FOR IMMEDIATE RELEASE
Golenbock Eiseman Assor Bell & Peskoe LLP Win Approval of Landmark Bankruptcy Plan for Victims of 1031 Tax Group Fraud
Firm preserved resources and time, and maximized settlement funds, by instituting novel collaboration agreement with parallel class action
NEW YORK, NY (October 14, 2009) – Bankruptcy Trustee Gerard A. McHale, Jr. and his attorneys at Golenbock Eiseman Assor Bell & Peskoe LLP have obtained confirmation, for 1031 Tax Group LLC (“1031”), of a precedent-setting Chapter 11 reorganization plan whose owner Edward Okun was recently sentenced to 100 years in prison for fraud. Golenbock Eiseman Assor Bell & Peskoe was lead counsel for Trustee McHale. Bankruptcy partner Jonathan L. Flaxer served as lead attorney in the case.
This unique plan was the result of a creative collaboration entered into between the bankruptcy estate and parallel class action case, which ultimately saved time, money and resources for all.
1031 was a “qualified intermediary” company, with which, pursuant to section 1031 of the US Tax Code, property investors could legally defer capital gains taxes from the sale of their property until “in kind” replacement property purchases could be made. However, for the more than 300 “exchangers” (as Flaxer calls them, instead of “investors”) who placed about $150 million worth of proceeds into 1031’s accounts, when it came time to close on their replacement properties, their money – in some cases, their life savings – was gone.
When McHale first retained Golenbock Eiseman Assor Bell & Peskoe, the 1031 case had already been in Chapter 11 for about six months, and was already about $4 million dollars “under water,” thanks to $11 million in existing administrative claims. Okun’s other assets – which he had promised would be used to pay back the exchangers -- turned out to be grossly over-leveraged. “We couldn’t get much net value out of those assets, because of the considerable debt,” Flaxer explained.
The parallel class action cases filed in California posed an additional challenge – as the bankruptcy and class action cases tend to clash over which estate owns, and should be allowed to prosecute, claims.
Trustee McHale and the firm took a proactive approach. Starting with Flaxer’s premise that “anyone and everyone who touches the matter could have responsibility, with an eye towards creating the biggest possible recovery for the victims,” the firm spear-headed a broad investigation into other possible sources of recovery, such as claims against banks, insurance companies, professionals and other third parties who may have facilitated, or profited from, Okun’s fraud in some way.
Next, McHale and the firm decided to work strategically with the class action. Explained Flaxer, “There is a common reflex, in the bankruptcy world, to want to make the class action stand down while the bankruptcy side does its thing. The other side – the class side – fights for the opposite result. These are orthodoxies that need to be reconsidered.”
Flaxer continued, “McHale, the Golenbock team and class action lawyers worked out an arrangement where, to the greatest extent possible, we worked together – for example, on depositions and settlement negotiations. Whereas, in typical cases, the target defendants can argue the other side owns the claim you are trying to pursue, in this case we were unified, jointly owning it all. I am not aware of this having been done before.”
In a unique twist, the two collaborating groups even conducted their October 7th hearings jointly, via live video simulcast connecting the NY bankruptcy court and the district court hearing the class action in San Francisco. As for the victims, once the 10 day Bankruptcy and 30 day federal district court appeals period expire, it is Flaxer’s expectation that distributions will be made, before year’s end. The victims are currently slated to receive a recovery of 44 cents on the dollar, a percentage that is expected to increase as the Trustee and the class action negotiate future settlements.
The plan confirmation authorized and permitted the distribution to the Okun creditors of the funds arising from the 14 settlements Golenbock and Trustee McHale had negotiated to date, and will facilitate distribution of the funds expected from future settlements. The plan also formally creates a liquidation trust, which McHale will also head, with Golenbock Eiseman Assor Bell & Peskoe continuing as counsel.
About Golenbock Eiseman Assor Bell & Peskoe
Golenbock Eiseman Assor Bell & Peskoe LLP is a full-service Manhattan law firm of approximately 50 attorneys which has served its clients’ complex litigation and corporate needs for over 25 years. The firm takes pride in its sophistication, experience and ability to take on major engagements for its domestic and international clients while also maintaining a hands-on, personalized approach to all matters.
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