5-8.1 BANKRUPTCY REFORM ACT OF 1994
The Bankruptcy Reform Act of 1994 made several changes to the criminal bankruptcy sections. The old sections continue to apply to crimes completed before the effective date of the Act, which was October 22, 1994. The new sections apply to all cases begun on or after the effective date. It is an open question as to whether crimes committed after the effective date of the Act in cases that began before the effective date are covered by the old statutes or the new statutes. Until case law resolves the issue, the safest course of action is to use the older of the statutes.No significant changes were made to 18 U.S.C. § 152. The paragraphs were numbered and the United States Trustee was specifically included in the statutory language. Although Congress stated the maximum fine as $5,000 and five years in prison, 18 U.S.C. § 3571 provides the maximum fine will be $250,000 for individuals and $500,000 for organizations.
18 U.S.C. § 153 was changed to extend coverage to more individuals who embezzle funds from estates. The law now includes anyone who has access to property or documents of the estate by virtue of their participation in the administration of the estate in some official capacity. It also, for the first time, specifically covers employees and agents of those who have this access.
18 U.S.C. § 154 was changed to allow the United States Trustee access to documents and accounts relating to the affairs of an estate without the necessity of a court order.
18 U.S.C. § 156 is a new section which prohibits a bankruptcy petition preparer from knowingly attempting to disregard the provisions of title 11 or the Federal Rules of Bankruptcy Procedure if such action results in the dismissal of the case or proceedings. The offense is punished as a misdemeanor. A "bankruptcy petition preparer" is anyone, other than the debtor's attorney or that attorney's employee, who prepares for compensation bankruptcy documents for filing. It should be noted that the Act also provides civil fines and injunctive relief against bankruptcy petition preparers who do not disclose their names, addresses, social security numbers, and their compensation for preparing the documents. 11 U.S.C. § 110.
18 U.S.C. § 157 is the second new section. It creates a felony violation for anyone who devises or intends to devise a scheme or artifice to defraud and, for purposes of executing or concealing the scheme, files a petition under title 11; files a document in a proceeding under title 11; makes a false statement, claim, or promise in relationship to a proceeding under title 11 either before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under title 11.
5-8.2 GENERAL ISSUES
5-8.2.1 Definition of "Knowingly and Fraudulently"
Each section of 18 U.S.C. § 152 requires that the acts be done "knowingly and fraudulently." The term knowingly means that the defendant is aware of his/her act (or failure to act) and that his/her conduct is undertaken voluntarily and intentionally and not because of mistake or accident or other innocent reason. It is not necessary that the government prove the defendant knew that his/her acts or omissions were unlawful.
The term fraudulently means that the conduct was willful or done voluntarily and intentionally and with the intent to deceive, cheat, or defraud. An intent to defraud is accompanied, ordinarily, by a desire or purpose to bring about some gain or benefit to oneself or to cause some loss to some person. See 1 Devitt and Blackmar, Federal Jury Practice and Instructions, § 16.07 (4th ed. 1992).
5-8.2.2 Statute of Limitation
18 U.S.C. § 3282 provides that indictments must be brought within five years of the commission of the crime. However, 18 U.S.C. § 3284 provides that the offense of concealment of assets of a debtor under title 11 is a continuing offense and the five year statute does not begin to run until the debtor is discharged or a discharge is denied. In some cases, this section gives additional time.
When this statute was enacted, a corporation could be granted or denied a discharge in most cases. Under title 11, a corporation no longer receives a discharge. There is no direct case law on what effect this change in title 11 has on section 3284. A literal reading of section 3284 leads to the conclusion that there is no statute of limitations in cases involving a corporate bankruptcy concealment or in the case of an individual who does not receive either a discharge or a denial of a discharge. An individual who dismisses his/her case before receiving a discharge would be in this situation. See U.S. v. Ganaposki, 72 F. Supp. 982 (M.D. Pa. 1947), which held that Congress did not have to set a statute of limitation and, under the clear language of the statute, the debtor did not receive a discharge and, thus, there was no statute of limitation. But see U.S. v. Fraidin, 63 F. Supp. 271 (D. Md. 1945), and Rudin v. U.S., 254 F.2d 45 (6th Cir.), cert. denied, 357 U.S. 930 (1958), which held that the time where the debtor could no longer get a discharge would be used.
The rationale of these cases would indicate that a debtor who dismisses his/her case or does not receive a discharge will either have no statute of limitations for the crime of concealment of assets or will have the statute of limitations begin to run on the date of dismissal or on the last day a discharge would have been possible. The safer course of action is to use the Rudin rationale.
The extension granted by section 3284 only applies to the crime of concealment. No additional time is granted for other offenses, such as false oaths on petitions and schedules, even though the false oath is used to conceal assets. U.S. v. Knoll, 16 F.3d 1313, 1318 (2d Cir. 1994), cert. denied, 115 S.Ct. 579 (1994).
18 U.S.C. § 3293 provides a ten year statute of limitation for the violation of those sections of the Code that deal with financial institutions. This includes section 1014 dealing with false loan and credit applications, section 1344 dealing with bank fraud, and sections 1341 and 1343 dealing with wire and mail fraud.
5-8.2.3 Attorney-Client Privilege
In certain situations, an attorney-client privilege can be waived. The court-appointed bankruptcy trustee may waive the attorney-client privilege of the corporate debtor for communications prior to the declaration of bankruptcy. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 353 (1985). Congress has been clear that the debtor's directors do not have the right to assert the corporation's attorney-client privilege against the trustee. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 350 (1985). Corporate officers cannot assert an individual attorney-client privilege to prevent disclosure of corporate communications with corporation's counsel after the corporation's privilege was waived by the trustee. Matter of Bevill, Bresler & Schulman Asset Management Corporation, 805 F.2d 120, 125 (3rd Cir. 1986).
The chapter 7 trustee of a limited partnership debtor has the authority to waive the attorney-client privilege of the partnership in the case of a criminal bankruptcy fraud trial of a general partner. U.S. v. Campbell, 73 F.3d 44 (5th Cir. 1996).
There is limited authority that a trustee can waive the attorney-client privilege of an individual debtor, where there is no Fifth Amendment claim. In re Williams, 152 B.R. 123 (Bankr. N.D. Tex. 1992). There are no reported circuit court cases holding that a trustee can waive an individual debtor's attorney-client privilege where the debtor is asserting a Fifth Amendment privilege.
Case law support the proposition that no attorney-client privilege attaches to bankruptcy work papers where the information is imparted to bankruptcy counsel for the purpose of assembly into a bankruptcy petition and supporting schedules. This information is intended to be disclosed on documents filed with the court and not held in confidence. U.S. v. White, 950 F.2d 426, 430 (7th Cir. 1991). Likewise, where there is no evidence that a debtor sought legal advice regarding disclosure when the debtor did not reveal certain assets to their bankruptcy counsel, the attorney may disclose the fact that he/she was not told about the existence of such assets without violating the attorney- client privilege. U.S. v. White, 970 F.2d 328, 335 (7th Cir. 1992).
5-8.2.4 Fifth Amendment Privilege
Individual parties may exercise their right against self incrimination under the Fifth Amendment in any proceeding. However, a debtor who has sought the protection of the Bankruptcy Code may risk dismissal of the bankruptcy case for failure to provide relevant information about the estate under a claim of Fifth Amendment protection. In re Connelly, 59 B.R. 421, 448 (Bankr. N.D. Ill. 1986). The debtor may also face denial of a discharge under 11 U.S.C. § 727(a)(4)(d), (5), and (6). The procedure for seeking immunity in order to force a debtor to testify is set out at USTM 5-12.
5-8.2.5 Statutory Penalties
The statutory punishment for violation of 18 U.S.C. §§ 152, 153, and 157 are up to five years imprisonment and a maximum fine of $250,000 for individuals and $500,000 for corporations (18 U.S.C. § 3571). Practically, however, the sentencing guidelines will determine the actual sentence based on the amount of loss, whether court orders were obstructed, the person's role in the offense, and other prescribed factors. See USTM 5-14.
5-8.2.6 Protective Orders/Confidentiality Agreements
A party may request a protective order or confidentiality agreement to deny criminal investigators, including grand juries, access to evidence developed in a civil proceeding. Requests directed to the United States Trustee for protective orders should be reported to the General Counsel immediately. Case trustees should be made aware that the Program's policy is not to enter into such agreements and should be advised to immediately contact the United States Trustee if any such agreement is requested in one of their cases.
5-8.3 OVERVIEW OF 18 U.S.C § 152 VIOLATIONS
This section sets forth the most common violations that may be committed by anyone who attempts to defeat the purposes of the Bankruptcy Code by fraudulent means. The section is subdivided into nine separate paragraphs. Each paragraph describes a separate crime as follows:
- The concealment of property belonging to the estate of the debtor.
- The making of false oaths or accounts in or in relation to any case under title 11.
- The making of a false declaration, certificate, verification, or statement under the penalty of perjury in or in relation to any case under title 11.
- The making of false claims against the estate of a debtor.
- The fraudulent receipt of property from a debtor.
- Bribery, extortion, or forbearance in connection with a case under title 11.
- Transfer or concealment of property in contemplation of a case under title 11, or with the intent to defeat the provisions of title 11.
- The concealment or destruction of documents relating to the property or affairs of the debtor.
- The withholding of documents from the administrators of a case under title 11.
5-8.3.1 Fraudulent Concealment of Property, 18 U.S.C. § 152(1)
"[A person who] 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: [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
5-8.3.1.1 Elements of the Offense
The government must prove:
- The charged bankruptcy was in existence at the time of the offense.
The defendant fraudulently concealed property of the estate. The term concealed means any act done by the defendant that hides the existence of property from anyone entitled to know of it. The defendant does not have to physically hide the property. Failure to list property on schedules is sufficient to conceal it from a trustee.
Property and assets are defined very broadly. The terms include both legal and equitable interests in both tangible and intangible property.
The property belongs to the estate. Even if the status of an asset is doubtful, it is the duty of the debtor to disclose its existence for a final determination by the court. Even if the property is ultimately determined not to be property of the estate under the technical rules of the Bankruptcy Code, it still may be property of the estate for the purposes of section 152. See U.S. v. Cherek, 734 F.2d 1248, 1254 (7th Cir. 1984), cert. denied, 471 U.S. 1014 (1985). Under these circumstances, however, proof of knowing and fraudulent intent may be difficult.
5-8.3.2 False Oath, Declaration, Account, Verification, or Statement, 18 U.S.C. § 152(2)
5-8.3.2.1 Elements of the Offense"[A person who] knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11 [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
- The charged bankruptcy was in existence at the time of the false oath or account.
- The statement was under oath.
- The statement was to a material fact.
The question of whether the statement concerns a material fact is a question of fact for the jury. The Supreme Court case of U.S. v. Gaudin, 115 S. Ct. 2310 (1995), changed the long-standing rule that materiality was a question of law for the court. It is not necessary to show anyone was harmed by the false statement. It is sufficient that the false statement bears a reasonable relationship to a bankruptcy matter.
- The statement was false.
The government must prove the statement was known by the defendant to be untrue when made. A non-responsive, truthful answer to a question may not be false even if made with the intent to mislead. Bronston v. U.S., 409 U.S. 352, 359 (1973).
A person making the false statement may avoid prosecution if the statement is unequivocally recanted before it is apparent that its false nature has or will be discovered.
To avoid the rule that two witnesses are required to prove this offense where the defendant falsely testifies or produces other false information before a court, 18 U.S.C. § 1623, may be used. This section is discussed at USTM 5-9.13.
5-8.3.3 False Declarations, 18 U.S.C. § 152(3)
"[A person who] 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 [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
The elements of the offense of a false oath (discussed at 5-8.4.2.1) apply to this section as well. The only difference is that the false declaration must be made under the penalty of perjury as provided by 28 U.S.C. § 1746. This section was added to allow prosecution where the statement is not under oath, but does have the statement above the signature or on a certificate that it is made under the penalty of perjury as provided by 28 U.S.C. § 1746.
The United States Trustee should consider using the statement "under the penalty of perjury as provided by 28 U.S.C. § 1746" on any important statements or reports filed in connection with bankruptcy cases.
5-8.3.4 False Claims, 18 U.S.C. § 152(4)
"[A person who] knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity, or as or through an agent, proxy, or attorney . . . [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
A claim is a legal document submitted to the court by a creditor of the entity that has filed bankruptcy. It is immaterial whether the claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, mature, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. U.S. v. Connery, 867 F.2d 929, 934 (6th Cir. 1989).
5-8.3.4.1 Elements of the Offense
5-8.3.5 Fraudulent Receipt of Property, 18 U.S.C. § 152(5)
"[A person who] 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, [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
This provision is very similar to 18 U.S.C. § 152(1) since it also reaches the concealment of assets from the trustee. The paragraph is designed specifically to reach defendants, including creditors, who assist debtors in concealing assets.
5-8.3.5.1 Elements of the Offense
- The defendant receives a material amount of property from a debtor.
There are no cases that define the term "material amount." In view of statutes which make theft of over $100 a felony, 18 U.S.C. § 641, that amount could be considered material. Other statutes make $5,000 a basis for federal jurisdiction. 18 U.S.C. § 2314.
- Such transfer occurred after the filing of a case under title 11.
Even though a transfer occurs before filing a bankruptcy petition, a conspiracy to violate this section could be charged if overt acts occurred after the filing. Knoell v. U.S., 239 F.16 (3d Cir. 1917).
- The acts were done with the intent to defeat the provisions of title 11.
This element adds little to the statute. In U.S. v. Lawson, 255 F. Supp. 261, 266 (D. Minn. 1966), the court held that this only meant that the act was willful.
5-8.3.6 Extortion and Bribery, 18 U.S.C. § 152(6)
"[A person who] knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 11 [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
5-8.3.6.1 Elements of the Offense
A person who, with criminal intent, attempts to gain anything from a case under title 11 by either acting or forbearing to act.
This is a very broad statute which covers all aspects of bribery and extortion in cases involving title 11. There is no requirement that the act or forbearance of acting be unlawful itself. Acting or not acting with the requisite criminal intent is sufficient. For example, a bidder agreeing to withdraw his/her bid in return for money is covered. U.S. v. Weiss, 168 F. Supp. 728 (W.D. Pa. 1958).
The issue of competing plans being withdrawn in return for payment of fees raises an issue under this statute if full disclosure is not made. U.S. v. Dunkly, 235 F. 1000 (N.D. Cal. 1916). Full disclosure of any offers to act or not act, e.g., compromise claims, would negate any suggestion of criminal intent.
5-8.3.7 Fraudulent Transfer or Concealment, 18 U.S.C. § 152(7)
"[A person who] in a 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, 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 [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
This provision overlaps in many respects with 18 U.S.C. § 152(1). It clearly reaches acts committed before the filing of a bankruptcy petition if done in contemplation of such filing. All concealment and transfers done before filing a bankruptcy petition constitute one offense. After the filing of bankruptcy, each separate act constitutes a separate offense.
The paragraph also expressly reaches transfers of property, as well as the concealment of property. This provision is useful to reach the transfer of funds and property between related persons or corporations just before filing a bankruptcy petition.
This section can reach improper transfers or concealment of assets of a confirmed chapter 11 plan. There is no requirement in this paragraph, as there is in paragraph 1, that it involve property of the estate. The only requirement is that the concealment or transfer of property be in contemplation of, or with the intent to defeat, the provisions of title 11. U.S. v. Messner, 107 F.3d 1448 (10th Cir. 1997).
5-8.3.7.1 Elements of the Offense
Although the paragraph does not state from whom the concealment must be, it is safe to conclude that it must be from someone with an interest in the bankruptcy. The same group listed in 18 U.S.C. § 152(1) would clearly be included.
- The defendant transfers or conceals his/her property or the property of another.
- Such act of concealment or transfer was done in contemplation of a case under title 11 or with the intent to defeat the provisions of title 11.
5-8.3.8 Fraudulent Destruction or Alteration of Documents, 18 U.S.C. § 152(8)
"[A person who] after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor [shall be fined not more than [$250,000], or imprisoned not more than five years, or both.]"
Violations of this paragraph will normally involve violations of other paragraphs of section 152. There is no requirement that the false entries be under oath. The paragraph covers acts done in contemplation of bankruptcy, as well as acts done after filing.
5-8.3.8.1 Elements of the Offense
- Proceedings in bankruptcy were filed, or contemplated and then filed.
- The defendant does one of the acts listed in 18 U.S.C. § 152 with criminal intent.
- The act affects or relates to the property or affairs of a debtor.
Documents or information that would lead to sources of funds or assets or means of reorganizing an estate would be included.
Recording a known fraudulent transaction would be a false entry, as would placing false credits or debits on a company's books.
5-8.3.9 Fraudulent Withholding of Documents, 18 U.S.C. § 152(9)
"[A person who] after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court, or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor, shall be fined not more than [$250,000], or imprisoned not more than five years, or both."
This paragraph will normally be used in connection with other paragraphs charging concealment of assets. A defendant, however, can be convicted of withholding records even if he/she is not convicted of the actual concealment of assets.
5-8.3.9.1 Elements of the Offense
5-8.4 EMBEZZLEMENT AGAINST THE ESTATE
5-8.4.1 18 U.S.C. § 153
"(a) Offense. A person described in subsection (b) who knowingly and fraudulently appropriates to the person's own use, embezzles, spends, or transfers any property or secretes or destroys any document belonging to the estate of a debtor shall be fined not more than [$250,000], imprisoned not more than five years, or both.
(b) Person to Whom Section Applies. A person described in this subsection is one who has access to property or documents belonging to an estate by virtue of the person's participation in the administration of the estate as a trustee, custodian, marshal, attorney, or other officer of the court or as an agent, employee, or other person engaged by such officer to perform a service with respect to the estate."
5-8.4.1.1 Definition of Officer and Custodian
Congress amended this section in October of 1994 specifically to include attorneys and employees of trustees and other administrators of the estate. Even under the old section, however, the term custodian reached anyone who came into custody of property involving an estate because of some official position. It has reached the attorney for the trustee. Jackson v. U.S., 72 F.2d 764 (3d Cir. 1934). It has also reached the treasurer of a debtor under reorganization who was employed with court approval. U.S. v. Lynch, 180 F.2d 696 (7th Cir.), cert. denied, 339 U.S. 981 (1950). See also the definition of custodian in 11 U.S.C. § 101.
Under the old statute, the term officer would reach any professional employed by a trustee and approved by the court, such as an auctioneer. 11 U.S.C. § 327. It would not, however, reach a regular employee such as a secretary or paralegal.
The new statute clearly applies to the attorney for the debtor. It also should reach the debtor in possession under chapter 11. A good argument can be made that such a debtor in possession does have access because of that person's participation in the administration of the estate under court approval. If so, employees of the debtor in possession would also be covered. Until case law resolves this issue, however, a charge under 18 U.S.C. § 152(1) should also be used.
5-8.4.1.2 Elements of the Offense
- A case exists under title 11.
- The defendant is a person involved with the administration of the estate in an official capacity, or is the employee of such a person, as an officer of the court, trustee, marshal, attorney, or custodian.
- The defendant, with criminal intent, uses, steals property of the estate, or secretes or destroys documents of the estate.
- The defendant had access to such property or documents by virtue of the defendant's participation in the administration of the estate.
If property came into the defendant's hands because of an official position, the statute is violated even if it is later determined that the property was not that of the estate. Meagher v. U.S., 36 F.2d 156 (9th Cir. 1929).
5-8.4.2 18 U.S.C. § 645
"Whoever, being a United States marshal, clerk, receiver, referee, trustee, or other officer of a United States court, or any deputy, assistant, or employee of any such officer, retains or converts to his own use or the use of another or after demand by the party entitled thereto unlawfully retains any money coming into his hands by virtue of his official relation, position, or employment is guilty of embezzlement and shall be fined [$250,000], or imprisoned not more than ten years, or both . . ."
"It shall not be a defense that the accused person had any interest in such money or fund."
5-8.4.2.1 Differences from 18 U.S.C. § 153
This statute is in many ways broader than the old version of 18 U.S.C. § 153. There is no requirement that the embezzlement be with fraudulent intent. U.S. v. Sharpe, 996 F.2d 125 (6th Cir.), cert. denied, 114 S. Ct. 400 (1993). Also, the statute provides that even if the defendant had an interest in the property, it is not a defense. This should be useful when a trustee or other professional claims to have just been taking his/her fee up front before receiving court approval.
The statute also expressly covers the employees, assistants, and deputies of the listed individuals, something that 18 U.S.C. § 153 did not cover until the 1994 amendments. Thus, this statute can be used to prosecute any employee of the trustee who steals estate money which is in the trustee's custody.
The statute has a misdemeanor provision where the amount of money does not exceed $100. The United States Attorney may charge less than $100 and allow a defendant to plead to a misdemeanor even if the amount, in fact, exceeds $100.
5-8.4.2.2 Elements of the Offense
5-8.4.3 Adverse Interest and Conduct of Officers, 18 U.S.C. § 154
"A person who, being a custodian, trustee, marshal, or other officer of the court--
(1) knowingly purchases, directly or indirectly, any property of the estate of which the person is such an officer in a case under title 11;
(2) knowingly refuses to permit a reasonable opportunity for the inspection by parties in interest of the documents and accounts relating to the affairs of estates in the person's charge by parties when directed by the court to do so; or
(3) knowingly refuses to permit a reasonable opportunity for the inspection by the United States Trustee of the documents and accounts relating to the affairs of an estate in the person's charge, shall be fined not more than $5,000 and shall forfeit the person's office, which shall thereupon become vacant."
This statute is classified as an infraction because it does not authorize any imprisonment. It does, however, provide for the immediate removal from office. This could be useful in any case where the judge is reluctant to remove a trustee or other professional. The term "office" is not defined in the statute, and there are no reported cases that indicate how broad the term "office" is interpreted.
Of note is that the statute has no de minimis provision. Under a literal reading of the statute, a trustee handling a large retail merchant could not buy any property of the retailer even if it was from the store and it was in the regular course of business. The United States Trustee should make trustees and other professionals aware of this statute.
5-8.4.3.1 Elements of the Offense--Improperly Acquiring Property of Estate
5-8.4.3.2 Elements of the Offense--Improperly Refusing Access to Books and Records
5-8.5 FEE AGREEMENTS, 18 U.S.C. § 155
"Whoever, being a party in interest, whether as a debtor, creditor, receiver, trustee, or representative of any of them, or attorney for any such party in interest, in any receivership or case under title 11 in any United States court or under its supervision, knowingly and fraudulently enters into any agreement, express or implied, with another such party in interest or attorney for another such party in interest, for the purpose of fixing the fees or other compensation to be paid to any party in interest or to any attorney for any party in interest for services rendered in connection therewith, from the assets of the estate, shall be fined not more than $5,000 or imprisoned not more than one year, or both."
There are no reported cases under this section. The intent of the section is to prevent parties in interest from dividing up the estate outside the control of the bankruptcy court. The statute requires that the acts be done knowingly and fraudulently. Failure of a party to make disclosure statements required under the Bankruptcy Rules would be evidence of such intent. The definition of parties in interest is extremely broad and essentially covers anyone involved in any way with a case under title 11.
5-8.5.1 Elements of the Offense
5-8.6 KNOWING DISREGARD OF BANKRUPTCY LAW OR RULE, 18 U.S.C. § 156
"(a) Definitions.--In this section--
`bankruptcy petition preparer' means a person, other than the debtor's attorney or an employee of such an attorney, who prepares for compensation a document for filing.
`document for filing' means a petition or any other document prepared for filing by a debtor in a United States bankruptcy court or a United States district court in connection with a case under this title. (b) Offense--
If a bankruptcy case or related proceeding is dismissed because of a knowing attempt by a bankruptcy petition preparer in any manner to disregard the requirements of title 11, United States Code, or the Federal Rules of Bankruptcy Procedure, the bankruptcy petition preparer shall be fined under this title [not more than $100,000], imprisoned not more than 1 year, or both." This section is useful against petition mills that file bankruptcy petitions, that are later dismissed, for people they know are not eligible for relief; or who, having filed the petition, knowingly take no action to complete the proceedings by filing schedules or notifying the debtor to attend meetings.
5-8.6.1 Elements of the Offense
5-8.7 BANKRUPTCY FRAUD, 18 U.S.C. § 157
"A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so--
(1) files a petition under title 11;(2) files a document in a proceeding under title 11; or
(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title [maximum $250,000], imprisoned not more than 5 years, or both."
This statute allows prosecutors a significantly longer reach in the bankruptcy fraud area. Any defendant who undertakes a fraud scheme against anyone, or attempts to do so, and then carries out or conceals the scheme by using bankruptcy or by filing any documents in the bankruptcy, violates this statute. This section also is applicable against the defendant who tries to defraud someone by falsely telling them a case is in bankruptcy in order to forestall the victim's actions. The crux of this statute is the existence of a fraud scheme or attempted fraud scheme and any use of the bankruptcy system to try to carry out the scheme. For example, this statute should be applicable to petition mills that are set up to defraud the landlord of a few months rent, or to any bustout scheme. Likewise, a defendant who is actively defrauding anyone violates this statute if he/she files bankruptcy to delay or conceal the fraud.
Case law addressing the wire, bank, and mail fraud statutes (18 U.S.C. §§ 1341, 1343, and 1344), which have similar language, will be very useful in determining the reach of this statute. Congress deliberately chose language from those statutes to insure a broad reach.
5-8.7.1 Elements of the Offense