Three financial instutions holding $21 million in claims against  Boy Band Promoter Lou Pearlman and his company, Transcontinental Airlines, Inc., filed an involuntary bankruptcy this week against Pearlman and Transcontinental. 

Pearlman, who best known for promoting "boy bands" N-SYNC and Back Street Boys, has been alleged to have bilked investors out of $317 million in a Ponzi Scheme.  The State of Florida Office of Financial Regulation filed an action against Pearlman and his myriad companies and caused a receiver to be appointed.  Pearlman is reportedly overseas in Germany. If an order for relief in the involuntary bankruptcy is granted, some or all of the state court receiver's activities will come to a halt.

The filing of an involuntary bankruptcy is not always the best move in the wake of a fraud such as Pearlman's.  Under the bankruptcy laws, all creditors are required to stay their collection activities and instead seek recovery as a creditor in the bankruptcy.  Unless the bankruptcy court lifts the automatic stay, only the trustee in bankruptcy can pursue claims on behalf of the creditors. 

The trustee, however, owes a duty to all creditors, and all creditors share pro rata in whatever assets the trustee may recover. Unless there is money in the estate, the trustee will need to be funded, usually by the larger, financial institution-type creditors.  Thus, it is likely that the creditors who filed the involuntary bankruptcy will have to fund the trustee's activities, but have no control over the trustee.  Moroever, whatever funds are recovered will be shared with other creditors.

In contrast, if these  creditors had aggressively pursued their own asset recovery investigation, any assets they would recover, they could keep for themselves. 

This comment is not meant as a criticism of the creditors who filed the Pearlman bankrupcty; there are surely many complex issues and concerns that lead to their decision.  I just offer this comment to demonstrate that the conventional step--filing a bankrupcty--may not be the best one.