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Multimillion-Dollar Mysteries Persist in Prosser Bankruptcy Case

Nov. 27, 2007 — Despite 15 months of bankruptcy-court litigation, more than 1,000 legal filings and an extensive investigation costing close to $1 million, a number of multimillion-dollar mysteries persist in the case involving Jeffrey Prosser, the former owner of Innovative Telephone.
For example, who really owns the three residences of Prosser and his family in New York, Florida and on St. Croix? What's happening with Prosser's income-tax filings?
All of these matters remain unresolved in the final report (all 154 pages of it) filed by a court-appointed expert in the case. The examiner, to use his legal title, is Dallas attorney Steven A. Felsenthal, a retired chief judge of the U.S. Bankruptcy Court in that city. Felsenthal, his lawyers and accountants have billed the debtor's estate $925,891 as of Aug. 23, his report said, but have been paid only $125,000.
Felsenthal asked the court to terminate his services, as Prosser's case before the court has been converted from a Chapter 11 proceeding — a relatively debtor-friendly part of the law — to a less-friendly Chapter 7 case. Another professional, a case trustee, is taking on the examiner's former duties.
A principal reason for many of the financial uncertainties, the report says again and again, is that Prosser has refused to turn over various sources of financial information to the examiner. The sources include his own checkbooks and those of New ICC, one of his holding companies. The report also claims Prosser has failed to document his claims.
In addition, the examiner essentially stopped working when he was replaced by the Chapter 7 trustee.
As to the houses, the question of who really owns them is crucial to Prosser and his wife, Dawn, and to the creditors. To the extent that such property is owned by New ICC (once a Prosser-controlled holding company) it can be sold to help pay the creditors. To the extent that the property is owned by Dawn Prosser, it is out of reach of the creditors or exempt. To the extent that it is owned by Jeffrey Prosser — or by both Mr. and Mrs. Prosser — well, that brings up other questions discussed later in this article.
Dealing with the residences from north to south, the report says first that it is unclear how much the Lake Placid, N.Y., home is worth. Prosser values it at $1,391,000, but the local government's assessment is $2,388,300. Experts say that an owner who feels his house is over-assessed by a million dollars is likely to appeal the assessment, but nothing in the examiner's report suggests that an appeal has been filed.
Further, Prosser claims in his bankruptcy filing that a household-exemption provision means that he and his wife get to keep the house. The examiner, citing New York law, disagreed, and asked Prosser to submit documentation on this claim. It was not forthcoming, the examiner says.
Prosser says the house at 252 El Bravo Way, Palm Beach, Fla. — worth $8,714,808 — presents a different unresolved problem. Does New ICC or the Prossers own the house? The examiner reports that New ICC conveyed the house to the Prossers on April 18, 2000, "in exchange for a promissory note (from the Prossers) in the amount of $5,650,000, payable on or before April 10, 2007."
"Furthermore," the report continues, "the examiner's accountants were denied access to New ICC's records and could, therefore, not determine if a note was actually executed or if the obligation was actually paid (by the Prossers)."
The implication being that if the payment was not made, the house belongs to ICC.
Then there is the Estate Shoys Property on St. Croix, a largely but not completely built 10,000-square-foot house on several lots. The question with this one: Is it owned by Dawn Prosser, as "the applicable deeds indicate"? No value is given for this house in the report.
Regarding the ownership question, the examiner wrote: "… Dawn Prosser reported interest income of $2,133 on her and the debtor's (i.e. Prosser's) joint income tax return for 2005; however, Dawn Prosser reported no wages or salary and no other earnings from investments for the time period. If Dawn Prosser made payments on the First Bank Mortgage after the debtor (filed for bankruptcy), as reported by the debtor, the source of funds must have come from a bank account or other asset in her name that was not disclosed by the debtor on his (bankruptcy filing), and that did not pay significant interest or dividends in the 2005 tax year. The examiner did not complete his investigation of this question."
In addition to these questions about the ownership and value of the Prosser residences, the examiner raised another question — one that, if decided against Prosser, could reduce his interest in these three multimillion-dollar residences to a mere $125,000.
The examiner cites federal law stipulating that, in a bankruptcy case, the home-ownership exemption can be limited to a total of $125,000 (for all homes) in cases where "fraud, deceit or manipulation in a fiduciary capacity" is present. He goes on to say that the case in the Delaware courts lost by Prosser and won by the former minority stockholders in a Prosser holding company — now represented by the Greenlight companies — "is based on manipulation in a fiduciary capacity."
The examiner recommends that an objection be filed to "limit the debtor's exemption" of the three properties to no more than $125,000.
As to Prosser's potential tax problems, the examiner's report is forthcoming on some matters but not others.
There is, for example, the $4,818,000 question of the interest deduction taken by Prosser in his 2005 tax return. Interest of that amount — and $8,914,000 in other expenses — were reported by Prosser as offsets to a gross income of $14,560,000 on his Schedule C form, leaving a reported net income of $828,000. That and $2,133 in interest income were the only sources of income reported by the Prossers that year. The $4,818,000 was, according to the report "… purportedly for interest paid on the New ICC loan debt." The report continues, "However, the debtor indicated to the examiner that neither the debtor nor ICC-LLC (another Prosser holding company) actually paid New ICC $4,818,000 in interest in 2005."
The report concludes, "The debtor's decision to report a deduction for interest not actually paid by the debtor or ICC-LLC indicates that the Internal Revenue Service may have a tax claim against the debtor for a portion of such deduction."
As previously reported, the examiner's final report also deals with "possible unreported income from forgiveness of New ICC debt." (See "Report Details Prosser's Troubled Finances, Tax Issues.") This is the question of what tax consequences there are for the way Prosser and his accountants dealt with the "upstreaming" of tens of millions of dollars from the Prosser operating companies, such as Innovative Telephone, to Prosser and his wholly owned holding companies. One description of these payments given by the Prosser forces was that the payments were loans to Prosser that were not expected to be repaid.
To which the examiner replied in his report, "If the debtor concluded that the debt has been forgiven, the debtor would have been required to declare the forgiven debt as income. The debtor did not do so on his 2005 tax return, or on prior returns." The examiner added in a footnote, "While the examiner did not complete his investigation … (he) anticipates that the Internal Revenue Service will likely review the tax returns for at least the three years preceding the debtor's bankruptcy filing."
Interestingly, the examiner's report does not indicate whether the IRS or V.I. tax authorities are currently looking into the case. The report doesn't show any contact between the examiner and
those agencies, nor does it explore the question of whether Prosser filed his returns as a mainland or a V.I. taxpayer.
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Nov. 27, 2007 -- Despite 15 months of bankruptcy-court litigation, more than 1,000 legal filings and an extensive investigation costing close to $1 million, a number of multimillion-dollar mysteries persist in the case involving Jeffrey Prosser, the former owner of Innovative Telephone.
For example, who really owns the three residences of Prosser and his family in New York, Florida and on St. Croix? What's happening with Prosser's income-tax filings?
All of these matters remain unresolved in the final report (all 154 pages of it) filed by a court-appointed expert in the case. The examiner, to use his legal title, is Dallas attorney Steven A. Felsenthal, a retired chief judge of the U.S. Bankruptcy Court in that city. Felsenthal, his lawyers and accountants have billed the debtor's estate $925,891 as of Aug. 23, his report said, but have been paid only $125,000.
Felsenthal asked the court to terminate his services, as Prosser's case before the court has been converted from a Chapter 11 proceeding -- a relatively debtor-friendly part of the law -- to a less-friendly Chapter 7 case. Another professional, a case trustee, is taking on the examiner's former duties.
A principal reason for many of the financial uncertainties, the report says again and again, is that Prosser has refused to turn over various sources of financial information to the examiner. The sources include his own checkbooks and those of New ICC, one of his holding companies. The report also claims Prosser has failed to document his claims.
In addition, the examiner essentially stopped working when he was replaced by the Chapter 7 trustee.
As to the houses, the question of who really owns them is crucial to Prosser and his wife, Dawn, and to the creditors. To the extent that such property is owned by New ICC (once a Prosser-controlled holding company) it can be sold to help pay the creditors. To the extent that the property is owned by Dawn Prosser, it is out of reach of the creditors or exempt. To the extent that it is owned by Jeffrey Prosser -- or by both Mr. and Mrs. Prosser -- well, that brings up other questions discussed later in this article.
Dealing with the residences from north to south, the report says first that it is unclear how much the Lake Placid, N.Y., home is worth. Prosser values it at $1,391,000, but the local government's assessment is $2,388,300. Experts say that an owner who feels his house is over-assessed by a million dollars is likely to appeal the assessment, but nothing in the examiner's report suggests that an appeal has been filed.
Further, Prosser claims in his bankruptcy filing that a household-exemption provision means that he and his wife get to keep the house. The examiner, citing New York law, disagreed, and asked Prosser to submit documentation on this claim. It was not forthcoming, the examiner says.
Prosser says the house at 252 El Bravo Way, Palm Beach, Fla. -- worth $8,714,808 -- presents a different unresolved problem. Does New ICC or the Prossers own the house? The examiner reports that New ICC conveyed the house to the Prossers on April 18, 2000, "in exchange for a promissory note (from the Prossers) in the amount of $5,650,000, payable on or before April 10, 2007."
"Furthermore," the report continues, "the examiner's accountants were denied access to New ICC's records and could, therefore, not determine if a note was actually executed or if the obligation was actually paid (by the Prossers)."
The implication being that if the payment was not made, the house belongs to ICC.
Then there is the Estate Shoys Property on St. Croix, a largely but not completely built 10,000-square-foot house on several lots. The question with this one: Is it owned by Dawn Prosser, as "the applicable deeds indicate"? No value is given for this house in the report.
Regarding the ownership question, the examiner wrote: "... Dawn Prosser reported interest income of $2,133 on her and the debtor's (i.e. Prosser's) joint income tax return for 2005; however, Dawn Prosser reported no wages or salary and no other earnings from investments for the time period. If Dawn Prosser made payments on the First Bank Mortgage after the debtor (filed for bankruptcy), as reported by the debtor, the source of funds must have come from a bank account or other asset in her name that was not disclosed by the debtor on his (bankruptcy filing), and that did not pay significant interest or dividends in the 2005 tax year. The examiner did not complete his investigation of this question."
In addition to these questions about the ownership and value of the Prosser residences, the examiner raised another question -- one that, if decided against Prosser, could reduce his interest in these three multimillion-dollar residences to a mere $125,000.
The examiner cites federal law stipulating that, in a bankruptcy case, the home-ownership exemption can be limited to a total of $125,000 (for all homes) in cases where "fraud, deceit or manipulation in a fiduciary capacity" is present. He goes on to say that the case in the Delaware courts lost by Prosser and won by the former minority stockholders in a Prosser holding company -- now represented by the Greenlight companies -- "is based on manipulation in a fiduciary capacity."
The examiner recommends that an objection be filed to "limit the debtor's exemption" of the three properties to no more than $125,000.
As to Prosser's potential tax problems, the examiner's report is forthcoming on some matters but not others.
There is, for example, the $4,818,000 question of the interest deduction taken by Prosser in his 2005 tax return. Interest of that amount -- and $8,914,000 in other expenses -- were reported by Prosser as offsets to a gross income of $14,560,000 on his Schedule C form, leaving a reported net income of $828,000. That and $2,133 in interest income were the only sources of income reported by the Prossers that year. The $4,818,000 was, according to the report "... purportedly for interest paid on the New ICC loan debt." The report continues, "However, the debtor indicated to the examiner that neither the debtor nor ICC-LLC (another Prosser holding company) actually paid New ICC $4,818,000 in interest in 2005."
The report concludes, "The debtor's decision to report a deduction for interest not actually paid by the debtor or ICC-LLC indicates that the Internal Revenue Service may have a tax claim against the debtor for a portion of such deduction."
As previously reported, the examiner's final report also deals with "possible unreported income from forgiveness of New ICC debt." (See "Report Details Prosser's Troubled Finances, Tax Issues.") This is the question of what tax consequences there are for the way Prosser and his accountants dealt with the "upstreaming" of tens of millions of dollars from the Prosser operating companies, such as Innovative Telephone, to Prosser and his wholly owned holding companies. One description of these payments given by the Prosser forces was that the payments were loans to Prosser that were not expected to be repaid.
To which the examiner replied in his report, "If the debtor concluded that the debt has been forgiven, the debtor would have been required to declare the forgiven debt as income. The debtor did not do so on his 2005 tax return, or on prior returns." The examiner added in a footnote, "While the examiner did not complete his investigation ... (he) anticipates that the Internal Revenue Service will likely review the tax returns for at least the three years preceding the debtor's bankruptcy filing."
Interestingly, the examiner's report does not indicate whether the IRS or V.I. tax authorities are currently looking into the case. The report doesn't show any contact between the examiner and those agencies, nor does it explore the question of whether Prosser filed his returns as a mainland or a V.I. taxpayer.
Back Talk Share your reaction to this news with other Source readers. Please include headline, your name and city and state/country or island where you reside.