Debtor in possession bankruptcy for MD Helicopters?

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Wilmington, DEMD Helicopters Inc. appears to have secured financing that will see the company emerge from bankruptcy as a going concern. The company’s Chapter 11 bankruptcy filing, however, was just the latest twist in a case that began with a lawsuit in 2013.

The revolving door and subsequent fraud

The underlying facts of United States ex re. Marstellar vs. Tilton are complicated because they involve multiple military supply contracts negotiated over a period of years with MD Helicopters, as well as a significant reinterpretation of the requirements of the federal False Claims Act (FCA). Nonetheless, the basic story is that the military contractor unfairly influenced the contract award process by dangling the offer of post-retirement employment in front of the decision maker.

The main actors are :

  • Col. Norbert Vergez, who was program director for the Army’s Program Management Office for Non-Standard Rotary Wing Aircraft at the time the contracts were awarded;
  • Lynn Tilton, who had described herself as the “turnaround queen” of business and was then CEO of MD Helicopters; and
  • Philip Marsteller and Robert Swisher, two former MD Helicopter employees, who filed a complaint with the FCA.

Marsteller and Swisher originally filed their complaint with the FCA in 2013. The original complaint reportedly cited Colonel Vergez’s “level of submission to [MD CEO Lynn] Tilton and his continued involvement in MD’s Army contracts” after accepting a job offer from the company. He alleges that MD Helicopters knowingly inflated helicopter prices in several government contracts.

In a related but separate action in 2015, Vergez pleaded guilty to misrepresentation and criminal conflict of interest. The charges stemmed from his failure to report receiving $30,000 for “relocation expenses” related to his immediate post-service employment with an MD Helicopter affiliate and his non-disclosure of the gift of a Rolex watch. $4,000 to his wife.

In the meantime, the government declined to pursue the lawsuit on its own, freeing Marsteller and Swisher to pursue it on behalf of the government, as a qui tam case. At the end of the trial, a federal jury found the company guilty of generalized fraud. The largest claim against the company is for $108.7 million by the Fraud Section of the Civil Division of the US Department of Justice.

According to documents filed with the United States Bankruptcy Court for the District of Delaware, this is only part of MD Helicopter’s fraud liability. The company apparently owes between $100 million and $500 million to at least 1,000 creditors.

Misrepresentation Act

The FCA provides that anyone who knowingly submits false claims to the government can be held liable for three times the government’s damages plus a penalty of $5,000 to $10,000 for each false claim.

In addition to allowing the United States to prosecute fraudsters itself, the FCA allows private citizens to sue on behalf of the government against those who have defrauded the government. Private citizens who successfully bring qui tam actions may receive a portion of the government’s clawback.

If the government refuses to intervene in the qui tam action, the whistleblower is usually entitled to receive between 25 and 30% of the amount recovered by the government. The whistleblower’s share is taken from the amount received by the respondent’s government. If a qui tam action is successful, the whistleblower is also entitled to legal fees and other expenses of the action by the defendant. The amount Marstellar and Swisher will receive is still subject to negotiation, but could be as high as $30,000 plus fees.

Debtor in possession 11 bankruptcy

The final phase of this case involves a special form of bankruptcy, called debtor-in-possession bankruptcy. By definition, a debtor in possession is a person or corporation that has filed for Chapter 11 bankruptcy protection, but still holds property over which creditors have a legal claim under a lien or of another surety. The debtor in possession can continue to manage the business using these assets, but must do so under the supervision and in the best interests of the bankruptcy creditors.

The most obvious reason to seek this status in bankruptcy court is that the assets are used in the course of a going concern with a higher resale value than the assets alone. Debtor-in-possession status allows bankrupt companies to avoid liquidating the lowest asset prices and may benefit creditors. This is often a transitional step towards complete liquidation.

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