ABI’s Nonprofit Pushes for Unclaimed Chapter 11 Funds

Top bankruptcy attorneys have found a new place for the scraps of leftover money from corporations that collapsed under Chapter 11 protection: their own charity.

Without clear instructions from the U.S. Bankruptcy Code on what to do with the unclaimed money that’s too small to distribute among a liquidated company’s creditors, the American Bankruptcy Institute is pushing the corporate bankruptcy attorneys among its roughly 13,000 members to donate the money to the organization’s own nonprofit endowment fund.

“We think it’s as good a place as any,” said ABI executive director Sam Gerdano, who said that three bankruptcy estates have promised to funnel leftover money into the charity so far. “Rather than having it [turn over] to the state, why not recycle it into the bankruptcy community?”

The group has posted a 131-word passage on its website that bankruptcy attorneys can copy and paste into creditor payout plans to direct the money to the fund, which pays for scholarship and bankruptcy research.

The trade group’s initiative comes at a time when many restructuring professionals are confused over what to do with unexpected leftover money in a liquidating Chapter 11 bankruptcy case. That money can come from uncashed creditor checks, tax rebates or returned utility deposits.

The Bankruptcy Code says that leftover money in Chapter 11, which is usually used to restructure companies and keep them in business, should return to the reorganized company. The Code’s designers, however, didn’t foresee that more companies would instead use Chapter 11 to liquidate.

Closing a company using the Chapter 11 process gives a company’s executives more control because they stay on staff to unwind the company themselves. Under the more traditional Chapter 7 liquidation process, the court appoints a trustee to do that work.

It’s unclear how much unclaimed money has accumulated, but attorneys say the amounts can range from a few hundred dollars to more than $50,000.

Without oversight, “the money is totally off the radar,” Florida bankruptcy attorney Paul Steven Singerman said last year. He once was handed a $150,000 insurance rebate check for a company whose bankruptcy he handled.

Congress hasn’t made much progress toward clearing up the confusion. Democratic staffers for the U.S. House of Representatives’ Judiciary Committee are working on a proposal that would direct the leftover money to Chapter 7 trustees, a group of professionals who have long complained that they are underpaid for the work in recovering money for creditors of liquidated companies. Right now, they can collect as little as $60 per case. That proposal hasn’t been introduced to Congress yet.

Some bankruptcy attorneys recently suggested that the money could help plug the budget hole left by the federal sequester, which has forced cuts of nearly $350 million upon the judicial system, according to the Administrative Office of the U.S. Courts. The cuts, which trimmed 5% of the system’s overall budget, have caused some courthouses to close early because they don’t have the money to pay for security.

But Charles Hall, a spokesman for the federal court system, explained that federal law prevents the court from taking the money since federal law directs “unclaimed funds” in the judicial system toward the U.S. Treasury.

“The bankruptcy court cannot use unclaimed funds, whether there’s sequestration or not,” he said.

Some attorneys and judges are trying to transfer leftover money from Chapter 11 cases to charity rather than let it sit in bank accounts or transfer it to pay off the national debt. Bankruptcy courts within Florida’s southern district even created a rule in the local court procedures handbook that encourages the money to be donated to charity.

Gerdano of ABI wouldn’t say which three liquidated companies are putting the leftover money in their estates into the organization’s endowment, even though that information had to be disclosed in a company’s publicly filed Chapter 11 payout plan. He said that so far, the estates have contributed at least $100,000 to the fund.

ABI’s endowment fund pays for bankruptcy-related research into topics such as the high fees in corporate bankruptcy cases or the cost of bankruptcy for individuals.

“In lieu of people throwing around anecdotes or impressions or firsthand experiences, we provided data-supported conclusions,” said University of Maine law professor and bankruptcy attorney Lois Lupica.

The money is also paying for some of the $300,000 effort to update the Chapter 11 process, which some advocates say has grown imbalanced since its last overhaul in 1978.

Write to Katy Stech at [email protected].