The rapper Curtis James “50 Cent” Jackson III filed a voluntary chapter 11 bankruptcy petition in Connecticut bankruptcy court on Monday, July 13, 2015. Jackson rose to prominence with songs like In Da Club and P.I.M.P. from his 2003 album Get Rich or Die Trying (also the name of his 2005 film biopic) and has starred in many film and television projects, including the Starz show Power and the upcoming movie Southpaw.
“This filing for personal bankruptcy protection permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs,” Jackson’s attorneys said in a statement.
The chapter 11 filing was made the same day a jury was scheduled to determine whether Jackson is liable for punitive damages in a 2010 lawsuit filed by Lastonia Leviston. Just days prior to the filing, the same jury awarded Leviston $5 million in compensatory damages, after she alleged that Jackson violated her privacy by posting a sex tape of her online without her permission. Jackson’s attorneys are disputing the damages award. As a result of the bankruptcy filing, the proceedings in the sex tape lawsuit are stayed, meaning that Leviston cannot try to enforce or collect her $5 million award, or obtain a finding from the state court jury on the amount of punitive damages, without first obtaining relief from the automatic stay in the bankruptcy case.
Jackson’s bankruptcy petition was a mere five pages and lists Jackson as having both assets and liabilities in the $10 million to $50 million range. No mention was made of the Leviston lawsuit. Given the paucity of information contained in the bankruptcy petition, Jackson’s chapter 11 filing leaves many question unanswered.
First, is Jackson really broke? In addition to his recording and movie contracts, Jackson also invested in the maker of Glacéau Vitaminwater, which was sold to Coca-Cola for $4.1 billion in 2007. It is reported that Jackson received between $40 million and $100 million from the deal. What’s more, in May, Forbes estimated Jackson’s net worth at $155 million, ranking him No. 4 on the list of the wealthiest hip hop artists, and the New York Times praised Jackson’s “exceptional business instincts” in a profile published only a few days before the bankruptcy filing. Thus, why should a $5 million award of compensatory damages, or even the threat of punitive damages, send Jackson into bankruptcy? However, it doesn’t really matter whether Jackson is “bankrupt” or “insolvent” or “broke” because proof of insolvency is not required in a voluntary chapter 11 case. What matters is whether Jackson filed his bankruptcy case in good faith.
There are two good faith requirements in the Bankruptcy Code. First, section 1129(a)(3) provides that every plan of reorganization be “proposed in good faith and not by any means forbidden by law” which won’t come into play unless Jackson’s filing is found to be valid and he stays in chapter 11 long enough to propose a plan of reorganization. In addition, section 1112 sets forth a list of abuses and failures that can lead to the outright dismissal of a chapter 11 case or its conversion to a chapter 7 liquidation. Although prosecution of a chapter 11 case in “bad faith” is not listed as one of the examples in section 1112, courts have consistently found that a “bad faith filing” constitutes “cause” for dismissal or conversion under section 1112(b). The determination of whether a case was filed in bad faith is made on a case by case basis, but a filing by a solvent debtor to obtain a tactical litigation advantage has been found to be a bad faith abuse of the bankruptcy process. To date, there has been no move by Leviston or the United States Trustee to seek dismissal of Jackson’s bankruptcy as a bad faith filing. However, if Leviston is not successful in obtaining relief from stay, a motion to dismiss Jackson’s chapter 11 case as a bad faith filing could be her next line of attack.
Second, what information about Jackson’s assets and debts will be revealed when Jackson files his bankruptcy schedules and statement of financial affairs? Among the items that must be disclosed in detail in the schedules and statement are: (1) real property, (2) personal property, (3) contracts, (4) known secured claims, (5) known unsecured claims, (6) transfers made within the year prior to the bankruptcy filing, and (7) known litigation claims. Items creditors will be watching for will include the potential revenue streams from Jackson’s recording and movie contracts, total cash on hand, the value of his Connecticut home, and the damages stemming from the Leviston sex tape lawsuit. The current deadline for Jackson to file the schedules and statement is July 27, 2015.
Third, and perhaps most importantly, will Leviston be granted relief from stay to proceed with her state court lawsuit? The state court judge is holding the jury in the Leviston case until July 17, 2015 to give Leviston an opportunity to obtain stay relief, so that if the relief is granted, the punitive damages phase of the trial can proceed before the jury. Accordingly, Leviston filed a motion for relief from stay just hours after Jackson filed his bankruptcy petition, and also filed a motion to have the hearing on her motion held on an expedited basis. The bankruptcy court granted Leviston’s motion for an expedited hearing and scheduled a hearing on her relief from stay motion on July 17, 2015 at 10:00 a.m. Eastern standard time.
Leviston is requesting relief from the automatic stay for “cause” pursuant to section 362(d)(1) to proceed with the punitive damages phase of the trial, and states a compelling case for relief from stay, arguing, among other things, that (1) a verdict has already been rendered against Jackson and relief from the stay would result in a complete resolution of the punitive damages issue, to the benefit of all creditors, and (2) continuation of the state court action would be the most economical way to resolve the lawsuit and the punitive damages issue, since the state court and the jury are already versed in the facts and issues relevant to the case.
Even if Leviston’s relief from stay motion is granted, and punitive damages are awarded by the jury, that does not mean that Leviston’s punitive damages claim will be allowed in full in the bankruptcy case. Indeed, while there are courts that have allowed punitive damages awards in full in bankruptcy cases, many other courts have used their equitable powers to equitably subordinate punitive damages claims, finding that punitive damages frustrate a debtor’s ability to reorganize and punish innocent creditors for the debtor’s wrongdoing. Thus, it is possible that Jackson’s lawyers, fearing a significant award of punitive damages to Leviston, may have advised Jackson to seek bankruptcy protection so that he would at least have the option of petitioning the bankruptcy court for equitable subordination of the punitive damages award.
Jackson’s solvency (or lack thereof) may also significantly impact the treatment of any punitive damages awarded to Leviston. Specifically, if Jackson’s assets are sufficient to satisfy all claims against him, including any punitive damages awarded to Leviston, the bankruptcy court may be inclined to allow a punitive damages claim by Leviston. On the other hand, if punitive damages awarded to Leviston would significantly reduce the distributions to other creditors and prevent Jackson’s reorganization, the bankruptcy court could be more willing to reduce, disallow or subordinate a punitive damages claim by Leviston.
Lastly, a punitive damages award to Leviston could impact Jackson’s discharge. A bankruptcy discharge releases the debtor from certain specified types of debts, meaning that the debtor is no longer legally required to pay debts that are discharged in bankruptcy. In an individual chapter 11 case, such as that filed by Jackson, the bankruptcy court generally grants the discharge pursuant to a plan of reorganization, or as soon as practicable after the debtor completes all payments under the plan. Section 523 of the Bankruptcy Code enumerates various categories of debts that are precluded from discharge in bankruptcy, including debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Various courts, including courts of appeal, have found that punitive damages are precluded from discharge where the damages are attributable to a “willful and malicious injury.” The definition of willful and malicious injury applied by courts varies, but as Judge Posner of the Seventh Circuit Court of Appeals noted:
But whatever the semantic confusion, we imagine that all courts would agree that a willful and malicious injury, precluding discharge in bankruptcy of the debt created by the injury, is one that the injurer inflicted knowing he had no legal justification and either desiring to inflict the injury or knowing it was highly likely to result from his act.
There is certainly an argument that the injury Jackson inflicted on Leviston by posting the sex tape online without her permission would satisfy this standard, rendering any punitive damages awarded to Leviston (and allowed in the bankruptcy case) nondischargeable.
For now, Jackson continues to promote his new movie Southpaw and even stopped by the Conan O’Brien show to talk about his bankruptcy filing. Twitter and the internet are also awash with jokes about Jackson’s bankruptcy filing. As noted by one astute twitter user (Justin Paterno/@zerobeta), Jackson and his bankruptcy estate might recognize a real monetary benefit if “50 cent had a nickel for every ‘50 Cent’ joke.”