Dismissal of tax-driven bankruptcy plan affirmed.

• Author: Beavers, James A.

The Seventh Circuit affirmed a bankruptcy court's refusal to confirm a bankruptcy plan and its dismissal of the bankruptcy proceeding because the principal purpose was to avoid taxes. The court said the filing was in bad faith and did not serve the proper purpose of bankruptcy law.

Background

South Beach Securities (South Beach), at the time it declared bankruptcy, was a shell corporation that had no employees or business activities, and its only "assets" were net operating losses. It had been a registered securities broker-dealer. Scattered Corporation, a securities firm that the Chicago Stock Exchange had driven out of the securities business after a prolonged legal battle, was the only creditor of South Beach. Leon Greenblatt, a Chicago businessman, controlled both South Beach and Scattered.

South Beach was wholly owned by NOLA, LLC, another company with no business operations. Its sole asset was the stock of South Beach. NOLA had three members. One was Greenblatt's father; the others were the fathers of Scattered's other two officers and directors. A company named Teletech managed NOLA. This was the sole function of Teletech, whose president and sole employee at the relevant time was Greenblatt. Through Teletech, and thus through NOLA, Greenblatt controlled South Beach.

In 2001, Greenblatt directed another corporation that he controlled, Loop Corporation, to lend South Beach $2.2 million, which he then had South Beach lend to NOLA (along with another $1 million of indeterminate origin) to enable NOLA to purchase the stock of a company called Health Risk Management, Inc. (HRM). Loop then sold the $2.2 million loan that it had made to South Beach to Scattered for $100,000, making Scattered a creditor of South Beach.

South Beach filed for bankruptcy under chapter 11 and submitted a plan of reorganization to the bankruptcy court. South Beach's bankruptcy filings listed the stock in HRM as its sole asset and assigned the stock a value of zero. Under the plan, Scattered, the only real creditor of South Beach, would receive South Beach stock in satisfaction of its claim, and South Beach would be discharged.

South Beach did not list its net operating losses as an asset; however, the disclosure statement it filed with the bankruptcy court stated that the purpose of the bankruptcy was to monetize South Beach's net operating losses. If the bankruptcy court approved the plan of reorganization, Scattered would become the owner of South Beach and...