Federal Bankruptcy Fraud: Chapter 7 and 11 Fraud Charges.

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Does Filing Chapter 7 or Chapter 11 Make Bankruptcy Fraud a Federal Crime?

Federal bankruptcy fraud is a federal crime that is commonly charged under 18 U.S.C. §§ 152 and 157, and the chapter of bankruptcy filed does not affect whether the conduct constitutes a federal crime. Chapter 7 generally uses liquidation, while Chapter 11 generally uses reorganization. Both of these chapters provide statutory frameworks for pursuing discharge, and either of these can lead to civil or criminal sanctions if bankruptcy fraud is committed.

The mere filing of a Chapter 7 or Chapter 11 petition does not establish the existence of federal bankruptcy fraud, and it does not establish the existence of either the fraudulent conduct or the fraudulent intent (scienter) that is required to substantiate federal bankruptcy fraud charges. A debtor is entitled to engage in bankruptcy proceedings in good faith, and the filing of a Chapter 7 or Chapter 11 petition can be a legitimate response to financial crisis and financial hardship.

At the same time, an accidental omission is not enough to satisfy the statutory requirements for criminal bankruptcy fraud. 18 U.S.C. § 152(1) prohibits knowing and fraudulent concealment of estate property, § 152(3) prohibits a knowing and fraudulent false declaration or statement under penalty of perjury, and § 157(1) prohibits filing a bankruptcy petition to execute or conceal a fraud scheme. These two federal crimes are serious felony offenses, and the burden of proving either one rests with federal prosecutors. They must be able to provide evidence that meets these statutory requirements, and they must do so beyond a reasonable doubt.

If you are facing federal bankruptcy fraud allegations, we understand why you may be scared about these accusations. At Spodek Law Group, our federal criminal defense lawyers and paralegals can reach out to federal prosecutors to discuss your case.

Which Bankruptcy Acts Fit Section 152 Rather than Section 157?

Federal bankruptcy fraud charges generally fall under 18 U.S.C. §§ 152-157. Each section contains specific conduct that the federal government can use to build a criminal case.

Acts That Fit Section 152

Section 152 of 18 U.S.C. targets the following acts:

• Concealing property belonging to a bankruptcy estate and fraudulently, or without authority, in any bankruptcy discharge proceeding, concealing property, or knowingly and fraudulently making an oath, declaration, or account in a manner that prevents a creditor from receiving just payment on a debt;
• Knowingly and fraudulently making a false oath or account in relation to a bankruptcy filing;
• knowingly and fraudulently making a false oath or account, or a false declaration, certificate, verification, or statement under penalty of perjury, in or in relation to a Title 11 case;
• Knowingly and fraudulently presenting any false claim for proof against a debtor’s estate, or using such a claim in a Title 11 case, personally or as an agent, proxy, or attorney;
• Knowingly and fraudulently concealing any property belonging to a bankruptcy estate, or knowingly and fraudulently aiding, abetting, or conspiring with any other person to do so;
• Knowingly and fraudulently transferring or concealing, in contemplation of a Title 11 case or with intent to defeat Title 11, the person’s property or another person’s or corporation’s property;
• Knowingly and fraudulently concealing or disposing of any property that is part of a bankruptcy estate, or knowingly and fraudulently concealing or disposing of property for the purpose of avoiding the payment of the obligations of the debtor; and,
• Knowingly and fraudulently attempting to obstruct, or knowingly and fraudulently conspiring to obstruct the execution of any laws relating to bankruptcy.

Acts That Fit Section 157

Section 157 of 18 U.S.C. targets the following acts:

• Devising or intending to devise any scheme or artifice to defraud or to obtain any money or property by means of any false or fraudulent representation, promise, or pretense, attempt to convert any transaction or attempt to obtain any property through the use of any means or scheme to defraud; or,
• Filing a petition under Title 11 in the United States bankruptcy courts for the purpose of executing such a scheme or concealing the fraudulent nature of any such scheme.

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How Does a Suspected Bankruptcy Scheme Move From the Court to Federal Prosecutors?

How does a suspected bankruptcy scheme move from the bankruptcy court into the hands of federal prosecutors? There are several ways this can happen, and it is not unusual for a variety of different parties to come together when investigating federal bankruptcy fraud allegations.

Referral by the United States Trustee

The first way that a bankruptcy-related scheme or case can move from the bankruptcy court to federal prosecutors is through the United States Trustee. When overseeing a bankruptcy case, the United States Trustee can refer the case to federal prosecutors if he or she has suspicions about potential bankruptcy fraud. Under 28 U.S.C. § 586(a)(3)(F), the United States Trustee must notify the appropriate United States attorney of matters that may constitute a federal crime.

Identification of Fraudulent Acts by Others

The United States Trustee can be the one who discovers issues like inconsistent schedules or unexplained bank activity; however, bankruptcy trustees, creditors, and bankruptcy court officials can also identify fraud. When they identify fraud, they generally refer their discovery to the United States Attorney’s Office (with the U.S. Trustee typically handling the referral).

Federal Bankruptcy Fraud Investigation

Once a bankruptcy-related case becomes the subject of a federal bankruptcy fraud investigation, the U.S. Attorney’s Office will typically engage the FBI or IRS Criminal Investigation, and sometimes the U.S. Marshals Service as well. The case may then proceed toward trial in federal district court.

Mail Fraud and Other Crimes

A significant percentage of suspected bankruptcy-related schemes also involve the use of the mail to send fraudulent documents and make fraudulent representations. In cases such as these, federal prosecutors may pursue charges under 18 U.S.C. § 1341 in addition to charging the suspect with federal bankruptcy fraud. Mail fraud is a federal crime that carries the potential for imprisonment as well as substantial fines, and federal prosecutors have been successful at securing convictions for this crime in many different types of cases.

What Sentence Can Sections 152 and 157 Actually Produce Today?

Section 152 of 18 U.S.C. explicitly labels its violations as felonies, noting that the appropriate sentencing is...

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

Similarly, Section 157 of 18 U.S.C. also allows for up to 5 years of imprisonment, a $250,000 fine, or both. While there is an identical statutory maximum sentence under Section 152, the actual penalty imposed on those who are convicted of the offense will typically be lower than this, as these ranges are influenced by a variety of factors under the Federal Sentencing Guidelines.

Calculations of Loss in Federal Sentencing Guidelines

Under the Federal Sentencing Guidelines, the sentencing ranges for criminal offenses include fraud. In cases of bankruptcy fraud under Section 152 or 157, the range calculated by the sentencing guidelines is largely based on the calculations of financial loss that the fraud caused creditors. This can include concealed assets, but not lost interest, among other factors.

Average Sentences for Federal Bankruptcy Fraud Charges

While the Federal Sentencing Guidelines provides sentencing ranges, they aren’t the same as the statutory maximum and the statutory maximum sentence doesn’t necessarily establish the average sentence imposed by the court in bankruptcy fraud cases. For example, while Section 152 and Section 157 both allow for sentences of up to 5 years, in 2013 the average reported sentence in cases involving these charges was reportedly 47 months according to data from a competitor. This does not reflect current cases involving these charges, but it does demonstrate that there is a broad range of possible sentencing, and it does not necessarily reflect a convicted individual’s actual sentence.

Can a Bankruptcy Court Deny Discharge Without a Criminal Conviction?

Because criminal cases rely on proof beyond a reasonable doubt, while civil disputes rely on the preponderance-of-the-evidence standard, a bankruptcy court does not need a criminal conviction to make decisions based on circumstantial evidence of bankruptcy fraud. The bankruptcy court is capable of making its own determination and issuing its own remedies without waiting for criminal sentencing. A defendant does not need to avoid criminal bankruptcy fraud charges in a criminal bankruptcy fraud case to avoid civil consequences such as a denied discharge under 11 U.S.C. § 727. Sections 727(a) and 727(d) address denial or revocation of discharge based on specified conduct; they do not expressly address discharge after a criminal conviction. While a conviction for federal bankruptcy fraud can lead to a denial of discharge, it does not need to be a prerequisite. Additionally, other civil proceedings in bankruptcy courts can address the consequences of concealing a debtor’s estate, such as demanding turnover of all concealed property. These are separate legal consequences from a criminal conviction.

Summary of the Difference Between a Civil Bankruptcy Dispute and Criminal Bankruptcy Fraud

Below is a summary of the difference between a civil bankruptcy dispute and criminal bankruptcy fraud allegations.

| Aspect | Civil Bankruptcy Dispute | Criminal Bankruptcy Fraud |

| :--- | :--- | :--- |

| Burden of Proof | Preponderance-of-the-evidence standard | Proof beyond a reasonable doubt |

| Consequences | Denial of discharge, loss of legal immunity, turnover of property | Imprisonment, substantial fine, criminal conviction |

| Determining Entity | Bankruptcy court judge | Federal district court judge or jury |

| Statutory Maximum Penalty | Not applicable | 5 years imprisonment, $250,000 fine |

| Standard of Conduct | Applicable bankruptcy-law standards | Offense-specific knowing and fraudulent conduct or a fraudulent scheme under § 157 |

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.