Are There No Exceptions?
The criminal statute itself contains no exceptions. Indeed, it is unambiguous: The proscribed activity is “knowingly purchas[ing], directly or indirectly, any property of the estate of which the person is an officer in a case under title 11.”1 Federal statutes, including criminal statutes, if unambiguous, are generally to be construed in accordance with their plain meaning.2 The Supreme Court has stated:
We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says. When the words of a statute are unambiguous, then this first rule is also the last: “judicial inquiry is complete.”3
In criminal cases, the “plain meaning” rule is somewhat tempered by the “fair warning” requirement.4 This requirement has three manifestations. First, the vagueness doctrine bars enforcement of:
a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application.5
Second, the canon of strict construction of criminal statutes, or rule of lenity, resolves ambiguity by applying the statute only to conduct clearly covered.6 Third, due process bars the application of a novel construction to a criminal statute.7 It is submitted that the “fair warning” requirement does little to temper the breadth of the statute. The statute is neither vague nor ambiguous. Nor does its ordinary application stem from a novel construction. As a result, any exceptions to the statutory prohibition have to come from the two recognized exceptions to the “plain meaning” rule, for results that are (1) demonstrably at odds with the legislature’s intention8 or (2) absurd.9
It is difficult to sustain any exception to the statutory prohibition by probing the legislature’s intention. The purpose of the prohibition against purchasing estate assets has been described as “avoid[ing] unfairness, the improper use of confidential information, or the appearance of impropriety.”10 As the Supreme Court has stated: “Equity tolerates in bankruptcy trustees no interest adverse to the trust. This is not because such interests are always corrupt, but because they are always corrupting.”11 This purpose does not readily admit to a loosening of the prohibition against fiduciaries’ purchasing estate assets.
A more fruitful search for an exception comes from the realm of the absurd. The first candidate is where the debtor is engaged in the business of selling merchandize at retail to the general public. Consider the chapter 11 trustee of an airline. Should he or she be prohibited from traveling with the estate’s own airline and purchasing an alcoholic beverage (beer or wine in coach)? Do we force the trustee to travel with a competitor? Or do we avoid the crime of “purchasing” by giving the trustee free travel and amenities? Consider, too, the attorney for the debtor-in-possession (DIP) in one’s favorite retail chain in bankruptcy. Is that attorney prohibited from purchasing a necktie for full retail value? Everyone in the world is welcome to make such purchases. To hold a fiduciary criminally liable or to impose the forfeiture of office for doing what anyone else in the world may do represents the height of absurdity. A public retail exception ought to be recognized.
What about others? A public auction of estate property creates an open market where bidders compete so the estate can obtain the highest and best price for the property. Should criminal liability or civil forfeiture attach for such purchases by a fiduciary? The answer is that it should for the seller, and the seller’s agents of sale. The rule prohibiting a trustee from buying trust property is ancient and well known.12 So, too, is authority prohibiting an appraiser from buying the property he has appraised, because he has “confidential information concerning the cost of the property . . . and concerning many other matters affecting its value and the price to be obtained for it.”13 For similar reasons, auctioneers, brokers and even investment bankers should be subject to the criminal prohibition and civil forfeiture for purchasing the property they are selling. The issue of the liability of officers and directors of DIPs and members of committees should be determined by whether the individuals possessed the property or had access to the confidential information (not available to other bidders) concerning the property. Nevertheless, because of the interest in maximizing value, appropriate disclosure to the court should overcome the prohibition.14
If the debtor is a merchant, other merchants may become members of a chapter 11 creditors’ committee. Is such a committee member that continues the ordinary course of business practice of buying the debtor’s goods a criminal? The access to confidential information that affects the value and the price of the property suggests that such a purchase ought to be prohibited. There is certainly a conflict between the merchant’s desire to buy at a favorable price, and the committee member’s fiduciary duty to maximize the recovery for the benefit of creditors. Nevertheless, there ought to be some way for the debtor and the creditors' committee member to continue ordinary course trading. The notion of a “screening wall” within the members of a creditors’ committee is current with respect to trading claims and securities of debtors.15 A similar device should insulate a creditors’ committee member from liability under §154.
What about obtaining court permission? For those crimes for which an intent to defraud is required, good faith is a defense.16 If good faith suffices, then court permission ought to be determinative. Certainly, court permission ought to eliminate any grounds for removal of the fiduciary short of a criminal conviction. But §154 does not contain an intent-to-defraud requirement; all that is required is that the act be done "knowingly."17 Good faith, therefore, is not a defense. Moreover, it seems doubtful that, by granting a fiduciary permission to purchase, the bankruptcy court can grant immunity from prosecution.18 Nevertheless, little law enforcement purpose would be served by the prosecution of a fiduciary who received court permission.
Conclusion
The criminal prohibition of fiduciaries’ purchasing estate assets is serious business. A misstep, if brought to the court’s attention, can result in the forfeiture of office. In most cases, the improper conduct is easy to prevent. Nevertheless, in some cases the improper conduct can be committed by someone not realizing that he or she is an “officer of the court” and therefore subject to the prohibition, or by someone not realizing that acting like a member of the general public or a merchant in the ordinary course of business is no defense. Truly absurd results, such as in public retail cases, ought not to trigger the unfortunate consequences. The best course of action is for all participants in a bankruptcy case who have either a fiduciary duty or a requirement of disinterestedness to hold their position to be cognizant of the rule and consciously avoid violating it.
1 This article is a revised, updated and condensed version of materials presented at the American Bar Association 1998 Spring Meeting in the Subcommittee on Bankruptcy Crimes, Fraud and Abuses of Bankruptcy Process of the Committee on Business Bankruptcy, as to which the author also reserved the copyright. Part I appeared in the April 2007 edition of the Commercial Fraud Task Force Committee eNewsletter. Alec P. Ostrow is a shareholder of Stevens & Lee, P.C. in the New York City office. He is also the co-chair of the ABI’s Real Estate Committee, an adjunct professor of law at St. John’s University School of Law in the LL.M. in Bankruptcy program, and a fellow of the American College of Bankruptcy. He can be reached at (212) 537-0402 and apo@stevenslee.com.
18 U.S.C. §154(1).
2 See, e.g., Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1990).
3 Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54 (1992); see United States v. Alvarez-Sanchez, 511 U.S. 350, 356, 359 (1994) (construing 18 U.S.C. §3501) (relying on Connecticut Nat'l Bank v. Germain, 503 U.S. at 253-54).
4 A criminal statute must give “fair warning . . . in language that the common world will understand, of what the law intends to do if a certain line is passed. To make the warning fair, so far as possible the line should be clear.” United States v. Lanier, 520 U.S. 259, 265 (1997) (quoting McBoyle v. United States, 283 U.S. 25, 27 (1931) (Holmes, J.)).
5 Id. at 266 (quoting Connally v. General Constr. Co., 269 U.S. 385, 391 (1926)).
3Id.
7 7Id. at 266-67. This is in part based on the Constitution's prohibition on ex post facto laws. U.S. Const. art. I, §9, cl. 3.
8 Hubbard v. United States, 514 U.S. 695, 703 (1995) (“In the ordinary case, absent any ‘indication that doing so would frustrate Congress's clear intention or yield patent absurdity, our obligation is to apply statute as Congress wrote it.’”) (quoting BFP v. Resolution Trust Corp., 511 U.S. 531, 570 (1994) (Souter, J., dissenting)); Ron Pair, 489 U.S. at 242; Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982).
9 Hubbard, 514 U.S. at 703 (quoted in the preceding footnote). As the Supreme Court said over a century ago:
All laws should receive a sensible construction. General terms should be so limited in their application as not to lead to injustice, oppression, or an absurd consequence. It will always, therefore, be presumed that the legislature intended exceptions to its language, which would avoid results of this character. The reason of the law in such cases should prevail over its letter.
United States v. Kirby, 7 Wall. (74 U.S.) 482, 486-87 (1868).
10 Gross v. Russo (In re Russo), 762 F.2d 239, 241 (2d Cir. 1985) (holding that a former -- as distinguished from a current -- trustee may purchase estate assets at public auction).
11 Mosser v. Darrow, 341 U.S. 267, 271 (1951). In Mosser, the Court held a reorganization trustee personally liable for breach of fiduciary duty of loyalty by permitting employees to trade in securities of the debtor's subsidiaries. The trustee did not himself trade, nor did he profit personally. Id. at 275. Section 154 was not discussed. The trustee resigned after an investigation into the employees' conduct was commenced by the SEC. Id. at 270.
12 In re Frazin & Oppenheim, 181 F. 307, 310 (2d Cir. 1910). “‘A fiduciary cannot purchase property which he is empowered to sell’ because his actions may be ‘tainted with the possibility of unfairness or of conflict between personal desires and trust obligations.’” Russo, 762 F.2d at 242 (quoting Donovan & Schuenke v. Sampson, 226 F.2d 804, 811 (9th Cir.), cert. denied sub nom. Freedman v. Donovan & Schuenke, 350 U.S. 895 (1955). See generally G. Bogert & G. Bogert, The Law of Trusts and Trustees, § 543 at 204-05 (rev. 2d. ed. 1978).
13 Frazin & Oppenheim, 181 F. at 310.
14 Beck Indus., 605 F.2d at 635. See also In re Rex Body Corp., 138 F.2d 912, 913 (2d Cir. 1943) (noting that even directors could purchase, where the court found that the sale “was the best one available”).
15 See Lieb, Richard, Vultures Beware: Risks of Purchasing Claims Against a Chapter 11 Debtor, 48 Bus. Law. 915, 938 (1993); Posen, Robert C. and Mencher, Judy K., Chinese Walls for Creditors' Committees, 48 Bus. Law. 747, 748 (1993) (both commenting on the unpublished order in In re Federated Dep't Stores, Inc., No. 1-90-00130 (Bankr. S.D. Ohio 1991), which permitted trading in securities of the debtor by creditors' committee members who established a "Chinese wall").
16 United States v. Williams, 728 F.2d 1402, 1404 (11th Cir. 1984). This case is cited with approval in the legislative history to the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4139, which in title III amended the bankruptcy crimes statutes. 140 Cong. Rec. H 10,773 (daily ed. Oct. 4, 1994). See generally, Klestadt & Holly, supra note 14, at 33, col. 2 & n.21. But see United States v. Zehrbach, 47 F.3d 1252, 1262 (3d Cir. 1995) (A “defendant’s good faith belief in the lawfulness of his conduct is not a defense to bankruptcy fraud.”)
17 18 U.S.C. §154.
18 See generally, Donahue, Bonnie Kay and Whelehan, Rory D., "Operation Total Disclosure: Crime and Punishment Bankruptcy Style! Overview of New Developments in Bankruptcy Crimes and Fraud and Needed Changes of the Law," 26-32, in materials for A.B.A. Section of Business Law, Committee on Business Bankruptcy (Oct. 1996).
19 Immunity is covered by 18 U.S.C. §§6001-6005, and bankruptcy judges are not authorized to confer it. See id. §6003.