A lawyer for Chris Pettit has raised questions about the “authenticity” of the $270 million claims filed by creditors in the cases in a letter to the judge overseeing the ex-lawyer’s bankruptcies.
The “apparent concern is that some creditors could take dividends substantially larger than they are entitled to, to the detriment of honest creditors,” San Antonio bankruptcy attorney Ron Smeberg wrote.
Pettit is in jail awaiting trial in connection with allegedly stealing millions of dollars from his former legal clients. He pleaded not guilty to charges last week on five counts of wire fraud and three counts of money laundering.
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Pettit filed for bankruptcy protection for himself and his law firm on June 1 amid mounting lawsuits alleging he had defrauded clients. He subsequently relinquished his license to practice law and closed his offices.
Smeberg said questions about creditors’ claims “developed” during a Tuesday arrest hearing in federal court where prosecutors argued Pettit should remain incarcerated pending trial.
FBI agent Thomas Sweatt testified that “current demands” against Pettit ranged from $30 (million) to $70 million, Smeberg wrote in his letter to Chief US Bankruptcy Judge Craig Gargotta on Wednesday.
“There appears to be a $200 million connection between the FBI investigation and the claims filed,” Smeberg added.
Sweatt said on the witness stand the ongoing investigation had identified about 60 victims but said the number was rising and their losses could exceed $70 million.
“Almost every week we identify new potential victims,” he said. “The further we get, the more we see where sacrificial funds have been misappropriated.”
Pettit reported approximately $112 million in liabilities in each of the bankruptcies.
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That was far less than was reported by creditors. A review by the Express-News found that as of Oct. 5, around 200 claims totaling nearly $260 million had been filed. It did not include duplicates or an apparently erroneously filed $8 million claim.
“In bankruptcy cases, it is common for claims filed to exceed amounts actually owed,” said San Antonio attorney Raymond Battaglia, who is representing a creditor.
The largest was for $55 million, submitted by an elderly couple from San Antonio. The attorney handling the claim for her previously told Express-News the amount was based on information Pettit provided to the couple.
Eric Terry, the Chapter 11 trustee representing the bankruptcy estates, did not immediately respond to a request for comment, so it could not be determined whether he shared Smeberg’s concerns about the authenticity of the claims.
If a creditor submits a proof of claim, it is deemed admissible unless an objection is raised. The trustee or any interested party may object to any claim – including the lack of documentation to support the claim. No objections appear to have been raised so far.
In his letter, Smeberg said Pettit lacked the funds to fund opposition proceedings.
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But Pettit “will do his best under the circumstances to provide the Trustee (and other creditors upon request) with information about claims that he believes are fraudulent or excessive,” Smeberg added.
The “honest creditors” would likely have smaller claims and not have the resources to contest other claims, he said. He did not immediately respond to a request for comment, so it’s not clear why he chose to address the letter to the judge rather than the trustee.
Separately, Smeberg said a friend of Pettit’s raised a “$30,000 defense fund” for the criminal case, but “those funds are no longer available.” He didn’t want to explain what happened to the money.
Last month, Smeberg agreed to accept a $25,000 advance to represent Pettit in his personal bankruptcy. He said he only received $5,000 and agreed to lower the advance to $15,000 so that the remaining $10,000 could be used to pay Pettit’s defense attorney.
