NOWHERE TO RUN, NOWHERE TO HIDE: THE IMPACT OF SARBANES-OXLEY ON SECURITIES ARBITRATION

St. John's Law Review, Winter 2007 by Pierre-Louis, Lydie Nadia Cabrera

Simultaneously, with the filing of the bankruptcy estate, the automatic stay becomes effective. This power of the automatic stay is immediate and absolute; the automatic stay prohibits creditors from collecting on their accounts or taking any other action that may diminish the value of the estate including receiving any payment on outstanding debts. The trustee or the debtor-in-possession continues to pay the administrative expenses of the debtor, including financial and legal counsel.

The debtor has a 120-day exclusivity period to propose a plan of reorganization to the court. The bankruptcy court may extend or diminish the exclusivity period if the debtor provides good cause for such an extension. At the end of the 120-day period, if the debtor has not proposed a plan, the debtor's creditors, equity holders, and other parties-in-interest may file their own plans of reorganization. Alternatively, if the debtor has proposed a reorganization plan, the debtor has an additional sixty days to obtain approval of a consensual plan from creditors. During the sixty day extension period, competing plans may not be filed, unless during the extra sixty days a consensual plan of reorganization was not reached between the creditors and parties-in-interest.

The plan of reorganization must be specific as the distribution of estate, and it must describe with specificity the details of how all the creditors and equity interests are affected. The debtor must disclose the plan's contents to all interested parties. If all the creditors and parties-in-interest consent to the reorganization and the plan meets the statutory confirmation requirements, the bankruptcy court will confirm the plan. If a consensual plan is achieved at the end of the 60 day extension period, the Bankruptcy Code provides an alternative method of confirmation.

Upon confirmation, the debtor is discharged with the bankruptcy estate's remaining assets reverting to the debtor. The debtor, in exchange for surrendering all of his assets to the court for distribution to the creditors, receives a discharge from the court for the debtor's entire obligation to pay all of his debts. A discharge is a "release of a debtor from personal liability for prebankruptcy debts."56 Consequently, if the debtor owes an unsecured creditor a debt and that debt is discharged in bankruptcy, the unsecured creditor will only receive a pro rata share of the assets from the bankruptcy estate. Often, the creditor will receive only cents on the dollar or nothing at all.

B. Bankruptcy Code Renders Arbitration Awards Moot

If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.

-JP Getty57

Small investors often are confronted with unintended consequences when they entrust their life-savings with unscrupulous brokerage firms or brokers. Not surprisingly, small investors that have been defrauded by their brokerage firm or broker typically allege misconduct revolving around sales practice violations by brokerage firms or brokers, including (1) unsuitable recommendations, (2) churning, (3) unauthorized trading and misrepresentations, or (4) stealing the money outright, and are appalled by the arduous process to recover their money.58 The defrauded investor must commence an arbitration proceeding by filing a statement of claim, provide testimony at an arbitration hearing, and hopefully obtain a favorable verdict. The entire process, at minimum, will take eighteen months.