Bankrupt Arkansas coach deferred 71% of total pay

Brent Schrotenboer, USA TODAY Sports | USATODAY

A week before he filed for bankruptcy, Arkansas football coach John L. Smith arranged to have $600,000 of his $850,000 in pay deferred until after the season --a move that bankruptcy experts say raises legal questions because it could keep that money away from his creditors.



Public records obtained from the university by USA TODAY Sports show that Smith signed an agreement on Aug. 30 to collect a $300,000 payment on Dec. 31, 2012, and another $300,000 on Feb. 23, 2013. The money would come from the Razorback Foundation, a nonprofit fund-raising arm of the athletic department.

The rest of his compensation -- $250,000 – would come from the university in monthly payments.



In general, the bankruptcy estate controls assets acquired by a debtor before the date of the bankruptcy filing, which in Smith's case was Sept. 6. Debtors generally can keep what they earn after the filing date.

By deferring 71% of his Arkansas pay until several months after his bankruptcy filing, Smith could keep it away from his creditors. But the move raises questions that could be subject to a fight in bankruptcy court.



"It was an obvious attempt to avoid having to turn the cash over to the Chapter 7 bankruptcy trustee and alter the amount of income he had to show," said Scott Ehrlich, a professor and bankruptcy expert at the California Western School of Law.



In his bankruptcy filing, Smith lists $40 million in liabilities, most owed to banks and fellow investors from failed real estate investments in Kentucky. He lists just $1.3 million in assets, including $1.2 million tied up in retirement accounts. Smith states his current gross monthly income as just $19,856.

A review of the records obtained by USA TODAY Sports shows changes in how the coach would be paid:

-- On April 23, Smith first agreed to a 10-month, $850,000 contract to coach the Razorbacks. His signed agreement stated that he would receive half of his salary ($425,000) from the university in monthly payments, with the remaining $425,000 to come from the Razorback Foundation.



-- A month later, on May 22, the Commonwealth of Kentucky ordered a Kentucky bank to garnish Smith's funds to help satisfy a $865,000 judgment Smith owed to a Louisville investor.



-- On July 10, Smith signed his formal contract with the University of Arkansas, but the payment terms had changed. The revised contract said he would be paid $250,000 from the university in monthly installments. The rest -- $600,000 -- would come from the Razorback Foundation for radio and television appearances, an agreement that was signed on Aug. 30.



-- A week later, on Sept. 6, Smith filed for Chapter 7 bankruptcy, seeking to discharge his debts.



Last week, Smith updated his bankruptcy form to state he had earned $134,832 so far in 2012 from Arkansas. If he had been paid the full amount of his $850,000 contract monthly, it would have been near $425,000.

By contrast, Smith's predecessor at Arkansas, Bobby Petrino, received his regular pay in equal monthly installments from the university and foundation.



Arkansas has referred questions about Smith's bankruptcy to his attorney, who didn't return messages seeking comment.



Ehrlich, the bankruptcy expert, said the change in Smith's contract should be scrutinized.



"Suppose Smith had $600,000 in cash," Ehrlich wrote in an email. "In contemplation of bankruptcy, he transferred the cash to the university and said, 'Hold this for me until after I file bankruptcy, then return it to me.' The attempt to transfer the cash from his hands into someone else's to prevent his creditors from getting the cash is, without a doubt, a fraudulent transfer under both state and federal bankruptcy law.



"The same is true of the contract alteration. The modifications constituted a shift of a large asset (the contractual right to $600,000) until after the petition was filed. Whether the transfer was hard cash, or a contractual right, the impact on creditors was the same – a shift of $600,000 from the creditors to Smith, by transferring the wealth to the university and getting it back after the petition.



According to bizfilings.com, which provides legal information to small businesses, because the filing date is the "line of demarcation" in a bankruptcy, anticipating future finances is part of planning a bankruptcy.



The site suggests "a debtor who works on a contract basis (e.g., a building contractor) could postpone forming any lucrative contracts until after the proceeding commences."

The site recommends waiting, however, to sign such contracts until after the bankruptcy "is completed (not just filed), if at all possible, to avoid any allegation of fraud."

A meeting of creditors in the Smith bankruptcy is scheduled for Friday in Fayetteville, one day before his team (2-4) hosts Kentucky.



