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Missing Dreier Escrow Snags Bankruptcy Payments
New York Law Journal
December 23, 2008
Within hours of Marc S. Dreier's arrest on Dec. 2 in Toronto on an impersonation charge, a nearly nine-year-old bankruptcy, which was supposed to be closed out with a final $38.5 million payment to unsecured creditors, was brought to a standstill.
Norman N. Kinel, a lawyer from the 250-lawyer Dreier firm who represented the unsecured creditors committee in the 360networks (USA) bankruptcy, made three requests on Dec. 1 and 2 that Dreier wire the money from a firm client trust account so it could be distributed to creditors. The requests went unheeded.
Kinel recounted the incident in a sworn statement on Dec. 8 for the Securities and Exchange Commission. He told the SEC that he had been advised by Dreier's comptroller that "substantially less" than the $38.5 million was available in all firm accounts to which he had access.
The news that all or some of the escrow money was missing triggered a remarkable turnabout.
On Dec. 2, the same day Dreier was arrested in Toronto, Willkie Farr & Gallagher, counsel to 360networks, moved for a final decree in Southern District Bankruptcy Court closing out a series of Chapter 11 reorganizations, involving 360networks and related entities, which -- along with several other major telecommunications giants -- filed for bankruptcy in 2001.
Barely a week later, on Dec. 10, Willkie Farr withdrew its motion to close out the bankruptcy. According to a filing by the U.S. Trustee's Office, 360networks was unable, without the money, "to effectuate substantial consummation of the plan."
On Dec. 17, Bankruptcy Judge Allan L. Gropper, who is presiding over the 360 proceedings, authorized the appointment of a "representative" of 360network's 580 unsecured creditors to investigate what happened to the funds and to determine if any recovery actions should be initiated.
At a hearing Friday on the bankruptcy proceeding involving Dreier's law firm, Steven J. Reisman, a partner at Curtis, Mallet-Prevost, Colt & Mosle, stated that he had been designated as the representative for 360's unsecured creditors.
Reisman, who did not return several requests for comment Monday, expressed a concern at Friday's hearing that some of the $1.1 million reportedly in the Dreier firm's operating account last week may have come from client trust accounts.
Referring to the Dreier firm's assets, Reisman stated at the hearing, which was held before Chief Judge Stuart M. Bernstein, that "there doesn't appear to be a lot of money and every dollar is meaningful."
Experts said that the bankruptcy is likely to remain open until Reisman completes his investigations and pursues any recovery measures approved by Judge Gropper. Willkie Farr's Dec. 2 motion to terminate the case had been scheduled to be heard on Dec. 15.
The 360networks bankruptcy was filed in 2001 as In re 360networks (USA), 01-13721. In November 2002, a reorganization plan was approved, allowing the company to operate on its own.
The main remaining business of the bankruptcy was the pursuit of some 200 recovery actions.
Dreier remains in jail without bail, though Magistrate Judge Douglas F. Eaton has signaled a willingness to revisit the issue if Dreier makes a full disclosure of the whereabouts of his assets.
Dreier's arrest in Toronto was followed by his arrest in New York on Dec. 7 on charges of peddling phoney promissory notes to hedge funds and other investors. Prosecutors now say the fake sales amounted to $380 million.
15 PERCENT PAYOUT SEEN
According to the U.S. Trustee's memorandum of law, the unsecured creditors committee in the 360networks' bankruptcy, for which Kinel served as counsel, estimated that it had collected enough money to pay about 15 percent of $275 million in unsecured claims.
Kinel, in his declaration in support of the SEC's recovery action, reported that the committee had recovered $65 million through the commencement of about 200 preference actions.
Bankruptcy law allows a company in Chapter 11 to sue creditors who received payments in the 90 days prior to the bankruptcy filing for a return of the payments. Those lawsuits are called preference actions because they are designed to even out payments between creditors who are paid pre- and post-filing. Otherwise, creditors paid before a filing would receive 100 percent on their claims while those paid after the filing receive only the portion that the company's remaining assets will support.
Since September, according to Kinel's statement, 360networks made two distributions to unsecured creditors totaling $16.4 million, leaving $38.5 million in the trust account to distribute before the Dreier firm collapsed earlier this month under the weight the criminal charges against Dreier.
The remaining $10.1 million of the $65 million recoveries, Kinel said in an interview, was used to pay for the costs of the recovery actions, including lawyers', accountants' and experts' fees.
REQUIRED REPORTS
The U.S. Trustee's memorandum also suggested there was a need "to determine if there were any breaches of fiduciary duties owed by any of the professionals in these cases."
According to the memorandum, the unsecured debtors committee was required to "promptly" provide 360networks, as the reorganized debtor, with monthly statements itemizing the deposits and withdrawals from the Dreier client trust account holding preference action recovery funds.
Also, 360networks was required to file quarterly post-confirmation reports. The U.S. Trustee's memorandum stated that the last such report was filed on April 16, 2004.
Kinel said 360networks had received "the required reports detailing every dollar that was received [by the committee] and paid out."
"A final accounting had been filed, and everyone had signed off on it," he said. "The only thing that remained was for Mr. Dreier to arrange to have the money wired which he failed to do."
Dreier "betrayed my trust and the trust of my clients," Kinel added.
Kinel brought the representation of the creditor's committee with him from Sidley Austin when he joined Dreier LLP in 2003. He terminated his ties to Dreier on Dec. 15.
Dreier's lawyer, Gerald L. Shargel, was on vacation and could not be reached for comment.
In a memorandum of law, 360networks' lead lawyer at Willkie Farr, Alan J. Lipkin, rejected the U.S. Trustee's suggestion that there was a need to determine whether there had been a breach of fiduciary duty on the part of 360networks and related entities.
"Nowhere does the [United States Trustee] assert or provide a basis for concluding that there was a breach of any duty, let alone a fiduciary duty," the memorandum stated. The document further called the suggestion of possible professional liability "without basis to any participant here beyond Dreier LLP."
A bankruptcy expert also said that the quarterly post-confirmation reports do not contain the sort of information that would have shed light on the account at Dreier holding the recoveries from the preference actions.
