A Study on Bankruptcy Crime Prosecution Under Title 18: Is the Process Undermining the Goals of the Bankruptcy System?

• Publication year: 2015

A Study on Bankruptcy Crime Prosecution Under Title 18: Is the Process Undermining the Goals of the Bankruptcy System?

Leia Clement

A STUDY ON BANKRUPTCY CRIME PROSECUTION UNDER TITLE 18: IS THE PROCESS UNDERMINING THE GOALS OF THE BANKRUPTCY SYSTEM?

Abstract

The bankruptcy system was devised to provide debtors with a fresh start and to provide creditors equitable shares of assets in satisfaction of the debts they are owed. When debtors, creditors, trustees, or others involved the bankruptcy process compromise the system by committing bankruptcy fraud, the consequences are numerous. In order to protect the important interests of the government and the federal bankruptcy system's paramount interest in preserving the honest administration of bankruptcy proceedings and ensuring a distribution to creditors, the federal bankruptcy system depends upon the United States Trustee Program to identify bankruptcy fraud and upon the United States Attorney's Office to take appropriate action under title 18 of the United States Code.

First, this Comment discusses the laws pertinent to bankruptcy fraud in depth and details the United States Trustee Program and its responsibility to identify and investigate bankruptcy fraud in coordination with the United States Attorney's Office and other law enforcement agencies. Second, it then seeks to provide insight into the factors that may affect whether a case is chosen to be prosecuted or dismissed. Third, it will then provide an analysis of the available data compiled on bankruptcy fraud cases from the fiscal years of 2010 and 2011 with respect to the following factors: specific bankruptcy fraud criminal violations, other United States Code violations, the identity of the defendants, the types of bankruptcy filing involved, the verdicts, and the sentences resulting from guilty verdicts. Finally, this Comment concludes that bankruptcy fraud is not being sufficiently prosecuted independently of other United States Code violations and as a result, creditors, debtors, the government, the court, and the public are harmed and the policies underlying the bankruptcy system are undermined.

Introduction

Bankruptcy fraud is an under prosecuted crime, directly affecting the integrity and honest administration of the entire bankruptcy system. The

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principal factor in determining whether a bankruptcy fraud crime is prosecuted is whether it accompanies a general fraud prosecution, irrespective of the merits of the bankruptcy fraud case itself. This comment examines bankruptcy cases involving bankruptcy fraud to argue that bankruptcy fraud is under prosecuted. As revealed in the study, bankruptcy crimes are typically not prosecuted independently of non-bankruptcy crimes. Despite acknowledgement by the federal government that bankruptcy fraud is widespread, bankruptcy fraud is not widely prosecuted.

Part I.A of this Comment will first present a discussion of the four categories of bankruptcy crime as defined under §§ 152-157. Then, in Parts I.B and C, it will proceed to discuss the current system utilized by the United States Trustee Program for identifying fraud, abuse, and error, the process for making referrals to the United States Attorney's Office, and finally the rate and extent of prosecution of bankruptcy fraud. In Part II, this Comment will present a study based on the cases the United States Attorney's Office chose to prosecute in the fiscal years of 2010 and 2011 and will analyze the variables that were determined by this study to have the greatest influence on whether a case was prosecuted. Finally, based on the results of this study, this Comment will argue that bankruptcy fraud is not being prosecuted independently of non-bankruptcy related crimes and will briefly discuss the potential effects failure to prosecute may have on the public, the government, and the policies underlying the bankruptcy system.

I. Background

A. An Introduction to Bankruptcy Crimes Under Title 18 of the United States Code

The federal bankruptcy system "depends on full disclosure by debtors, creditors, and professionals in order to resolve disputes and to distribute money and property."¹ The provisions in title 18 were enacted "to preserve honest administration in bankruptcy proceedings and to ensure the distribution to creditors of as large a portion of the bankrupt's estate as possible."² These provisions "were enacted to serve the important interests of the government,

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not merely to protect individuals who might be harmed by the prohibited conduct."³ The objectives of bankruptcy law, to provide the debtor with a fresh start, to provide equitable distribution to creditors, and to serve the important interests of the government, are frustrated when participants in the process engage in dishonest activity.⁴ In order to protect these important interests, the federal bankruptcy system depends upon the United States Trustee Program to identify bankruptcy fraud and abuse and to prosecute it.⁵

The United States Code provides 18 U.S.C. §§ 152-157 to combat bankruptcy crime and protect the important interests of both private citizens and the government.⁶ These six sections and their sub-parts can be broken down into four general categories of bankruptcy crimes.

The first category of bankruptcy crime involves the concealment of assets.⁷ This often occurs when a debtor or his attorney seeks to avoid forfeiture of certain assets to the bankruptcy estate.⁸ The second category encompasses intentionally filing false or incomplete forms.⁹ The first and second categories of crimes often occur in conjunction in that both categories are implicated when a debtor or his attorney conceals assets and fails to include the concealed assets in the debtor's financial schedules.¹⁰ The third category is composed of crimes attributed to filing bankruptcy numerous times within a specific time frame and to filing bankruptcy concurrently in several states.¹¹ Finally, the fourth category involves bribery and extortion of court-appointed trustees and other parties.¹² Together, these provisions "attempt to cover all the possible methods by which a bankrupt or any other person may attempt to defeat the

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Bankruptcy Act through an effort to keep assets from being equitably distributed among creditors."¹³

These provisions seek to protect the economy and court system from the damaging consequences that result from bankruptcy crime.¹⁴ There are at least three social and economic consequences that result from bankruptcy crime. First, bankruptcy crime affects tax revenues in both federal and state governments.¹⁵ Second, bankruptcy crime causes the costs of lending to increase.¹⁶ Lending costs increase when a lender suffers a decrease in the return on investment because it incurs costs that may not already be factored into the cost of lending money.¹⁷ As lenders learn that they are absorbing losses due to frequent bankruptcy crimes, they may increase lending costs to offset the decreased return on investment.¹⁸ As a result, these costs are then passed on to borrowers.¹⁹ Third, prevalent fraud has the potential to undermine public confidence in the integrity of the bankruptcy system.²⁰

B. Catching the Crime

The United States Trustee Program is the division of the United States Department of Justice that seeks "to promote the efficiency and protect the integrity of the Federal bankruptcy system."²¹ The U.S. Trustee oversees the conduct of all parties involved in bankruptcy proceedings and all administrative functions in order to "further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code."²² The U.S. Trustee also works with the Office of the United States Attorney, the

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Federal Bureau of Investigation, and other law enforcement agencies to identify and investigate bankruptcy crime and abuse.²³

In general, jurisdictions allow a trustee either to report directly to the United States Attorney's Office and furnish the United States Trustee with a copy of the crime report or to coordinate with the United States Trustee, who may then forward the report to the United States Attorney.²⁴ After inquiring into the facts of the report, the United States Attorney may present the matter to a grand jury or may "decide that the ends of public justice do not require investigation or prosecution."²⁵

The United States Trustee Program currently has four primary methods of identifying bankruptcy fraud, abuse, or error: (1) private trustees review bankruptcy cases; (2) the United States Trustee Program field offices review bankruptcy cases; (3) the United States Trustee Program receives tips from persons who "could have a grievance with the debtor or who might be offended by the debtor's behavior and misuse of the bankruptcy system"; and (4) the United States Trustee Program performs debtor audits.²⁶

1. The Primary Methods of Identifying Bankruptcy Crime

a. The Private Trustees' Review of Case Information

Private trustees have a number of duties under 11 U.S.C. § 704.²⁷ In chapter 7 cases, the trustee has a duty to collect and liquidate the property of the debtor's bankruptcy estate.²⁸ In chapter 13 cases, the trustee must fulfill the duties of § 704(a)(2)-(9)²⁹ as well as evaluate and assist in the performance of

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the debtor's repayment plan.³⁰ Trustees, under both chapters, also have a duty to investigate the financial affairs of the debtor and to report potential bankruptcy crime to the Office of the United States Attorney.³¹ Because trustees have these duties to oversee the financial affairs of each case assigned to them, they are potentially better able than other parties involved in the bankruptcy process to identify and report bankruptcy crimes.³²

However, these trustees review all documentation manually and because none of the documentation is data-enabled for a system to detect key indicators of bankruptcy crime, trustees may be forced to focus their...