Caveat Counsel Pitfalls That Can Lead to the Prosecution of Attorneys for Bankruptcy Crimes

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Jul/Aug 1999

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Numerous persons and organizations are concerned with preventing bankruptcy crimes<a href="#2" name="2a">2</a> and

prosecuting those who commit them. Debtors being defrauded by creditors, creditors being

defrauded by debtors, members of the bench and bar, and various federal law enforcement

agencies all have strong interests in preserving, protecting and defending the integrity of the

bankruptcy system. The federal criminal statutes most associated with bankruptcy crimes are

<a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §152</a> (listing numerous bankruptcy crimes) and <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §157</a> (bankruptcy

fraud).<a href="#3" name="3a">3</a> Misconduct during the course of a bankruptcy case can also potentially be prosecuted

as mail fraud, perjury, obstruction of justice, conspiracy, false statements, money laundering

and a wide range of other statutes, depending on the particular facts of the case.

Although the vast majority of bankruptcy crime prosecutions focus on debtors and creditors,

a number of cases over the past several years have shown that participating in an effort to

circumvent the honesty requirements of the bankruptcy process—whether as counsel for a

client or individual—can subject an attorney to criminal liability. Attorneys who participate in

bankruptcy cases should be alert to the fact that any participation in their clients' efforts to

cheat the system can not only lead them into ethical problems and potential disbarment, but can

also lead them to jail.

Counsel who are tempted to advise their clients to intentionally undervalue assets, overvalue

claims or otherwise be exceptionally "creative" in an effort to take unfair advantage of the

bankruptcy system should keep in mind that it is a federal crime to "aid, abet, counsel,

command, induce or procure" another to commit a federal crime.<a href="#4" name="4a">4</a> It is also a crime to conspire

with another to commit a federal bankruptcy crime or other criminal act.<a href="#5" name="5a">5</a>

Attorneys risk being indicted for attempting to "receive, relieve, comfort or assist the offender

in order to hinder or prevent his apprehension, trial or punishment"<a href="#6" name="6a">6</a> if they assist their

clients in eluding the law. Additionally, an attorney can possibly commit the crime of

misprision of felony if he or she knows "of the actual commission of a felony cognizable by a

court of the United States, conceals and does not as soon as possible make known the same to some

judge or other person in civil or military authority under the United States."<a href="#7" name="7a">7</a>

<h3>Summary of Selected Cases</h3>

A review of U.S. Department of Justice records and published case law reveals that a number of

attorneys have been convicted of bankruptcy-related crimes. The punishment for bankruptcy

crimes can be severe.<a href="#8" name="8a">8</a> The cases are summarized below.

United States v. Washington.<a href="#9" name="9a">9</a> Betty L. Washington, a New Orleans-area attorney, was

sentenced in January 1999 to 33 months in prison and ordered to pay approximately $5,000 in

restitution for multiple counts of fraud, including bankruptcy fraud. The bankruptcy fraud

count arose from the fact that between March 1992 and January 1995 she knowingly and

fraudulently concealed from the chapter 7 trustee and her creditors her right to receive legal

fees from a client. In addition, as part of a scheme to obtain more than $20,000 in automobile

loans, Washington attempted to mislead a bank into believing her bankruptcy case had been

concluded. A jury in the U.S. District Court for the Eastern District of Louisiana found

Washington guilty of eight of the 12 counts brought against her. She was acquitted on charges of

mail fraud and credit card fraud.

United States v. Hattier.<a href="#10" name="10a">10</a> Craig Joseph Hattier of Covington, La., was sentenced in June

1998 to 12 months and one day in prison, and ordered to pay full restitution of $116,500 for

concealing bank accounts from creditors during his chapter 7 bankruptcy case. His sentence,

handed down by the U.S. District Court for the Eastern District of Louisiana, included

enhancements for abuse of a judicial order, for more than minimal planning and for the large

dollar amount involved. Hattier, an attorney, knowingly concealed from the bankruptcy trustee

two bank accounts in the name of Angel Builders Inc., through which he made deposits and wrote

checks. Hattier, who had filed for bankruptcy on Dec. 5, 1990, pleaded guilty in October 1997

to a violation of <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §152</a>, which prohibits the concealment of assets in a bankruptcy case.

United States v. Kubick, et. al.<a href="#11" name="11a">11</a> The longest white-collar crime sentence ever imposed

in the District of Alaska—a 58-month prison term—was handed down in 1998 against Robert

Kubick of Anchorage for fraud that resulted in a $2,334,000 loss to his chapter 7 bankruptcy

estate. Kubick's attorneys also received prison terms for their roles in the fraud. Kubick

pleaded guilty to one count of bankruptcy fraud and one count of tax evasion in connection with

the concealment of assets.

Kubick was an Anchorage real estate developer in the 1980s. When the Alaskan economy crashed

in the late 1980s, Kubick engaged in an extensive effort to evade creditors, many of whom were

failed banks taken over by the Federal Deposit Insurance Corp. Kubick filed a chapter 7 petition

in Houston in 1991, but he failed to disclose the following property:

<ul><li>more than $450,000 in buried cash and diamonds;

</li><li>more than $100,000 in jewelry;

</li><li>a big game trophy collection worth more than $90,000;

</li><li>two elephant tusks valued at $10,000;

</li><li>paintings;

</li><li>an Alaskan hunting lodge worth $325,000; and

</li><li>funds placed in an attorney trust account that were used to purchase a $48,000 Land Rover

Kubick gave to his 17-year-old daughter.

</li></ul>

Kubick also failed to disclose that he controlled several corporations and partnerships that

continued to hold or participate in real estate developments in Anchorage and Wyoming through

the actions of his attorneys, Wayne Herron and Carol Birdwell of Fort Worth, Texas, in a series

of transactions in preparation for Kubick's bankruptcy.

Attorney Herron also pleaded guilty and was sentenced on one count of bankruptcy fraud and one

count of tax evasion. He received three years of prison time and three years of supervised

release, and was directed to pay $6,000 in restitution to Kubick's bankruptcy estate. His wife,

attorney Birdwell, pleaded guilty to one count of tax evasion. She was sentenced March 5 to eight

months in prison. Herron and Birdwell planned and executed a scheme that laundered

funds—some of which were funneled to them through an Anchorage law firm's trust

account—from various real estate transactions. Herron and Birdwell represented to others that

they held partnership interests in their own names, and falsified statements regarding an

<a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… Revenue Code §501(c)(3)</a> foundation's interest in the trophy collection.

United States v. Leslie J. Webster.<a href="#12" name="12a">12</a> Leslie Webster was convicted in the U.S. District

Court for the Western District of Wisconsin of aiding and abetting his client's fraudulent

concealment of estate property. Webster had helped his client incorporate a bar by conveying it

and other assets to a new corporation in return for stock. Webster drafted and notarized the

corporate documents. A little more than a month later, the client and his wife, on Webster's

advice, filed a voluntary chapter 7. In the Statement of Financial Affairs prepared by Webster,

the clients falsely stated that the bar had been surrendered—the month before the corporation

was created—to a creditor due to an unpaid land contract. The schedules also failed to list the

clients' interest in the new corporation that owned the bar.

United States v. Gary L. Dolan.<a href="#13" name="13a">13</a> Gary Dolan was convicted in the U.S. District Court for

the District of Nebraska of conspiracy to conceal bankruptcy estate property and aiding and

abetting in the concealment of estate property. Dolan's client concealed from creditors an

$85,000 Ferrari and his interest in a lawsuit that settled post-petition for $1.9 million. Dolan

was co-counsel on the lawsuit and personally received $50,000 out of the settlement proceeds

as a personal bonus. When Dolan learned of his client's interest in the vehicle after the case was

filed, he failed to disclose it to the court or creditors, and failed to have his client disclose the

vehicle. Though he was aware his client had $1.9 million and the Ferrari, Dolan continued to

tell creditors he was unable to pay any of his debts. Dolan raised as a defense of sorts that the

Code of Professional Responsibility did not allow him to disclose the settlement if it would

subject his client to prosecution. And he asserted that while he was permitted to withdraw from

the case, he was not required to do so.

United States v. Michael Robert McIntosh.<a href="#14" name="14a">14</a> Michael McIntosh was convicted in the U.S.

District Court for the District of Kansas of three counts of bankruptcy fraud and 10 counts of

money laundering associated with his own chapter 11 case. McIntosh did not disclose more than

$100,000 in post-filing fees he received from a pre-petition case he had brought for clients

against a local county board.

United States v. Timothy Edward Graham.<a href="#15" name="15a">15</a> Timothy Graham was convicted in the U.S.

District Court for the District of Minnesota for failing to disclose his undivided one-half

interest in a series of apartment buildings in his own chapter 11 case. He did not list this asset

in Schedule A (personal property) or Schedule B (his partnership interest). At the §341

meeting, he claimed to have transferred his interest to his minor son a little over a year

earlier. Graham could not have made the transfer as he testified because a watermark on certain

documents he used in an effort to support his story established that the paper was not

manufactured until two years after the date the documents had allegedly been created.

United States v. David R. Knoll.<a href="#16" name="16a">16</a> Attorney David Knoll was convicted in the U.S. District

Court for the Western District of New York on one count of aiding his client in committing

bankruptcy fraud and one count of aiding his client in making a false statement to the probation

service. Knoll advised his client to file chapter 11 to protect certain business assets from being

tied up in a messy divorce. When the client did so, he failed to disclose the name under which he

had conducted business during the past six years. He also failed to list two bank accounts he had

maintained in the two years prior to filing, which together contained more than $600,000.

Knoll was involved in the undisclosed business, helped open both undisclosed accounts and

prepared the "Statement of Financial Affairs," in which none of these items was listed.

United States v. Tommy Brown.<a href="#17" name="17a">17</a> Attorney Tommy Brown was convicted in the U.S.

District Court for the District of Colorado of conspiracy, two counts of bankruptcy fraud and

mail fraud. Brown was an associate of a law firm that represented the owners of a Denver

furniture store. When one of the owners filed bankruptcy, the debtor did not disclose $250,000

in the law firm's trust account, a $300,000 investment/ownership interest in a business made

with employee pension funds and $125,000 in an accounting firm's trust account. Brown was

involved in creating the undisclosed business. He prepared the debtor for a deposition in which

the debtor made several false representations. He destroyed boxes of business records without

court permission. The court held that the evidence supported the inference that Brown knew of

the undisclosed assets, that he discussed with the debtor how to conceal the assets during the

deposition and that his destruction of business records was indicative of his involvement in the

conspiracy.

United States v. Mark A. Center.<a href="#18" name="18a">18</a> Attorney Mark Center was prosecuted in the U.S.

District Court for the Southern District of Indiana and convicted on two counts of fraudulently

falsifying and making false entries in documents affecting or relating to the affairs of a debtor.

When Center learned of an asset his client had omitted from the chapter 11 schedules (a debt of

$130,000 that the closely related business had sufficient assets to pay), he not only failed to

amend the schedules to inform the court and all parties of it, but he saw to it that documents

were executed and book entries made that made it appear the debt was not owing due to the

set-off he fabricated.

<h3>Conclusion</h3>

A license to practice law does not confer upon an attorney a license to use his or her skills to

manipulate the legal system to the advantage of clients or to his or her own personal advantage.

Indeed, the converse is true—attorneys are ethically required to be honest in their dealings with the courts, clients and other attorneys, and must report the unethical acts of others in their

profession or risk being disciplined for failure to do so.

This survey of cases indicates that the federal criminal justice system aggressively pursues

lawyers who lie, cheat, steal and conceal. Consequently, counsel appearing in bankruptcy court

should carefully consider whether their advice comes close to counseling clients to commit a

bankruptcy crime or other federal offense—and should exercise caution so that their words and

deeds do not come perilously close to the realm of illegal activities.

<hr>

<h3>Footnotes</h3>

<a name="1">1</a> Chair, South Dakota Bankruptcy Fraud Task Force; Chair, ABI Commercial Fraud Task Force; Adjunct Professor of Law, University of South Dakota. The views expressed in this

article are solely those of the author and should not be attributed to any persons or entities associated with him. <a href="#1a">Return to article</a>

<a name="2">2</a> This list includes components of the U.S. Department of Justice (U.S. Trustees, U.S. Attorneys' Offices, the Fraud Section of the Criminal Division and the FBI), Internal Revenue Service Criminal Investigation Division, Social Security Administration and the U.S. Department of Agriculture Criminal Investigation Division, among others. <a href="#2a">Return to article</a>

<a name="3">3</a> See, generally, Gaumer, Craig Peyton, "Operation Total Disclosure: A Commentary on the U.S. Department of Justice and the Prosecution of Bankruptcy Crimes," April 1996

ABI Journal 10. <a href="#3a">Return to article</a>

<a name="4">4</a> In full, <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §2</a> reads as follows:

(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.

(b) Whoever willfully causes an act to be done which, if directly performed by him or another would be an offense against the United States, is punishable as a

principal. <a href="#4a">Return to article</a></blockquote>

<a name="5">5</a> In full, <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §371</a> reads as follows:

If two or more persons conspire either to commit any offense against the United States or to defraud the United States, or any agency thereof in any manner or for any

purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or

both.

If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the

maximum punishment provided for such misdemeanor. <a href="#5a">Return to article</a></blockquote>

<a name="6">6</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §3</a> states:

Whoever, knowing that an offense against the United States has been committed, receives, relieves, comforts or assists the offender in order to hinder or prevent his

apprehension, trial or punishment, is an accessory after the fact.

Except as otherwise expressly provided by any Act of Congress, an accessory after the fact shall be imprisoned not more than one-half the maximum term of

imprisonment or (notwithstanding §3571) fined not more than one-half the maximum fine prescribed for the punishment of the principal, or both; or if the principal is

punishable by life imprisonment or death, the accessory shall be imprisoned not more than 15 years. <a href="#6a">Return to article</a></blockquote>

<a name="7">7</a> The misprision of felony statute, <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §4</a>, reads:

Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the

same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or

both.</blockquote>

The statute has been construed to require "both knowledge of a crime and some affirmative act of concealment or participation." See <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… v. Hayes, 408 U.S. 665, 696, n.

36, 92 S.Ct. 2646, 2664, n. 36, 33 L.Ed.2d 626 (1972)</a>. See, generally, Glazebrook, "Misprision of Felony—Shadow or Phantom?", <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… Am.J.Legal Hist. 189, 283 (1964)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> See, generally, <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=…, Craig Peyton, "Bankruptcy Fraud: Crime and Punishment," 43 S. D. L. Rev. 527 (1998)</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> USTP Press Release (February 12, 1999). <a href="#9a">Return to article</a>

<a name="10">10</a> USTP Press Release (June 26, 1998). <a href="#10a">Return to article</a>

<a name="11">11</a> USTP Press Release (March 6, 1998). <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.3d 1024 (7th Cir.1997)</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.3d 856 (8th Cir.1997)</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… B.R. 688 (D. Kan. 1996)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.3d 463 (8th Cir. 1995)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.3d 1313 (2nd Cir. 1994)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.2d 1246 (10th Cir. 1991)</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… F.2d 568 (7th Cir. 1988)</a>. <a href="#18a">Return to article</a>

Journal Authors

Craig Peyton Gaumer

Journal Date

Thursday, July 1, 1999 - 12:00