October 1998 Issue


Federal Bankruptcy Court Judge Jeffrey H. Gallet of the Southern District of New York addressed a group of CPAs during lunch at an August CPE class and gave a list of things that bother him that petitioners do when presenting information. CPAs and others that assist parties in bankruptcy proceedings should take note:

* Overvalued receivables. He is dismayed that petitioners and their CPAs can submit receivables as assets of an estate at 95% of billed amounts. CPAs, noted Judge Gallet, have a special responsibility to exercise due professional care.

* Faulty valuations. He noted one valuation included air rights over a building for which there was no possible purchaser or user of those rights.

* Bankruptcy fraud. Some unscrupulous businesses use practices such as "bust-outs" or "bleed-outs" to use the bankruptcy vehicle to defraud other businesses. In a bust-out, the perpetrator buys on credit and sells for cash, takes the cash from the business, and then seeks bankruptcy protection from creditors. In a bleed-out, the perpetrator purchases product for credit and sells it to a friendly company for less than market, thereby transferring higher profits to the friend. The perpetrator then declares bankruptcy. Judge Gallet reminded CPAs that such antics constitute fraud, which can lead to criminal prosecutions.

Judge Gallet also noted the opportunity for CPAs to help maintain the effectiveness of bankruptcy by practicing at the highest professional levels when assisting parties to a proceeding. *

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