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Apr 09, 2004

the legal line

Ed Maldonado, Esq.

Dear Legal Line,

I am a national distributor of calling cards, PINs and other types of prepaid service cards. I have a few questions about some of the things I have experienced when card providers go bankrupt. First, I received a stay order from a federal bankruptcy court in Florida after I had sued a provider over selling me bad cards here in my home state. What does this really mean to my company? My attorney said that it means the case is over as far as he is concerned. I can’t believe this because it would be too easy for them to escape responsibility. Our case involves fraud and a whole number of things that I can prove. Does this really kill all my litigation or not? I keep hearing mixed stories about it. Second, I have also found out that the company has been doing some business in the prepaid industry. Not as much as before, but its servicing some big names in prepaid. Is this fraud against the court or what? Can a company selectively go in and out of bankruptcy? I feel like I am getting blindsided. What are your comments?

- “Getting Hoodwinked”

Dear Hoodwinked,

You definitely picked a murky subject to bring to light – commercial litigation and bankruptcy protection. Unfortunately this topic is common in telecom. From the sound of it, you received an Automatic Stay Order issued by a Bankruptcy Court after a Petition for Bankruptcy Relief was filed. This may be pursuant to either Chapters 13, 11 or 7 depending on the filing and the review of the Court. Check the Order your received to be clear on this.

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Under the Federal Bankruptcy Code, specifically 11 USC § 362(a), bankruptcy petitioners are afforded a broad stay against pre-petition litigation, liens, enforcement of judgments and other efforts that are attempts to collect pre-petition debts. It generally applies to all persons, entities, and governmental subdivisions, including the U.S. government, until the bankruptcy court discharges the debt or dismisses the petition for relief. As the statute reads and is enforced by the Court, any entity or person that continues to pursue a pre-petition claim after notice of the Stay Order SHALL be subject to sanctions for violating the order. This means that if you don’t cease from continuing actions (which can be anything from litigation to demand letters) you will be penalized and that will be an increased loss to your claim. Most states require that the attorney for the bankruptcy petitioner file a Notice of Suggestion of Bankruptcy in all ongoing cases. This places the proceedings on hold until the Bankruptcy Court dismisses the petition, requires re-organization, or grants a Super-Discharge wiping out your claim in a settlement of debt. The Stay Order does not apply to criminal proceedings or criminal restitution judgments, be they for local crimes, proceedings by the state attorney generals, or indictment by the federal government. The Stay Order also does not apply to a narrow realm of ministerial acts, such as certain state and federal regulatory filings. However, in most contractual cases (or those involving the Uniform Commercial Code and invoices) concerning pure debt issues, the Stay Order signals the end of the road as your claim will likely be encompassed in the Bankruptcy Court’s final ruling for relief.

While this Automatic Stay Order protection is broad, it is not absolute and without exceptions for those in litigation. This may be a topic to explore with your attorney before throwing in the proverbial towel on your case, because if applicable, there is a ten (10) day limit on filing relief. These exceptions are found under Section 362(d) of the Code that allows the Court to grant relief from the automatic stay by terminating it or modifying it “for cause.” Unfortunately, the Code fails to identify or define what constitutes “for cause.” For someone with existing litigation, this may be a point of venture because the Bankruptcy Court is a court of Equity — meaning they can consider the equality of the issues before them, as opposed to just pure legal remedies.

There are a number “causes” that the Court has recognized that would apply to telecom: 1.) Lack of adequate protection of the creditor in the assets to be re-organized; 2.) The Action is being done to thereafter recover loss against insurance; 3.) The filing of bankruptcy is being done “in bad faith” to avoid litigation or for some other financial motive; 4.) There is a clause in the contract between the debtor and bankruptcy petitioner in which the petitioner agrees not to contest any Relief to the Automatic Stay. Now, you mentioned aspects of your case that contained elements of fraud to which you say you have proof. This may be an important point to re-evaluate with your local counsel. Another consideration is the local court itself. Merely filing a Notice of Suggestion of Bankruptcy does not require that the Court must find the Stay applicable to the case. A local court could rule, in accord with the “for cause” rationales found in the federal bankruptcy code, that the facts or circumstances in your particular case separate it from those afforded typical commercial claims. Strong evidence showing fraud could qualify. This is definitely a point to further investigate with your attorney after reviewing ALL the particulars of your case. Thereafter, he or she can tell you if the case is really dead-in-the water or not.

As for your question about the petitioner company still operating, this may not be a fraud upon the court as you suggested. I think more information is needed about the bankruptcy proceeding. Many times, particularly when the company is going to liquidate its assets entirely, the trustee will evaluate the company in light of “ongoing concerns”. This is a term used to isolate the ongoing business value apart from fixed assets that may be worth less. An example is your own business. Distribution businesses usually have few hard assets as opposed to the value of their receivables should they continue business. If a trustee sees that the value of hard assets of the petitioner is practically nothing, he may opt for keeping the business running in order to maximize the businesses value to pay its creditors. Before calling this a foul on the part of the petitioner, it may be wise to do some more footwork and assess whether the trustee is operating the business. If the trustee is not operating the business, bring it to the attention of your attorney because this can be used as a part of a “for cause” relief claim or that the petition was filed in “bad faith”. Both moves could remove your case from discharge in the final bankruptcy decision.

Good Luck and Success in the Industry


“This settlement says a lot about Gary Winnick's character. Clearly, he does feel badly about all those who were hurt by Global Crossing's collapse both shareholders and employees.”

- Mr. Howard J. Rubenstein — a spokesman for Gary Winnick founder and chairman of Global Crossings who sold $123 million worth of GC stock as the company spiraled toward one of the biggest bankruptcy filings in U.S. history and who now agreed pay $55 million in settlement after commencement of SEC investigation. March 20, 2004


“They do things better with logarithms.”

- Hon. Benjamin N. Cardozo, on the Certainty of the Law, Paradoxes of Legal Science, 1928

•• Ed Maldonado is a principal of Maldonado & Glenn, a telecom legal firm. He can be reached Send all of your Legal Line questions

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