Should Assistant U.S. Trustees Serve as Experts in Fraud Proceedings
There is a split in the U.S. Courts of Appeals as to whether an Assistant U.S. Trustee (AUST) should be allowed to testify in a bankruptcy fraud prosecution about how the bankruptcy process works. This article argues that the precedent preventing AUSTs from testifying about the requirements of the bankruptcy system is unsound and that federal juries would be better served by hearing such testimony.
United States v. Sobin
In United States v. Sobin,4 a 1995 decision, the U.S. Court of Appeals for the District of Columbia Circuit approved the prosecution tactic of calling an AUST as a witness in a bankruptcy fraud case. The decision vividly illustrates why the testimony of an expert is needed to assist the jury in comprehending how the bankruptcy process works.
Sobin and an associate had purchased a number of "976" telephone lines in various corporate names. Sobin was in charge of the corporations in whose names the phone lines were held. One of the phone lines was "an adult party line that proved very profitable, yielding revenues...of over $912,000 in less than two years."5 Before he filed his personal chapter 11, Sobin engaged in a series of transactions in which he opened multiple bank accounts under various aliases and directed into them the proceeds from the party line. When he filed chapter 11, he made no mention in his Statement of Financial Affairs of the aliases, the bank accounts or any interest in the business that controlled the party line. Among the multiple crimes for which Sobin was eventually charged and convicted were two counts of bankruptcy fraud based on the filing of the false Statement of Financial Affairs.6
Sobin challenged his conviction, partly on the grounds that the testimony of the AUST was improper.7 The AUST testified about "what information a bankruptcy trustee expects in response to the questions contained in the [Statement of Financial Affairs] and why that information is important."8 Sobin claimed that because of the perceived authority of the AUST's statements, the only conclusion the jury could have reached in his case was guilty. The court disagreed.
The D.C. Circuit explained that expert testimony is allowed if it will assist the trier of fact and extends to matters beyond the knowledge of a layperson.9 The court added that most jurors have no experience understanding what information should be contained in a Statement of Financial Affairs and why it is important. The court concluded that the AUST properly assisted the jury in understanding these facts, and that the testimony did not improperly impact the ultimate question of guilt or innocence. Accordingly, the court concluded that the consideration of the AUST's testimony was not an abuse of discretion.10
The Sobin decision is rather succinct in addressing the propriety of the AUST's testimony. However, its conclusion is right on target. The primary question in assessing whether it is appropriate to allow the testimony of an expert is whether he or she has specialized knowledge that will assist the trier of fact. It is indisputable that AUSTs possess such knowledge about bankruptcy. Bankruptcy is a complicated process, and it is difficult for many members of the bench and bar—let alone lay persons—to quickly obtain a clear comprehension of the duties of the debtor, the rights of creditors, the significance of the myriad of documents and how each particular chapter works. Juries handling bankruptcy fraud cases need someone to explain such matters to them. AUSTs, who in many ways manage the daily operations of the bankruptcy process, are by experience and training the ideal candidates to serve this educational role.
United States v. Messner
The Tenth Circuit Court of Appeals in United States v. Messner11 ruled that the U.S. District Court for the District of Kansas committed "harmless error"12 by allowing the testimony of an AUST on the debtor's post-confirmation duty to disclose. The issue arose in a prosecution related to two chapter 11 filings by Messner in 1990.
The first case was filed jointly by Messner and his wife, and the second was filed by Messner in the name of a building business in which he was an officer and stockholder. As the debtor-in-possession (DIP) of his personal chapter 11, he submitted a chapter 11 reorganization plan approximately a year after filing, which was confirmed in April 1991. The case remained open until 1994. The corporate case was converted at some point to a chapter 7 liquidation. After filing his petition in 1990, Messner twice failed to disclose a partnership interest he had in a commercial property. He also failed to disclose a $246,845 promissory note owed to him that he had assigned to his son for $10 on the eve of filing. Further indiscretions included concealing his $10,000 interest in a pre-petition contract and concealing his receipt of $10,000 in cash from certain bonds. Both of these were charged as post-petition concealments.13
Messner attempted, in part, to defend against bankruptcy fraud charges by arguing that he had no duty to disclose his receipt of assets in 1992 (when he apparently received the benefits of the $10,000 contract and bonds) because confirmation of the reorganization plan in 1991 dissolved the estate and revested all estate property in him. He contended that his status as a fiduciary obligated to make disclosure of assets ended at confirmation.14 While acknowledging that the property at issue was likely not estate property at the time charged, the Tenth Circuit noted that the money "did not simply appear in his hands. He received it because it was derived from tangible or intangible assets he held prior to the filing of either bankruptcy [petition]."15 At a minimum, the court noted, the assets were subject to disclosure as the proceeds of estate property, and he should have amended his bankruptcy filings to disclose the receipt of the funds.16
Messner also attempted an indirect attack on his conviction for failing to disclose his receipt of the two $10,000 assets. He argued that the district court "erred in allowing expert testimony from...an attorney in the U.S. Trustee's Office, regarding a debtor's post-confirmation duty of disclosure."17 Messner asserted that this "impermissibly encroached on the trial court's function to decide the law of the case."18 On this point, the court agreed with Messner.
The foundation of the Tenth Circuit's decision was its prior non-bankruptcy fraud jurisprudence. In Sprecht v. Jensen,19 the court had held that "when the purpose of the testimony is to direct the jury's understanding of the legal standards upon which their verdict must be based, the testimony cannot be allowed. In no instance can a witness be permitted to define the law of the case."20 The Messner court similarly concluded that the AUST's testimony had transgressed this standard.
The Messner court briefly addressed Sobin, but distinguished it on the grounds that "the disputed issues at trial were not addressed by legal testimony in Sobin."21 It further noted that Sprecht, not Sobin, was controlling in the Tenth Circuit.
The Messner decision is unclear on some significant details of the AUST's testimony. Did he testify about where he would expect the debtor to disclose certain information, based on his training and experience, or did he testify that the law required that certain information be disclosed in a certain way in certain documents? The former is undoubtedly a factual matter, while the latter comes closer to raising a legal question.
Thus, the Messner decision fails to specifically address a critical issue in bankruptcy fraud cases. Should information about how the bankruptcy process works be considered matters of law or matters of fact? If they are questions of law, then the courts should resolve them either in advance of the trial or early in the process and provide the jury with preliminary jury instructions to guide their consideration of the testimony. If such matters constitute factual information, and those who administer the bankruptcy system are precluded from testifying about how the process works, then the jury will be left unable to acquire the knowledge of the system that it will need to assess whether the accused committed the bankruptcy crime charged. While various acts of Congress created the bankruptcy process, the manner in which it is operated is at least a mixed question of law and fact, if not a question of fact, about which a competent expert witness should be permitted to testify.
No groups of persons are better qualified to provide expert testimony on the nuts-and-bolts and complexities of bankruptcy than AUSTs...
The Messner court assumed that the debtor's duty to disclose information was a legal matter, not a factual matter, with no analysis. Federal courts have historically not been hesitant to accept testimony about legal matters in certain types of cases. For example, federal courts allow attorneys in cases involving foreign law to testify on the legal standards in other countries.22 At least one federal appeals court has held that foreign law is a question of fact.23 Attorneys have been allowed in intellectual property cases to explain to juries the interpretation and application of patent claims,24 and have been allowed in securities cases to explain the rules of the New York Stock Exchange.25 The Messner court would have served the public better by explaining why it considered the issue in question a legal one, and not a factual matter.
The Messner court's effort to distinguish Sobin may also signify a lack of understanding of the bankruptcy process. Sobin and Messner were both convicted of concealing material information/assets from the bankruptcy process. The AUST in Sobin testified about the debtor's duty to disclose information in the Statement of Financial Affairs. The debtor's duty to disclose pre-petition assets in Sobin was as much a "disputed" issue as the debtor's duty to disclose assets in Messner in the sense that in both cases the prosecution had the obligation to establish in its case-in-chief that the debtor failed to disclose material information with the intent to defraud.26 As noted above, the Messner court does not explain why the duty-to-disclose assets is a fact question in the D.C. Circuit and a legal question in the Tenth Circuit. This issue needs to be addressed by the courts.
The Federal Rules of Evidence
The extent to which any person may offer testimony in a federal criminal trial is governed by the Federal Rules of Evidence. The critical question to answer in determining the scope of the matters about which an AUST can testify is whether or not he or she is a fact witness or an expert witness. The text of the relevant rules do not support the exclusion of AUST testimony concerning the actual facts of a particular bankruptcy or concerning how the bankruptcy process works. AUSTs can be considered either fact witnesses, experts or both.
If an AUST has personal knowledge of certain events relevant to a bankruptcy crime prosecution, he or she can most assuredly testify in court about such events. Fed. R. Evid. 602 prohibits a witness from testifying about a matter unless he or she has "personal knowledge of the matter." Evidence of personal knowledge may come from the witnesses' own testimony. The Office of the U.S. Trustee monitors the status of bankruptcy cases in their respective judicial districts and receive copies of most, if not all, bankruptcy pleadings. Thus, as a general rule, AUSTs should be able to testify from their review of official records about when a bankruptcy was filed, what was contained in court pleadings and the status of a bankruptcy case.
The Messner court tacitly held that the extent to which AUSTs should be allowed to testify about how the bankruptcy process works, whether certain property was part of an estate, whether specific information was material to the bankruptcy, or how omissions, concealment or transfers affected the bankruptcy process are not governed by Fed. R. Evid. 602. If an AUST's testimony in these areas is considered opinion and expert testimony, it is controlled by Fed. R. Evid. 701-706.
Fed. R. Evid. 701 allows persons who are not experts to testify about their opinions or inferences that are "rationally based on [their] perception[s]," "helpful to a clear understanding of the witness' testimony or the determination of a fact in issue," and "not based on scientific, technical or other specialized knowledge within the scope of Rule 702." Thus, to the extent that an AUST is explaining how the process works because of his or her specialized knowledge within the scope of Fed. R. Evid. 702, the testimony is expert testimony.
Under Rule 702 (Testimony by Experts), "[i]f scientific, technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education may testify thereto in the form of an opinion or otherwise." The rule requires that (1) the testimony be based on sufficient facts or data, (2) the testimony be based on reliable principles and methods and (3) the witness apply the principles and methods reliably to the facts of the case. In Kuhmo Tire Co. Ltd. v. Carmichael,27 the U.S. Supreme Court explained that the trial court's "gatekeeping function" under Fed. R. Evid. 702 is a "flexible one" and must be tied to the facts of a particular case.28 The duty of the courts in assessing whether to allow Rule 702 evidence is "to make certain that an expert, whether basing testimony on professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practices of an expert in the relevant field."29
Neither Fed. R. Evid. 702 nor the recent Supreme Court cases interpreting it expressly prohibit the testimony of attorneys as expert witnesses. If the particular facts of a case require a witness to explain how a legal process works, and a witness is competent by experience or training to present such testimony, the courts should not be reluctant to allow an attorney to provide such testimony. The fact that the bankruptcy process has specialized courts to administer it—and a federal regulatory body to supervise it—strongly suggests that it is a sufficiently complex system to warrant expert testimony in bankruptcy fraud cases to explain how it works.
No groups of persons are better qualified to provide expert testimony on the nuts-and-bolts and complexities of bankruptcy than AUSTs, who are qualified by knowledge, training, experience and integrity to assist the court and federal juries in understanding the operation of the Bankruptcy Code.
The Role of the U.S. Trustee System
U.S. Trustees and their assistants are charged with overseeing the integrity of the bankruptcy process. As such, they are much more than a typical bankruptcy lawyer or bankruptcy expert.
The Bankruptcy Reform Act of 1978, P.L. 95-598, constituted a major overhaul of the entire bankruptcy process. One of the most significant changes was "the creation of a government officer to supervise the conduct of bankruptcy cases."30 Prior to the creation of this new official, known as the U.S. Trustee, bankruptcy referees or judges had supervised much of the administration of bankruptcy cases, such as presiding over the first meeting of creditors, supervising debtor exams and appointing and supervising trustees, all in addition to resolving judicial questions. The role of supervising trustees—and then presiding over litigation involving the trustee's administration of the bankruptcy estate—created an "untenable position of conflict."31 Congress found that "[b]ankruptcy is an area where there exists a significant potential for fraud, self-dealing and for diversion of funds,"32 and thus "active supervision is essential. Bankruptcy affects too many people to allow it to proceed untended by an impartial supervisor."33
To fill this role, Congress established the Office of the U.S. Trustee.34 "The concept of the U.S. Trustee system [was to] provide decentralized, semiautonomous officials to administer the bankruptcy laws."35 The legislative history of the Bankruptcy Reform Act of 1978 indicates that Congress expected U.S. Trustees to oversee administration of bankruptcy cases and "to serve as bankruptcy watchdogs to prevent fraud, dishonesty and overreaching in the bankruptcy arena."36
There can be no doubt that, as a matter of law, U.S. Trustees and their assistants have a congressional mandate to determine when the conduct of persons within the bankruptcy system contravenes bankruptcy statutes or rules.37 Congress explained:
The U.S. Trustees will...be responsible for the day-to-day operations of the bankruptcy system. They will supervise trustees, assist them in the performance of their duties, oversee their actions and see to it that the bankruptcy laws are properly executed.... They will serve as enforcers of the bankruptcy laws by bringing proceedings in the bankruptcy courts in particular cases in which a particular action taken or proposed to be taken deviates from the standards established by the proposed Bankruptcy Code.38
To accomplish these duties, Congress charged the U.S. Trustee with conducting "investigations in appropriate circumstances to ensure that participants in bankruptcy cases are not avoiding the requirements of the Bankruptcy Code."39 "The sum of all these duties, according to Congress, strongly suggested that the U.S. Trustees would be the "executives of the bankruptcy network...the U.S. Trustees' responsibilities will be to operate the bankruptcy system and to [execute] the bankruptcy laws."40
While the Bankruptcy Reform Act of 1978 created a U.S. Trustee "pilot program," the U.S. Trustees, bankruptcy judges and the Family Farmer Bankruptcy Act of 198641 transformed the U.S. Trustee pilot program into a permanent, nationwide program. The duties of the U.S. Trustees are in large part set forth in 28 U.S.C. §586, though other provisions of the Code address additional rights and responsibilities of U.S. Trustees and their assistants.
28 U.S.C. §581 provides that the Attorney General of the United States shall appoint one U.S. Trustee for 21 distinct regions. Section 582 allows the attorney general to appoint "one or more assistant U.S. Trustees in any region when the public interest so requires." Many of the duties of the U.S. Trustees and their assistants are set forth in 28 U.S.C. §586 and include:
- supervising the private trustees in chapter 7, 11, 12 and 13 cases;42
- monitoring the confirmation process of plans under chapters 11, 12 and 13;43
- taking such actions as he or she "deems to be appropriate to ensure that all reports, schedules and fees required to be filed under title 11 by the debtor are properly and timely filed";44
- notify the U.S. Attorney of any actions that might constitute a crime;45 and
- monitor "the progress of cases under title 11" and take "such actions as [he or she] deems to be appropriate to prevent undue delay in such progress."46
This statutory language codifies the intent of Congress that the U.S. Trustees supervise the operation of the bankruptcy process.
AUSTs are qualified by experience and training to explain facts at issue, namely the nuances of the bankruptcy process. Their testimony would assist the jury in understanding how the system works and the importance of certain documents and events.
The unique role of the U.S. Trustee calls into question whether testimony from AUSTs is solely expert testimony. After all, AUSTs are not "hired guns" asked to testify in bankruptcy fraud prosecutions about cases in which they have no involvement. AUSTs testify about bankruptcy cases they have a duty to monitor to ensure that the debtor-creditor process conforms to the requirements of the Code and the Federal Rules of Bankruptcy Procedure. If the AUST has personal knowledge of the case by virtue of his or her official position, he or she is arguably testifying about matters based on personal knowledge—indeed, within official knowledge—which is admissible under Fed. R. Evid. 602, and not within the scope of the expert witness rule. Thus, while AUSTs are undoubtedly experts in their field, they should not be considered expert witnesses unless they are testifying about matters outside of their personal knowledge. Because of its supervisory role over the entire process, it would be an extremely rare case for a U.S. Trustee's Office to have absolutely no direct knowledge of a bankruptcy from which allegations of fraud arise.
Assuming for the sake of argument that, when called to testify about how the bankruptcy process works, AUSTs are experts and not lay witnesses, their testimony should be allowed under Fed. R. Evid. 702. AUSTs are qualified by experience and training to explain facts at issue, namely the nuances of the bankruptcy process. Their testimony would assist the jury in understanding how the system works and the importance of certain documents and events. It is improper to exclude such information from the jury and impractical to provide an overview of the bankruptcy process to the jury in instruction form.
Of course, the courts would be well within their discretion to define a range of specific terms for the jury, such as the definition of "debtor," "creditor," "title 11," "property of the estate" or even certain disclosure requirements. If, as the Messner court maintained, it is a question of law to determine the debtor's duty to disclose, this issue (and similar issues) could—and should—be resolved in a preliminary jury instruction, which would facilitate the jury's understanding and allow the AUST to weave the complex threads together for the jury through his or her testimony.
AUSTs have been trained to understand how the bankruptcy process works and to identify problems or transgressions in the system. The U.S. Trustees and their assistants monitor and supervise each of the tens of millions of bankruptcy cases that have been filed in the United States since the Bankruptcy Reform Act of 1978 was passed. No attorney who calls an AUST to the witness stand should be timid about offering the witness as an expert.
The foregoing discussion explains why, contrary to United States v. Messner, federal courts should allow the testimony of AUSTs in bankruptcy fraud cases to explain to juries how the bankruptcy process works and the significance of certain documents, events and acts, either as fact witnesses who have direct knowledge of the case in their administrative capacity or as expert witnesses. If the rule in Messner stands, U.S. District Courts will be forced to compile jury instructions explaining in detail such matters as what a petition is, what the schedules are and how and why they are used, what the Statement of Financial Affairs is, what the §341 meeting (first meeting of creditors) is, what the duties of a chapter 7 trustee are, what the duties of a debtor-in-possession are, how the liquidation process works in chapter 7, how the confirmation process works in chapters 11, 12 or 13, and a multitude of other matters. Such jury instructions might be so voluminous as to be of questionable use to the jury. Whether they are called as experts or fact witnesses, the testimony of AUSTs is often critical in bankruptcy fraud cases to ensure that the jury is provided with an objective education into the workings of the bankruptcy process.
1 J.D. (1989) Washington University; M.A. (1986, Sociology) and B.A. (1984, Journalism) Eastern Illinois University; former Chair of South Dakota Bankruptcy Fraud Task Force (1992-2001); former law clerk to Hon. Frank W. Koger, U.S. Bankruptcy Judge, W.D. Mo. (1989-91). Return to article
2 The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, the U.S. Attorney for the Southern District of Iowa or any other person or entity associated with him. Thanks to Chuck, Bruce, Jim and Sandra. Return to article
3 Locke, John, Essay Concerning Human Understanding, Bk. 11, ch. 1, §19 (1690). Return to article
4 56 F.3d at 1423 (D.C. Cir. 1995). Return to article
5 56 F.3d at 1425. Return to article
6 56 F.3d at 1425-26, n. 3. Return to article
7 56 F.3d at 1427. Return to article
8 56 F.3d at 1427. Return to article
9 56 F.3d at 1427. Return to article
10 56 F.3d at 1427-28. Return to article
11 107 F.3d at 1448 (10th Cir. 1997). Return to article
12 See Fed. R. Crim. P. 52 (Harmless Error and Plain Error). Subsection(a) provides that "[a]ny error, defect, irregularity or variance which does not affect substantial rights shall be disregarded." Return to article
13 107 F.3d at 1451. Return to article
14 107 F.3d at 1452. Return to article