• 07
  • January

The Wall Street Journal ran an article recently that examined the problems that can arise when assets are the target of both a bankruptcy proceeding and a criminal investigation. The WSJ article discusses a current situation where these two areas of law overlap.  When creditors of a south Florida law firm tried to obtain the firm's assets through an involuntary bankruptcy, they discovered that the assets had already been forfeited to the government as a result of racketeering and money laundering charges.

Although similar on the surface, the purpose of seizing funds acquired through criminal means and collecting unpaid debts through bankruptcy are very different. The purpose of the criminal forfeiture statutes is to strip individuals who have profited from fraud or other criminal activity of the assets they have gained from those activities. This often comes up in drug trafficking or other criminal matters where the victims of the crime may not be readily identifiable. Those types of cases rarely involve creditors attempting to recover the same funds that the government has seized.

Bankruptcy is a very different process. It provides an orderly manner for an individual or business that is unable to pay their outstanding debts an avenue to pay back their creditors as much as possible using the available assets. During a bankruptcy proceeding, most other litigation against the person or business are automatically halted or 'stayed.' This allows for the creditors to be prioritized and repaid to whatever extent is possible.

In the next post we will take a closer look at what situations can create a struggle between the criminal prosecutors and bankruptcy creditors for the same pool of limited funds.  Both may have a legitimate claim to the same assets. The Wall Street Journal indicates that the amount of funds seized through criminal forfeiture has been rising. This increase, along with criminal prosecutions for financial malfeasance, may bring this issue more regularly before the courts.

Source: Wall Street Journal, "Prosecutors, Trustees Fight For Dominance In Ponzi Bankruptcies" Jacqueline Palank, 3 Jan 2011