In a late 2023 post, I wrote about Rudolph Giuliani’s efforts to avoid the collection of a $148 million defamation award in a post titled, “Can Giuliani Escape His Defamation Judgment In Chapter 11?”.
I observed that the former major of New York City would have to overcome a number of challenges to confirm a plan of reorganization before the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”),
Giuliani is likely to face a number of obstacles in pursuing his bankruptcy case. A failure to meet his obligations as a DIP or to provide the required level of transparency may result in the case being dismissed, converted to a liquidation proceeding under Chapter 7, or the appointment of a Chapter 11 Trustee.
It became apparent that Giuliani had not made any lifestyle changes after he filed his bankruptcy case, was not being transparent about his sources of income and use of funds, had not obtained insurance for his New York apartment or his Florida condominium, and was not undertaking meaningful steps to meet his duties as a debtor in possession (“DIP”).
The Official Committee of Unsecured Creditors (the “Committee”) in the case had moved to compel Giuliani to sell his Florida condominium for the benefit of creditors and to obtain insurance. Judge Sean Lane declined to compel the sale of the Florida condominium at that juncture of the case, notwithstanding the significant concerns raised that Giuliani was spending significant funds on the Florida condominium.
Several months into the case concerns about Giuliani’s spending and lack of transparency relating to his financial affairs prompted the Committee to move for the appointment of a Chapter 11 Trustee in May 2024. The election workers defamed by Giuliani, Ruby Freeman and Wandrea’ Arshaye Moss, joined in the motion, which was opposed by Giuliani.
Two weeks after argument was held the Committee’s motion to appoint a Chapter 11 Trustee, Giuliani filed a one-page motion, which was signed by him personally rather than his counsel, seeking to convert his case to a liquidation proceeding under Chapter 7 of the Bankruptcy Code. The Committee, Freeman and Moss opposed the conversion motion. Argument on the conversion motion was scheduled for July 10, 2024.
An hour before that hearing, Giuliani filing a notice of consent to dismissal with a proposed order providing for dismissal of his case with prejudice to refiling for bankruptcy protection for one year or, alternatively, conversion of the case to one under Chapter 7.
At the July 10th hearing, counsel for the parties in interest argued about the best course going forward as between the appointment of a Chapter 11 Trustee, conversion of the case to one under Chapter 7 that would result in the appointment of a Chapter 7 Trustee, or the dismissal of the case.
In a memorandum of decision entered on June 12, 2024, Judge Lane determined that dismissal was appropriate. After concluding that Giuliani did not have an absolute right to convert his case, the Bankruptcy Court found cause to dismiss or convert the case due to “Mr. Giuliani’s continued failure to meet his reporting obligations and provide the financial transparency required of a debtor in possession.”
Giuliani’s failures included: (a) non-compliance with subpoenas issued to him and his businesses under Rule 2004 of the Federal Rules of Bankruptcy Procedure; (b) his failure to fully comply with his duties to file certain schedules and lists detailing his financial condition, including a list of creditors, a schedule of assets and liabilities, a statement of current income and current expenditures, and a statement of financial affairs; and (c) his failure to comply with his obligations to file accurate, complete monthly operating reports
Conversion was opposed by the Committee, Freeman and Moss. The Bankruptcy Court concurred in their view that the conversion of the case would be a “substantial step backwards”, noting:
A newly appointed Chapter 7 trustee would need to learn the bankruptcy case from scratch, without the assistance of the Committee that would be disbanded in any Chapter 7. Moreover, a Chapter 7 liquidation proceeding is ill equipped to maximize any value from Mr. Giuliani’s ongoing business ventures.
While the Committee continued to support the appointment of a Chapter 11 Trustee, Freeman and Moss advocated for the dismissal of the case.
After considering eight different factors outlined in In re Hampton Hotel Invs., L.P., 270 B.R. 346, 359 (Bankr.S.D.N.Y. 2001), the Bankruptcy Court concluded that dismissal was in the best interest of creditors.
The Bankruptcy Court directed Freeman and Moss to settle an order providing for the dismissal of the case within three days, i.e. on or before July 15, 2024.
However, Giuliani could not reach an agreement with Freeman and Moss at to the terms of the dismissal order. Freeman and Moss’ order required Giuliani to pay administrative expenses incurred during the seven months the case had been pending, based upon available funds. Giuliani resisted those efforts, prompting a further hearing before Judge Lane on July 17, 2024.
At that hearing, it was reported that Giuliani had spent $30,000.00 in the week since the hearing held on July 10th, which represented half of the funds in his account. It has also been reported that Giuliani and two (2) companies traveled first class to the Republican National Convention, notwithstanding the dwindling balance in his DIP account.
Giuliani’s lack of transparency hindered the ability of Freeman and Moss to asses his liquidity for the purpose of fixing the amount of the administrative expenses he should pay as a condition of his dismissal.
The Court told Giuliani’s counsel, “I strongly, strongly urge you and your client to sit down and figure out what you really want the end game to look like here.” Judge Lane set an 11:00 am deadline for an update the following day.
Judge Lane warned that “[t]here are ways to do this that include requiring your client to come in and sit in that box over there and have a discussion about the available liquid assets that can be used to pay these professionals. So does your client want to do that?”
No agreement had been reached on the terms of the dismissal order as of the July 18th deadline.
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