Attorneys for TelexFree have filed a motion seeking court approval for a six-week extension to provide the required supplements to their bankruptcy filing, including financial disclosure statements, summaries of assets, and lists of creditors. TelexFree, LLC, TelexFree Inc., and TelexFree Financial, Inc. (collectively, "TelexFree") filed for Chapter 11 bankruptcy protection last week shortly before state and federal regulators accused it of operating a massive pyramid and Ponzi scheme. In a Motion for Extension filed yesterday, TelexFree argued that a six-week extension was necessary in light of the ongoing actions by the Massachusetts Securities Division and the Securities and Exchange Commission, as well as the company's alleged inability to access its corporate documents following a raid of its headquarters last week by federal authorities.
Federal Bankruptcy Rule 1007 sets forth a list of the required documents and schedules to be filed in connection with initiation of a Chapter 7, 9, 11, or 13 bankruptcy. In addition to a bankruptcy petition, a debtor is also required to file:
- schedules of assets and liabilities;
- a schedule of current income and expenditures;
- a schedule of executory contracts and unexpired leases; and
- a statement of financial affairs.
In addition, other required schedules include lists of creditors holding secured and unsecured claims, personal and real property holdings, and executory contracts and expired leases.
In the initial filings made by TelexFree, none of these required schedules were included. These schedules contain information, such as current assets and income, that will be crucial to determining whether TelexFree will be permitted to move forward with a Chapter 11 reorganization or if it is instead ordered to proceed with a Chapter 7 liquidation. Indeed, one of the threshold requirements for receiving approval to proceed with a Chapter 11 bankruptcy is that creditors must receive more than they would receive under a Chapter 7 liquidation. The bankruptcy court issued a Notice of Incomplete and/or Deficient Filing on April 14, 2014, and ordered that all of the missing schedules were to be filed no later than 14 days after the initial filing date of April 13, 2014.
In the Motion to Extend filed April 21, 2014 (the "Motion"), TelexFree stated that the deadline to file the schedules is currently April 28, 2014 (when in reality the deadline is April 27, 2014 - 14 days after the petitions were filed on April 13, 2014). It first noted that it had included a list of all known creditors in its bankruptcy petition - with the exception of "the complete list of Promoters, believed to exceed 700,000 parties." With the Schedules currently due in less than one week, the Motion referenced several parallel actions that it argued warranted a six-week extension until June 16, 2014. This included (1) the execution of federal government search warrants on TelexFree's Massachusetts office resulting in the inability to access complete records; and (2) the "significant time" TelexFree is spending to address complaints filed by the Massachusetts Securities Division and the Commission. Indicating that these issues would prevent TelexFree from completing the Schedules within the statutorily-prescribed time, TelexFree requested an extension to June 16, 2014. Oddly enough, it appears that TelexFree originally had planned to seek an extension until May 31, 2014 - as indicated by the date set forth in the proposed order that accompanied the Motion.
While the exact reasons for the Motion are unknown, it is likely that TelexFree did not anticipate the swift response their bankruptcy filing would provoke from the Massachusetts Securities Division and the Commission, which have served only to magnify the spotlight currently on the company. In addition, federal authorities executed a search warrant on TelexFree's Massachusetts office the same day. The information required to be filed in the Schedules is certainly likely to garner an intense amount of scrutiny, and TelexFree lawyers may feel that a six-week extension may be sufficient breathing room to deal with the competing actions and ensure that any figures eventually submitted are accurate.
Yesterday, TelexFree filed an ex parte motion to shorten the time requirement to schedule a hearing on the Motion, and requested that the Motion be added to the list of motions currently scheduled for hearing on May 2, 2014.
A copy of the Motion is below: