Fifth Amendment Privilege in Bankruptcy

JurisdictionUnited States,Federal
CitationVol. 76
Publication year2021

76 Nebraska L. Rev. 497. Fifth Amendment Privilege in Bankruptcy


Craig Peyton Gaumer* Charles L. Nail, Jr.**

Truth or Consequences: The Dilemma of Asserting the Fifth Amendment Privilege Against Self-Incrimination in Bankruptcy Proceedings


I. Introduction 498

II. Overview of Bankruptcy Law 500

III. Overview of the Fifth Amendment 514

IV. Corporations 517

V. Documents 520

VI. Invoking the Privilege 530

VII. Waiver 535

VIII. Adverse Inference 540

IX. Other Negative Consequences 545

X. Stay of Bankruptcy Proceedings 553

XI. Immunity 557

XII. Conclusion 560



The Fifth Amendment to the United States Constitution provides that "[n]o person . . . shall be compelled in any criminal case to be a witness against himself." An individual may assert this privilege against self-incrimination at any stage in a criminal or a civil proceeding, including a bankruptcy proceeding.(fn1)

The primary purpose of the privilege against self-incrimination is to "avoid confronting the witness with the `cruel trilemma' of self-accusation, perjury or contempt."(fn2) In a criminal case, an individual who successfully invokes the privilege need not choose among these equally unattractive alternatives. He may remain silent, leaving the government to meet its burden of proof without his forced assistance.(fn3)It is of no concern that the individual may be guilty of the offense with which he is charged.(fn4) "[It is] better for an occasional crime to go unpunished than that the prosecution should be free to build up a criminal case, in whole or in part, with the assistance of enforced disclosures by the accused."(fn5)

In a civil case, however, an individual who asserts her Fifth Amendment rights may be confronted with an additional dilemma. If she chooses to remain silent to avoid potential criminal liability, she may jeopardize her civil action or defense. On the other hand, if she testifies in support of her civil action or defense, she may expose herself to the risk of making potentially incriminating statements that the government could use against her in a subsequent criminal proceeding.


This dilemma frequently arises in bankruptcy cases. The "right to remain silent" is often in direct conflict with a bankruptcy debtor's obligation to disclose the particulars of his financial affairs.(fn6) "[T]he bankruptcy process places greater emphasis on full disclosure of an individual's financial affairs for the benefit of all creditors of the debtor's estate and thus affords the debtor only a thin shield against wide-ranging discovery."(fn7)

Such a conflict may arise in connection with, among other things, the preparation and filing of the debtor's schedules and statements;(fn8)the debtor's testimony at the meeting of creditors;(fn9) the debtor's testimony at any examination ordered by the court;(fn10) the debtor's response to a complaint either to determine the dischargeability of a debt(fn11) or to deny the debtor a discharge;(fn12) the debtor's efforts to confirm a plan of reorganization;(fn13) the debtor's preparation and filing of periodic operating reports;(fn14) the debtor's response to a motion to convert or dismiss the case;(fn15) and the debtor's response to a motion to appoint a trustee or examiner(fn16) or to remove the debtor as debtor in possession.(fn17)

The debtor is not the only party protected by the Fifth Amendment privilege. The same sort of conflict between the right to remain silent and the bankruptcy process also may arise in connection with such other matters as a Chapter 7 trustee's response to a motion to remove the trustee(fn18) or an objection to a creditor's proof of claim.(fn19)As the number of bankruptcy cases filed in the United States continues to hover near the one-million-a-year mark, simple statistics suggest that the number of persons involved in the bankruptcy process with potential criminal problems will increase. These bankrupt individuals and third parties who bring a history of questionable conduct into bankruptcy proceedings not only must contend with credi


tors and bankruptcy trustees who might pursue civil remedies against them, they also likely have to contend with the United States Department of Justice, which has stepped up its efforts to combat criminal bankruptcy fraud.(fn20) Under the circumstances, bankruptcy practitioners are well-advised to become more familiar with the nuances of the Fifth Amendment.

To assist them in this regard, this Article discusses both the manner in which issues regarding the Fifth Amendment privilege against self-incrimination may arise in bankruptcy cases and the many potential consequences of asserting the privilege. Parts II and III provide a general overview of the bankruptcy process and the Fifth Amendment, respectively. Part IV examines whether and to what extent the privilege against self-incrimination protects corporations and their directors, officers, and shareholders. Part V offers a similar examination of the extent to which the Fifth Amendment protects against the compelled production of documents. Parts VI and VII address the closely related topics of invocation and waiver of the privilege. Part VIII analyzes what may well be the most serious potential consequence of invoking the privilege-the court's drawing an adverse inference against the individual choosing to remain silent. Part IX analyzes other, at least arguably, less serious potential consequences when the court draws such inferences. Part X discusses the question of whether a bankruptcy court can and should stay bankruptcy proceedings pending the outcome of criminal proceedings against an individual who invokes the privilege against self-incrimination during a bankruptcy proceeding. Finally, Part XI deals with immunity, an often suggested but seldom granted means of resolving the inherent conflict between the individual's right to remain silent and other parties' interests in full disclosure.


The dramatic increase in the number of bankruptcy filings over the past ten years has correspondingly produced an increase in the number of attorneys who represent clients in bankruptcy cases. Participants in the bankruptcy process thus may range in experience from recent law school graduates and sole practitioners who have had limited contact with the bankruptcy system to bankruptcy specialists who devote most, if not all, of their time to the practice. This Part serves as both an introduction to bankruptcy law for less experienced practitioners and a refresher course on the historical purpose and current


operation of the American bankruptcy system for more seasoned attorneys.

The various American bankruptcy systems that have been created by Congress over the past two centuries are the products of two distinct provisions of the United States Constitution. Article I grants Congress the express authority to create courts inferior to the United States Supreme Court.(fn21) Article I also confers the power to establish uniform laws on the subject of bankruptcies.(fn22) Beginning in 1800, Congress has exercised these powers to create five successive systems of bankruptcy laws: the Bankruptcy Act of 1800;(fn23) the Bankruptcy Act of 1841;(fn24) the Bankruptcy Act of 1867;(fn25) the Bankruptcy Act of 1898;(fn26) and the Bankruptcy Reform Act of 1978,(fn27) which created the current bankruptcy system.

Article I, Section 8, Clause 4 of the Constitution empowers Congress to pass uniform laws on the subject of bankruptcy, but provides no definition for the concept of "bankruptcy." To understand the boundaries of the bankruptcy power, it is therefore necessary to appreciate the historical nature and development of bankruptcy law.(fn28)


To the extent that bankruptcy is considered simply a process whereby a person is released from her debts, its genesis can be traced to Biblical times. While the concept of discharging the downtrodden from their debts may have Judeo-Christian origins, it was given serious sanction in civil law(fn29) by the Romans. During the reign of Julius Caesar, the Romans enacted a law called "Cessio Bonorum," or "the law relating to assignments for the benefit of creditors."(fn30) The term "bankruptcy" descends from statutes of fourteenth century Italian city-states known as "banca rupta," a term that referred to a "medieval custom of breaking the bench of a banker or tradesman who absconded with property of his creditors."(fn31)

Yet, as is the case with much of America's constitutional jurisprudence, the origins of the Bankruptcy Clause can be traced to English law.(fn32) The first English bankruptcy laws, enacted in 1542 during the reign of King Henry VIII, were quasicriminal in nature.(fn33) The Statute of Bankrupts, enacted during the reign of Queen Elizabeth in 1570, applied only to merchants and was punitive in nature.(fn34) En-glish bankruptcy laws became more humane as time passed. The first law granting a debtor a discharge of debts owing at the time of filing, with certain conditions, was enacted during the rule of Queen Anne in the eighteenth century.(fn35)


The subject of bankruptcy law was discussed only briefly at the Constitutional Convention that met in Philadelphia during the summer of 1787. The Convention was convened to revise the Articles of Confederation, but instead produced the current United States Constitution.(fn36) The topic, however, did come up later.

On August 29, 1787, Charles Pinkney proposed adding the following clause to the new constitution: "to establish uniform laws upon the subject of bankruptcies, and respecting the damages arising on the protest of foreign bills of exchange."(fn37) Pinkney's suggestion was referred to a subcommittee,(fn38) which issued a favorable report on the...

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