The Never-ending Story The Statute of Limitations for Concealing Assets from a Bankruptcy Estate
—Oliver W. Holmes Jr., The Path of the Law, 10 Harv. L. Rev. 457, 476 (1897)
Statutes of limitation are part of the law not by virtue of judicial fiat, but as a consequence of legislative action.3 Indeed, the common law fixed no limitation period for bringing legal action against a person, regardless of whether the claim was civil or criminal.4 Statutes of limitation are the product of a legislative balance between "repose on the one hand, and vindication of both public and private legal rights on the other."5 As Justice Holmes observed in the quote set forth above, the very notion of preventing any person from remedy to vindicate his or her rights—or to prevent a person from seeking redress for a grievance done him or her—seems at best counter-intuitive, and unjust at worst.
Half a century after Holmes's critique of the concept of limitations, Associate Justice Robert Jackson offered the classic explanation of the purpose and policy behind such laws:
Statutes of limitation find their justification in necessity and convenience rather than in logic. They represent expedients rather than principles. They are practical and pragmatic devices to spare the courts from litigation of stale claims and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost. They are by definition arbitrary, and their operation does not discriminate between the just and unjust claim, or the voidable and the unavoidable delay. They have come into the law not through the judicial process but through legislation... The history of pleas of limitation shows them to be good only by legislative grace and to be subject to a relatively large degree of legislative control.6The time periods set by legislative bodies in America restricting the prosecution of certain crimes varies greatly.7 The same holds true of various classes of crimes prosecuted in the federal criminal justice system in general, and of various bankruptcy crimes, specifically.
The general statute of limitations for most non-capital offenses, which includes bankruptcy crimes, is 18 U.S.C. §3282. This statute requires indictment or the filing of an information within five years after the offense has been committed. The limitations period in §3282 applies to such bankruptcy crimes as false oath or account, false declarations or statements under penalty of perjury, false claims, receipt of material amount of property from a debtor, trading on a discharge, destruction or falsification of records, and withholding recorded information.8 Section 3282 also governs other offenses that persons who attempt to defraud the bankruptcy system may commit in the process, such as mail and wire fraud. In cases where one or more persons work together to commit a bankruptcy crime, the limitations period runs five years from the date that the last act in furtherance of the conspiracy was committed.9 Congress has, however, established a different limitations period for the time in which persons who conceal assets from a bankruptcy estate may be prosecuted.
Special Limitations Period for Concealment
The statute of limitations for concealment offenses is controlled by 18 U.S.C. §3284. This provision extends the limitations period for concealment of assets charged under 18 U.S.C. §152(1) and 18 U.S.C. §152(7)—and arguably for any concealment of assets charged under §157, as well. According to the text of the statute, it is the nature of the crime committed, and not necessarily the provision under which the defendant is prosecuted, that controls. In full, §3284 reads as follows:
The concealment of assets of a debtor in a case under title 11 shall be deemed to be a continuing offense until the debtor shall have been finally discharged or a discharge denied, and the period of limitations shall not begin to run until such final discharge or denial of discharge.
By its text, this limitations period is not tied to any particular statute, but to the offense of concealment of assets of a debtor. At a minimum, it would seem certainly to apply to concealment offenses charged under 18 U.S.C. §152 and §157.
Theoretically, this limitations period might also be applied to mail and wire fraud offenses where the mails or interstate wires were used to facilitate a concealment of a debtor's assets from a bankruptcy estate. At least one federal court has concluded, however, that the general five-year limitations period applies to false statements made for the purpose of facilitating the concealment of assets, rather than the continuing offense statute of limitations applicable to concealment.10
In any event, the statute of limitations for concealing assets from a bankruptcy estate is five years from the time a debtor has received a discharge or an order is entered denying a discharge. The time frame in which a debtor might obtain a discharge—or be denied one—varies from chapter to chapter.
Eligible chapter 7 debtors receive a discharge 60 days following the first date set for the first meeting of creditors (§341 meeting), absent an objection to discharge by a creditor, the trustee or the U.S. trustee.11 Thus, the limitations period for concealment will typically begin to run from 60 days after the bankruptcy was filed in a typical chapter 7 no-asset case. A corporation does not receive a chapter 7 discharge, and thus the question of what limitations period applies to corporate debtors that conceal assets is rather murky.12 Three possibilities exist: (1) no limitations period applies; (2) the general five-year limitations period applies; or (3) the concealment is an ongoing offense that must be prosecuted within five years of when the last event that could be considered the functional equivalent of a discharge occurred.
In a chapter 11 reorganization, the discharge is effective when the plan is confirmed.13 Note that a corporate debtor does not get a chapter 11 discharge if the plan provides for a liquidation of substantially all assets and it does not continue in business after the plan has been consummated.14 Consequently, confirmation or denial of confirmation are the events that trigger the beginning of the limitations period for concealment in a common chapter 11 case.
Chapter 12 and 13 debtors receive a discharge after they have completed all payments called for in their plan during the post-confirmation, pre-discharged period,15 unless they receive a hardship discharge upon application to the bankruptcy court. Because a chapter 12 or 13 plan may take six months to a year to get confirmed, and a chapter 12 or 13 plan can extend from three to five years, the limitation period for concealment in a normal chapter 12 or 13 may not start to run until five or more years after the case was first filed.
What Happens When the Discharge Is Not Granted or Denied
The text of §3284 does not explain, however, what the limitations period is for concealment cases where a discharge is neither granted nor denied. Such situations can arise when the case is dismissed on motion by a party, the court or voluntarily by the debtor. The courts are split over what limitations period to apply in concealment cases if there is no discharge provided by statute, or if there is no order entered in the bankruptcy case discharging or denying a discharge to the debtor. Some early cases hold that the statute of limitations remains open-ended.
The Early Debate
In United States v. Newman,16 the U.S. District Court for the Southern District of New York was called on in 1945 to decide whether an indictment charging the defendant with concealing property from a trustee in bankruptcy should be dismissed on the grounds that it was barred by the predecessor to §3284 (11 U.S.C. §52). The government charged the defendant with concealing property from the trustee on or about Sept. 14, 1937. The applicable statute of limitations then in force was three years from the date the offense occurred. The indictment was filed Feb. 8, 1945. In 1938, the statute of limitations for concealment offenses was amended to read "the offense of concealment of assets of a bankrupt shall be deemed to be a continuing offense until the bankrupt shall have been finally discharged, and the period of limitations herein provided shall not begin to run until such final discharge."
[M]ore than half a century after the courts first began to struggle with deciding what limitations period applies in concealment prosecutions when the bankruptcy court has not ruled on the bankrupt's discharge, the same question remains unanswered by Congress.
The court denied that motion to dismiss because the defendant had made no showing that he received a discharge. The defendant complained that if the statute of limitations was construed in this manner, "bankrupts will or may suffer injustice and sound public policy be violated." The Newman court felt compelled to apply the statute as "its language plainly demand[ed.]" The court further noted that if its interpretation raised such concerns, the proper remedy was to seek amendment of the statutes in question. The court also observed that '[u]nwise public policy is not the equivalent of lack of power," and Congress, not the courts, possessed the authority to legislate in the area. The motion to dismiss was denied.
A few months after Newman was decided, the U.S. District Court for the District of Maryland, in United States v. Fraidin,17 reached the opposite conclusion.
In Fraidin, six defendants were indicted on Feb. 27, 1945, for unlawfully concealing assets from the receivers and the trustee of David Fisher's bankruptcy estate. Fisher was never granted a discharge nor did he ever apply for one. The indictment alleged that, beginning in June 1938, the defendants unlawfully, knowingly, willfully, feloniously and fraudulently concealed a large amount of personal property belonging to the estate, such as "certain goods, wares, merchandise and moneys." Two defendants argued that their prosecution violated the applicable statute of limitations (11 U.S.C. §52d). These defendants asserted, among other claims, that the offense of concealment occurred, if at all, more than three years before the filing of the indictment on Feb. 27, 1945, and was, therefore, barred by the very terms of the statute as it stood before amendment. They further argued that, because the period in which an indictment could be brought for concealment of assets against them might run indefinitely because the bankrupt could never obtain a discharge, the statute was invalid.
The Fraidin court held that the new statute of limitations applied "because enactments limiting the time for the prosecution of offenses may be changed or repealed altogether in any case where the original period of limitations has not yet completely run." It nevertheless concluded that the prosecution was barred under its interpretation of the statute. The court first explained that prior to the 1926 amendments to the Bankruptcy Act when the period of limitation for the prosecution of offenses was made three years, it had been one year. The "Chandler amendments," defining the crime of concealment as "a continuing offense until the bankrupt shall have been finally discharged," was the result of conflicts in decisions interpreting the meaning of "concealment" under the Act. Prior to the Chandler amendments, some courts had held that the statute of limitations in concealment prosecutions did not begin to run until the last overt act had been committed. However, the court could not decide when this overt act occurred. Some courts concluded the period did not begin to run until a trustee qualified by giving bond, and others held that it did not begin until the trustee had been elected by creditors or appointed by the court on their failure so to elect. In attempting to set a bright-line standard, however, Congress made a gaping error: It incorrectly assumed that there would ultimately be a discharge of the bankrupt in every bankruptcy case.
The Fraidin court framed the question before it as to whether Congress may "afford to some offenders the benefit of a definite limitation within which they may be prosecuted, while at the same time affording no time limitation whatsoever to other offenders within which they may be prosecuted, because in their cases the specified event has not happened, and cannot happen." Its analysis, while lengthy, offers little guidance on what rule of law prohibited the foregoing result. The fact that the court was discussing two distinct classes of defendants suggests that it was weighing equal protection considerations decades before the U.S. Supreme Court first ruled that the Due Process Clause of the Fifth Amendment contained an equal-protection component.18 Other language in the opinion suggests that the court was basing its decision on the unfair treatment it perceived resulted from the law as it was written, which was not an uncommon practice during the Lochner era,19 when federal courts had been afforded considerable leeway in deciding policy matters. Ignoring the text of the statute, the court based its decision on "the intent of Congress" to "place all persons who may have concealed bankruptcy assets in the same class as respects limitations, and not to differentiate between those cases in which the bankrupt might have been discharged and those in which he might not." Rather than striking the three-year statute of limitations, the court decided to interpret it so that it also included the denial of discharge as well.
During the same time period, in United States v. Nazzaro,20 the U.S. District Court for the Southern District of New York, acknowledging the "exhaustive opinion" in Fraidin, observed that that the provisions of the statute were not ambiguous, and that "Congress and not the courts must determine if and when prosecution for an offense should be barred by limitation." The Nazzaro court further observed that no "legislative history has been found or called to the attention of the court indicating that Congress intended otherwise than it expressly provided." The Nazzaro court elected to follow the Newman decision rendered by another judge within its district, rather than Fraidin.
The U.S. District Court for the Middle District of Pennsylvania added its voice to the debate on how the concealment statute of limitations should be interpreted in 1947. In United States v. Ganaposki, the court was confronted with a case where an involuntary petition in bankruptcy had been filed against the defendant on June 15, 1938, the defendant was adjudicated a bankrupt, and an indictment was returned on Oct. 22, 1946. He allegedly concealed property from the estate from Aug. 15, 1938, until he was charged. The defendant had not, up until the date of the indictment, received a discharge. The defendant moved to dismiss the indictment on the grounds that (1) the prosecution was barred by the statute of limitations, (2) the amendment to the statute of limitations did not apply equally to all debtors, and (3) on other grounds.
While the defendant relied on Fraidin in support of his argument that the amendment did not apply to all debtors equally, the Ganaposki court proclaimed that it was within the power of Congress to make such a classification, that the law applies with equal force to all within the class, and the defendant "points to nothing by way of citation of authority or argument to convince us that the classification...was illegal or unconstitutional." The court noted that Fraidin based its analysis on an interpretation of the statute suggested during this time frame by Collier on Bankruptcy. While going to great lengths not to disagree with the "able author of the text of that valuable book," the Ganaposki court refused to take the commentary "as a suggestion to the courts to make an addition to the legislation as it was written by Congress." The court relied on other scholarly authority in declaring it did not have the authority to judicially rewrite the statute. One of the foremost proponents of the doctrine of judicial restraint in the 20th century, former Harvard law professor and U.S. Supreme Court Associate Justice Felix Frankfurter, in his work on Reading of Statutes,21 explained that "[a]n omission at the time of enactment, whether careless or calculated, cannot be judicially supplied; however, much later wisdom may recommend the inclusion." Again, following Newman, the Ganaposki court denied the motion to dismiss.
The Modern Era
The statute of limitations for concealment was, of course, later amended to clarify that it begins to run when a discharge is granted or denied. However, more than half a century after the courts first began to struggle with deciding what limitations period applies in concealment prosecutions when the bankruptcy court has not ruled on the bankrupt's discharge, the same question remains unanswered by Congress. If a corporate debtor conceals assets in a liquidation, or a debtor dismisses his or her case without the entry of a discharge, the triggering event will not have occurred. As the foregoing authority makes clear, one possible consequence of this course of events would be that the crime would not be governed by any limitations period.
In deciding when a statute of limitations begins to run in a given case, the U.S. Supreme Court has explained that the analysis must be guided by several considerations.22 On one hand, criminal limitations statutes are to be liberally interpreted in favor of repose.23 On the other hand, statutes of limitations normally begin to run when the crime is complete,24 but should not be extended except as otherwise expressly provided by law.25 Because Congress has defined concealment as an ongoing offense, the authority of the courts to judicially craft a limitations period other than the ones set forth in the statute is suspect, as noted by the majority of the district courts that addressed the similar interpretation issue in the 1940s.
The Fraidin court may, however, have been on the right track with its equal protection analysis, but without an established body of law to back it up. It can be argued the principles of equal protection would be violated by an interpretation of the concealment statute of limitations that allows defendants in some cases to be prosecuted ad infinitum, while limiting the authority of the state to prosecute others to five years from the entry or denial of the discharge. Social and economic legislation that employ suspect classifications or impinge on fundamental rights must be invalidated under the equal protection component of the Fifth Amendment when the legislative means are not rationally related to a legitimate government purpose.26 While Congress has a legitimate purpose in combating bankruptcy crimes, the government would, in the face of an equal-protection challenge, have to articulate a rational reason for the two classes that relates to this purpose. It could be argued that debtors who stay in bankruptcy long enough to have discharge questions litigated have subjected themselves to the jurisdiction of the courts and scrutiny of the trustee that would tend to ferret out acts of concealment, while those who employ the bankruptcy process for a short period conceal assets, and then dismiss the case before discharge questions that can be addressed have hindered the ability of the system to uncover such fraud, and therefore they should not be entitled to the benefits of the limitations period. Upon dismissal, the bankruptcy court, panel trustee, U.S. Trustee and creditors would no longer be able to use the civil bankruptcy process to combat acts of fraud perpetrated against the system. Neither the statute, case law nor legislative history weigh in on this debate.
Notwithstanding the debate during the 1940s, the modern trend is for the courts to hold that the dismissal of the case, or such similar event that prevents the entry or denial of discharge, begins the running of the limitations period.27 The fact that there is little modern case law on the subject suggests that prosecutors have likely been cautious in their charging decisions to stay safely within the most conservative limitations period, which is a sound approach. While practical, this approach is not based on the text of the statute. A text-based alternative might be to apply the general five-year statute of limitations when the triggering events of granting or denial of the discharge have not occurred, but apply it from the point when the last act of concealment occurred, or the last opportunity the debtor had to disclose the property while the bankruptcy was pending. After the case has been closed, the concealment could be considered to have succeeded (although a case can likely be reopened to administer fraudulently concealed assets).
Crooked debtors—and others—who conceal assets from a bankruptcy estate should take no solace from the foregoing discussion. It is clear that Congress intended to extend the time period in which they can be prosecuted for such crimes beyond the limitations period set for most crimes. Further, persons who commit such crimes and attempt to avoid prosecution are subject to an even longer limitations period.
Persons who attempt to flee in an effort to thwart the efforts of federal authorities to prosecute them for defrauding the bankruptcy system should consider the fact that engaging in such conduct will toll the limitations period. Section 3290 of Title 18 provides that "[n]o statute of limitations shall extend to any person fleeing from justice." Thus, when a defendant flees from justice, the statute of limitations is tolled. In Streep v. United States, the U.S. Supreme Court explained what it means to "flee justice" within the scope of the tolling statute:
In order to constitute a fleeing from justice, it is not necessary that the course of justice should have been put in operation by the presentment of an indictment by a grand jury, or by the filing of an information by the attorney for the government, or by the making of a complaint before a magistrate. It is sufficient that there is a flight with the intention of avoiding being prosecuted, whether a prosecution has or has not been actually begun.28
The case law makes it clear that whether or not a warrant has been issued at the time of a defendant's flight is not determinative. Rather, the focus is on the defendant's intent to avoid prosecution.
In cases when no discharge has been granted or denied, there is more than one interpretation of the statute of limitations that governs prosecutions for concealment of property from a bankruptcy estate. Congress should consider clearing up the uncertainty in the law that has existed for more than half a century. Until it does so, dishonest debtors and the federal prosecutors who prosecute them have yet one more issue over which to wage war.
Because most efforts to defraud the bankruptcy system can be charged as a violation of more than a single statute, and prosecutors can consider a range of offenses when making their charging decisions, they should keep both statutes of limitations in mind. For example, the general five-year statute of limitations will apply for false statement or false declarations, and may be close to running out before the concealment offense is established through investigation. As soon as possible after opening the case, the prosecutor should determine when the limitations period will run on the various charges under consideration, and schedule the investigation and prosecution in order to preserve as much of the case as possible.
1 Mr. Gaumer received his J.D. in 1989 from Washington University, his M.A. in 1986 in sociology and his B.A. in 1984 in journalism from Eastern Illinois University. He is a former chair of South Dakota Bankruptcy Fraud Task Force (1992-01) and a former law clerk to Hon. Frank W. Koger, U.S. Bankruptcy Judge, W.D. Mo. 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. Return to article
6 Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314 (1945) (citation omitted). Return to article
7 As late as 1999, at least, Wyoming apparently had no time limitations on criminal prosecutions. DeMichele v. Greenburgh Central High School, 167 F.3d 784. 789 n. 4 (2nd Cir. 1999), citing Vermer v. State, 909 P.2d 1344, 1348 (Wyo. 1996). Return to article
9 To be within the limitations period, a conspiracy charge requires proof that (1) the conspiracy must still have been ongoing within the five-year period preceding the indictment, and (2) "at least one overt act in furtherance of the conspiratorial agreement [must have been] performed within that period." Grunewald v. United States, 353 U.S. 391, 396-97 (1957) ("[T]he crucial question in determining whether the statute of limitations has run is the scope of the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and whether the act relied on as an overt act may properly be regarded as in furtherance of the conspiracy."). See, also, Brown v. Elliott, 225 U.S. 392, 401 (1912) ("[In the case of an alleged conspiracy,] the period of limitations must be computed from the date of the last [overt act] of which there is an appropriate allegation and proof." (internal quotation marks omitted)). Return to article
12 In a case where a corporate debtor converted from a chapter 11 to a chapter 7, the Eleventh Circuit has held that the limitations
period runs from the date the case was converted, which was the last opportunity for the corporate debtor to obtain a chapter 11 discharge.