Former pro baseball player Len Dykstra, the outfielder who epitomized hustle as a New York Met and Philadelphia Philly during the late 1980s and early 1990s, clearly was in the zone of insolvency when he allegedly tried to dispose of $400,000 worth of personal items after filing for bankruptcy in 2009. The charges of bankruptcy fraud for embezzling from his own estate were announced last Friday, a day after Dykstra was arrested on unrelated grand theft charges for apparently buying cars using fraudulent means, according to the U.S. District Attorney's Office in Los Angeles. At presstime, CFO was unable to reach Dykstra's attorney for comment.
Under the bankruptcy law, a debtor is prohibited from selling off personal property without permission from the bankruptcy trustee, as in most cases, the trustee instructs that the proceeds from any sale be used to pay off creditors. Dykstra, who became something of a celebrity stock picker after retiring from baseball, was charged with looting his own $18 million Los Angeles area mansion, actions that included "ripping out" a $50,000 sink.
The Dykstra fraud case provides an opportunity to revisit the unusual position some creditors of corporate bankruptcies find themselves in when suppliers and vendors fall into the zone of insolvency. Indeed, there are times when payments from bankrupt suppliers must be returned if they are classified as preference payments, says Hal Schaeffer, president of D&H Credit Services and an expert witness in preference-claims cases. Essentially, if a vendor is within 90 days of filing for bankruptcy, and makes an irregular payment to a creditor -- one outside of the normal business cycle -- the payment could be considered preferential treatment of one creditor over another. If that is the case, the trustee can sue creditors for return of the payment -- which can range anywhere from a few thousand dollars to $5 million -- and then dump the money won in the lawsuit into the pool of assets being distributed to all creditors.
While large companies usually can absorb the loss of a preference payment claim, the hit to cash flow of smaller companies has a much larger impact, Schaeffer told CFO in an earlier interview. Preference payment suits are likely to climb over the next few years simply because bankruptcy claims are increasing. According to SecondMarket, an exchange on which bankruptcy claims and other alternative investments are traded, $40 billion in bankruptcy claims were traded during 2010, a 400% jump from the 2009 total. Further, in February of this year, $3.47 billion in claims were traded, up from $2.55 billion in January. The February total was the highest since July of 2010, and included newly-traded claims from the Great Atlantic & Pacific Tea Co., Constar International, TerreStar Networks, and the Catholic Diocese of Wilmington. Clearly, the player they used to call "Nails" was in the zone -- and not in the athletic sense.