Bankruptcy Fraud Resource Center

District court vacates conviction for not disclosing closed bank account; held false statement not material

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.

Cross examination into possible bankruptcy fraud did not constitute improper "other crimes" evidence in bank fraud trial

Earlier this week in this post, we reported on Brenda Hartman' s loss of her Oregon state insurance producer's license as a collateral conseqence of her conviction for committing bankruptcy fraud.  Today, we again are reporting on collateral consequences - only this time there was no bankruptcy criminal conviction - only evidence of possible bankruptcy fraud.

In United States v. Ross, No. 05-4469 (6th Cir., Sept. 21, 2007), Ross appealed his conviction on two counts of bank fraud for depositing multiple counterfeit checks as part of a so-called Nigerian counterfeit check scam.  During the course of trial, Ross testified on direct examination that he had filed a personal bankruptcy petition under chapter 7 of the bankruptcy code and "all the loans and people that [he] owed were put into the bankruptcy...."  Over a timely defense objection, the government was permitted to cross-examine Ross by attempting to elicit that Ross had improperly failed to schedule some of his personal creditors.  Ross was convicted of the bank fruad and on appeal argued that the government's cross-examination was improper Rule 404(b) evidence of other crimes, wrongs or acts - namely bankruptcy fraud. 

The Sixth Circuit flatly rejected the argument holding that Ross' direct testimony that he scheduled all of his creditors "open[ed] the door for exploration of that statement on cross-examination."  Because the government is permitted to impeach any statement made by Ross on direct examination, the cross-examination - though it may have related to a possible bankruptcy fraud - was entirely permissible.

Oregon woman loses state insurance producer license as collateral consequence of bankruptcy fraud conviction

The Oregon Department of Consumer and Business Services has revoked the state insurance producer license of a woman who pleaded guilty to committing bankruptcy fraud.

Brenda G. Hartman was convicted in the District of Oregon of violating 18 U.S.C. section 157 by among other things fruaudulently failing to disclose in her bankruptcy case her ownership interest in an automobile, underreporting her income, listing bogus expenses, providing false testimony and fabricating documents purporting to show she sold the undisclosed automobile.

Under Oregon law an insurance producer license is subject to revocation when the holder is convicted of a felony involving dishonesty or breach of trust, which includes an offense involving fraud, false written or oral statements, or a scheme to defraud.  Violations of 18 U.S.C. 157 fall squarely within the class of offenses warranting license revocation. 

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.

Gary Peel finally detained pending bankruptcy fraud sentencing

Gary Peel, whose well publicized conviction for bankruptcy bribery, obstruction of justice and possessing child pornography has been reported in numerous columns on this blog, was finally detained pending his June 25 sentencing date.  As reported here, Judge Stihel originally ordered Peel detained pending sentencing but stayed the order when Peel moved for reconsideration.  Upon reconsideration, Judge Stiehl found insufficient evidence of the "exceptional circumstances" required to warrant Peel's release pending sentencing.  Peel turned himself in Monday morning.

Ninth Circuit reverses bankruptcy fraud convictions; sheds light on meaning of bankruptcy fraud statute

In what I believe is a very exciting decision, the Ninth Circuit Court of Appeals has reversed the seven count bankruptcy fraud conviction of a northern California man who pretended to be a lawyer in order to defraud numerous tenants facing eviction of fees paid to him to assist them.  The opinion in United States v. Milwitt, No. 05-10344 (9th Cir. Feb. 5, 2007) is available here.

I say the opinion is "exciting" not because of the result (a reversal in which I have no stake), and despite the ugly fact that many people were defrauded, but because this is the first time in a long time that an appellate court has construed 18 U.S.C. 157 - a statute that creates so many unanswered interpretive questions.  It is exciting also because the opinion touches on several issues of first impression that I specifically identified - and attempted to resolve - in my bankruptcy crimes treatise (Bankruptcy Crimes Law and Procedure - available here). 

In short, the Ninth Circuit reversed Milwitt's convictions on seven counts of bankruptcy fraud on sufficiency of the evidence grounds because the government proved at trial that Milwitt acted with intent to defraud the tenants, rather than intent to defraud the landlords as the indictment charged.

I will be digesting the opinion (complete with a dissent) tonight and will be discussing multiple aspects of it in several posts throughout the day.  Among the issues addressed by the Ninth Circuit are (1) to what extent should mail fraud jurisprudence inform interpretations of the bankruptcy fraud statute, after which section 157 was patterned? and (2) must a bankruptcy fraud defendant have specific intent to defraud a victim or the victims of the scheme to defraud, that constitutes the first element of the crime?  More to come ...

Severance motion denied in bankruptcy fraud and pornography case

In a previous post (here) I promised to review several of the interesting pre-trial defense motions in the case of Illinois attorney Gary Peel who is charged with bankruptcy bribery and possessing child pornography.  One such motion was Peel's motion to sever the charges on the ground that a joint trial on all of the charges would unduly prejudice his right to a fair trial.  At first blush, the case would seem to be a classic one for severance inasmuch as the pornography counts do not seem to be the same as or similar to the obstruction and bankruptcy crime charges.  However, Peel is charged with bankruptcy bribery, obstruction of justice and possession of child pornography in a case in which he allegedly offered to trade sexually explicit photos of his ex-wife's underage sister to his ex-wife if she would drop her objection to the dischargeability of Peel's financial obligations to her as a result of divorce proceedings.

In a written decision (available here), Judge Stiehl denied the motion for severance, holding that the allegations of the indictment satisfy Rule 8 (Fed.R.Crim.P.) because "they arise out of a series of related transactions, all tied to the charged conduct."  "Put simply," he wrote, "the bankruptcy fraud and obstruction charges are so inextricably intertwined with the defendant's alleged use of, and possession of, child pornography that without this evidence being admitted, the allegations of fraud and obstruction would have neither context nor foundation."

Judge Stiehl grants hearing to determine relevance of bankruptcy fraud defendant Peel's expert witness

In the last post (here) updating Gary Peel's bankruptcy fraud case we reported that the government had requested a Daubert hearing to challenge whether the testimony of proposed defense witness Thomas Hoops, CPA - a CPA and valuation analyst - is relevant and reliable.  Recall, Peel is charged with bankrupcy bribery, obstruction of justice and possession of child pornography in a case in which he allegedly offered to trade sexually explicit photos of his ex-wife's underage sister to his ex-wife if she dropped her objection to the dischargeability of obligations Peel owed to her as a result of divorce proceedings.

In an opinion available here, Judge Stiehl agreed with the government that a hearing was necessary to determine how Hoops' testimony would be relevant to the issues in the case.  Judge Stiehl's decision marks yet another set back for Peel, whose several motions to dismiss various of the charges have all previously been denied.