Criminal Consequences of Concealing Assets in Bankruptcy

New York Law Journal

JUNE 2, 1998

OUTSIDE COUNSEL

By Paul Hollender

Clients often have misconceptions when it comes to "pre-bankruptcy planning".

For example, a client advised that her Florida Condo is property of the bankruptcy estate, responded, "But who will know?" A client who learned he could only retain $7,500 from an auto accident, remarked, "Well, that won't be settled for years, we don't have to include it."

And some clients, when asked about additional bank accounts their name, disclose that they have joint savings accounts that are not "really" in their name.

Lawyers may be aware that concealment of assets or the filing of false schedules, or giving false testimony in a bankruptcy case may be grounds for denial of discharge.

That is exactly what happened to one local businessman. Based upon his lawyer's advice, he failed to disclose the existence of certain asset transfers before filing for bankruptcy, failed to list other assets, and scheduled a mortgage which may not, in fact, have been supported by any consideration (other than the desire to shelter substantial equity in the debtor's residence).

Another local businessman failed to disclose an active personal injury case in his bankruptcy schedules. When the settlement was reported in the newspaper, an irate creditor reported it to the bankruptcy trustee, who commenced an adversary proceeding against the debtor and his attorneys for turnover of the money to the bankruptcy estate.

In this situation, since the personal injury attorneys had knowledge of the bankruptcy case prior to distribution of the money to the debtor, they had potential personal liability. It should be pointed out, however, that the absence of knowledge of the bankruptcy would not impact on the fact that these proceeds belonged to the trustee.

What most people, attorneys included, fail to recognize is that conduct which could give rise to a denial of discharge, could also be a crime, punishable by a $5,000 fine and five years imprisonment for each incident.

Under U.S. Code, Title 18, the following bankruptcy crimes are enumerated:

    • concealing property of a bankruptcy estate
    • falsely testifying at a creditors meeting or court proceeding
    • filing false bankruptcy schedules
    • filing a false proof of claim
    • offering or receiving a bribe
    • fraudulently transferring or concealing property (either before or after bankruptcy filing)
    • concealing, destroying, mutilating, changing or withholding records.
    • embezzlement of bankruptcy assets or secreting of documents by any person involved in a bankruptcy estate. This includes an attorney, a trustee, a Chapter 11 debtor-in-possession, or other person involved in post-petition estate administration
    • self-dealing by a trustee or debtor-in-possession
    • refusal by a trustee or debtor-in-possession to provide reasonable access to documents or accounts
    • entering into an undisclosed fee arrangement for attorneys (or other) fees to be paid from property of the bankruptcy estate
    • conduct by a "bankruptcy petition preparer" (other than the debtor's attorney or an employee of that attorney), which results in dismissal of a debtor's bankruptcy case
    • filing a bankruptcy petition for the purpose of perpetrating a fraudulent scheme
    • filing a document in bankruptcy case for the purpose of perpetrating a fraudulent scheme
    • making a false or fraudulent representation, claim or promise in a bankruptcy case, or in a case falsely asserted to be pending
    • concealment of property or impending an investigation relating to liquidation of a bank by the RTC, the FDIC, or like conservator or liquidating agent.
  • The bankruptcy judge, the case trustee, or the U. S. Trustee has authority to refer suspected bankruptcy crimes to the U.S. Attorney's Office.

    Recently, a new emphasis has been placed on investigation of bankruptcy an informal bankruptcy fraud working group has been assembled in the U.S. Attorneys Office. The group consists of representatives from the Office, the FBI and the Inspector General of the Post Office. In the past, these cases have been given low priority, but the climate seems to have changed.

    A QUESTION OF INTENT

    A key element to prosecuting someone under these provisions can be whether they acted intentionally and fraudulently, or merely innocently.

    In a recent Ninth Circuit Case,1 the debtor had been convicted of making false statements and omitting information on his bankruptcy schedules.

    Two weeks before filing bankruptcy the debtor transferred a 13-year old dodge van to his daughter; a lease to a Cadillac to another daughter, and ownership of a life insurance policy to his wife (after having just completed drawing out the policy's full loan value, which was deposited in a bank account under his grandson's name).

    Post-petition, the debtor filed an insurance claim for a theft, listing items claimed to be worth $21,000, with acquisition dates pre-dating the bankruptcy petition, but which had not been listed in the bankruptcy schedules.

    The court heard evidence of a substantial firearms collection which had not been scheduled and a Rolex watch likewise not disclosed.

    Although the jury convicted the debtor of various bankruptcy crimes, the Ninth Circuit reversed and remanded for a new trial, since it found the jury was likely swayed by impermissibly allowed testimony of the debtor's attorney, which was used to show the debtor's intent.

    At the criminal trial, debtor's bankruptcy counsel testified (after the trial counsel's objection on the basis of attorney-client privilege was overruled) that he advised his client that he was signing the schedules under penalty of perjury. The appellate court concluded that the trial court erroneously compelled the attorney's testimony. The attorney-client privilege is a two-way street, protecting both the client's communications to the attorney and the attorney's responses. When the attorney's communications go beyond the ministerial role as a messenger of factual public information, and reach the level of giving legal advice, those communications are protected.

    Reviewing the balance of the evidence, the court concluded that the debtor's defense of "ignorance, mistake or stupidity" could be plausible, the attorney's testimony "almost certainly sealed [the debtor's] fate in the eyes of the jury." Accordingly, the matter was sent back for a new trial.

    Notwithstanding the reversal, the case is instructive on the types of typical debtor conduct which could give rise to an indictment. Even though an attorney might not be called upon to testify against his client, the client's intentional omission of relevant information regarding transfers, and suspicious pre-and-post-petition conduct, are likely to give rise to criminal consequences.

    Furthermore, although not overtly brought into play in this case, the hidden question was: what did the attorney know about the concealed assets? If he was aware of, or worse, directed those transfers to be made, the unanswered question is did the attorney put his license on the line to help his client?

    1) United States v. Bauer 132 F3rd 504
    (Dec. 22, 1997)

    Paul Hollender, a member of the firm of Corash and Hollender, PC, is a Board Certified (ABBC) Bankruptcy Attorney, with offices in Staten Island, Manhattan, and North Brunswick, N.J.

    This article is reprinted with permission from the June 2, 1998 edition of the New York Law Journal © 1998 NLP IP Company.

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