Bankruptcy Fraud Resource Center

No privilege or immunity for draft bankruptcy schedules in bankruptcy criminal investigation

Two of the most valuable sources of information in the investigation of a debtor's alleged bankruptcy fraud are the debtor's bankruptcy attorney and drafts of the debtor's schedules (including the completed intake questionnaire).  With limited exceptions, a debtor's bankruptcy counsel may properly be interviewed by investigating authorities, and both he and his files may be subpoenaed for use before a grand jury or during trial.  The contours of this rule, and its exceptions, I analyze in Chapters 5 and 6 of my treatise on bankruptcy fraud, Bankruptcy Crimes Law and Procedure (LRP 2006).

Most recently, the U.S. District Court for the District of Columbia enforced the general rule in United States v. Naegele, No. 05-0151 (PLF) (D. D.C. Jan. 4, 2007), denying the attorney client privilege and work product immunity for a debtor's draft bankruptcy schedules that the government had subpoenaed during the investigation of several alleged bankruptcy crimes.  Upon receiving a subpoena, for his files and trial testimony, the debtor's bankruptcy attorney moved for a protective order, which the government opposed. 

While several categories of documents were at issue, the district court held that the attorney client privilege did not attach to draft bankruptcy schedules because the information they contained was intended to be disclosed publicly to the bankruptcy court and therefore was not confidential.  Naegele, slip op. at 9.  The court also denied the draft schedules any work product immunity holding: "the bankruptcy filing was not itself 'litigation' in anticipation of which protected attorney work product can be created."  Naegele, slip op. at 13.

While neither of these rulings beaks new ground the opinion is important reading for bankruptcy practitioners.  The full text of the opinion is available here.

Does amending schedules preclude a bankruptcy fraud conviction?

One of the most common misconceptions concerning bankruptcy fraud is that a amending a petition or schedule to supply missing (or to correct inaccurate) information in an original filing protects the debtor from a bankruptcy fraud charge.  In the classic context, suppose a debtor omits an asset from the schedules.  A trustee's examination during a meeting of creditors uncovers the asset and the debtor is instructed to amend the appropriate schedule.  The schedule is in fact then duly amended, filed and noticed.  Does the amendment - and hence the disclosure - mean the debtor could not properly be charged with a concealment or false statement?  The answer is no.  While amendments are liberally allowed (see Fed.R.Bank.P. 1009(a)), subsequent remedial measures do not shield a debtor from criminal prosecution (or conviction), although the corrective action may be admissible in a criminal case to show a lack of fraudulent intent. 

Applying this well established rule, the Tenth Circuit recently rejected a debtor's argument that amending his schedules to correct a false social security number (SSN) operated as a defense to a false declaration charge (18 U.S.C. 152(3)).  In United States v. Beach, Nos. 05-3362 - 063053 (10th Cir. Apr. 9, 2007) (unpublished) (available here), a debtor filed a pro se chapter 7 bankruptcy petition in which his SSN was reversed, except for one number.  The clerk eventually noticed the inaccuracy and alerted the debtor to the deficiency.  Within a week of the original filing the debtor filed an amended petition with his correct SSN.  Before discovering the deficiency, however, the clerk published a Notice of Commencement of Case containing the incorrect SSN.  Following his conviction for making a false declaration, the debtor appealed, raising the amendment, among other issues, as a challenge to his conviction.  The circuit court properly rejected the argument finding significant that the "damage" was already done by the time of the amendment because the clerk had issued the Notice with the incorrect SSN (slip op. at 10 n.4). 

While the result is correct, the rationale is not.  The crime was complete the moment the debtor filed the original schedule containing the false declaration with fraudulent intent.  The "harm" caused to creditors or the public in receiving an incorrect Notice is irrelevant to the issue of liability.  In other words, the debtor would properly have been convicted even had he amended the petition in time for the original Notice to be published and had no creditor ever been deceived. 

A final note.  Interestingly in this case, the clerk noticed the error and called it to the debtor's attention before the amendment, making the case even weaker for an "amendment defense."  As a  practical and legal matter, a debtor must have corrected the original inaccuracy before it was discovered to have any realistic chance of demonstrating that the corrective measure shows a lack of fraudulent intent.      

The collateral consequences of a client's bankruptcy fraud

One of the perils of bankruptcy work, particularly in representing debtors, is the risk that a client accused (or convicted) of bankruptcy fraud will claim "my lawyer told me to do it."  Of course, the allegation is nearly never true, and is no defense besides.  But the allegation once made can be a nightmare for the bankruptcy practitioner.  The Seventh Circuit's recent decision in United States v. Roti, No. 06-3192 (7th Cir. May 3, 2007), illustrating this point, should be mandatory reading for the bankruptcy bar - or at least that segment of it that does debtor work. 

Judge Easterbrook's opening paragraph sets the tone:

EASTERBROOK, Chief Judge.  Saddled with a judgment for more than $400,000 on account of a guarantee of his small corporation's debts, James Roti decided to hide his assets from creditors.  He has been convicted of bankruptcy fraud, see 18 U.S.C. § 157, and concealing assets from the bankruptcy trustee, see 18 U.S.C. § 152.  His sentence is 21 months' imprisonment.  Roti concedes that he parked some assets with family members and moved others to accounts unknown to his creditors, and that he lied to his principal creditor, to the federal bankruptcy court, and to the trustee.  Roti says that his lawyer Andrew Werth put him up to it, and at trial he contended that he should be acquitted because Werth managed the scheme's details. . . .

The full text of the opinion is available here.

Maine woman pleads guilty to converting federal funds and making false oath in bankruptcy

Barbara Jean Pearson has pleaded guilty in the District of Maine to the sole count of a criminal information charging her with converting federal funds from the U.S. Department of Health and Human Services Low Income Home Energy Assistance Program and to count 6 of an indictment (available here) charging her with making a false oath in bankruptcy by failing to disclose a business bank account.

Under the terms of a plea agreement, Pearson has waived her right to appeal her conviction and any sentence imposed with the applicable Guidelines range.  The government has agreed to move to dismiss the seven remaining counts of the indictment after sentence is imposed.  A sentencing date has not yet been set.

Gary Peel's motion for new trial available

Updating yesterday's post concerning the case of Illinois attorney Gary Peel, his motion for a new trial is available here. 

In the most relevant aspect of the motion, Peel argues that the district court's exclusion of certain evidence pertaining to his ex-wife prevented him from presenting a complete defense.  In particular, Peel argues that the district court improperly denied the admission of evidence regarding Peel's claims against his ex-wife relating to improper use of marital funds.  This evidence, he explains, would have allowed the jury to consider the full extent of the consideration he was giving up in negotiations with his ex-wife.  Without the evidence, the jury was not allowed to properly weigh whether Peel had fraudulently used the pictures to gain an advantage in the bankruptcy, as the government charged.  In fact, according to the motion, Peel's conduct with respect to the photos was "not done for the purpose of obtaining an advantage in the bankruptcy," but rather "was a reaction to activities on the part of his ex-wife in making private matters in the bankruptcy public."

To this observer, Peel's argument seems strained and will not win a new trial.  The government has not yet filed its opposition.  Stay tuned for further updates.

Peel files motion for new trial on bankruptcy fraud charges

Convicted attorney Gary Peel has filed a motion for a new trial of charges for which he was convicted on March 23, including bankruptcy bribery, obstruction of justice and possession of child pornography, according to this excellent article in The Madison Record.  I will post the motion and discuss the salient arguments concerning the bankruptcy fraud charges later today.