Bankruptcy Fraud Resource Center | Wayne D. Holly, P.C.

Bankruptcy Attorneys Compelled to Disclose Name of Client as Court Holds Attorney-Client Privilege Inapplicable

A South Carolina bankruptcy court last week ordered a local law firm to disclose the names of bankruptcy clients amidst a discovery dispute with the U.S. Trustee.  The attorney-client privilege, the court held, does not apply to information disclosed for the purpose of filing a bankruptcy petition or assembling the schedules because the information, ultimately, is intended to be publicly disclosed.  The U.S. Trustee sought the information in connection with its motion to review the conduct of the firm and for disgorgement of fees.  The case is In re Hogan, No. 18-05693-HB (Bankr. D. S.C. May 19, 2020) (available here).

The bankruptcy court's decision hardly breaks new ground, as the attorney-client privilege long has been held inapplicable generally to a client's identity and the amount of the fee - with an exception where disclosure of identity has not been authorized by the client and compelled disclosure would reveal a client's confidences.  The decision is a very good reminder, however, of the many pitfalls that a bankruptcy filing creates for debtors who may, or expect to, be the subject of a parallel criminal investigation. 

Courts generally have held that attorney-client privilege does not shield a debtor from compelled disclosure (by the debtor or the debtor's attorney) in a criminal case of matters required to be disclosed in the bankruptcy petition or schedules.  Thus, material of this kind can be, and regularly is, accessed in bankruptcy criminal investigations, at trial or during plea negotiations, and even at sentencing.  The precise contours of the privilege in bankruptcy-related matters, of course, must be determined on the facts of individual cases and compelled disclosure should be resisted by counsel on behalf of the (former) client when appropriate so that a proper judicial determination may be made.

Advice of Counsel Defense Negates Fraudulent Intent in False Oath Case

A North Carolina Bankruptcy Court recently upheld the advice of counsel defense to allegations that a debtor knowingly and fraudulently made a false oath in bankruptcy, confirming once again that debtors who reasonably act, after full disclosure to their attorneys, on the advice of counsel do not intend to deceive or cheat creditors.  The case, DFWMM Holdings, LLC v. Richmond (In re Richmond), Case No. 17-11413; Adv Proc. No. 18-02010 (Bankr. M.D. N.C. April 24, 2020) (opinion here), was on remand from the U.S. District Court for the Middle District of North Carolina, No. 1:19CV667 (M.D. N.C. March 9, 2020) (opinion here).   The advice of counsel defense is interpreted consistently across civil proceedings to deny a debtor's discharge (11 U.S.C. 727(a)) and criminal cases construing the parallel bankruptcy crimes provisions (18 U.S.C. 152).

A prepetition judgment creditor commenced an adversary proceeding to deny the debtor's discharge on the ground that he knowingly and fraudulently made a false oath or account in his chapter 7 case.  Following trial, the bankruptcy court found that the debtor made three false statements in the schedules or statement of financial affairs: (1) his debtors were primarily consumer debts; (2) his gross income from operation of a business was $0; and (3) failure to list his interest in a Harley Davidson motorcycle on Schedule A/B.  The secured debt owed to the financial company and the motorcycle itself was identified as collateral on Schedule D.  The court found that counsel for the debtor was fully informed of the facts in each case and the debtor reasonably relied on counsel's advice in each matter when completing the schedules.  The debtor's reasonable reliance on the advice of counsel therefore negated any inference of fraudulent intent - an essential element of the cause of action.

Counsel Not "Compelled" to Turn Over Files of Former Bankruptcy Fraud Client for Habeas Petition

The U.S. District Court for the District of Minnesota recently denied a motion to compel a bankruptcy fraud defendant's former attorney to turn over his case file to assist the former-client in preparing an anticipated habeas petition. 

Bryan S. Reichel was convicted by a jury of wire fraud and bankruptcy fraud in November 2016.  He was sentenced June 2017. Reichel appealed, and the U.S. Court of Appeals for the Eighth Circuit affirmed the convictions and sentence in December 2018. Reichel recently moved for a court order compelling his former court-appointed defense counsel to provide him with the case file.  The district court denied the motion in United States v. Reichel, Case No. 14-cr-0298 (WMW/FLN) (D. Minn. Feb. 11, 2020) (available here).

The court held that while it is mindful of certain ethical obligations that may be implicated by Reichel's request (ABA Standards of Criminal Justice, Defense Function Standards and Commentary and Minnesota Rules of Professional Conduct), ethical obligations do not vest the court with authority to compel the production from a former attorney of the case files.

Bankruptcy Judge Makes Criminal Referral of Serial Filer Who Duped Counsel into Filing Case in Ex-Wife's Name

A serial bankruptcy filer was criminally referred to the U.S. Attorney's Office in the Northern District of Texas in connection with an alleged and convoluted series of bankruptcy filings in his own and his ex-wife's name in order to stay pending foreclosure proceedings.  U.S. Bankruptcy Judge Gernigan's memorandum opinion sorting out the facts and making the criminal referral is available here.

According to the court, Gabriel Santos, who had filed bankruptcy three times, was barred from filing bankruptcy for 180 days after having his most recent chapter 13 case dismissed with prejudice. To work around the bar, Santos sought to file bankruptcy in his ex-wife's name, without a power of attorney or any other form of authorization, to prevent imminent foreclosure on his house. He falsified emails purportedly from his ex-wife authorizing the bankruptcy and sent them to his attorney the day before the scheduled foreclosure.  Santos also brought to counsel $3,500 cash.  Counsel filed a chapter 13 petition, schedules, and statement of financial affairs using Mrs. Ramos's name and social security number without obtaining a single wet signature.  Santos said his ex-wife was out-of-town and unavailable to talk to counsel on the telephone—yet, somehow, she was supposedly able to take credit counseling from a remote location and email counsel a purported profit and loss statement for a business. The attorney decided to forge Mrs. Ramos's electronic signature at least six times on documents filed with the court—allegedly assuming, in good faith (according to the court), that he had her permission—via her ex-husband—to do so.

Eventually, the chapter 13 trustee filed a motion to dismiss the case and counsel, in an attempt to undo his mistake, filed a motion to expunge on behalf of Mrs. Ramos.  After a hearing, the bankruptcy court declined to expunge the case, lest evidence of potential bankruptcy fraud might be eliminated.  Instead, the court directed the chapter 13 trustee to submit an order of dismissal.  The bankruptcy court determined that Santos not only abused the bankruptcy system but also manipulated counsel assisting Santos in what appeared to be a scheme to commit bankruptcy fraud and identity theft against his ex-wife.  As a result, Judge Gernigan referred the matter to the U.S. Attorney for further inquiry.

Disputed Plea Agreement Not Enforceable in Bankruptcy Fraud Case

A recent case that provides great practical lessons both for counsel and bankruptcy criminal defendants denied a defendant's motion to dismiss an indictment under circumstances where an alleged plea agreement on misdemeanor charges could not be proven and was never accepted by the court.

In United States v. Welch, No. 4:19-CR-00278-DCN (April 7, 2020), the defendant filed a bankruptcy petition and later was accused of concealing hundreds of thousands of dollars in assets during the case.  According to Welch, he received a target letter from the U.S. Attorney's Office.  His attorney began investigating the case and negotiated with the government a misdemeanor plea agreement.  In the ensuing time period, a discovery package arrived but no plea agreement.  Nine months later, Welch was indicted on two counts of bankruptcy fraud and two counts of concealing assets in his bankruptcy case.  He moved to dismiss the indictment on the ground that the government reneged on the alleged plea agreement or in the alternative to enforce the agreement and reduce the charges to a misdemeanor offense.  The government opposed the motion arguing (1) there was no plea agreement and (2) if there was an agreement it wasn't binding because it was never accepted by the court and the defendant did not detrimentally rely on it.

The court credited the government's position and denied the motion.  The court held there was insufficient evidence that a plea agreement was negotiated, agreed upon and drafted.  Welch provided no supporting documentation, declarations, or affidavits.  He could have provided an affidavit himself, or sought one from the negotiating attorney or prosecutor but didn't.  And he could have provided attached email negotiations as exhibits, but didn't.  On the record, the court had only alleged communications from two attorneys formerly involved in the case which amounted to inadmissible hearsay.  Without adequate admissible evidence of the plea agreement, dismissal of the indictment was not warranted. 

Interested readers are referred to the full opinion here for the court's treatment of the detrimental reliance issue, which the court need not have reached since it found no evidence for an agreement in the first place.

 

Third Circuit Remands For Resentencing Case of Bankruptcy Fraud Defendant - District Court Failed to Explain Sentence

The Third Circuit recently remanded the case of a bankruptcy fraud defendant for re-sentencing on the ground that the district court failed adequately to explain how it applied the statutory sentencing factors in 18 U.S.C. 3553(a) and failed to explain it's ruling on the defendant's objection to the restitution amount.  The unpublished decision in United States v. Jackson, No. 19-1579 (3rd Cir. March 30, 2020) (slip op.) (here).

Michael Jackson was convicted following a plea to 30 counts of criminal conduct including making false statements in relation to a bankruptcy proceeding (18 U.S.C. 152(3)) and bankruptcy fraud (18 U.S.C. 157(1)).  The district court sentenced him to 145 months imprisonment and ordered him to pay $1,567,275.25 in restitution.  During sentencing, Jackson argued that he was entitled to a downward variance from the U.S. Sentencing Guidelines range so he could be released from prison while young enough to earn money to repay his victims.  The district court neither responded to the argument nor recited any particular section 3553(a) factor in explaining its sentence.  While counsel did not object, the failure adequately to explain application of the statutory factors was plain error in the view of the Third Circuit and necessitated remand.

The appellate court found a second error in how the district court handled Jackson's objection to a portion of the restitution order.  Jackson had raised two objections to the restitution amount, one to a $175,000 portion of the order and a second objection to a $74,500 portion of the order.  The district court granted the first objection but as the Third Circuit noted on appeal, the record "offers no other indication that the District Court had even considered Jackson's second objection and the arguments made in support thereof."  Even the government conceded that failure to explain was plain error.  Accordingly, the Third Circuit remanded the case for resentencing.

Former Uber Engineer Under Indictment Requests Bankruptcy Court Approval to Retain Special Criminal Counsel

Former Uber Technologies engineer Anthony Scott Levandowski has requested court approval in his chapter 11 bankruptcy case to employ a criminal defense firm as special counsel.  Both Google and the Office of the United States Trustee (UST) filed replies.  A hearing on the motion is scheduled for May 21. 

Levandowski has been embroiled in litigation over theft of trade secrets allegations since he left Google in 2015 to start a self-driving truck company.  The company was subsequently acquired by Uber and Uber was then sued by Google (through its autonomous vehicle unit Waymo), who claimed Levandowski stole trade secrets when he left.  Levandowski was not named in the suit but indicated he would invoke his FIfth Amendment privilege if subpoenaed.  Uber fired Levandowski in May 2017 and eventually settled with Waymo for $245 million.  The case was referred to the U.S. Attorney's Office and Levandowski was indicted last August in the Northern District of California on 33 counts of theft and attempted theft of trade secrets, in violation of 18 U.S.C. § 1832. 

Following the indictment, Google won a $179 million arbitration award against Levandowski.  A California superior court judge affirmed the award in March and hours later Levandowski filed for bankruptcy under chapter 11.  By plea agreement on March 19, Levandowski pled guilty to one count theft of trade secrets and negotiated for a limit of $950,000 to any restitution order.  A change of plea hearing and sentencing is schedule for August 4.

So, will the bankruptcy court approve the debtor's proposed retention of special criminal counsel?  As a matter of law, the Bankruptcy Code does not prohibit a debtor from retaining criminal defense counsel to render services in connection with a parallel criminal proceeding.  In fact, I devote an entire chapter to this subject in my legal treatise, Bankruptcy Crimes Law and Procedure. Bankruptcy courts may authorize the retention of criminal counsel under section 329(e) of the Bankruptcy Code when the employment is in the best interest of the estate.  (The retention issue is entirely distinct from whether counsel may be compensated from the estate - a process that requires a separate fee application and which is governed by section 330(a) of the Bankruptcy Code.).

Levandowski argues retaining special criminal counsel is in the best interest of the estate because (i) counsel has negotiated a fixed restitution amount in the plea agreement ($756,499) that will leave more funds available to creditors and (ii) counsel's services are directed to reducing (or eliminating) prison time, leaving the debtor to "work and earn funds that would be estate property."  The application requests an order approving retention, approving a $5 million flat-fee arrangement, and permitting immediate payment of $1.5 million from criminal counsel's client-trust account.

The UST says the application should not be granted until the debtor shows that employment of special criminal counsel for a $5 million flat fee is in the best interest of the estate, and it's too early right now to determine the benefit to the estate of proposed counsel's services.  The UST also argued that Levandowski's application fails to show the reasonableness of the flat fee or of the immediate payment of $1.5 million.  As an aside, it says, payment may be approved only by fee application after notice and a hearing in accordance with section 330(a) of the Bankruptcy Code.

While the Bankruptcy Code does not prohibit the retention by debtors of special criminal counsel, and in fact provides two statutory mechanisms through which the retention may be approved (11 U.S.C. 329(a) and 11 U.S.C. 329(e), bankruptcy courts nearly never authorize such retentions.  The burden under section 329(e) to show that criminal defense services are in the best interest of the estate has proven nearly insurmountable in the cases.  On the present state of the record, Levandowski's application will nearly certainly be denied to the extent of retaining, and immediately permitting payment to, criminal counsel.  As I've written elsewhere, however, the issues of retention and compensation are distinct, although nearly always blurred by the courts.  An indicted debtor has a Sixth Amendment right to retain counsel of his choosing.  A Bankruptcy Court's determination that retention is not in the best interest of the estate simply cannot preclude an indicted debtor from retaining criminal counsel as the constitutional right supercedes the statutory requirement of court approval in bankruptcy.  Of course, an attorney who is retained and renders criminal defense services without complying with the Bankruptcy Code will have no chance of recovering fees from the bankruptcy estate.

Americore CEO Invokes 5th Amendment Privilege in Deposition Amid Accusations of Mismanagement

Grant White, CEO of Americore Holdings LLC, invoked his Fifth Amendment right to avoid self-incrimination during a deposition Thursday before the Official Committee of Unsecured Creditors in his Chapter 11 bankruptcy case.  Americore and its affiliated hospitals filed for chapter 11 protection in the Eastern District of Kentucky in December, 2019.  The United States Trustee earlier filed a motion for the appointment of a chapter 11 trustee or an examiner.  The motion alleged that White was mismanaging the company, had lied to the bankruptcy court, was under civil and criminal investigation and had "inappropriately siphoned money" from affiliated entities.  The motion was joined by the creditors committee and one of the debtor in possession's largest debt holders.

 

Deloitte report studying link between bankruptcy and fraud available

The Deloitte Forensic Center and its Reorganization Services Group has produced the findings of a report that studied the correlation between bankruptcy and fraud.  The primary question examined was whether the increased scrutiny that follows a company's bankruptcy filing leads to more incidents of fraud claims as compared to companies that have not filed bankruptcy.    The report is available here.

Among its findings:

·         Companies filing for bankruptcy protection are three times more likely than non-bankrupt companies to face enforcement action by the SEC relating to alleged financial statement fraud.

·         Companies that were issued financial statement fraud-related SEC Enforcement Releases were more than twice as likely to file bankruptcy protection as those not issued one.

·         Approximately one in seven financial statement fraud SEC Enforcement Releases issued to companies that filed for bankruptcy protection were issued prior to their bankruptcy filings. These situations may provide a warning signal of potential bankruptcy filing.

·         Bankrupt companies receiving SEC Enforcement Releases were twice as likely as non-bankrupt companies to have more than 10 alleged financial statement fraud schemes – and at least 1.5 times more likely to have six to 10 alleged fraud schemes than non-bankrupt companies.

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.