By Reno F.R. Fernandez III MacDonald | Fernandez
Recently, rapper 50 Cent (Curtis Jackson) found about 700 Bitcoins between his virtual couch cushions worth some $7.7 million as of January 24, 2018. These were some of the proceeds of his 2014 album, namely Animal Ambition. At the time, 50 Cent’s Bitcoin was worth about $400,000.
On the day the album came out, 50 Cent took part in an “Ask Me Anything” session on Reddit, where he commented on accepting bitcoin as a way to “stay with times.” Now, the rapper reflects upon his good fortune via Instagram, commenting that: ” I forgot I did that s***” and “Not Bad for a kid from South Side, I’m so proud of me” alongside an emoji of a sack of money.
50 Cent has much to be proud of, and indeed there is a group likely to agree that the rapper’s good fortune is a result of skill and not luck. This group is comprised of 50 Cent’s creditors that were not paid in full as part of his 2015 bankruptcy case. Specifically, 50 Cent paid approximately $22 million on account of $32.5 million in debt, and the balance was discharged. Creditors will almost certainly be looking at 50 Cent’s Bitcoin with envy and wondering whether they can grab it to satisfy their unpaid claims.
50 Cent filed his bankruptcy petition on July 13, 2015, in the United States Bankruptcy Court for the District of Connecticut (Case No. 15-21233). On August 3, 2015, 50 Cent filed his schedules of assets and liabilities, which were amended several times thereafter. 50 Cent’s schedules do not disclose any interest in Bitcoin. This will likely strike creditors as odd because 50 Cent is on record just a year earlier stating that he was accepting Bitcoin to stay with the times.
50 Cent’s case was filed as a reorganization under Chapter 11 of the Bankruptcy Code. Chapter 11 allows a debtor to propose and confirm a plan of reorganization, allowing the debtor to continue in business but pay less than all of its debt, under certain circumstances. On July 7, 2016, the bankruptcy court confirmed 50 Cent’s plan of reorganization, providing for payment of a portion of his debt over time and discharging the rest. In fact, 50 Cent paid all of the payments due under the plan early after settling a malpractice claim against former counsel for about $14.5 million. 50 Cent’s discharge was entered on February 2, 2017. Any Bitcoin received before the case was filed on July 13, 2015, became property of his bankruptcy estate. 11 U.S.C. § 541. Because of special rules that apply to individual debtors (human beings), Bitcoin received thereafter also became property of the estate. 11 U.S.C. § 1115(a)(1).
With a plan confirmed and a discharge entered, how can creditors get at 50 Cent’s Bitcoin? At first glance, the prospects look dim. Specifically, Bankruptcy Code Section 1144 provides that an order confirming a plan can be revoked for fraud but only by a motion filed within 180 days after confirmation, which has long since passed in 50 Cent’s case. Also, a confirmed plan for an individual debtor cannot be modified after all plan payments are made. 11 U.S.C. § 1127(e). 50 Cent did make all payments required under the plan.
To summarize, a creditor cannot revoke confirmation of 50 Cent’s plan or modify his plan. But there is another route. Discharge of debt in Cchapter 11 is dependent upon the rules for discharge under Chapter 7 of the Bankruptcy Code. In particular, Bankruptcy Code Section 727(d) provides for revocation of a discharge in the case of fraud, concealment of assets and certain other scenarios. The deadline to bring an action for revocation of discharge for concealment of certain assets stays open until the case is closed. 11 U.S.C. § 772(e)(2)(B). In fact, 50 Cent’s case remains open for certain administrative purposes. The deadline to bring an action for revocation based on fraud is one year after the discharge is entered, which has passed (11 U.S.C. § 727(e)(1)), but the deadline can be retroactively extended for cause if there are demonstrable grounds supporting revocation and the moving party did not know such facts within the time to object to discharge (Fed. R. Bankr. P. 4004(b)).
If the discharge is revoked but 50 Cent still will not liquidate the Bitcoin himself to pay creditors, then creditors may seek to convert the Chapter 11 case to a liquidation under Chapter 7 of the bankruptcy code. 11 U.S.C. § 1112. Ordinarily, a case cannot be converted after all plan payments are made because there is nothing left of the estate to administer; here, however, there is some $7.7 million in Bitcoin left in the estate. If the case is converted, a Chapter 7 bankruptcy trustee would be appointed to liquidate the Bitcoin and distribute the proceeds to creditors.
If you followed this game of statutory ping pong, you will see that 50 Cent knew he had Bitcoin some time before bankruptcy but did not disclose it. Accordingly, it appears there are at least some grounds to revoke his discharge and an opportunity to request that his case be converted. On the other hand, 50 Cent is famous, and he did not hide the fact that he held Bitcoin from the press in 2014. If creditors actually knew about 50 Cent’s Bitcoin, then they may be stuck with the status quo. Also, the picture may not be so clear if the Bitcoin is owned by one of 50 Cent’s business entities and not himself personally, in which case he may not have had a duty to make extensive disclosures. Let’s watch and see what happens….
About the author:
Reno F.R. Fernandez III is a partner of Macdonald Fernandez, and he practices commercial litigation and bankruptcy from offices in San Francisco, Modesto and Calistoga. He is a former chair of BASF’s Commercial Law and Bankruptcy Section.