In re Featherworks Corp.

Arthur Puro’s wife and daughter owned Windsor Trading Corporation (Windsor) and Hudson Feather & Down Products, Inc. (Hudson), which owned Featherworks Corporation (Featherworks) (debtor). Puro was president and chief executive officer of Windsor and Hudson and controlled Featherworks. Featherworks filed for Chapter 11 bankruptcy after a judgment was entered against Featherworks in a litigation with Far West Garments, Inc. (Far West) (creditor). Walter E. Heller & Co. (Heller) (creditor) had a $5 million secured claim against Featherworks and obtained relief from the automatic stay to collect Featherworks’ accounts receivable and foreclose on Featherworks’ inventory. However, Heller received only $3.5 million from those efforts, leaving Heller with a $1.5 million unsecured claim. Featherworks’ other creditors were Windsor, Hudson, Far West, and the attorneys who represented Featherworks in the Far West litigation. Featherworks filed a proposed reorganization plan that, among other things, provided for Featherworks’ unsecured creditors to receive a pro rata share of $40,000 contributed by Windsor. When the creditors voted on Featherworks’ proposed plan, Heller voted to reject the plan. Excluding the votes of insiders Hudson and Windsor, no impaired class of creditors voted to accept the plan, which meant the plan could not be confirmed. Following the vote, Windsor paid Heller $25,000. Heller then sought permission to change its vote and accept Featherworks’ plan. Far West asked the bankruptcy court to disqualify Heller’s acceptance and notify the United States Attorney of a potential violation of 18 U.S.C. § 152, which criminalizes fraudulently and willfully giving or receiving money for taking any action in connection with a bankruptcy proceeding. Heller asserted that it had wanted to accept the plan but had subsequently realized that the inventory received from Featherworks was of a lesser quality than had been represented, so Heller decided to reject the plan and threatened to sue Featherworks, Windsor, and Puro. Puro allegedly paid Heller the $25,000 to release Puro and Windsor from the threat of litigation, and Heller then notified Featherworks that Heller would accept the plan.