Allen Stanford, Marc Dreier, Bernie Madoff, Tom Petters…
More than a few cases these days are at or near the intersection of criminal law and bankruptcy law and the U.S. Court of Appeals for the Eighth Circuit, reviewing an appeal from the Bankruptcy Appellate Panel for the Eighth Circuit has weighed in today.
The basic facts of the In re: Racing Services, Inc. decision were that a company, Racing Services (“RSI”) and its president and sole shareholder were indicted for gambling and money laundering and a jury convicted them. With an appeal of the criminal case pending, RSI made a claim for reimbursement of expenses in the bankruptcy context. The bankruptcy court allowed the claim but, under the doctrine of “equitable subordination,” made the claim subordinate to other claims (likely resulting in a diminished or nonexistent ultimate recovery).
The criminal conviction was then overturned on appeal. The bankruptcy court “undid” the subordination in response to a Rule 60 motion for relief from judgment. The Bankruptcy Trustee argued strenuously that the rule was inapplicable and also that he should be allowed to make other additional arguments for the subordination of RSI’s claim, which the Eighth Circuit rejected. The bankruptcy court and appellate court acknowledged that the facts of the case did not fit neatly into Rule 60 jurisprudence but emphasized the equitable nature of bankruptcy courts generally and subordination in particular.