16.3 Bankruptcy Crimes

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

16.3 BANKRUPTCY CRIMES ⁸⁰

Congress enacted Chapter 9 of the Bankruptcy Code to police the conduct of parties, particularly but not exclusively "debtors," that choose to seek the benefits of or otherwise participate in proceedings and cases under title 11 of the United States Code. ⁸¹ Pursuant to 18 U.S.C. § 151, "the term 'debtor' means a debtor concerning whom a petition has been filed under Title 11." The discussion below will demonstrate that various "participants" in a bankruptcy case—attorneys, creditors, third-party asset purchasers, and others—also may fall within the applicability of the criminal statutes found in title 18 of the United States Code.

16.301 Criminal Intent. Before reviewing the particular bankruptcy crimes, it is important for the bankruptcy practitioner, who may not customarily advise on matters relating to criminal conduct, to keep in mind a "law school" concept that materially distinguishes this area of the law from all others: mens rea or criminal intent—the notion that the criminal suspect has a "guilty mind." For example, among the statutory elements of the crimes described in section 152 is that a person charged with criminal conduct specified therein must have done so "knowingly and fraudulently." ⁸² The Fifth Circuit Court of Appeals upheld a jury instruction stating that "[a]n act is done 'knowingly' when that act is done voluntarily and intentionally, not

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because of mistake or accident." ⁸³ Fraudulent intent is typically established by circumstantial evidence. ⁸⁴ Unfortunately, criminal defendants in bankruptcy crime cases too often try to undermine this element by suggesting that all of the conduct alleged by the prosecution was the result of advice of counsel. ⁸⁵ This inclination to blame someone else appears to continue and has also included bankruptcy petition preparers. ⁸⁶

16.302 Concealment of Assets.

A. Scope of Section 152. 18 U.S.C. § 152 indicates that the statute covers "concealment of assets; false oaths and claims; and bribery." The subparagraphs of section 152 that address conduct that can be summarized as "concealment of assets" provide, in pertinent part, as follows:

A person who—

(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;

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(5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11;

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(7) in personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation,

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or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation;

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shall be fined under this title, imprisoned not more than 5 years, or both. ⁸⁷

The elements of the offense of concealment of assets are: (i) a bankruptcy proceeding existed under title 11; (ii) the defendant concealed interests in property from any creditor or the bankruptcy trustee; (iii) such interests in property belonged to the bankruptcy estate; and (iv) the defendant acted knowingly and fraudulently. ⁸⁸

The overwhelming number of reported decisions concerning bankruptcy crimes involve the interpretation or application of section 152, which covers concealment, false oath, false claims, bribery, fraudulent transfers, and the destruction and concealment of records. In United States v. Ward, ⁸⁹ the collection of proceeds of undisclosed accounts receivable constituted the offense of concealment of assets, regardless of amount. An "easily traceable" transfer can still show intent to conceal under section 152(1). ⁹⁰

B. Construction of Section 152. Failure to list property that is property of the estate on required schedules and disclosures may constitute two separate crimes—concealment ⁹¹ and false declaration ⁹² —even where the offenses involve the same property. ⁹³ In fact, Congress apparently intended

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that section 152 be construed broadly "to cover all of the possible methods by which a debtor or any other person may attempt to defeat the intent and effect of the bankruptcy law through any type of effort to keep assets from being equitably distributed among creditors." ⁹⁴ In United States v. Messner, ⁹⁵ a Chapter 13 debtor's receipt of proceeds of property of the estate after plan confirmation was determined to be a crime under section 152(7). ⁹⁶ In United States v. Wagner, ⁹⁷ the appellate court upheld a conviction of "concealment" under section 152(1) where the former debtor-in-possession changed the locks on certain real property to prevent a Chapter 7 trustee from gaining access after the case was converted from a Chapter 11 proceeding.

C. Money Laundering. The Fourth Circuit has determined that once property is fraudulently concealed, for purposes of the federal money laundering statute, the funds or other property constitute "criminally derived property" such that when that property is used in a "monetary transaction" the participant is guilty of money laundering. ⁹⁸ In Butler, a Chapter 11 debtor apparently received settlement funds from a settlement not approved by the bankruptcy court, which he concealed by transferring the proceeds to a friend who ultimately, through various deposits and cashier's checks, returned a large portion of the money to the debtor to be used to satisfy a large lien against Butler's home.

D. Diverting Proceeds of the Debtor's Accounts Receivable. In a case with a similar name, United States v. Butner, ⁹⁹ the Fourth Circuit affirmed the convictions of counsel for a corporate debtor where the attorney actively participated in diverting the proceeds of the debtor's accounts receivable to an account in his name. In addition to a conviction for violating 18 U.S.C. § 152(1), Butner was also convicted of conspiracy pursuant to 18 U.S.C. § 371.

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` careful where he or she participates in business transactions as a principal as well as counsel. ¹⁰⁰

E. Criminal Responsibility of Corporate Officers, Directors, and Employees of a Debtor. Attorneys engaged to advise potential Chapter 11 debtors should keep in mind that officers, directors, and in some circumstances various employees of a corporate debtor may have criminal responsibility although they are not the debtor themselves. For instance, in United States v. Connery, ¹⁰¹ an attorney was convicted of aiding and abetting the filing of a false claim in a bankruptcy case. Specifically, in-house counsel prepared a back-dated and false corporate resolution to support the charges on a proof of claim being asserted by the creditor against a Chapter 11 debtor.

F. Pre-Petition Schemes. Criminal convictions have also occurred when creditors have been defrauded even though a bankruptcy filing was only possible and not actually filed. ¹⁰² In United States v. Micciche, ¹⁰³ various individuals were convicted of violating section 152 by participating in a pre-petition scheme to "order a large inventory, dispose of that inventory for whatever it would bring, and then disappear." ¹⁰⁴ The prosecutions occurred only after creditors initiated an involuntary bankruptcy. The convictions were for knowingly and fraudulently concealing and transferring assets "in contemplation of bankruptcy and with intent to defeat the bankruptcy law." ¹⁰⁵

G. Period of Limitations. Practitioners should also be aware that concealment of assets is a "continuing offense" and, as such, the period of limitations does not begin to run until the debtor has been discharged or had his or her discharge denied. ¹⁰⁶

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16.303 False Oath. Among the other subparagraphs of section 152 are the following, which set out or define the crime of giving false oath in bankruptcy proceedings:

A person who—

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(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

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shall be fined under this title, imprisoned not more than 5 years, or both. ¹⁰⁷

The elements of the offense of making false oaths are: (i) a proceeding in bankruptcy existed; (ii) the defendant made or caused to be made a false declaration or statement in that bankruptcy proceeding, or in relation to that bankruptcy proceeding; (iii) the declaration or statement related to some material matter; (iv) the declaration or statement was false; and (v) the defendant made the declaration or statement knowingly and fraudulently. ¹⁰⁸

Among the few reported decisions interpreting or applying this statute is United States v. Ellis, ¹⁰⁹ in which the court concluded that omission of requested information is equally prohibited. Similarly, the failure to list transfers of realty to a father-in-law and transfers of cash to a mother were false oath by omission, particularly since the debtor had been told by a former attorney that the transfers would have to be disclosed. ¹¹⁰ Courts have likewise convicted a debtor for failure to list all prior bankruptcy cases (in a

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case where the debtor's admitted purpose in filing the bankruptcy petitions was to delay an imminent sheriff's sale). ¹¹¹

Substantial understatement of current and past income has been held sufficient to establish a crime of false oath. ¹¹² United States v. Rowe ¹¹³ demonstrates just how careful practitioners need to be in representing debtors in bankruptcy cases. That case involved allegations of false oath in Chapter 12 and 13 cases where the debtors did not disclose on...