1. What is the status of DLI?
The United States District Court appointed Brad Sharp of Development Specialists, Inc. as Permanent Receiver for Direct Lending Investments LLC, Direct Lending Income Fund, L.P., Direct Lending Income Feeder Fund, Ltd., DLI Capital, Inc., DLI Lending Agent, LLC, and DLI Assets Bravo, LLC and their successors, subsidiaries and affiliated entities (collectively, “DLI” or the “Receivership Entity”) on April 1, 2019. Additional information about the Receivership, including a copy of the Preliminary Injunction Order and Order Appointing Permanent Receiver, can be found at https://cases.stretto.com/dli.
During the Receivership, the Receiver has evaluated the assets of the estate, engaged an investment banker, investigated the circumstances that led to the receivership and potential claims, and has taken numerous actions to maximize the return to creditors and investors. A more complete discussion of the activities that have taken place can be found in the Status Reports posted on the Receiver’s website.
2. Why was the Receivership necessary?
See the Complaint filed by the Securities and Exchange Commission at docket entry 01 filed on March 22, 2019 at https://cases.stretto.com/dli for a summary of the reasons for the filing.
3. What is a Receivership?
Receivership is a process in which a legally appointed receiver acts as custodian of a company's assets or business operations. The Receivership process is designed to allow a court‐appointed third party to act as a custodian for assets and maximize asset values for investors, creditors, employees and parties who have an interest in the estate.
4. Who does the Receiver work for?
The Receiver is an agent of the Court and therefore works for the appointing judge. The beneficiaries of the Receiver's work are the investors, creditors, employees and parties who have an interest in the estate.
5. Does this mean DLI is going out of business?
DLI will not be accepting any additional investor funds. The goal of the Receiver is to evaluate assets and maximize asset values to create as much value as possible for investors, creditors, employees and interested parties.
6. Do you have an update on the status of current operations?
Since April 1, 2019, the Receiver, his portfolio team, his investment banker Raymond James & Associates, Inc. (“RJA”) and his counsel, including his creditors’ rights specialists at Goldberg Kohn Ltd., have analyzed in depth the outstanding loan/investment portfolio to prepare and execute strategies to monetize the portfolios and maximize value for the estate.
A more complete discussion of the activities that have taken place can be found in the Status Reports posted on the case website.
7. What entities are included in the Receivership?
Direct Lending Investments, LLC; Direct Lending Income Fund, L.P.; Direct Lending Income Feeder Fund, Ltd.; DLI Capital, Inc.; DLI Lending Agent, LLC; and DLI Assets Bravo LLC and their successors, subsidiaries and affiliated entities.
8. Where can I learn more about the Receivership and obtain periodic updates?
Additional information about the DLI Receivership can be found at https://cases.stretto.com/dli. Status reports as filed with the court will be posted as they become available.
Investor Specific Questions:
9. Will I continue to receive monthly statements in the investor portal?
No, investors will no longer receive regular monthly statements, including statements as of December 31, 2018.
10. Will investors still be able to access records through Opus?
No. In August 2019, the Receiver shifted its investor noticing work from Opus to Stretto in anticipation of the termination of Opus as an ongoing service provider. Investors should contact Stretto to request any historical account information.
11. How do I request and obtain audit or other confirmations for investor accounts?
DLI will no longer be able to respond to investor audit or other confirmation requests.
12. I invested with my retirement account and received notification from my custodian stating that they will no longer support custody of the DLI investment.
The Receiver is aware that certain custodians have notified US investors with interests in Direct Lending Income Fund L.P. in their retirement accounts that they will no longer support custody of the DLI investment and that investors either need to request a distribution, request a redemption, or appoint a successor custodian at another financial institution. The Receiver is aware that the following custodians may support custody of the DLI Investment:
- PENSCO Trust Company
- Advanta IRA
- Millennium Trust Company
If you choose to appoint a successor custodian, please submit the transfer paperwork to our case administrator, Stretto. The email address is TeamDLI@stretto.com. Appointing a successor custodian will not cause a rejection of your claim.
Please consult with your accountant or tax advisor on the best course of action.
13. What happened at the April 15, 2019 Status Conference?
The Receiver and counsel provided an overview of the activity that transpired in the first 15 days of the Receivership. This included gaining control of the cash and related management systems and preserving all records while working to evaluate the available assets and execute a strategy to maximize value to the investors, creditors, employees and interested parties.
14. What happened at the September 9, 2019 Omnibus Hearing?
The hearing set for September 9, 2019 was removed from the Court’s calendar. The Court deemed matters related to the Motion of Receiver for Order Granting Subpoena Power to Receiver in Aid of His Powers and Duties appropriate for decision without oral argument.
15. Do you have any updates regarding VoIP Guardian Partners I LLC ("VoIP GP")?
VoIP GP filed a voluntary Chapter 7 petition for liquidation on March 11, 2019. Though the DLI loan to VoIP GP has a par value on the Receivership Entities’ books of over $190 million, there are substantial questions and concerns regarding collection of the underlying telecommunications accounts receivable, not the least of which is the bankruptcy filing and that approximately $22 million dollars in funds are being held in The Netherlands as a result of a government seizure related to a criminal investigation of Rodney Omanoff and others for money laundering and other criminal claims.
The Receiver attended the 341 Meeting of the Creditors and moved for approval of a stipulation with the Chapter 7 Trustee of the VoIP Guardian bankruptcy estate to provide an avenue to allow the Chapter 7 Trustee to use the Trustee’s statutory and other powers and resources, standing in the shoes of VoIP Guardian, to pursue recoveries on the telecommunications receivables and other assets subject to the Receivership Entities’ security interest and provide for a sharing of recoveries that the Trustee is able to make. The stipulation was approved by the Court by order entered September 12, 2019 (Doc. No. 124).
The Receiver will continue to monitor the proceedings of VoIP GP's bankruptcy and work with the Chapter 7 Trustee to maximize the ultimate recovery to the Receivership Entities.
16. When will additional updates to investors be provided and how do I receive these?
Please continue to check the website for periodic updates. To subscribe to receive updates as items are filed on the court docket, please visit https://case.stretto.com/dli and click on the “Civil Docket” on the top menu of the website. From there, please select “Subscribe” to sign up to get email notifications as pleadings are filed, daily, or weekly.
The Receiver also files periodic Status Reports that are available at https://case.stretto.com/dli.
17. Will Brendan Ross have continued involvement?
Brendan Ross formally resigned all positions at DLI on March 18, 2019 and ceded control to DLI’s management committee. The Receiver has taken custody of DLI’s assets and operations.
18. Who do I contact for additional information?
You may submit an inquiry on the Contact Us page of the website (https://case.stretto.com/dli) or send an email to email@example.com.
US Receivership Claims:
19. How do I file a claim?
The court established July 7, 2020 as the claims bar date, which is the deadline for investors and creditors to file a claim. Further information, including the claim form, can be found in Doc. No. 253.
Doc. No. 253, Click HERE
You must submit this completed claim form to the Receiver by no later than July 7, 2020. Submit your form to one of the following:
1. E-Claim Filing: To E-File a claim, click HERE
2. Email: DLIclaims@Stretto.com
3. DLI Claims Processing Center C/O Stretto 410 Exchange, Suite 100 Irvine, CA 92602
If you have not filed a claim by July 7, 2020, you are still encouraged to submit a late claim which may still be considered.
20. I was provided with a proof of claim (interest) form along with an Exhibit A. What activity is included in the Requested Redemption Paid column in my Exhibit A form?
The proof of claim (interest) form requires each investor to provide information regarding redemptions and distributions requested and paid. The activity reported to you in Exhibit A under the Requested Redemption Paid column includes both cash redemptions and monthly cash distributions paid to you the investor. Exhibit A does not distinguish between the type of cash paid to you as it is intended to verify the total amount of cash paid and is not intended to make any finding or determination as to the nature of the payments made.
21. What is happening with 12/31/18 and 1/31/19 redemptions?
The nature and amounts of claims for investors with such unpaid redemption requests and the ultimate recovery on such claims will be determined by the distribution plan that was approved by the Court on December 14, 2020. The distribution plan will govern and supersede any and all communication to you prior to the Receivership regarding the treatment of unpaid redemption requests. Further information can be found in Doc. No. 321.
22. Will I continue to receive distributions?
Receiverships provide for a process whereby a claims bar date will be set for parties to file a claim. The Receiver will evaluate all claims and will make distributions based on a determination of such claims and court approval of a distribution plan. The court established July 7, 2020 as the claims bar date, which is the deadline for investors and creditors to file a claim. A distribution plan will be determined after the claims bar date. Further information can be found in Doc. No. 253. and Doc. No. 321.
23. What does it mean for my DLIF investor claim to be allowed on a “Net Investment Basis” as discussed in the distribution plan? And am I at risk of an inferior claim treatment relative to other DLIF investors depending on how I filed my DLIF investor claim?
Any DLIF Investor that either agreed with the investor activity reflected in Exhibit A of the proof of interest form provided to them or disputed something other than the activity in Exhibit A (such as the claims allowance methodology) will have an allowed claim based on the court approved Net Investment Basis. Net Investment Basis simply means that the claim amount will be determined by cash in less cash out and transfers in less transfers out, with the transfer amount excluding reported profits.
No investor had the opportunity to receive a different claim treatment nor is there a group of investors that will benefit from a different claim treatment. In other words, both the DLIF investors that disputed only the claims allowance methodology and DLIF Investors that agreed with Exhibit A are treated in the same way with an allowed claim on a Net Investment Basis.
24. How are distributions for DLIF investor claims calculated?
The distribution plan is based on the rising tide methodology for DLIF investor claims on a Net Investment Basis. The first interim distribution was released during the week of February 22, 2021 to all investors with allowed claims below a 30.95% recovery percentage. To explain the calculations using an example, an investor that invested $100,000 and received redemptions and/or distributions totaling $40,000 would have a 40% recovery percentage and would not receive a first interim distribution on account of that claim. Such an investor will receive a distribution if and when there is sufficient distributable cash that results in all investors with allowed claims receiving more than a 40% recovery percentage. If, under that same example, the investor received $30,000 instead of $40,000, then that investor would have a 30% recovery percentage and would receive a $950 distribution (30.95% - 30.00% = 0.95% x 100,000).
25. What is the timing for distributions to investors?
The first interim distribution was released during the week of February 22, 2021 to all investors with allowed claims below a 30.95% recovery percentage consistent with the rising tide methodology discussed in the distribution plan. Investors that are subject to potential claims objections are being notified of their status and reserves will be maintained for the distributions that would have otherwise been released on account of their claim.
Initial distributions to claimants holding allowed claims were determined by a Court approved distribution plan. The Receiver filed a motion seeking Court approval of a distribution plan on November 20, 2020, after the claims bar date of July 7, 2020, and after all claims had been reviewed. The Court granted the distribution plan on December 14, 2020. The Receiver is evaluating all claims submitted and will make distributions based on a determination of such claims and in accordance with the Court approved distribution plan.
Timing of the subsequent and final distribution amounts to claimants holding allowed claims will depend on the time required for the Receiver to fully administer the assets. The Receiver is continuing his evaluation of all assets and execution of a strategy to maximize the value of those assets. As such, no estimate can be provided for the amount or timing of final distributions to claimants.
26. I understand that the first interim distribution was released during the week of February 22, 2021 to all investors with allowed claims. Why did I not receive my distribution?
First interim distribution checks were sent to all DLIF Investors with allowed claims and a recovery percentage below 30.95%, consistent with the rising tide methodology discussed in the distribution plan. If you believe that you have not recovered 30.95% of your investment on a Net Investment Basis prior to the first interim distribution and you have not received a first interim distribution, please contact firstname.lastname@example.org for further assistance.
27. I received my first interim distribution but it was lower than I expected. How did you calculate the amount distributed to me? What is the allowed claim amount for my claim?
Please reference the answer to the “How are distributions for DLIF investor claims calculated?” FAQ and/or contact email@example.com for further assistance.
28. Do you have an estimate of what percent of our original investment may be returned to us in the form of a distribution?
As reported in the Seventh Status Report filed with the Court on December 2, 2020, the Receiver expects to recover approximately 27%-34% of the March 31, 2019 reported par value of DLI Capital, Inc.’s (the Master Fund) investments in addition to the $31.7 million in cash on hand (or approximately 4% of the reported par value of investments) as of March 31, 2019. Taken together, the Receiver expects to see a gross recovery amount equal to 31%-38% of the March 31, 2019 reported par value of investments. The gross recovery amount will be distributed to all Feeder Fund investors (DLIF and DLIFF) and creditors with allowed claims in accordance with the distribution plan that was approved by the Court on December 14, 2020. While the 31%-38% range may provide some indication of the ultimate recovery on your investment with DLIF, the ultimate recovery will be subject to the distribution plan including competing non-DLIF investor claims, increased by any proceeds from litigation that has been and will be filed by the Receiver, and reduced by operating costs, administrative fees and expenses. As of the date of this FAQ, the Receiver has not identified any reasons to change his view on estimated recovery amounts from what was reported in the Seventh Status Report.
29. Can I write off my investment loss?
The Receiver cannot give tax or other legal advice. Please consult with your accountant or tax advisor and seek their advice.
DIRECT LENDING INCOME FEEDER FUND, LTD. (IN OFFICIAL LIQUIDATION):
30. What is the status of the DLI group?
The United States District Court in the Central District of California appointed Bradley Sharp of Development Specialists, Inc. as Permanent Receiver (“US Receiver”) for Direct Lending Investments LLC, Direct Lending Income Fund, L.P. (“US Feeder”), Direct Lending Income Feeder Fund, Ltd. (“DLIFF”), DLI Capital, Inc., DLI Lending Agent, LLC, and DLI Assets Bravo, LLC and their successors, subsidiaries and affiliated entities (collectively, “DLI” or the “Receivership Entity”) on April 1, 2019.
The US Receiver is undertaking an orderly wind down of the assets and business operations of DLI. Information about and updates on the receivership of DLI can be found at https://case.stretto.com/dli.
31. What is the status of DLIFF?
DLIFF was incorporated under the laws of the Cayman Islands and is the offshore feeder of DLI Capital Inc. (“Master Fund”). DLIFF is part of the Receivership Entity.
DLIFF is in official liquidation under the supervision of the Grand Court of the Cayman Islands by order on July 25, 2019. Christopher Johnson and Bradley Sharp are the appointed Joint Official Liquidators (“JOLs”).
DLIFF’s primary asset is its investment in the Master Fund, the value of which is currently being determined and formalized.
32. When will the JOLs make a distribution to DLIFF stakeholders?
The return to DLIFF’s stakeholders is dependent on 1) DLIFF’s return from the Master Fund; 2) JOLs' recoveries from litigation; 3) adjudication of creditor claims from investors; and 4) priority of claims.
The US Receiver initiated the US claims administration process in 2020 and established a claims bar date of July 7, 2020. This process has several stages, culminating in the approval of a distribution plan. The distribution plan was determined and submitted to the Court on November 20, 2020, and it was later granted by the Court on December 14, 2020.
Next, in accordance with the court approved distribution plan, the US Receiver will undertake a distribution to the Master Fund’s feeder entities, the US Feeder and DLIFF. Only after a distribution from the Master Fund will it be possible for the JOLs to consider an onward distribution to DLIFF stakeholders.
The US Receiver’s bar date is not applicable to DLIFF stakeholders, who are required to pursue their claims and interests in the DLIFF liquidation with the JOLs. Further information on the DLIFF claims process is in Section 4, below.
Neither the US Feeder nor DLIFF will have priority over the other in terms of receiving distributions from the US receivership. The investors in the US Feeder do not have priority over DLIFF investors.
33. Is there a deadline for DLIFF stakeholders to file claims in the liquidation?
The JOLs have not set a deadline for submitting claims in the DLIFF liquidation. The JOLs will update DLIFF investors in respect of their respective claims as soon as possible.
34. What is the DLIFF claims process?
The Cayman Islands claims process is a formal process of adjudication of DLIFF claims. This is being managed by the JOLs and is separate to the claims process for US investors. The JOLs are currently considering claims and have identified the following potential classes of stakeholder claims in DLIFF:
Trade creditor claims
Trade creditors are unsecured, third party creditors. Trade creditors that have not already done so should submit a proof of debt form, along with the accompanying documentation as requested on the form. Forms can be obtained by emailing DLIFF@cjacayman.com.
Redemption creditor claims
Redemption creditors are investors who sought to redeem with effective redemption dates prior to the suspension of withdrawals and voluntary redemptions on February 8, 2019, but are unpaid. The JOLs are in direct, ongoing communications with investors who submitted a redemption request before February 8, 2019 regarding the adjudication of their claims.
Late subscriber claims
Late subscribers are investors that submitted subscriptions in DLIFF with effective dates after November 30, 2018. The JOLs are in the process of obtaining relevant information on these claims and determining the appropriate treatment of these investors in the DLIFF claims process. An update on the treatment of the late subscribers will be communicated in due course following completion of the JOLs’ review.
Unredeemed investor claims
Unredeemed investors are investors who did not initiate redemptions prior to the February 8, 2019 suspension. Unredeemed investors that do not fall into any of the categories previously mentioned do not need to submit a proof of debt or otherwise prove their investment in DLIFF at this time.
35. What is the order of distribution to DLIFF stakeholders?
Expenses of the DLIFF liquidation are payable in priority to any distribution to the stakeholders of DLIFF. When the JOLs have sufficient funds available, and claims have been adjudicated, distributions on claims admitted by the JOLs will be made in the following order (in accordance with the laws of the Cayman Islands):
1. Trade creditors (unsecured, third party creditors);
2. Redemption creditors (those investors who are deemed to have redeemed before the suspension of withdrawals and voluntary redemptions on February 8, 2019, but are unpaid). This represents approximately 18% of DLIFF participating shares as at November 30, 2018 (although this figure is subject to change pending the outcome of the adjudication of these claims);
3. Unredeemed investors (those investors who did not initiate redemptions with an effective redemption day prior to the suspension).
Note: Late Subscribers see above section.
36. When can I expect to receive additional tax reporting?
There are no ongoing tax reporting requirements that are expected to result in additional tax reporting to DLIFF investors. It is anticipated, however, that certain DLIFF investors will receive an updated 2018 Form(s) 1042-S by the second quarter of 2021.
37. What is the role of the DLIFF Liquidation Committee (“LC”)?
A LC has been appointed in respect of DLIFF, whose role is to represent the wider body of DLIFF creditors and contributories. There are three members that represent DLIFF creditors and two members that represent DLIFF contributories.
The JOLs must periodically report to the LC and the LC is asked to approve such items as the JOLs’ remuneration. Liquidation matters are brought to the attention of the LC and the JOLs consult with the LC accordingly.
38. When will the JOLs be providing an update on the liquidation to DLIFF stakeholders?
In addition to ongoing updates and communications with the LC, investors are updated one-on-one as queries are raised and formal reporting will be undertaken annually when the DLIFF AGM is convened (which need not be prior to October 8, 2020). A full report from the JOLs on the DLIFF liquidation will be provided at that time.
No monthly statements or audit confirmations will be issued.
39. What is the status of claims against management and third party professionals?
The JOLs, in conjunction with the US Receiver, are in the process of reviewing potential litigation claims of DLIFF against certain parties. An update on the review of potential litigation claims has been provided to the LC and this information will be provided in the US Receiver’s status reports, as published on the US Receiver’s website (see US Receiver’s website link above).
40. Can I transfer my shareholding in DLIFF?
Share transfers need to be sanctioned by the Grand Court of the Cayman Islands. The costs of preparing the Court application for a share transfer will be borne by the investor. Investors interested in transferring shares may contact the JOLs by email at DLIFF@cjacayman.com for recommendations of Cayman Islands counsel to assist in the preparation of the necessary Court application documents.
41. Where can I find general information about the Cayman Islands official liquidation process?
If you have questions relating to the Cayman Islands official liquidation process in general, please contact the JOLs by email at DLIFF@cjacayman.com.
42. What is the current status of the Loan Portfolio?
The primary assets of the estate consist of the various investment instruments, loans and loan portfolios into which funds generated from investors through the feeder funds were invested. The Receiver’s initial review of the books and records of the estate indicated there were 26 outstanding investments comprising the primary estate assets. In the Seventh Status Report, the Receiver reported almost $194 million in portfolio collections and a remaining portfolio of 14 investments. Ongoing efforts are being made to maximize the recovery of the remaining portfolio.
43. What is the value of the current Loan Portfolio and what is the plan for the portfolio?
As reported in the Seventh Status Report filed with the Court on December 2, 2020, the Receiver expects to recover approximately 27%-34% of the March 31, 2019 reported par value of DLI Capital, Inc.’s (the Master Fund) investments in addition to the $31.7 million in cash on hand (or approximately 4% of the reported par value of investments) as of March 31, 2019. Taken together, the Receiver expects to see a gross recovery amount equal to 31%-38% of the March 31, 2019 reported par value of investments.
The Receiver continues to evaluate the asset portfolio and estimated recoveries which are subject to many different variables and factors in addition to considerations relating to the quality of the collateral and loans/investments, among many other potential issues.
DLIF 2019 Schedule K-1:
44. Why does my ending capital account in the capital account analysis section of the Schedule K-1 show a zero balance?
Pursuant to federal income tax law, limited partnership (“LP”) capital accounts are required to be adjusted to reflect each member’s contributions, distributions and distributive share of LP income, gain, deduction and loss.
There are two primary reasons for the reductions in capital account balances.
1) Additional Losses. Consistent with this requirement, in 2018, significant capital losses resulting from the worthlessness of certain assets were reported on the investors’ Schedule K-1. Although these losses may or may not have been deductible to any particular LP member in 2018, they did result in a reduction to the 2018 ending capital account balance. Again, in 2019, significant losses were reported on Schedule K-1, primarily from Theft Losses discovered during the year. These losses have also resulted in a reduction to the investors’ capital account.
2) Transfer of DLIF Assets to Receivership Entity. On or about April 1, 2019 all of the assets of DLIF were transferred to the Direct Lending Investments Receivership, pursuant to a court order. A further adjustment was made to capital account balances effective April 1, 2019 in order to “zero” them out and reflect the full transfer of all assets from DLIF to the Direct Lending Investments Receivership. For this reason, the Schedule K-1 was marked as final as DLIF does not anticipate issuing a Schedule K-1 to you in subsequent years. Instead of a membership interest in DLIF, investors now own a claim in the Direct Lending Investments Receivership and all subsequent financial activity going forward, that would otherwise be reported by DLIF, will be reported under the Direct Lending Investments Receivership.
The activity reported to you in Schedule K-1 is not necessarily an indication of the amount or value of your claim or estimated recovery. To date, the Receiver has not made any cash distributions to DLIF investors and will only be able to do so in accordance with the distribution plan that was approved by the Court on December 14, 2020.
45. Why do I have a negative amount associated with capital contributed during the year in the capital account analysis section of the Schedule K-1?
In most cases, all or a portion of the amount reported as a negative capital contribution is a reconciling adjustment amount to zero out the investor’s capital account. The negative capital contribution is also referred to as a transfer out in the Schedule K-1 and represents the transfer of your investment account with DLIF in exchange for a claim in the Direct Lending Investments Receivership. The amount reported as a negative capital contributed/transfer out is not an indication of the amount or value of your claim or estimated recovery.
46. Why is my share of profit, loss, and capital not the same as those shown on my 2018 Schedule K-1?
Your share of profit, loss and capital will naturally vary from year to year as other investors increase or decrease their investment in DLIF. Even if you did not make any changes to your DLIF investment in 2019, there were changes to the investment accounts of other DLIF limited partners which impacted the share being reported to you.
47. What does it mean for the Schedule K-1 to be marked as final? Does it mean investors will receive no further return of capital?
On or about April 1, 2019 all of the assets of DLIF were transferred to the Direct Lending Investments Receivership, pursuant to a court order. In connection with the Receivership, your capital balance in DLIF was “zeroed” out to reflect the full transfer of all assets from DLIF to the Direct Lending Investments Receivership. For this reason, the Schedule K-1 was marked as final as DLIF does not anticipate issuing a Schedule K-1 to you in subsequent years. Instead of a membership interest in DLIF, investors now own a claim in the Direct Lending Investments Receivership and all subsequent financial activity going forward, that would otherwise be reported by DLIF, will be reported under the Direct Lending Investments Receivership.
48. Can you explain the nature and amounts associated with the “unrealized appreciation (depreciation) and timing differences” being reported to me?
Amounts reported on the Partner Capital Account Reconciliation as “unrealized appreciation (depreciation) and timing differences” represent a “book” expense in 2018 for Non-Business Bad Debt that was not deductible for tax purposes in 2018. This amount has been reclassified and reported on the 2019 Schedule K-1 as Theft Loss. The total Theft Loss reported on the 2019 Schedule K-1 includes the reversal of this timing difference that reduced the 2018 Partner Capital Account but was not reported for tax purposes until 2019. In addition, a prior period adjustment is reflected in the 2019 Partner Capital Account Reconciliation.
49. Can you explain the two Theft Loss line items being reported to me?
The reason that there are two Theft Loss items on the 2019 Schedule K-1 is strictly a tax software issue. As discussed above, a portion of the 2019 Theft Loss resulted from the reversal of a 2018 Book/Tax adjustment. In order for the tax preparation software to properly reflect the effect of this reversal in the Partner Capital Account Reconciliation this portion of the Theft Loss deduction had to be separately stated.
50. I transferred my account to a new custodian, why does my Schedule K-1 not reflect the change?
All Schedule K-1s were distributed by e-mail to the e-mail address(es) associated with the tax identification number of record as of March 31, 2019 for each account. The investor name and address reflected on your Schedule K-1 also reflects the information of record as of March 31, 2019.
Changes related to the custodian of your investment account have been and will continue to be processed and reflected as and when received by Stretto in connection with the claims process and distribution plan.
51. How should I report the activity reported to me on my Schedule K-1 in my tax returns? Is the reported loss to be treated as an ordinary loss for tax purposes?
The Receiver cannot provide you with any tax advice. It cannot be overemphasized how important it is to consult a professional tax advisor regarding your investment in DLIF. The tax treatment of specific items reported on both the 2018 and the 2019 Schedule K-1 from DLIF should be carefully analyzed when preparing your personal income tax returns. The capital account reported on Schedule K-1 is not necessarily reflective of the tax basis in your investment in DLIF, nor is it reflective of the amount or value of any claim you may have in the assets of the Direct Lending Investments Receivership.
As indicated to you in the footnotes to your Schedule K-1:
The Theft Loss reported on your Schedule K-1 may or may not be deductible to you in 2019. The requirements set forth in U.S. Treasury regulations related to the deduction of Theft Losses must be met in order for Theft Losses to be deducted in any particular tax year. Each K-1 recipient has their own unique tax situation and, therefore, should discuss the deductibility of the Theft Loss with their own tax consultant. Schedule K-1 recipients may want to consider the provisions of Rev. Proc. 2009-20 when determining deductibility of Theft Losses associated with investments made in Direct Lending Income Fund, L.P. It should be noted that Mr. Brendan Ross was indicted in 2020.
52. Is there a document from the Court or other source that can accompany the Schedule K-1 to further verify the nature of the Theft Loss? Was the fraud documented?
It is important for you to seek advice from a tax advisor. In connection with the Theft Loss, the Schedule K-1 indicates that Brendan Ross was indicted in 2020. The provisions governing the deduction of Theft Losses contained in U.S. Treasury Regulations and other guidance issued by the IRS should be carefully analyzed in determining the deductibility of Theft Losses in a particular tax year. As reported in a news release on August 11, 2020 (available at https://www.justice.gov/usao-cdca/pr/owner-investment-firm-managed-over-1-billion-assets-arrested-federal-case-alleging-he) a grand jury indictment was filed against Brendan Ross on July 30, 2020. As reported in the press release, the grand jury indictment “charges Ross with 10 counts of wire fraud based on a scheme he executed between late 2013 and early 2019 to defraud investors in funds managed by DLI.”
53. Why does my Schedule K-1 report theft losses to me when the IRS no longer allows theft losses or casualty losses for the years 2018 through 2025.
While personal theft losses are not allowed for the years 2018 through 2025, losses incurred in a trade or business and losses incurred in any transaction entered into for profit, though not connected with a trade or business, may be deductible. Please consult with your accountant or tax advisor and seek their advice on the deductibility of losses reported to you.
54. Why is the loss reported to me categorized as a "theft loss" rather than a combination of "theft" and "ordinary" losses?
The vast majority of losses generated by DLIF in 2018 and 2019 are from worthlessness of non-business loans (a capital loss) and worthlessness of equity investments (a capital loss) from investments made by DLIF to DLI Capital (“DLIC”). In 2018, the DLIF tax return reported a capital loss from “worthless stock.” In addition, there was a loss for partial worthlessness of the loan from DLIF to DLIC. This partial write-off was not eligible to be deducted for tax purposes, which resulted in a book to tax adjustment on the 2018 tax return. In 2019, the loan from DLIF was further impaired, resulting in an additional partial write off that would have been nondeductible for tax purposes. None of these losses qualified for ordinary loss treatment in the DLIF tax returns without meeting the theft loss requirements. It was determined that for DLIF’s 2019 tax return that the theft loss requirements were met and a theft loss reporting was appropriate. As a result, the 2018 partial write off of bad debt (which previously was not deductible for tax purposes) and the 2019 partial write off of bad debt were reported as a theft loss in 2019. For this reason, these losses have been reported on your 2019 Schedule K-1 as a theft loss. If these losses were not reported as a theft loss, they would have been reported as a capital loss. Further, included with the Schedule K-1 reported to you was a statement that each DLIF member would need to determine whether the theft loss was deductible to them personally in 2019 or in a subsequent tax year.
55. Since the theft loss is being reported to me in my 2019 Schedule K-1, does that mean I am able to use the theft loss as a deduction on my tax return for 2019?
Since Mr. Ross was not indicted until 2020, DLIF did not make the safe harbor election of Rev. Proc. 2009-20 in 2019. The Receiver believes that 2020 would be the “year of discovery” under the provisions of Rev. Proc. 2009-20. By reporting the theft loss on the 2019 Schedule K-1, the partnership is not indicating that each investor is able to take a theft loss on their 2019 tax return. The reporting of theft loss on the 2019 Schedule K-1 is merely establishing the amount of theft loss allocable to each member. The proper year of deduction of the theft loss and whether or when an investor chooses to elect for safe harbor treatment of the theft loss must be determined by each investor.
56. Is there an estimate of the recovery amount or percentage of my original investment that I can expect to receive in the form of a distribution? How do I determine the value of my investment?
The capital account reported on Schedule K-1 is not necessarily reflective of the amount or value of any claim you may have in the assets of the Direct Lending Investments Receivership. As reported in the Seventh Status Report filed with the Court on December 2, 2020 (a copy of which is made available on the Receivership website located at https://case.stretto.com/dli), the Receiver expects to recover approximately 27%-34% of the March 31, 2019 reported par value of DLI Capital, Inc.’s (the Master Fund) investments in addition to the $31.7 million in cash on hand (or approximately 4% of the reported par value of investments) as of March 31, 2019. Taken together, the Receiver expects to see a gross recovery amount equal to 31%-38% of the March 31, 2019 reported par value of investments. The gross recovery amount will be distributed to all Feeder Fund investors (DLIF and DLIFF) and creditors with allowed claims in accordance with the distribution plan that was approved by the Court on December 14, 2020. While the 31%-38% range may provide some indication of the ultimate recovery on your investment with DLIF, the ultimate recovery will be subject to the distribution plan including competing non-DLIF investor claims, increased by any proceeds from litigation that has been and will be filed by the Receiver, and reduced by operating costs, administrative fees and expenses. As of the date of this FAQ, the Receiver has not identified any reasons to change his view on estimated recovery amounts from what was reported in the Seventh Status Report.
57. What is the timing for distributions to investors?
Initial distributions to claimants holding allowed claims will be determined by the distribution plan that was granted by the Court on December 14, 2020. The Receiver will evaluate all claims submitted and will make distributions based on a determination of such claims and in accordance with the Court approved distribution plan. As of the date of this FAQ, the Receiver’s best estimate of the timing for initial distributions to investors is the first quarter of 2021.
Final distribution amounts to claimants holding allowed claims will depend on the time required for the Receiver to fully administer the assets. As such, no estimate can be provided for the amount or timing of final distributions to claimants.
All distributions to investors will come from the Direct Lending Investments Receivership entity.
58. Should I expect to receive a Schedule K-1 or any other tax reporting for the partial 2019 period and future years from the Receivership entity?
The Receiver does not anticipate any tax reporting to investors by the Receivership entity for the partial 2019 period or beyond since all future distributions are expected to be a return of capital.
59. I still have questions regarding my 2019 Schedule K-1, who can I speak with?
If you have additional questions, please submit them to firstname.lastname@example.org and they will be addressed.
DLIF 2018 Schedule K-1:
60. Does the Receiver plan on restating the 2018 K-1s to reflect that the losses were “theft losses”?
There is no plan to amend the 2018 income tax return to reclassify the worthlessness of stock from a capital loss to theft loss. There is insufficient evidence to support this position at this time. Should this change, then the amendment of the 2018 income tax return will be revisited.
61. Why does the Schedule K-1 reported to me show a net-long term capital loss?
DLIF holds two main assets on its balance sheet: (1) equity investment in DLI Capital, Inc. (“DLI Capital”) and (2) a note receivable from DLI Capital. The net-long term capital loss reported to you primarily reflects the impact of various asset write-downs of DLI Capital taken on a GAAP basis as of December 31, 2018. The write-downs reflect that the investment positions held by DLI Capital, Inc. were worth significantly less than their carrying value. The bulk of the write-downs in 2018 comes from the complete write-off of VoIP Guardian.
The amount of the loss in value that had occurred was so extensive that adjustments that were made to the assets of DLIF at the end of the 2018 tax year reflected the complete worthlessness of its equity position in DLI Capital, which is the basis for the net-long term capital loss reported to you.
The long-term characterization of the loss is based on the partnership’s holding period, not your holding period as an investor in the partnership.
62. Why does the Schedule K-1 reported to me show a significant current year decrease in my capital account?
In addition to the complete worthlessness of its equity position in DLI Capital, DLIF’s note receivable was partially written down, due to the fact that the extent of the loss of value of DLI Capital assets not only rendered its stock worthless but also impaired its ability to fully repay its outstanding debts.
Because of the nature of its activity as an investment partnership, DLIF generates only non-business income. As such, the note receivable write-down is a non-business bad debt expense. These write-downs decreased your capital account in DLIF and resulted in the recharacterization of DLI Capital’s 2018 interest payments from ordinary income, on which you would have been subject to current taxes, to a return of capital, on which you will NOT be subject to current taxes. Since DLIF is not engaged in a trade or business, bad debt expense is only reportable as a short-term capital loss in the year that the debt becomes completely worthless.
63. Why does the Schedule K-1 reported to me show a negative ending capital account?
Investors with a negative ending capital account received a complete redemption in 2018 and zeroed out their interest in DLIF. While you received cash payments in 2018 for what was identified as interest at the time of payment, due to the recharacterization of interest payments in 2018 discussed above, you do not have any corresponding interest income being reported to you, resulting in the negative ending capital account.
64. Why was the write-down taken as of December 31, 2018 as opposed to earlier time period(s)?
While there were various write-downs and other activity reflected throughout the 2018 tax year, the bulk of the capital account decrease reflected on your Schedule K-1 is related to the asset write-downs taken at the end of the 2018 tax year. The write-downs were taken in December 2018 because that was the period when issues impacting the recoverability of certain assets were known
In December, no interest was paid or accrued on the loans from the feeder funds to DLI Capital due to the fact that the accounting personnel at DLI had become aware that certain of the investment positions held by DLI Capital were not making the interest and principal repayments due to DLI and that the shortfall in the payments was substantial enough to both forego the interest payment on the loans from the feeder funds and to delay accruing the interest on the loans until more about the nature of the non-payments and the likelihood of future payments was known.
65. Why does there appear to be a discrepancy between the total amount I invested in the fund and the capital account balances being reported to me?
The capital account balance reported on the partnership’s tax returns are determined on a GAAP basis. As a result, capital accounts are adjusted based on capital contributions, redemptions and non-cash income and losses. Thus, any redemptions with a 2018 effective date will reduce an investor’s ending capital balance in the 2018 Schedule K-1. Additionally, the year-end write-downs that resulted in the recharacterization of 2018 interest income to a return of capital and partial worthlessness of the DLI Capital note receivable may further account for ending capital balance discrepancies on the 2018 K-1.
Other Assets of the Estate:
66. What will be done to recover the funds that were lost due to fraud?
Other assets of the estate include prospective litigation claims. These claims are also of uncertain net value to the estate at this time.
After focusing on efforts to assess and recover on the loan/investment portfolios as well as a broad range of receivership administration issues in the initial stages of the receivership, the Receiver and counsel have shifted their focus more toward claims investigation and assessment, including potential fraudulent transfer claims, potential claims against professionals, and potential claims against officers and directors of the Receivership Entities, including claims that may be covered by the D&O Insurance Policy.
The Receiver and counsel have identified possible litigation targets and potential legal and other theories of recovery. They are pursuing factual investigation which may include interviews of witnesses, analysis of documents and records, and investigation of the facts and circumstances relevant to the basis to assert those claims or may provide evidence of defenses to the claims precluding or limiting their assertion.
The claim investigation is ongoing and confidential. The Receiver will provide additional reporting to the Court on those potential claims as appropriate and when additional information is developed.