Creditor forces conversion from Chapter 11 to Chapter 7

When used properly, the bankruptcy process can help businesses and individuals here in Chicago and around the country get back on their feet and continue on with their lives while putting their financial difficulties behind them. But the Bankruptcy Code has a number of rules, and it is important for those who enter bankruptcy not to run afoul of them. The consequences of violating the rules can be severe.

As an example, take the case of a man who set up an enterprise for collecting movie posters. He gathered some of the most valuable posters, including one that was used to promote a highly regarded 1927 silent film called Metropolis. He purchased the item in 2005 for nearly $700,000, a sum that topped all prior poster sales. As part of his business, he obtained a $500,000 loan from another man. After a period of time, the loan came due, but the man had not paid it.

The creditor sought a court judgment on the loan, but in response the man declared he was bankrupt and filed for Chapter 11 protection. The Bankruptcy Code requires people to give an accurate picture of their financial health, but unfortunately this man appears to have left some of his posters off of the required disclosure list. In addition, he had attempted to sell the Metropolis poster during the course of the bankruptcy proceedings.

Concerned that the man was not being forthcoming about his assets and liabilities, the creditor requested that the court convert the case from a Chapter 11 reorganization to a Chapter 7 liquidation. The court did so, finding that the man had not complied with Bankruptcy Code rules. After a bankruptcy trustee completes an examination of his holdings to confirm that every asset has been disclosed, the trustee will take possession of the man's inventory and liquidate it at auction to satisfy his creditors' claims.

Source: The Hollywood Reporter, "World's Most Expensive Movie Poster Seized in Bankruptcy Case," Andy Lewis, June 22, 2012.

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