The Hazard of Concealing Assets in Bankruptcy
The Hazard of Concealing Assets in Bankruptcy
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I waive the quantum o' the sin,The hazard of concealing:
But, och! It hardens a' within,
And petrifies the feeling!
—Robert Burns
Epistle to a Young Friend, st. 6
The federal government has had a statute prohibiting certain bankruptcy crimes in its arsenal of weapons continuously since 1898. Section 29 of the Bankruptcy Act of 1898 set forth the predecessors of current §§152(1) (concealment of assets), 152(3) (false oath or account), 152(4) (false proof of claim), 152(5) (receiving property after filing to defeat provisions of the Bankruptcy Code) and 152(6) (transferring property with intent to defeat provisions of Title 11).
The Bankruptcy Act also contained two provisions directed at officers of the court, which are now codified in §§153 (embezzlement against the estate) and 154(1) and (2) (adverse interest or conduct of officers). Section 29 was amended in 1926 to add what is now §152(7), which allows the government to prosecute corrupt corporate officers involved in cheating the bankruptcy system, and to reach wrongful acts taken in contemplation of bankruptcy. This amendment also added the crimes currently found in §§152(8) (concealing, destroying or making a false entry in documents) and 152(9) (fraudulently withholding recorded information from trustee).
While Congress has tinkered with various technical aspects of the bankruptcy crime laws since 1926, the Department of Justice has not substantially deviated from prosecuting the offenses on the books at that time. Notwithstanding the longevity of the laws criminalizing the concealment of assets and information from the bankruptcy process, many persons who file for relief choose to try to cheat the system. This article discusses the law of concealment in the hope that debtors' counsel will be able to use it to facilitate better decision-making by their clients.
The Statutory Scheme
In pertinent part, 18 U.S.C. §152 declares:
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 U.S. Trustee, any property belonging to the estate of a debtor;shall be fined under this title, imprisoned not more than five years, or both.
...
[or] 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;
Section 152 was amended by the Bankruptcy Reform Act of 1994 to add numbers to the paragraphs; prior to 1994, none of the distinct subparts of the statute were numbered, and thus it is sometimes difficult to discern from the cases precisely which offense a defendant was charged with violating. The 1994 amendment also added the U.S. Trustee as a "victim" under §§152(1) and 152(9). The new provisions apply to all crimes continued or committed after the effective date.
Section 152 continues to be the most frequently used statute for charging bankruptcy crimes, and sets forth the most common criminal violations. The separate paragraphs of §152 create distinct crimes, and the violation of each subsection may be indicted in independent counts. United States v. Montilla Ambrosiani, 610 F.2d 65, 69 (1st Cir.), cert. denied, 445 U.S. 930 (1980); United States v. Arge, 418 F.2d 721, 722 (10th Cir. 1969); United States v. Gordon, 379 F.2d 788, 790 (2d Cir.), cert. denied, 389 U.S. 927 (1967); Knoell v. United States, 239 F. 16, 20 (3d Cir. 1917), err. dism'd., 246 U.S. 648 (1918). Violations of separate paragraphs of §152 constitute multiple counts because each requires proof of different facts. United States v. Roberts, 783 F.2d 767 (9th Cir. 1985); United States v. Kaldenberg, 429 F.2d 161 (9th Cir.), cert. denied, 400 U.S. 929 (1970); United States v. Christner, 66 F.3d 922, 928 (8th Cir. 1995). See, also, United States v. Falcone, 544 F.2d 607 (2d Cir.), cert. denied, 430 U.S. 916 (1977) (defendant charged with conspiracy, concealment of assets, false oath and making a false entry in separate counts based on the entry of a false credit on the accounts receivable records of the corporation).
Elements of the Offense
The crime of concealing property from a bankruptcy has clear and concise elements. To obtain a conviction, the government must prove the following beyond a reasonable doubt:
- the charged bankruptcy was in existence;
- certain property or assets belonged to the bankruptcy estate;
- the defendant transferred and/or concealed the property from the creditors, the trustee or from someone charged with control or custody of the property;
- the defendant did so knowingly and fraudulently.
Definition of Concealment
As used in the concealment statutes, the term "concealment" has been defined as any act done by the defendant that hides the existence of property or assets belonging to the estate from anyone entitled to know about it, such as a creditor, the trustee or a custodian. A "concealment" does not require a physical secretion of the property in question, though such an act is included within the scope of the statute. Burchinal v. United States, 342 F.2d 982, 985 (10th Cir.), cert. denied, 382 U.S. 843 (1965). The definition is expansive and means not only secreting, falsifying and mutilating, but also preventing discovery, fraudulently transferring or withholding knowledge or information required by law to be made known. United States v. Turner, 725 F.2d 1154, 1157 (8th Cir. 1984); United States v. Weinstein, 834 F.2d 1454 (9th Cir. 1987). Thus, withholding information about an asset constitutes concealment under 18 U.S.C. §152. Coghlan v. United States, 147 F.2d 233 (8th Cir.), cert. denied, 325 U.S. 888 (1945); United States v. Grant, 971 F.2d 799, 807 (1st Cir. 1992); United States v. Weinstein, 834 F.2d 1454, 1461 (9th Cir. 1987); United States v. Jackson, 836 F.2d 324 (7th Cir. 1987); United States v. Cherek, 734 F.2d 1248, 1254 (7th Cir. 1984), cert. denied, 471 U.S. 1014 (1985); United States v. Turner, 725 F.2d 1154, 1157 (8th Cir. 1984).
Reported decisions on "concealment" cover a wide range of conduct, ranging from the falsification of corporate books to hide a corporate asset, United States v. Center, 853 F.2d 568 (7th Cir. 1988), to the failure to account for the proceeds of the sale of a corporate asset, Turner, supra. The deliberate failure to list the property or asset on the debtor's schedules—or to disclose it in the Statement of Financial Affairs—is sufficient to conceal it from creditors and the trustee. The intentional undervaluing of assets can be considered a concealment crime. United States v. Walker, 29 F.3d 908 (4th Cir. 1994). The crime of concealment is a continuing offense that covers conduct occurring before and after the filing of a bankruptcy fraud case. Sultan v. United States, 249 F.2d 385, 386 (5th Cir. 1957).
Definition of Property or Asset
The phrase "property or asset" is defined in the broadest sense. The terms have been construed expansively to include "any legal, equitable or beneficial interest of the debtor in property existing on the date the bankruptcy petition was filed, or that [the debtor] may have acquired after the commencement of the case other than earnings from personal services or loan proceeds." United States v. Moody, 923 F.2d 341, 348 (5th Cir.), cert. denied, 502 U.S. 821 (1991); 11 U.S.C. §541(a)(1). Money or cash, as well as any other property, are included in the prohibition against transferring "property" under §152. United States v. Wernikove, 206 F.Supp. 407 (E.D. Pa. 1962). See, also, United States v. Goodstein, 883 F.2d 1362, 1369 (7th Cir.), cert. denied, 494 U.S. 1007 (1990). All equitable interests in property held by a bankruptcy estate must be disclosed. United States v. Weinstein, 834 F.2d 1454, 1461 (9th Cir. 1987); United States v. Moynagh, 566 F.2d 799, 803 (1st Cir.), cert. denied, 435 U.S. 917 (1978); United States v. Schireson, 116 F.2d 881, 883 (3d Cir. 1940).
The policy behind this all-encompassing definition is that the debtor must disclose information about all property that might be the debtor's, even if the status of the assets is uncertain. United States v. Cherek, 734 F.2d 1248, 1254 (7th Cir.), cert. denied, 471 U.S. 1014 (1985)<. The definition of "property" found in the Model Penal Code §223.0(6) may be used: "anything of value, including any interests in real estate, tangible and intangible personal property, contract rights and any claims to wealth."
If a debtor is uncertain as to whether certain property is legally required to be included in the schedules, the debtor has a duty to disclose the property so that the issue can be resolved. In re Braymer, 126 B.R. 499, 503 (Bankr. N.D. Texas 1991). An asset is property of the debtor estate even where nominal title is held in another person or company name, if the estate has paid for expenses related to the acquisition, repair or insuring of the asset. United States v. Cherek, 734 F.2d 1248, 1254 (7th Cir.), cert. denied, 471 U.S. 1014 (1985). If the law is uncertain as to whether the debtor will receive property, the uncertainty may be relevant to the issue of the defendant's intent to conceal the potential asset. See United States v. Collins, 424 F.Supp. 465 (E.D. Ky. 1977). If the status of an asset is uncertain, the debtor is nonetheless required to disclose its existence and provide the creditors an opportunity to make inquiries or take action to determine the status.
"If a debtor is uncertain as to whether certain property is legally required to be included in the petition, the debtor's duty is to disclose the assets so the question may be resolved. In re Braymer, 126 B.R. 499, 503 (Bankr. N.D. Texas 1991). For purposes of §152, it does not matter that the property is ultimately determined under technical bankruptcy rules not to be an estate asset; however, such circumstances would make it difficult to prove that the defendant had the requisite specific intent to knowingly and fraudulently conceal an asset. See United States v. Martin, 408 F.2d 949, 953 (7th Cir.), 396 U.S. 824 (1969); United States v. Cherek, 734 F.2d 1248, 1254 (7th Cir. 1984), cert. denied, 471 U.S. 1014 (1985); United States v. Beard, 913 F.2d 193, 197 (5th Cir. 1990).
Whether property belongs to the bankruptcy estate is a fact question for the jury to decide. United States v. Weinstein, 834 F.2d 1454 (9th Cir. 1987); United States v. Robbins, 997 F.2d 390, 393 (8th Cir.), cert. denied, 510 U.S. 948 (1993). A bankruptcy court's finding that the asset in question is property of the bankruptcy estate is admissible only on the question of notice, and the jury must be given a limiting instruction not to substitute the bankruptcy court's fact-finding for its own. Robbins, 997 F.2d at 393.d.
Generally, property that the estate (not the debtor) acquires after the filing of the bankruptcy is an asset of the bankruptcy estate. 11 U.S.C. §541(a)(7); see, also, 11 U.S.C. §541(a). This includes after-acquired property that is comprised of the proceeds of estate property. United States v. Messner, 107 F.3d 1448, 1453 (10th Cir. 1997). Thus, chapter 11, 12 and 13 debtors are required to report their post-petition income in monthly reports to the trustee—and can be prosecuted for concealing any such income.
Transfer of Estate Property
As used in §152(7), the term "transfers or conceals" is used in the disjunctive. Thus, proof of either an inappropriate transfer or an illegal concealment, in conjunction with the other elements of the offense, is sufficient to establish the commission of a bankruptcy crime. Concealment is not a necessary element of a prohibited transfer. United States v. Weinstein, 834 F.2d 1454 (9th Cir. 1987); Burchinal v. United States, 342 F.2d 982, 985 (10th Cir.), cert. denied, 382 U.S. 843 (1965); United States v. Switzer, 252 F.2d 139, 142 (2d Cir.), cert. denied, 357 U.S. 922 (1958).
Pre-petition Concealment or Transfers
Pre-petition transfers and concealment of property require an additional intent element—namely, that they were done "in contemplation of bankruptcy" or "with the intent to defeat the provisions of Title 11." "[W]hen the concealment of several items of property precedes the filing of the bankruptcy petition, the duty of the debtor to disclose is a single duty to reveal all." United States v. Moss, 562 F.2d 155, 160 (2d Cir.), cert. denied, 435 U.S. 914 (1978). Pre-petition concealment charges are often combined into one count to avoid multiplicity issues. United States v. White, 879 F.2d 1509, 1512 (7th Cir.), cert. denied, 494 U.S. 1027 (1990); United States v. McClellan, 868 F.2d 210 (7th Cir. 1989); United States v. Kaldenberg, 429 F.2d 161 (9th Cir.), cert. denied, 400 U.S. 929 (1970). Transfers to defeat the provisions of Title 11 that occurred more than one year before the bankruptcy filing may be prosecuted. United States v. West, 22 F.3d 586, 590 (5th Cir.), cert. denied, 513 U.S. 1020 (1994).
Fraudulent Post-petition Transfers
Post-petition transfers to defeat the provisions of Title 11 are also prosecutable under the text of §152(7). When the concealment of assets belonging to the debtor occurs after the filing of the petition and the appointment of a trustee, "each separate act of concealment is a separate violation of the statute [citation omitted]. In each such instance there is a separate act, taken at a discrete time, accompanied by the requisite intent." United States v. Moss, 562 F.2d 155, 159 (2d Cir.), cert. denied, 435 U.S. 914 (1978); United States v. Melton, 763 F.2d 401, 402 (11th Cir. 1985); United States v. Montilla Ambrosiani, 610 F.2d 65, 69 (1st Cir.), cert. denied, 445 U.S. 930 (1980).
Defenses Commonly Raised to Concealment Charges
Assets acquired post-petition. When the concealed-asset charge involves assets acquired after the filing of the bankruptcy petition, the government must prove that the assets were property of the bankruptcy estate. Cf. United States v. Messner, 107 F.3d 1448, 1453 (10th Cir. 1997); United States v. Robbins, 997 F.2d 390, 393 (8th Cir.), cert. denied, 510 U.S. 948 (1993).
Assets were abandoned by the trustee. Abandonment of the asset by the trustee in the course of the civil administration of the estate does not bar a later prosecution for the concealment of the asset. United States v. Grant, 971 F.2d 799, 806 (1st Cir. 1992).
Assets were exempt property. It is irrelevant that the concealed asset, had it been disclosed, would have been claimed as exempt property by the debtor. United States v. West, 22 F.3d 586 (5th Cir.), cert. denied, 513 U.S. 1020 (1994).
Assets were returned to the estate. It is no defense that the concealed asset or the proceeds of the concealed asset were returned to the bankruptcy estate. United States v. Klupt, 475 F.2d 1015, 1018 (2d Cir. 1973).
Assets were used to pay creditors. It is no defense that the concealed assets or the proceeds of the concealed assets were ultimately used to pay the creditors. United States v. Klupt, 475 F.2d 1015, 1018-1019 (2d Cir. 1973).
Defendant did not benefit from the concealment. It is no defense that the defendant was ultimately unsuccessful in attempts to conceal assets of the bankruptcy estate which were ultimately recovered. United States v. Mathies, 350 F.2d 963 (3d Cir. 1965).
Defendant's hard-luck story. It is not a defense that the defendant suffered some hard luck or financial reverses that required him to file bankruptcy, such as an IRS lien was placed on all of his bank accounts and residence, or a secured creditor would not cooperate with him on the use of mortgaged or secured property. Also, it is not a defense to assert that the defendant did not realize the fruits of his fraudulent acts. United States v. Key, 859 F.2d 1257, 1260 (7th Cir. 1988).
Creditors know about concealed assets. It is no defense that the creditors have actual knowledge of the location of the assets that were concealed by the debtor. United States v. Zimmerman, 158 F.2d 559, 560 (7th Cir. 1946).
Creditors were not injured by the concealment. This defense is similar to the defense that the concealed asset is exempt property. It is not a defense that the concealment did not injure the creditors. United States v. O'Donnell, 539 F.2d 1233, 1237 (9th Cir.), cert. denied, 429 U.S. 960 (1976).
Reliance on advice of counsel. Defendants will frequently assert that their actions in failing to disclose or concealing certain assets were undertaken in "good faith" upon the advice of counsel. If this defense is raised, the government may call the bankruptcy attorney as a witness at trial, due to waiver of the attorney-client privilege by the defendant. A debtor cannot blame the attorney for alleged illegal conduct and then prevent the attorney from testifying to clear his or her good name.
Conclusion
In short, it is foolish for a person to try to conceal assets from a bankruptcy estate. First, the chances are that someone associated with the bankruptcy has knowledge of the asset and the information will eventually be disclosed. Second, the bankruptcy laws are written so broadly that any attempt to do so will undoubtedly be a federal crime. And third, the defenses to such conduct are rather minimal.
Footnotes
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 the late 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. This work incorporates research done by various government attorneys with expertise in bankruptcy fraud, whose assistance and dedication is hereby acknowledged. Return to article
Journal Date:
Thursday, May 1, 2003