Contributed by Jeffrey Sponsler, MD
In our country we have laws in most states that allow for filing for bankruptcy. In Alaska, the law states for Chapter 7, "a trustee collects all of your assets and sells any assets which are not exempt. Non-exempt money is distributed to creditors with a commission taken by the trustee." "In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills and very few assets. In the vast majority of cases, a Chapter 7 bankruptcy is able to completely eliminate all of these debts. Exemptions include principle residence, disability benefits, insurance proceeds, and many others.
A Chapter 13 bankruptcy allows "a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtor's future income. You can use a Chapter 13 to prevent a house foreclosure; make up missed car or mortgage payments. If you can stick to the terms of your repayment agreement, all your remaining dischargeable debt will be released at the end of the plan." In other states, Chapter 11 bankruptcy is used to reorganize a business and restructure debt. Chapter 11 is very complicated but in the end, creditors do not get paid money that was lent by and large. There are plenty of resources that describe Chapter 11 on line.
So, bankruptcy can be very beneficial if an individual gets into a large debt situation. But there are others involved in the financial situation, specifically the persons or businesses to whom you owe money. It is probable that these persons are unhappy with the outcome. Some businesses will use bankruptcy law to "reorganize" a failing business adventure. Let's look at a real-world example. I will use the initials BC for "bankruptcy case."
First, I quote BC "I have used the laws of this country just like the greatest people that you read about every day in business have used the laws of this country, the chapter laws, to do a great job for my company, my employees, myself and my family,” (August 2015). BC's first business failure was a casino "Taj Mahal" located in Atlantic City, NJ. This casino cost $1.2 billion dollars and opened in 1990. In only one year, the casino failed, and BC filed for Chapter 11 protection. That means the investors that lent that large sum did not see a good return on investment.
The second business that was mismanaged into Chapter 11 was the "Castle Hotel & Casino" also in Atlantic City. The cost of the Castle was about $650 million, BC purchased it from Hilton Hotels in 1985 and in bankruptcy proceedings in March 1992. Investors and contractors were left holding the empty bag.
The third business that ultimately had to file for Chapter 11 was the "Marina." This was the "Castle Hotel" that was renamed the "Marina" after bankruptcy reorganization. BC owned this hotel from 1997 to 2011. There was an attempt to enter into a partnership with Jimmy Buffet and rename the complex "Margaritaville" but that fell through. This business failed in 2011.
In 1984, Plaza Hotel and Casino was opened. It filed for Chapter 11 in 1992. The upfront costs for this Hotel were $70 million. BC owned this hotel and at the same time the Taj Majal and the two were in competition. This would be like owning Ford and Chevy dealerships at the same time. There were 1000 employees at this complex and all lost their jobs when the business folded.
As of 2004, BC owned three casinos in Atlantic City at the same time. All were losing money at a high rate and the mother company filed for Chapter 11 with the debt amount set at $1.8 billion. By the legal process of Chapter 11, the debt burden was reduced from $1.8 billion to just $600 million. As if by magic, $800 billion dollars of debt (ie, investor money) disappeared.
As a side issue, let's look at the business that is the casino. By definition, a casino is a gambling house where for the most part, people go to gamble and see entertainment. A segment of gambling customers at a casino are addicted to gambling. 2.6% of Americans or 10 million people are so addicted. So, 3 of 100 customers in a casino are throwing away their kid's college fund, their retirement nest egg, etc. at the slot machine. So, a casino business owner is making a profit from people with a serious problem (gambling away money they cannot afford to lose). Our BC has been a casino owner in the past as noted above.
Who were these investors? Morgan Stanley ($500 million), Avenue Capital Management ($500 million?), the Meruelo Group ($20 million), and Deutsche Bank. Recent investigations reveal that Deutsche Bank had "red flags" going up regarding money laundering by "Russian individuals." Internal experts at Deutsche Bank raised alerts but high-level managers suppressed these alerts and did nothing about these concerns. In January of 2017, BC had $364 million in active loans at Deutsche Bank and this money was used to financially support the "----- International Hotel." It is believed that the bank has lent our BC $2 billion over 20 years. Deutsche Bank is already under investigation for $10 billion in money laundering. This bank is under investigation by US and UK governments because Russian criminals with ties to the Kremlin and the old KGB have been moving money there (as much as $80 billion). It is interesting that our man BC has filed a lawsuit against Deutsche Bank to block release of financial records to investigators in the US House of Representatives.
Outstanding questions include: Why would Deutsche Bank loan $364 million dollars to a person who had 4 previous high dollar bankruptcies? I leave this as an exercise for the reader.
What about the IRS? Well another important element of this bankruptcy story is that when BC filed his tax returns in the early 1990s, the forms noted $1.17 billion in business losses. According to published reports, the tax form stated "negative $916 million" in income. This negative income figure by law spares BC from paying income tax for up to 15 years. And this is money that BC borrowed from investors. So, investors are out of hundreds of millions of dollars and the US Government is also not seeing tax revenues (that might help to pay down some of that $22 trillion national debt).
In summary: 1) Bankruptcy law seems to be a way to escape from paying large debts. 2) Our case, BC, has used bankruptcy law to shield himself from billions in debt. 3) BC has used business losses to shield himself from paying income taxes. 4) BC has borrowed large sums from Deutsche Bank when no other bank would loan him money. And 5) Deutsche Bank is under investigation for laundering money from Russian criminals. What a fascinating story!
