19 Oct The Stanford Saga – Chapter 10: “Bleak House” Redux?
Postings on this blog have focused on the cross-border battle between Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey for control of the financial assets previously controlled by Sir Allen Stanford, including Stanford International Bank, Ltd. (SIB). A complete digest of prior posts is available here.
Mr. Janvey, meanwhile, has had to address yet another challenge to his receivership – from investors seeking to commence an involuntary Chapter 7 case. In early September, an ad hoc group of CD and deposit-holders fronted by Dr. Samuel Bukrinsky, Jaime Alexis Arroyo Bornstein, and Mario Gebel requested an expedited hearing on their request for leave to commence an involuntary bankruptcy against the Stanford entities.
The ad hoc investor group’s September request was not their first: In May of this year, the same investors requested essentially the same relief. That request was never acted on, presumably because presiding US District Court Judge David Godbey already had imposed a 6-month moratorium on interference with the receivership.
With the moratorium’s expiration, the investors have raised the issue once again.
A Receivership Run Wild?
Their second request largely repeats the investors’ prior arguments, many of them rather personal: No one is happy with the way this receivership has been run, they claim. Specifically, the receivership is far too expensive and the lack of meaningful participation deprives creditors of significant due process rights. Instead, an involuntary liquidation under Chapter 7 of the US Bankruptcy Code is the best and most efficient means of reining in expenses and preserving those rights. The investors’ brief offers a picture of the 21st century Stanford receivership more closely resembling Dickens’ 19th century “Bleak House”: Professional fees accruing at an “alarming” rate (in this case, an estimated $1.1M per week); an estate at risk of being consumed entirely by administrative costs; and investors ultimately twice victimized.
The investors further argue that an injunction prohibiting creditors’ access to the US bankruptcy system is, at best, an interim measure. As such, it can never be employed on a permanent basis – and, therefore, cannot survive the standards for injunctive relief articulated under the Federal Rules of Civil Procedure. They cite a variety of decisions which stand – according to them – for the proposition that the US Bankruptcy Court offers the best forum for complex liquidations such as the one at hand.
Creditors Who Don’t Know What’s Best For Them?
Predictably, Mr. Janvey disagrees in the strongest terms.
As he sees it (and as he sees a string of federal cases referenced in his response), a federal equity receivership – and not a federal bankruptcy proceeding – is the accepted, “decades-long practice” of federal courts in winding up entities that were the subject of alleged Ponzi schemes and other frauds. Moreover, Mr. Janvey suggests that if creditors are dissatisfied with the expense and claimed inefficiency of this proceeding, transition to a liquidation under the US Bankruptcy Code would be even more so. In support, Mr. Janvey offers a “parade of horribles,” such as the “procedural nightmare” involved in transitioning much of the complex litigation already underway in the receivership to a bankruptcy trustee’s administration, the likely existence of multiple creditors’ committees (and the attendant expense of their counsel), and the need to sort out the Antiguans liquidators’ competing Chapter 15 recognition request even if a Chapter 7 petition is filed.
Perhaps most significantly, however, Mr. Janvey believes that flexibility regarding a plan of distribution should govern the administration of the Stanford matters:
Like the Bankruptcy Code, equity receiverships ensure that persons similarly situated receive similar treatment. In a case such as this involving massive deception, however, a searching evaluation of the facts is required to discern relevant differences between and among categories of creditors. Unlike a trustee in bankruptcy, the Receiver can take into account relative fault within a class of creditors, and fashion an equitable plan of distribution that does not treat all creditors within a class identically if they are not deserving of equal treatment.
Mr. Janvey does not develop how a receiver’s application of equitable principles might differ from the equitable and other subordination provisions of Bankruptcy Code section 510. Ultimately, his response reduces itself to a simple proposition for Judge Godbey and for creditors:
Unfortunately, Messr’s. Bukrinsky, Bornstein, and Gebel do not. Their reply brief – submitted last Friday – again reiterates that the Stanford receivership has outlived its usefulness in this highly complex insolvency. According to them, the Stanford record speaks for itself. It is time for a new regime.
Like the liquidators’ request for US recognition of their Antiguan-based wind-up of SIB, the parties now await Judge Godbey’s decision.