The judge handling the bankruptcy trial of Jeffrey Prosser, former owner and CEO of Innovative Telephone, delivered two thunderous opinions on Friday, citing him for bad faith and fraud.
The two documents were 78 and 52 pages long, and replete with detailed citations and footnotes regarding Prosser’s convoluted finances and often self-contradictory testimony. The issues the judge discussed have been brewing for a long time, and the subject of an almost endless stream of legal briefs.
The first case was a decision by U.S. Bankruptcy Judge Judith Fitzgerald regarding whether four holdings of real estate, including Prosser’s unfinished mansion on St. Croix and his palatial house in Palm Beach, Fla., were out of reach of the bankruptcy process. She said no, they are subject to sale.
The second case reads like a judge’s order, but instead it is a recommendation from Fitzgerald to U.S. District Court Judge Curtis Gómez, who sits in St. Thomas, regarding what Fitzgerald found to be the "fraudulent intent" in the transfer of the $9 million Palm Beach house from Innovative Communication Corporation (ICC) to Prosser.
On Sunday, Prosser issued a news release addressed to the first of the two decisions, saying, among other things:
— "On February 6, my lawyers filed a motion to recuse Fitzgerald based in no small part on her making decisions without allowing me to be heard. To date, Fitzgerald has refused to rule on my motion. …
— "The errors in Judge Fitzgerald’s decisions are numerous and fundamental. They will be specifically addressed, one by one, in my appeal to the District Court. Most fundamental, however, was Judge Fitzgerald’s reliance on two witnesses, Arthur Steltzer and Eling Joseph."
Prosser said that both were former employees, but did not indicate what they had said that he disagreed with. The judge identified Stelzer as Prosser’s former valet.
Case No. 1: "Bad Faith" Wipes Out Prosser’s Exemption Claims
Prosser had claimed that the four parcels of real estate in question were jointly owned with his wife, Dawn, and thus, under federal law, not subject to sale to help meet the half billion dollars or so he and his former corporations owe to their creditors.
Stan Springel, the court-appointed Chapter 11 trustee in the case, had argued that all or most of the real estate really belonged to ICC, not to Prosser and/or his wife; that Dawn Prosser had no money or income of her own, and could not possibly be regarded as the joint owner of any of this real estate; and that Prosser had misbehaved in the bankruptcy process to the extent that he had no legal right to claim any exemptions at all.
Fitzgerald, who visits the Virgin Islands monthly, decided not to deal with the details of the ownership issues regarding each of the four real estate parcels in question, and determined instead that Prosser’s behavior throughout the bankruptcy process was such that, under federal law, he was not entitled to claim any of the exemptions he wanted.
In her words, "… throughout the bankruptcy proceedings, Mr. Prosser conducted himself in bad faith and … in abuse of the bankruptcy process. The court finds, based on the totality of the evidence, that the degree of Mr. Prosser’s misconduct … and abuse of the bankruptcy process was such that a sweeping denial of exemptions is appropriate. Therefore, as explained herein [her memorandum opinion] the exemptions claimed by Mr. Prosser under 11 U.S.C. 522(b)(3) of the Bankruptcy Code will be denied."
While most of Prosser’s corporate properties have been auctioned off, and his fleet of luxury cars, half his wine cellar and many works of art have been sold, these four pieces of real estate have remained in limbo awaiting the court’s ruling. The delays in the process have allowed the Prossers to live in their mansions "rent-free," according to an earlier courtroom statement by one of the lawyers in the case.
Prosser is expected to appeal this ruling to Gómez, who has usually supported Fitzgerald’s rulings when he acted on Prosser’s multitudinous appeals in the past.
The properties in question include, in addition to the two mansions, six residential lots, two at Hermon Hill, Christiansted; the other four are known as the Shoys Plot and are in Anna’s Hope on St. Croix.
To support her decision, Fitzgerald weighed in with a lengthy memorandum, a four-page organizational chart for Prosser’s one-time corporate empire, and a two-page order. The table of contents, alone, which summarized her findings, runs to a page and a half.
Much of the text covers information already made public about how Prosser "failed to produce material documents, failed to provide necessary access, and failed to cooperate with the court-appointed examiner, the Chapter 7 trustee, and the Chapter 11 trustee …."
There is much information on what the judge viewed as Prosser’s underreporting of his assets. It is now all available in a single document.
The memorandum, however, appeared to bring up some matters which the Source believes have not been reported on earlier, such as:
— the undisclosed cigar collection, worth thousands of dollars, which Chapter 7 Trustee James P. Carroll found on a walk-through of the Palm Beach property;
— a life-insurance policy on Prosser that ICC had provided at the cost of at least $85,000 a year, and which Prosser had not reported to the court;
— a previously unreported storage space in West Palm Beach which housed a Porsche registered to his wife but used by Prosser, as well as 11 boxes of financial records that should have been turned over to the trustees; and
— a previously unreported corporate presidency. On May 16, 2003, Prosser, as president of AMJ, signed a letter transferring $150,000 to himself. There was no description of the firm’s business or its location in the judge’s memorandum.
On the other hand, the judge found that there were two sets of contentions raised by the objecting parties (creditors and trustees) that were not proved. One dealt with gifts that Prosser gave to his wife in the year preceding the bankruptcy which he allegedly did not report to the court, and the other related to a Regent Bank account for $75,000 opened in the name of Prosser’s son, Adrian, and Linda Hirsch.
In his news release, Prosser said Stelzer had a criminal record, unknown to Prosser at the time of his hiring. Prosser has subsequently sued Stelzer.
Stelzer testified earlier that Prosser ordered him to delete a computer hard drive that contained financial information. A word search of Fitzgerald’s 72-page memorandum showed Steltzer’s name appearing frequently on 13 pages of the document (pp. 39-42), but nowhere else, and Joseph’s on only two pages of it (pp.41-42). She had worked as a secretary at ICC when Prosser owned it, and is still on the payroll.
Case No. 2: Fraud in Palm Beach
Meanwhile, in a separate controversy before the Bankruptcy Court, both Springel and Prosser had filed dueling motions for summary judgment regarding the prospective sale of the Palm Beach mansion.
Prosser had argued that the statute of limitations had run on the transfer of the house in 2000 from ICC to Prosser, and that the Chapter 11 trustee, Springel, could not reclaim the house for the creditors.
Springel had filed a nine-part brief, with the second section of it being the most significant. This was a claim, under Florida and federal law, that the transfer of the Palm Beach property from ICC to Prosser was a "fraudulent transfer" and that it should be judicially erased and the house returned to ICC (and sold for the benefit of the creditors).
Fitzgerald, in her recommendation to Gómez, agreed with Springel on the central part of his claim:
"The facts are that the house was transferred to the Prossers for no consideration [i.e. no money changed hands] at a time when creditors were raising claims against the corporate entities and Jeffrey Prosser and the consolidated entities’ financial position was deteriorating. The transfer was clearly made to insiders at a time when Jeffrey Prosser’s companies were incurring losses and when they and he were facing potential liability from the claims which arose in association with the privatization. …
"The totality of the evidence and the undisputed material facts prove numerous badges of fraud. The court concludes from those facts that the transfer was made with fraudulent intent to hinder, delay and defraud creditors."
The reference to privatization relates to Prosser’s successful effort in the late 1990s to convert ICC, previously a public corporation, to a private one that he alone owned. This process set off a long dispute with the Greenlight companies and other minority stockholders in Prosser’s old firm, which in turn led to a Delaware Court decision saying that the stockholders had been underpaid when Prosser took the firm private.
Fitzgerald recounted in detail how ICC had bought the Palm Beach mansion for Prosser, how it had been transferred to the Prossers without the knowledge of the ICC board and how, more than a year after the fact, Prosser signed a promissory note to ICC. She also discussed his self-contradictory testimony on the transaction — sometimes he called it a loan, and sometimes income — and how, if it had been income, he had not reported it on his tax returns.
In a related matter, Fitzgerald recommended that since the Palm Beach mansion belonged to ICC, that it was in the hands of Springel, the Chapter 11 trustee, and not John Carroll, the Chapter 7 trustee. Carroll is charged with handling Prosser’s personal debts and Springel with his corporate ones. Though the two often work together, as in this case, they sue each other.
Fitzgerald had recommendations on six of the other seven counts in Springel’s motion, all dealing with relatively minor matters. Some should be granted, some denied and some dismissed without prejudice (thus subject to revival in the future). The seventh, involving Greenlight, had previously been settled out of court.
It was not immediately clear why Fitzgerald had put her findings in the form of a recommendation to Gómez rather than issuing it as a decision.
Prosser’s news release was devoted totally to the first decision and was silent on the second one.
