptcy on October 21, 2005. The case was converted to Chapter 7 in July 2006. Preston fell into a coma on November 21, 2005, from which he never awoke. He died on June 6, 2006. A conflict emerged between the Chapter 7 trustee (the bankruptcy trustee) and the trustee of the William Preston Trust (the Preston trustee), with the Preston trustee alleging that Preston lacked capacity to agree to the bankruptcy petition on the day it was filed. The bankruptcy trustee filed an adversary proceeding, seeking a declaratory judgment that Preston was not incapacitated, that the trust therefore remained revocable, and that its assets are part of the bankruptcy estate. Continue reading

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By Johntex 2005 [GFDL (http://www.gnu.org/licenses/fdl.html), CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0/deed.en), or CC BY 2.5 (http://creativecommons.org/licenses/by/2.5/deed.en)], via Wikimedia CommonsVince Young, a National Football League quarterback, filed a petition for Chapter 11 bankruptcy in January 2014. Chapter 11 bankruptcy allows individuals or businesses to reorganize their debt payments. It bears some similarities to Chapter 13, although Chapter 13 is generally a better option for most individuals. Young reportedly filed the bankruptcy petition in order to stay efforts to collect a substantial judgment. He asked the bankruptcy court to dismiss the bankruptcy proceeding about two weeks after filing, stating that he had resolved the underlying collection dispute.

Young has been in the NFL since 2006. After playing for the University of Texas, he was drafted by the Tennessee Titans and played there for five seasons. He played for one season with the Philadelphia Eagles, and although he trained with the Buffalo Bills and the Green Bay Packers, he is not currently signed to a team. He reportedly made $34 million in his first six years, but ran into significant financial difficulties. During the 2011 NFL lockout, almost $2 million in loans were taken out in his name, which resulted in two lawsuits against him in New York filed by Pro Player Funding.

Pro Player Funding also filed an action in Houston, where Young resides, in 2012 to enforce any judgment obtained in the New York case. Young filed two appeals in Texas seeking to enjoin Pro Player Funding from collecting any judgment. An appellate court denied the injunction on December 17, 2013. Pro Player Funding obtained a turnover order from a Manhattan court the same day. On January 17, 2014, Young filed a Chapter 11 bankruptcy petition in Houston, which immediately stayed all collection action in Texas and New York. In re Young, No. 14-30400, petition (Bankr. S.D. Tex., Jan. 17, 2014). Continue reading

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By Tomharlyu [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsPersonal bankruptcy can help people recover from serious financial distress, when they no longer have enough consistent income to pay their bills. A major concern for people considering bankruptcy is the effect it will have on their credit and their future financial prospects, including homeownership, education, and other large expenses. While bankruptcy will certainly have an effect on a person’s credit, it is by no means a hindrance to one’s future plans. In fact, the purpose of bankruptcy is to help a person overcome financial difficulties so that they can proceed with those plans. While not everybody has the resources or talent of someone like R&B singer Toni Braxton, who completed a Chapter 7 bankruptcy last year and is rumored to have recently purchased a $3 million house, her story demonstrates that people can recover from bankruptcy.

Braxton has a history of entertainment successes and two completed bankruptcies. She became famous in the 1990’s with a string of hit songs leading to about $170 million in worldwide album sales and multiple Grammy awards. She has starred on Broadway, had her own headlining show in Las Vegas for several years, and now has her own reality television program. Her first Chapter 7 bankruptcy, filed in 1998, required her to sell her Grammys and other awards. Her career bounced back relatively quickly, with more hit albums and another starring role on Broadway.

Financial difficulties began again several years after she completed her first bankruptcy case. She sued her former manager in 2007 for alleged mismanagement, claiming that he owed her $10 million. She had to leave her Las Vegas show, which began in 2006, due to health problems, and she said that this caused a significant amount of the financial problems that led to her second bankruptcy filing in 2010. Her insurer reportedly refused to cover the cost of canceling the show, calling her heart problems an undisclosed pre-existing medical condition. This left her responsible for the loss to the hotel. Continue reading

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By Bongochico (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsAaron Carter, who achieved fame as a singer in the late 1990s and early 2000s, filed for Chapter 7 bankruptcy in Florida in October 2013. In his petition, he lists assets of just over $8,000 and debts of more than $2 million. More than half of the debts, including a seven-figure amount owed to the Internal Revenue Service, date back to when Carter, now twenty-five years old, was a minor. Much of his fame and fortune accrued before his eighteenth birthday, but he is liable for tax on that income regardless of age.

Carter’s music career began before he was even a teenager. His older brother, Nick Carter, was a member of the popular “boy band” the Backstreet Boys. Carter opened shows for the group and toured on his own. He acted in movies and on stage, and his family was featured on a reality television show several years ago. He is currently touring in support of a comeback, but the performances are reportedly not bringing in enough money to pay his debts.

The majority of his outstanding debts were incurred when he was a minor, and his relationships with the people managing his career did not always turn out well. He filed for legal emancipation from his mother, who was also his manager, in 2003, claiming that she was working him too hard and mismanaging his income. He was also managed by Lou Pearlman, who created and managed numerous “boy bands.” Pearlman is currently serving a sentence in federal prison for fraud, and has been the subject of multiple lawsuits by former clients, including two lawsuits filed by Carter in 2002 and 2007. Continue reading

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Edward Hicks [Public domain], via Wikimedia CommonsAn upcoming art auction, conducted by the famous auction house Sotheby’s, will put over two hundred pieces up for sale as part of an asset liquidation in the ongoing bankruptcy of Ralph Esmerian. Esmerian, the former owner of a luxury jewelry retailer, pleaded guilty to bankruptcy fraud and other charges in 2011, and is currently serving a six-year federal prison sentence. His extensive art collection is valued at up to $9.5 million, but reportedly still may not bring in enough to pay his creditors. Financial difficulties seem to follow the art collection, with the purchaser of one painting at an earlier auction getting into a dispute with Sotheby’s and filing for bankruptcy himself. Conflicting promises between an art museum, the auction house, and others have also complicated efforts to sell pieces from the collection. The ongoing case demonstrates some of the difficulties presented in bankruptcy by unconventional assets like art.

Esmerian was the owner of Fred Leighton, a high-end jewelry store based in New York. According to media reports, a 2005 robbery cost the store over $30 million in merchandise. In an effort to keep the company afloat, Esmerian reportedly took out loans that pledged specific pieces of jewelry as collateral that were already pledged elsewhere. Prosecutors accused him of misleading creditors, lying to a bankruptcy judge, and hiding millions of dollars overseas. He was arrested in November 2010, and he pleaded guilty to multiple fraud-related offenses. A judge sentenced him to six years in prison in July 2011, reducing the sentence from the maximum possible ten years based on his charitable works. He reportedly donated millions to the American Folk Art Museum (AFAM) and promised many of the pieces from his collection.

One of the works that became embroiled in Esmerian’s case was “The Peaceable Kingdom” by early-nineteenth-century painter Edward Hicks. Esmerian reportedly promised to donate it to AFAM in 2000, but then pledged it as collateral for a loan from Sotheby’s in 2005. He stated that this was not a conflict, but he was also dealing with loans that were coming due, including a $178 million from Merrill Lynch that it had declared to be in default. Esmerian put the painting up for auction with Sotheby’s. Continue reading

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Tlusťa [Public domain], via Wikimedia CommonsWhen considering whether to file for bankruptcy, most people worry about losing their home, their car, or other familiar assets. Creative works, such as music, films, and literary works are also considered assets, in the category of intellectual property. This type of asset may be especially common in cities with a strong entertainment industry, such as New York and Los Angeles. Bankruptcy law treats music and similar creative works subject to copyright protection as assets, although not all copyrights have value that would be of interest to a trustee liquidating a bankruptcy estate. The laws governing intellectual property are about as complicated as the laws of bankruptcy. A Chapter 7 bankruptcy may, on occasion, result in the debtor’s loss of rights to their music, when those rights include the right to royalty payments.

Copyright law protects the rights of authors to their own creative works, such as music, art, photographs, literary works, films and videos, and software code. Copyrights should not be confused with trademarks, which generally apply to brand names and logos, or patents, which protect inventions. An author of a creative work can register the work with the U.S. Copyright Office, but they may also have common law copyright protection. Copyright law protects the right of the copyright owner to reproduce, exhibit, or display their work; to create derivative works based on the original work; and, perhaps most importantly, to exploit and otherwise profit from the work.

Since music is an art form that is heard rather than seen, many of the rights to a musical work relate to the right to physically record and reproduce the music. The owner of a copyright may therefore grant various licenses, such as a mechanical license to record music onto a CD, a digital license to sell or transmit recordings online, and a license that allows a consumer’s personal use of a recording. In exchange, the copyright owner receives royalty payments. A musical copyright is an asset in the context of a bankruptcy case, and royalties are income. Most of the world’s songs achieve little to no fame, but those that do have the potential to generate significant royalty income. This gives the copyrights themselves considerable value, especially in a bankruptcy liquidation. Continue reading