• 10
  • January
    2011

In my last post we started looking at what happens when bankruptcy creditors try to recover funds that are also the subject of seizure by the government as part of a criminal investigation. The Wall Street Journal article I referenced focuses on a law firm whose creditors attempted to collect from the firm through an involuntary bankruptcy filing, only to find that the assets had already been seized as part of a racketeering and money laundering criminal investigation.

Bankruptcy and the seizure of assets in a criminal investigation can overlap in circumstances such as Ponzi schemes when criminal activity generates funds that may be subject to both bankruptcy and criminal forfeiture. In a criminal forfeiture, the funds may be used at the government's discretion without substantial judicial oversight. While one of the goals of the forfeiture statutes is to return funds to victims, these victims may not be creditors who could potentially collect in a bankruptcy action. The government may also use seized funds to reimburse local and state law enforcement expenses.

In Bankruptcy, the goals and process are very different than in a criminal matter. Bankruptcy provides a comprehensive framework for prioritizing creditors, staying other pending civil lawsuits and distributing assets. Bankruptcy itself does not imply that any criminal activity has taken place and the creditors are generally not victims of a crime.

The creditors of the Florida firm described in the Wall Street Journal article may find themselves out of luck in their attempts to collect through bankruptcy. There are times, however, when prosecutors and bankruptcy trustees are able to agree on the amount of the forfeited funds to be allocated to bankruptcy creditors. With many high profile criminal prosecutions currently overlapping with bankruptcy cases, we are likely to see more of this turf battle in the future.

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