AmeriDebt Inc. founder Andris Pukke has filed for personal bankruptcy protection, a move that could mean there will be less money available to consumers claiming to have been burned by his Maryland-based credit-counseling operation.
A bankruptcy filing typically puts an immediate hold on lawsuits against the filer. But the Federal Trade Commission, which has been pursuing Pukke through the courts on behalf of consumers since late 2003, said such a stay doesn't apply to its case.
"Congress didn't want bankruptcy to be a safe haven for wrongdoers," said Jeanne M. Crouse, the FTC's lead bankruptcy counsel in the agency's case against AmeriDebt, which was settled this year.
The agency claims that Pukke launched nonprofit AmeriDebt to steer consumers into debt repayment plans that charged high, poorly disclosed fees. AmeriDebt, in turn, spent millions of dollars to process accounts through Pukke's for-profit company, DebtWorks, which ended up supporting his lavish lifestyle, the FTC said. In a case expected to go to trial in January, the FTC seeks to recoup $172 million in fees that consumers paid to AmeriDebt over the years.
Pukke's lawyer has said the trial will give his client an opportunity to show how he saved consumers hundreds of millions of dollars by negotiating more favorable credit terms for them.
At the request of the FTC, a U.S. District Court judge in Greenbelt froze Pukke's assets in April and appointed a receiver to control and track down any other property, including potentially millions of dollars that the FTC says Pukke transferred to offshore accounts.
As part of its settlement with the FTC, AmeriDebt transferred its clients this year to another credit counselor and is liquidating in bankruptcy court.
Pukke, who now lives in Newport Beach, Calif., filed for protection Monday under Chapter 11, which is rarely used in personal bankruptcy cases. In documents filed in U.S. Bankruptcy Court in the Central District of California, Pukke stated that his assets and liabilities both are in the range of $10 million to $50 million. Among the largest creditors was a Washington law firm owed $1.48 million and BB&T Bankcard VISA, owed about $50,000.
The FTC, Internal Revenue Service, Maryland Comptroller's Office and states of Texas and Missouri - which sued Pukke and AmeriDebt for deceptive business practices - are also listed among the largest creditors, although the size of their claims is yet unknown.
An unusual move
Individuals typically file for bankruptcy under Chapter 7, in which most debts are wiped out, and under Chapter 13, in which a debtor repays creditors over time through a court-supervised plan. Pukke's debt is too high to qualify for a Chapter 13, legal experts said. By filing under Chapter 7, his assets would have been liquidated by a trustee.
By filing under Chapter 11, Pukke could regain control of his assets, some experts said.
"The receivership probably will be displaced by the bankruptcy filing. So the receiver that previously had control of his property will probably surrender control to him and he will now be a fiduciary on behalf of his creditors," said Lynn M. LoPucki, a UCLA law professor. "Some call it the fox guarding the chicken coop."
The wrangling over the control of assets could happen soon.
Pukke likely will file a motion to remove the receiver, and the receiver will file a motion to continue his duties, said Mark Taylor, AmeriDebt's court-appointed trustee. The fact that a U.S. district judge saw the need for a receiver also will likely carry a lot of weight with the bankruptcy court judge, Taylor said.
Pukke's bankruptcy lawyers did not return phone calls. John Williams, a Washington lawyer representing Pukke in the FTC case, said he is unfamiliar with bankruptcy law but expects many of the questions raised to be litigated in court in the next couple of weeks.
Fate of class action
Another issue enmeshed in the bankruptcy filing is the fate of a private class action lawsuit on behalf of consumers against Pukke and others. Plaintiffs' lawyers in that case could not be reached for comment yesterday, but legal experts expect them to request that any stay in the case be lifted.
For consumers hoping for restitution from Pukke, the filing could mean less money.
If the FTC wins its case, the judgment cannot be discharged in bankruptcy court. The FTC would become an unsecured creditor and would share in whatever of Pukke's assets remain after top-priority creditors, such as the IRS, are paid.
"By filing ... Pukke pulls into the bankruptcy all his existing creditors in addition to consumers. The pool of creditors has widened," said FTC's Crouse. "Our goal is to collect as much money as possible and return as much money as possible."
Every dollar spent by the receiver and in the bankruptcy case "is one less dollar that ultimately gets to consumers," Taylor said.