Can 50 Cent Successfully Reorganize Despite Adversity?

August 20, 2015Articles Law360

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

Curtis James Jackson III, better known as rapper 50 Cent, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Connecticut on Monday, July 13. At the time of his filing, Jackson indicated in papers filed with the bankruptcy court that his filing was “not primarily a result of excessive current expenses exceeding his current revenues, but rather the substantial costs of litigation and resulting awards against in the past year which total in excess of $20 million,” and that while he has “substantial assets, he does not have the ability to pay the full amount of these litigation claims and all other asserted claims at the present time, thereby necessitating this Chapter 11 filing.” Despite Jackson’s statements, the filing raised questions about whether Jackson was a victim of his own lavish lifestyle or drowning in litigation debt because he had not yet filed complete schedules listing all his assets and debts, along with a statement of financial affairs (SOFA) listing other important financial information.

Jackson’s bankruptcy filing gave him little relief from his litigation with Lastonia Leviston, who obtained a $5 million jury verdict, just prior his bankruptcy, for civil claims related to Jackson’s release of a private, intimate video depicting Leviston having sex with her then boyfriend. Less than a week after Jackson’s bankruptcy, the bankruptcy court granted Leviston relief from the automatic stay, pursuant to 11 U.S.C. § 362, to proceed with the punitive damages phase of her trial, resulting in verdict of an additional $2 million against Jackson.

On Aug. 3, Jackson filed his schedules and SOFA, which revealed that he has assets with a value of at least $24,823,899.18 and a majority of his $32,509,549.91 of debt is, in fact, from litigation claims exceeding $25 million by Sleek Audio LLC ($18,428,257 arbitration award) and Leviston ($7 million jury verdicts). The remainder of the $32,509,549.91 comprised of $4 million owed to Suntrust Bank on a guaranty, various law firms for legal fees exceeding $980,000, and child support payments to Daphne Narvaez (until child reaches age of 18 years old) in the amount of $832,600. Although Jackson lives a lavish lifestyle compared to most Americans, his reported monthly income of $184,969.58 far exceeds his monthly expenses of $108,000.

Unfortunately, for Jackson, the filing of a Chapter 11 bankruptcy case does not automatically result in the discharge of the debts by an individual debtor, for various reasons. Certain claims against a debtor are “nondischargeable.” This means that the debt cannot be eliminated by bankruptcy process and the debtor will still owe these debts after his/her bankruptcy.

There are several categories of nondischargeable debt for individuals in Chapter 11. These categories fall into two types of nondischargeable claims: 1) claims that are exempt from discharge as a matter of law (i.e. child support payments, criminal fines, certain taxes); and 2) claims that require a creditor to file an adversary proceeding, prior to the court-scheduled deadline, in the debtor’s bankruptcy case for determination by the bankruptcy court that the claim is nondischargeable.

Jackson has several claims that may fall into the purview of nondischargeable debts, including his child support payments and the litigation claims by Sleek Audio LLC and Leviston.

An interesting issue in Jackson’s bankruptcy case will be whether he can prevail against (or settle) any adversary proceeding by Leviston or Sleek Audio for determination that their debts are nondischargeable. One category of claims that requires a creditor to file an adversary proceeding for determination of nondischargeability is for a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity” pursuant to 11 U.S.C. § 523(a)(6).

By example, Leviston’s jury awards are, at least in part, based on a finding that Jackson was liable to Leviston under her cause of action for intentional infliction of emotional distress. The elements of a cause of action for the intentional infliction of emotional distress are: “(i) extreme and outrageous conduct; (ii) intent to cause, or disregard of a substantial probability of causing, severe emotional distress; (iii) a causal connection between the conduct and the injury; and (iv) severe emotional distress” (Howell v. New York Post Co., 81 N.Y.2d 115, 121 [1993] ).

Several courts have found that a claim for intentional infliction of emotional distress satisfies the “willful and malicious injury” standard under 11 U.S.C. § 523(a)(6), supporting nondischargeability of these types of claims. See e.g. Mussilli v. Droomers (In re Musilli), 379 Fed.Appx. 494, 498 (6th Cir. 2010); Berrien v. Van Vuuren (In re Berrien), 280 Fed.Appx 762, 766 (10th Cir. 2008); Collier on Bankruptcy § 523.12[4] (16th ed. 2012) (“Claims based on ... intentional infliction of emotional distress ... have typically been held nondischargeable”).

The court-scheduled deadline for filing adversary proceedings objecting to the dischargeability of certain debts is Oct. 5, 2015. It appears that Leviston may already be gearing up for such an adversary (or contemplating settlement options) based on her request to take the Rule 2004 examination of the debtor (Docket Entry 45). Often referred to as a fishing expedition, a Rule 2004 exam is deposition under oath that allows a party in interest to ask questions about “the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge.”

The answers to questions asked at a Rule 2004 exam can be used for many purposes, including (but not limited to): assessing a debtor’s financial condition and ability to reorganize and/or pay his debts; locating assets that may have been transferred by a debtor and are subject to recovery; and/or obtaining evidence for prosecution of an adversary proceeding objecting to discharge or dischargeability of certain debts.

However, despite the jury verdicts in favor of Leviston, one benefit of the Chapter 11 process is that Jackson has additional time to appeal the verdicts and any judgment without fear of execution on his assets. Based on Jackson’s designation of Leviston’s claims as “disputed” and his recent application to employ Brewer Attorneys and Counselors (D.E. 73), Jackson is likely to contest the Leviston verdicts and continue his litigation against Rick Ross. His application seeks to employ Brewer to represent him as primary counsel in his litigation with Leviston through entry of final judgment and to assist bankruptcy counsel on matters involving the interaction of Leviston litigation with the bankruptcy case.

Even if the Leviston and/or Sleek Audio’s claims are determined to be nondischargeable, Jackson could propose a Chapter 11 plan that provides for the full payment nondischargeable claims over time, without forfeiting any of his assets to those creditors. Under these circumstances, Jackson would benefit because creditors with nondischargeable claims would be “stayed” from enforcing their claims against Jackson’s assets, including his post-bankruptcy earnings, until after his discharge is entered. Although § 1141(d)(5)(A) and (B) contemplate the possibility that a discharge could be granted earlier, individual Chapter 11 debtors do not generally receive a discharge until completion of their plan payments (the term of plan payments is generally five years).

A status hearing will be held in Jackson’s bankruptcy case on Aug. 26, 2015, at 2 p.m. Several matters are set for hearing that day, including Leviston’s request for a Rule 2004 exam of Jackson and Jackson’s applications to employ professionals.

Will there be a fishing expedition for 50 Cent? Will Jackson prevail on his applications to employ professionals, despite objections? Will the discovery be bountiful for Leviston? Can Jackson successfully reorganize in spite of adversity? These are all interesting issues in the 50 Cent bankruptcy case and why it might be a case worth watching for practitioners.