Playing the bankruptcy game

Swimmer Simon Cowley

There’s been lots of media coverage of the washup of swimmer Nick D’Arcy’s bashing of fellow swimmer Simon Cowley in a bar some 4 years ago.  Understandably the victim is not willing to allow the perpetrator to escape scot-free by declaring himself bankrupt to avoid paying more than $370,000 in damages and costs awarded in the NSW District Court last year.

Moreover, D’Arcy is off to the London Olympics despite Cowley’s equally understandable view that he should never have been selected and that a secret deal was done, probably due to D’Arcy’s threats of legal action against Swimming Australia and AOC if his earlier banning was renewed on the basis that his cunning bankruptcy move rendered him in breach of SA’s code of conduct.  Cowley is in no doubt that D’Arcy is in breach and unfit to represent Australia:

Under Swimming Australia’s behavioural guidelines, competitors are required to be ”ethical, considerate, fair and honest”; refrain from any form of abuse, harassment or victimisation of others; and ”be a positive role model”.

Cowley said the organisation appeared to have overlooked those requirements when it recommended to the Australian Olympic Committee that D’Arcy be included in the Australian team for London.

However it appears that the AOC’s legal advice was rather different:

D’Arcy declared himself bankrupt, and AOC boss John Coates revealed legal action was sought then to see if he deserved his place on the team.

“(Chef de Mission) Nic Green told me he wanted to get legal advice to see if bankruptcy constituted misconduct, and meant bringing the team into public disrepute,” Coates said.

“It was not. …

It needs to be kept in mind that D’Arcy has already served a significant period of disqualification from the sport for his assault on Cowley.  Despite the fact that he has evinced little or no contrition for his thuggery, D’Arcy has served his time for the substantive assault.  It’s reasonable to suggest that the double jeopardy principle should be regarded as just as applicable in the sporting sphere as in criminal law.  Accordingly, D’Arcy could only be properly re-suspended if entering voluntary bankruptcy could be treated in itself as a further instance of misconduct.  It appears that the AOC’s legal advice was that it couldn’t be so regarded, and so D’Arcy had to be selected if his trial performances warranted it.  They did and so he was selected.

However, I wonder whether the legal conclusion is necessarily so clear-cut.  Certainly voluntary bankruptcy in itself could not be viewed as misconduct, but mightn’t it be relevant to examine all the surrounding circumstances? If a person enters voluntary bankruptcy as a result of a truly dire financial situation from which there is no hope of recovery then that is one thing, but if they make a calculated strategic decision to enter bankruptcy merely to avoid paying a judgment debt might it not be reasonable to take a different view?

Should he be permitted cynically to take advantage of his current short-term “poverty” to avoid paying Cowley?

I confess I haven’t examined the case law (if any) on the point but it’s a reasonable question on first principles.  D’Arcy is a 24 year old medical student whose father is a wealthy surgeon.  No doubt his current income and asset position is meagre, but equally without doubt he’ll be very well off in the fairly near future and well able to pay Cowley his justly awarded damages.  Should he be permitted cynically to take advantage of his current short-term “poverty” to avoid paying Cowley?  It appears that his Trustee in Bankruptcy thinks this is pefectly OK:

SWIMMER Nick D’Arcy made numerous attempts to reach an arrangement over debts totalling $800,000 before declaring himself bankrupt, his trustee said yesterday.

The trustee, Robert Whitton, said D’Arcy petitioned his own bankruptcy when it became apparent Simon Cowley intended to force it.

D’Arcy was dumped from the 2008 Beijing Olympic team after an altercation with Cowley in a Sydney nightclub.

He was given a 14-month, 12-day jail sentence fully suspended after conviction for inflicting grievous bodily harm.

Cowley, who was left with a shattered cheekbone, was awarded civil damages of $180,000 this year.

With costs and interest he is now owed about $380,0000.

D’Arcy, a 24-year-old medical student, filed for bankruptcy on November 30, listing his father and Cowley as creditors.

Mr Whitton said yesterday that there was no doubt about the veracity of the debt owed D’Arcy’s father Justin, a Sunshine Coast surgeon.

“His parents funded his defence,” Mr Whitton said.

“It (the loan) was properly documented over time.”

Mr Whitton said it was very unlikely that he would withhold D’Arcy’s passport, preventing him from contesting the 2012 London Olympics.

He said a successful Games could bring D’Arcy financial reward which could then allow payment to creditors.

D’Arcy would be required to make payments to creditors after he reached an after-tax income of $47,000.

“That wasn’t an offer, that was an insult.”

But was D’Arcy’s “offer” a serious one or just another cynical manoeuvre in a game to avoid payment orchestrated by the lawyers paid for by his surgeon dad?  Cowley’s lawyer is in no doubt about the answer:

Mr Cowley’s lawyer Sam Macedone told Channel Nine on Tuesday night that bankruptcy was “just a way of walking away from this whole mess and this debt and this judgment that he owes”.

“I would have thought that he would have had the courage at least to try to speak to Simon and try and negotiate something with him, whatever it was,” he said.

Mr Macedone, who did not respond to questions from the Daily, told AAP yesterday that an offer of $25,000 had been made.

“Out of $380,000, he offered $25,000,” Mr Macedone said.

“That wasn’t an offer, that was an insult.”

Perhaps it’s time to revisit and reform the rules for voluntary bankruptcy.  As academics Ian Ramsay and Cameron Sim observed in a recent paper, voluntary bankruptcy is becoming an increasing middle class phenomenon:

Between 1990 and 2008 there was a 261% increase in the number of personal insolvencies in Australia. We suggest one important aspect of this increase is that
Australian personal insolvency has become an increasingly middle class phenomenon.

If even a significant proportion of these are cynical strategies like D’Arcy’s gambit, maybe the rules need to be changed. Certainly another very recent case involving a son of a WA politician suggests this sort of thing is not an isolated aberration.

[T]he liberal approach prioritises the concept of a ‘fresh start’ for debtors.

Ramsay and Sim observe that Australia’s bankruptcy laws are at the liberal end of the international spectrum:

The function of personal insolvency laws depends upon what their ultimate goal should be. Australia has been placed in the liberal category of bankruptcy jurisdictions. These jurisdictions are seen as offering levels of debt forgiveness with both a high degree of certainty and relative haste. This is in contrast to many other jurisdictions, which have been categorised as taking either a conservative or moderate approach to debt forgiveness, under which there is an absence of debt forgiveness provisions, or the offer of debt forgiveness exists but is tempered by great uncertainty as to whether it will be granted. …

[T]he liberal approach prioritises the concept of a ‘fresh start’ for debtors. Accordant with this observation, Australian courts have viewed the intention of Australia’s bankruptcy laws as serving a fair distribution of bankrupt’s assets among creditors, as well as allowing bankrupt debtors to start afresh. Consequently, personal insolvency laws reflect attempted reconciliation of two competing goals: a fresh start for debtors and protection of the interests of creditors (together with equality of distribution for creditors).

While I have no major problem with bankrupts being released after 3 years with a “clean slate”  where they’ve been bankrupted on a creditor’s petition (the currrent legal regime), perhaps we should have a different regime when dealing with (strategic) voluntary bankruptcies.  I suggest that in that situation a discharged voluntary bankrupt should be required to continue contributing one-third of his/her income and assets acquired at any time within (say) 10 years after discharge. That would still allow a debtor to make a “fresh start” but prevent lawyered-up middle class debtors from taking advantage of short-term impecuniosity to avoid their creditors (who in D’Arcy’s case consisted only of his own parents and his victim Cowley).

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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Pedro
Pedro
9 years ago

Yes, perhaps the Trustee should have the discretion about releasing the bankrupt based on an assessment of the potential for further recovery. I suppose the problem is that the law relies on a vanished stigma. I wonder if the change in attitude came about through people going VB to avoid tax debts? I seem to recall reading that there has been a significant increase in VB for that reason. Though maybe my memory is wrong.

Tel
Tel
9 years ago

Now surely if D’Arcy took up boxing, and did a few rounds with Mundine, he would clear up his bankruptcy in an afternoon. There must be a few photos from Cowley’s medical report that would make errr, a knockout promotional poster for the big day. Ahh boxing, it’s the sport of kings. Well, king hits anyhow. After a short but exciting career in the ring, Tony Abbot (probably PM by then) would see an immediate opening on his team, and the rest (as they say) isn’t history… yet.

When life throws you a lemon, you just have to take it on the chin.

Tel
Tel
9 years ago

Between 1990 and 2008 there was a 261% increase in the number of personal insolvencies in Australia. We suggest one important aspect of this increase is that
Australian personal insolvency has become an increasingly middle class phenomenon.

I rather suspect that your average bankrupt is more typically struggling with a debt management problem than an anger management problem.

Alan
Alan
9 years ago

There are dangers to tightening the bankruptcy regime. The US has veered dangerously close to re-inventing debt peonage under a new name. In a world where creditors are quite blatant about transferring as much risk to borrowers as humanly possible (or impossible for that matter) I am not sure that pro-creditor legislation is a really really great idea.

I really could not care less about whether a Nick D’Arcy is or is not rorting the system. The respective lawyers put their clients in the best light. That is what lawyers do. His situation is so atypical that its not a good case to ground a policy. And one obvious reason for an increase in either insolvencies or voluntary bankruptcies is the state of the economy.

Katz
Katz
9 years ago

Bankruptcy used to carry a stigma. Now it is a lifestyle choice.

This change is a symptom of the breakdown of the face-to-face society, where the people harmed by default were the people in a locale.

It would appear that a new form of stigma needs to be attached to bankruptcy as a deterrent against callous or reckless actions.

mark textor
9 years ago
Reply to  Ken Parish

perhaps a reason for a discussion about chapter 11 laws here in Australia?
see: http://www.smh.com.au/business/chapter-11-mooted-for-business-rescues-20100119-mj8l.html

mark textor
9 years ago
Reply to  mark textor

Ken

I’ve asked @toplitigator to contribute here. he’s strong in both areas and his contribution would be valuable

But, regardless, a very interesting post. thank you.

Tex

meika
9 years ago

D’arcy looks on the description like a clear example of congenital entitlement. The sort Hockey couldn’t care less about. Voluntary Bankruptcy in a case is a form of subsidy to the irresponsible. I mean what would a psychopath choose.

Legal Eagle
Legal Eagle
9 years ago

Hmm, very interesting post. Of course, using bankruptcy to avoid judgment debts is of concern to us private lawyers, because it takes the teeth out of private law actions, as it were. Will have to think on this one, Ken!

rocco
rocco
9 years ago

Perhaps you could link in to a case in WA where a young man who drove a boat while drunk and hit a river pylon seriously injuring a young women has told her he cannot pay the $200,000 odd in damages a court has awarded her and is likely to declare bankruptcy if she pursues the debt. The young man is the son of a state independent MP and a prominent cardiologist. He had funds for his defence of the legal action against him but now says he has nothing and his parents don’t seem to feel any obligation.

rocco
rocco
9 years ago

ignore that … I see you alreday have was doing a bit of speed reading and glossed over SORRY

fxh
fxh
9 years ago

Ken. I’d suggest not using the word POVERTY, even in quotes, for a temporary cash flow problem of a trust fund kid, from a comfortable medical family, who will be earning in the top 1% of incomes on graduation, and who is most likely living exactly the same comfortable lifestyle as he was prior to bankruptcy.

Alan
Alan
9 years ago

Perhaps a better reform would be to limit the ability of judgment debtors to declare bankruptcy in respect of damages. I am not sure that debt is quite the high moral issue that many commenters seem to think or that an increased rate of voluntary bankruptcy indicates a lot more than a society that relies more and more on the private debt mountain. lenders have at least some responsibility for making bad loans, an economic boom does not necessarily benefit everyone in the economy equally, and people are not always wise.

fxh
fxh
9 years ago

I understand, but I haven’t looked up the figures, that a very large proportion of bankrupts in Australia are youngish not very well off people with mobile phone debts due to running over on “unlimited” plans. Another large group are a similar group who have purchased pretty ordinary cars on the never never.

In USA the single largest group of bankruptcies are due to health care bills.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
9 years ago

Thanks for an interesting post Ken.

It also seems to me to be relevant that the officials ‘forgiveness’ of D’Arcy is for a bankruptcy that directly relates to the previous events. That seems to me to be a further ground on which to oppose forgiveness by the Olympic officials.

Dan
Dan
9 years ago

Interesting post, but I am wary about the recommendation of changing the regime regarding voluntary bankruptcy. It is a near universal truth that some people will exploit a law strategically if they want to. When the people doing the exploiting are rich and high profile, it creates resentment.

However I think that these sort of changes can have unintended consequences. A ‘strategic’ bankruptcy is not the same thing as cheating the system. If we make the voluntary bankruptcy system less attractive for debtors, then in many cases the only thing that will change is that the creditor will have to spend more money on people like me in order to make the person bankrupt by court order.

The fact that he has a wealthy father shouldn’t have anything to do with this – do we honestly encourage policy making on the basis that wealthy friends or family should be obliged to bail out their kin?

A personal injury claim where insurance is not involved is inherently risky. If D’Arcy weren’t so disliked, I could easily conjure a sympathetic scenario with the same facts which would prompt sound support for the opposite point of view – viz D’Arcy has been criminally prosecuted and ‘done his time’, he has faced a civil proceeding where the plaintiff appears to have been willing to spend more in legal fees than he ended up being awarded, is now angry that D’Arcy has no money (though this is both unsurprising for a young student sportsperson) and wants to keep this judgment which cannot afford to pay hanging over his head for another 6 years further extending this ordeal which has been going on for years already etc etc etc.

Better stop before I get carried away but only wanted to add that personal credit cards and finance seem to account for far more bankruptcy cases than business failures

meika
9 years ago

We can keep voluntary bankruptcy, just exclude court made debt from any such bankruptcy process. They could have their own process.

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[…] I posted a comment on Ken’s recent post about swimmer Nick D’Arcy and his decision to file a debtor’s petition in bankruptcy, he graciously invited me to […]

Tel
Tel
9 years ago

A significant minority may have sought to build that nest-egg by excessively risky means, relying on the stigma-free “get out of gaol” or “clean slate” card of bankruptcy if the strategy comes unstuck.

Well gee whiz, how many banks played that game? … and I do believe they got their bailout kind of quick snappy when they help up the hand. Can you blame people for learning from their betters?

Tel
Tel
9 years ago

I understand, but I haven’t looked up the figures, that a very large proportion of bankrupts in Australia are youngish not very well off people with mobile phone debts due to running over on “unlimited” plans.

I think you will find those are not voluntary.

Jim Rose
Jim Rose
9 years ago

Todd Zywicki’s writes on the law and economics of bankrupty at http://mason.gmu.edu/~tzywick2/publications.html

he suggests that the decline in the stigma of bankruptcy, changes in the relative economic benefits and costs of filing bankruptcy, and changes in the consumer credit system made individuals more willing to file bankruptcy al least in the USA

before 2008, there is an anomaly of skyrocketing consumer bankruptcy filings since 1978 in the USA during an era of economic prosperity