18 U.S.C. §157 Criminalizing “Fraudulent Involuntary Bankruptcy Petitions”
by Wayne M. Greenwald
Wayne Greenwald PC; New York
What’s in a Name?
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 introduced several new terms into the bankruptcy lexicon. These include “means test,” “chapter 15,” “health care ombudsman,” “debt-relief agency” and “family fisherman.” These new terms are defined either by the statute, prior case history or legislative intent.
BAPCPA also amended 18 U.S.C. §157 by incorporating the Involuntary Bankruptcy Improvement Act of 2005 (IBIA). 18 U.S.C. §157 now makes it a crime to file a “fraudulent involuntary bankruptcy petition.”2 However, the new offense is undefined, which will render it unwieldy3 if not ineffective.
The legislative history for the statue provides no guidance as to what a fraudulent involuntary bankruptcy petition4 is. Nor is it defined anywhere else in the U.S. Code. Cases discussing a fraudulent involuntary bankruptcy petition are few.
In U.S. v. McBride,5 a tax protestor filed involuntary bankruptcy petitions against the judge, Internal Revenue Service agent and defense attorneys involved in the case in which his girlfriend was convicted of evading federal income taxes. The petitions were based on claims fabricated by that defendant.
In Marshall-Silver Construction Co. Inc., etc., v. Mendel, et anos.,6 the court dealt with a RICO claim7 whose predicate acts included filing a knowingly false involuntary bankruptcy petition. The court affirmed the dismissal of the action for failure to satisfy RICO’s “continuity” requirement. Id. at 598. The court did not consider the substance of the predicate acts alleged. Nor was any specific bankruptcy crime provision cited.8
Juxtaposed to the amendment of 18 U.S.C. §157 are BAPCPA and IBIA amendments to 11 U.S.C. §303(1), which provide relief for individual alleged debtors where an involuntary petition based upon false, fictitious or fraudulent information is dismissed. After dismissal, a court may enter orders (a) prohibiting all consumer reporting agencies from making any consumer report that contains any information relating to such petition or to the case commenced by the filing of such petition, and (b) expunging any records relating to an involuntary bankruptcy petition.9 However, it appears that an involuntary bankruptcy petition based upon false, fictitious or fraudulent information can be ratified by the case not being dismissed. Where a case is not dismissed, 11 U.S.C. §303(1)’s relief is not available.10
Nor does the term “fraudulent bankruptcy petition” seem to per se include a “collusive” involuntary petition.11 Thus, if an order for relief is rendered on a fraudulent involuntary bankruptcy petition, is the fraudulent bankruptcy petition cleansed of its taint?
What is the injury the new prohibition is attempting to stop? IBIA’s initial sponsor, Congressman James Sensenbrenner (Wisc. 5th Dist.), reported in 2003 that:
Unfortunately, tax protestors and other extremists are now resorting to filing fraudulent involuntary bankruptcy petitions against public officials and other innocent parties. In the case of the Ozaukee County officials, some of the county employees didn’t even realize they were the subject of a pending involuntary bankruptcy case until after their lines of credit were terminated, or were charged higher interest rates. In addition, some officials even had their mortgage statuses negatively affected. These filings were subsequently dismissed, but not until after causing financial problems for these folks.12
IBIA’s sponsor apparently intended §157’s amendment to deter using involuntary bankruptcy petitions as an implement for abuse of process. However, this ill does not yet seem pervasive.
The greater evil would be using bankruptcy cases to implement fraudulent schemes for identity theft and using a bankruptcy case to further frauds.13 However, an involuntary bankruptcy petition invites greater obstacles for those schemes. More participants are required to further the fraud. Involuntary petitions are generally filed with three petitioning creditors.14 While involuntary petitions can be filed by a single petitioning creditor,15 the eligibility to file an involuntary petition invites bankruptcy courts to examine their subject-matter jurisdiction through the eligibility of the petitioning creditors to file the involuntary petition.
In a fraudulent scheme, the involuntary petition requires three stooges. An additional stooge might pose as the target debtor.16 The easiest way to execute such schemes remains using voluntary bankruptcy petition with only one stooge. While the amended statute could address this ill, marginally competent bankruptcy fraud artists must already know that involuntary bankruptcy petitions are the riskier route to relief orders.
Moreover, pre-BAPCPA 18 U.S.C. §157 already addressed any paper filed on a bankruptcy case. It is hard to imagine that an involuntary petition commencing a bankruptcy case is not a paper filed in a bankruptcy case. For example, the McBride defendant was convicted of six counts, including three counts of bankruptcy fraud violating pre-BAPCPA 18 U.S.C. §157.17
A lack of definition also leaves prosecutions based on the amended statute subject to a “void for vagueness” challenge.18 While a prosecutor could hope that a trier of fact would “know it when I see it,”19 jury instructions for a fraudulent involuntary bankruptcy petition could be nightmarish.
Conclusion
Law and order proponents may hype the amendment to 18 U.S.C. §157 as part of a “get tough” approach to bankruptcy abuse and fraud. The amendment may be seen as a new tool for prosecutors to fight increasingly sophisticated bankruptcy frauds. Unfortunately, absent a useful definition of fraudulent involuntary bankruptcy petition, this new arrow in the prosecutor’s quiver appears pointless.
1Despite its title, the statute is gaining notoriety as the Bankruptcy Attorneys and Professionals Confused Profusely Act of 2005.
218 U.S.C. §157 now provides (BAPCPA amendments in italics):
- files a petition under title 11, including a fraudulent involuntary bankruptcy petition under §303 of such title;
- files a document in a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under §303 of such title; or
- makes a false or fraudulent representation, claim or promise concerning or in relation to a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under §303 of such title, 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.
Bankruptcy fraud
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 –
3 An undefined term’s lack of clear meaning creates problems in application. See In re Minor, 177 B.R. 576, 582 (Bankr E.D. Tenn. 1995).
4 House Report (BAPCPA 2005) states:
Section 332(c) amends §157 of title 18 to make it a criminal offense to file a fraudulent involuntary bankruptcy petition. Section 332 is similar to legislation considered by the House in the 108th Congress. [H.R. 1529], 108th Cong. (2003). The bill was ordered favorably reported without amendment by the House Judiciary Committee, H.R. Rep. No. 108-110 (2003), and passed by voice vote by the House. 149 Cong. Rec. H5104 (daily ed. June 10, 2003). The principal difference between this legislation and §332of the Act is that the bill would have permitted the court to expunge the case upon dismissal of the fraudulent involuntary petition.
5 434 F.3d 470, 472 (6th Cir. 2006).
6894 F.2d 593, 595-595 (3rd Cir. 1990).
7 18 U.S.C. §§1961 and 1964.
8 Curiously, 18 U.S.C. §157 is specifically excluded from being a RICO predicate act. 18 U.S.C. §1961(1)(D).
9 11 U.S.C. §303(1) is new and provides:
(1) If-
- (A) the petition under this section is false or contains any materially false, fictitious or fraudulent statement;
(B) the debtor is an individual; and
(C) the court dismisses such petition, the court, upon the motion of the debtor, shall seal all the records of the court relating to such petition, and all references to such petition.
(2) If the debtor is an individual and the court dismisses a petition under this section, the court may enter an order prohibiting all consumer reporting agencies (as defined in §603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f)) from making any consumer report (as defined in §603(d) of that Act) that contains any information relating to such petition or to the case commenced by the filing of such petition.
(3) Upon the expiration of the statute of limitations described in §3282 of title 18, for a violation of §152 or 157 of such title, the court, upon the motion of the debtor and for good cause, may expunge any records relating to a petition filed under this section.
10 11 U.S.C. §§303(1)(1)(c) and 303(1)(2).
11 Compare, In re Kingston Square Associates, 214 B.R. 713, 733 to 734 (Bankr. S.D.N.Y. 1997); In re Corto, 1995 WL 643372, *4 (W.D.N.Y.); In re Valdez, 250 B.R. 386, 390 (D. Ore. 1999) (to dismiss an involuntary bankruptcy as collusive, there must appear to be concerted action between the debtors and the petitioning creditor, and these parties must fraudulently invoke the jurisdiction of the bankruptcy court… In other words, the two parties must act for a wrongful purpose).
12 Press release, F. James Sensenbrenner, Jr., June 10, 2003.
13 E.g. filing a bankruptcy petition to fraudulently stall foreclosures and gain income from proberties (equity skimming). United States v. Lindholm, 24 F.3d 1078 (9th Cir. 1994).
14 11 U.S.C. §303(b).
15 11 U.S.C. §303(b)(2).
16 No offence intended to Moe, Larry, Curly and Shemp. Stooge is used as a term of art. It is an alter ego, alias or dummy of the actor and a device or sham used to disguise wrongs, obscure fraud or conceal crime. See Futurology Impex Corp. v. International Trade Group Inc., 1987 WL 42986, *2 (E.D.N.Y.), citing Cheatle v. Rudd’s Swimming Pool Supply Co., 360 S.E.2d 828, 831 (Va. 1987).
17 434 F.3d at 471.
18 The void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement. U.S. v. Cavalier, 17 F.3d 90, 93 (5th Cir. 1994), citing Kolender v. Lawson, 461 U.S. 352, 357, 103 S.Ct. 1855, 1858, 75 L.Ed.2d 903 (1983).
One commentator has summarized the purpose of this doctrine as being “concerned with how uncertainty about the content of substantive law influences the behavior of those to whom laws are addressed. The ‘fair warning’ notion identified by the courts as an animating principle of the doctrine thus seeks to ensure that individuals know the bounds of legal activity and can adjust their behavior to these bounds.” Hadfield, Gillian K., “Weighing the Value of Vagueness: An Economic Perspective on Precision in the Law,” 82 Calif. L. Rev. 541, 543 (1994).
In re Long, 261 B.R. 205, 208 (Bankr. S.D. Ohio, 2000).
19The “I know it when I see it” standard (to identify obscenity) was expressed in Justice Potter Stewart’s concurrence in Jacobellis v. Ohio, 378 U.S. 184, 197, 84 S.Ct. 1676, 1683, 12 L.Ed.2d 793 (1964).