Ex-Billionaire Wyly Bankruptcy Pits Church Against State

Former billionaire Samuel Wyly’s Dallas church is taking on the might of the U.S. government for a scrap of the businessman’s remaining fortune.

Wyly, who filed for bankruptcy after losing a fraud lawsuit by the Securities and Exchange Commission, owes $20,000 to the Third Church of Christ, Scientist, under a 2010 pledge to donate $100,000 over five years, the religious organization said in a Nov. 14 filing in U.S. Bankruptcy Court in Dallas.

The church, which says it needs the money to finish a building restoration project, argues in the filing that the SEC and the Internal Revenue Service, which seek the most money from Wyly, are trying to silence smaller creditors that can’t match the government’s “unlimited” legal resources.

The church filed a claim as an unsecured creditor in the case and said Texas law backs the treatment of such pledges as valid claims in bankruptcy.

“While the SEC and IRS debts may be the largest in the case, that does not mean, as the SEC seems to suggest, that there are no other creditors,” the church’s lawyer, Jonathan Gitlin, said in the filing.

A formal committee of unsecured creditors is needed in the case to give them a stronger voice against the SEC, the church said in the filing. The regulator, which challenges the formation of such a committee, seeks at least $200 million from Wyly, and the IRS seeks unspecified back taxes.

The government has argued that the church doesn’t have a chance of getting the money Wyly promised. The church disagrees.

SEC’s Attitude

“This attitude by the SEC that other claims are irrelevant and should be disregarded only reinforces the need” for a committee, the church said.

The U.S. argued in a Nov. 14 filing that the church and a charitable organization that wants to be on the committee, the Thanks-Giving Foundation, are ineligible because the Chapter 11 case is “essentially a two-creditor case,” referring to the SEC and the IRS.

“Mr. Wyly simply made a gift to his church’s building restoration fund when he executed the pledge,” the U.S. said. A committee “will unnecessarily waste resources and dissipate assets that should be used to pay creditor claims.”

A federal jury in Manhattan in May found Wyly and his late brother Charles Wyly, who helped build arts-and-crafts retailer Michaels Stores Inc. and other companies, perpetrated an offshore stock-trading fraud that generated $550 million in illegal profit over more than a decade. Wyly and his brother’s widow both filed for bankruptcy last month as the New York judge who oversaw the trial prepares a final disgorgement order.

Legal Actions

Wyly’s bankruptcy has triggered other legal challenges. The businessman was sued Nov. 6 by his ex-wife who claims he’s using Chapter 11 to avoid paying $500,000 a year in support obligations. The SEC sought to slash Wyly’s “lavish” spending after he projected personal expenses of almost $1 million a month in November and December. A federal judge froze his assets and proposed a spending limit of $15,000 a month.

The U.S. has also argued in support of the SEC against the formation of a committee of unsecured creditors on the ground that one such creditor, Security Capital Ltd., is an offshore tool of Wyly, citing a U.S. Senate report.

The report “finds that Security Capital was set up as a shell corporation used to funnel millions of dollars of the Wyly’s offshore dollars back to the United States,” the U.S. said. “It is clear that Security Capital is not qualified to be appointed to the unsecured creditors’ committee in this bankruptcy case.”

David Staber, a lawyer for Security Capital in the case, didn’t immediately reply to a call for comment on the U.S. filing.

U.S. District Judge Shira Scheindlin in New York, who oversaw the SEC trial, today heard testimony from an SEC expert in a hearing to determine how much the Wyly’s must forfeit to the regulator.

The bankruptcy case is Samuel E. Wyly, 14-35043, U.S Bankruptcy Court, Northern District of Texas (Dallas).