Does a false declaration made knowingly and fraudulenly in a bankruptcy case need to be "material" to constitute a bankruptcy crime? The statute prohibiting such statements (18 U.S.C. 152(3)) does not expressly say so but for years courts have held or assumed that a false statement in a bankruptcy case must relate to a material matter to constitute a crime. At the same time, the settled definitions of materiality were stated so broadly ("capable of influencing the result of the proceeding;" "pertinent to the debtor's financial transactions;" "related to possible discovery of an asset or area for inquiry") that the additional element seldom (if ever) provided an obstacle to prosecution - or conviction. But just when we thought the law was static, suddently it appears to be moving again, albeit slowly - and in opposite directions.
Previously we reported on the Eighth Circuit's decision in United States v. Mitchell, No. 07-3136 (8th Cir. June 10, 2008) holding that the terms "knowingly and fraudulently" in 18 USC 152(3)) sufficiently limit the reach of the statute that an additional element of "materiality" should not be implied. (The Mitchell decision is also fully discussed in the cover feature of this month's edition of The Bankruptcy Fraud Reporter available here). Mitchell thus makes easier the prosecution task of prosecuting false statements in bankruptcy cases - at least in the Eighth Circuit.
In the Eastern District of Michigan, however, U.S. District Judge Thomas L. Ludington's decision in United States v. Kalahar, No. 06-20514-BC, Slip op. (E.D. Mich. May 23, 2007) on the same question may produce the opposite effect by giving effect to a materiality element in the bankruptcy false declaration statute.
Among other charges, Kalahar was convicted of making a false declaration by falsely failing to disclose in his filed Statement of Financial Affairs the closing of two personal bank accounts in the year preceding his bankruptcy filing. One account reflected a balance of $51; the other had a balance of approximately $87. At trial Kalahar explained that they were old accounts about which he had forgotten which he prepared his bankruptcy filing. Unpersuaded, a jury convicted the debtor of violating 18 U.S.C. 152(3)); the defendant in turn moved for judgment of acquittal, which Judge Ludington granted. According to the court: "An essential element of bankruptcy fraud is that the failure to disclose be material. As the jury instructions explained,'[a] matter is 'material' if it has a natural tendency to influence, or is capable of influencing, the outcome of the bankruptcy proceeding.' . . . In light of the entire bankruptcy case, inlcuding the fact that Kalahar's liabilities exceeded his assets by well over $1,000,000, these two accounts cannot be said to be material."
Kalahar undoubtedly opens the door to a new defense at least in the Eastern District of Michigan - to false declaration charges in bankruptcy criminal cases.