The Strategic Use of Bankruptcy by Debtors – Gawker Media Files Chapter 11 Bankruptcy and Buys Time

The United States Bankruptcy Code is a powerful tool which, when used expertly, can provide the most precious remedy debtors who cannot pay their current obligations can possess – time.  The remedy of time is not limited to sophisticated large corporate entities like Gawker Media which understand the value of time and use it to its fullest extent.  This remedy can benefit homeowners facing foreclosure, small businesses seeking an opportunity to continue to operate while negotiating with creditors or to liquidate assets at market value, and consumer debtors unable to pay the debt service on their credit cards, personal loans or vehicle payments.

Gawker, whose publications include sleaze, slime, and other content intended to attract the voyeuristic interests of its readers was sued by Terry Gene Bollea, a wrestler who is professionally known as Hulk Hogan.  Hogan claimed that Gawker violated his privacy by publishing a private tape depicting him having sex.  The jury agreed with Hogan and awarded him $140 million dollars in damages.  Gawker appealed the judgment and sought a stay pending its appeal because the enforcement of the judgment would have resulted in the forced liquidation of all of Gawker’s assets.  When Gawker’s request for a stay was denied, it filed a Chapter 11 Bankruptcy Petition.

The filing of the Gawker Chapter 11 case created a “bankruptcy estate” which included all of Gawker’s assets and automatically stayed the enforcement of the judgment against Gawker.  The “automatic stay” provided for by Bankruptcy Code Section 362 (11 U.S.C. §362), requires that all creditors stop any attempt to collect a debt against the filing debtor(s) and the “bankruptcy estate” after the filing of a bankruptcy petition.  With very few exceptions, creditors who seek to proceed against the property of the “bankruptcy estate” must seek the permission of the bankruptcy court for relief from the stay.

The filing of the bankruptcy  – and resulting automatic stay – alone may, or may not, provide Gawker with a solution to the financial impact of the Hogan judgment.  First, the judgment entered against Gawker was for an intentional tort which may impact its treatment in the bankruptcy case.  Generally, unlike judgments which result from negligence (i.e. automobile accidents or other common personal injury claims), the judgment entered against Gawker may be deemed non-dischargeable because it is a result of an intentional tort.

Further, the complexities of a Chapter 11 case involve careful analysis of a debtor’s rights to address obligations to all of its creditors.  Nonetheless, Gawker gained precious time to continue to operate while it negotiates with creditors, sells its assets at or near market value, pays its secured creditors, and leverages the priorities of the Bankruptcy Code to address Hogan’s claim where the the law requires.   Outside of the bankruptcy, Hogan and his claim threatened the immediate liquidation of Gawker’s business.  Within the bankruptcy, Hogan may find himself at or near the end of a long line of creditors and other parties where he may not be paid in full – or not at all.

The strategic use of bankruptcy need not be limited to large corporate entities.  From homeowners facing foreclosure to small businesses and consumers, bankruptcy protections and the benefits they offer are unfortunately too often overlooked. For example, the provisions of Chapter 13 of the Bankruptcy Code can give homeowners threatened with foreclosure up to sixty (60) months to repay the arrears on their mortgages or to sell their homes and receive the equity in it rather than having their homes sold at a sheriff’s sale and receive nothing.  Businesses can use Chapter 11 of the Bankruptcy Code to restructure secured debt and to reduce or eliminate other debt obligations without creditors interrupting or interfering in the operation of their businesses.

So the question is: Why don’t homeowners, consumer debtors and small businesses use provisions of the Bankruptcy Code which can substantially benefit them?
The answer to this question is almost always the same.  They fail to promptly seek the advice of expert bankruptcy counsel, and to act on that advice.  It is almost certain that Gawker’s management discussed and planned with expert bankruptcy attorneys what its best course would be if the Hogan case was decided against them.  It is almost equally certain that these discussions took place well before its decision to file for Bankruptcy protection.  This planning enabled it to file its Chapter 11 Petition almost immediately after its request that the judgment be stayed pending appeal and to thereby take the fullest advantage of the precious asset of time.

In sharp contrast to Gawker’s strategic use of the the Bankruptcy Code, it has been our long experience that too often, even those faced with the loss of their homes, businesses, and earnings, contact us only at the last moment when many of the remedies that may have been available to them are lost or when the precious value of time has long since slipped away.