Among the listed “Bankruptcy Crimes” in chapter 9 of title 18 of the U.S. Code is one for “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 The criminal fiduciary does not go to jail; he or she is fined.2 Significantly for present purposes, the fiduciary who violates this prohibition automatically forfeits his or her office.3 Although prosecutions may be extremely rare,4 the forfeiture of office can nevertheless be enforced civilly in the bankruptcy court.
There is an express provision in the Bankruptcy Code for removal of trustees and examiners “for cause.”5 Other fiduciaries are removable under other provisions of the Bankruptcy Code. Chapter 11 debtors-in-possession (DIPs) are replaceable by trustees for cause,6 and if not replaced, are subject to the imposition of restrictions on their operation of the business.7 Committee members – if the prohibition applies to them – can be removed.8 Professional persons, including attorneys, accountants, appraisers and auctioneers, may be employed only with the court's approval,9 which, presumably for cause, may be withdrawn. In the absence of any specific authority, the court has the power to issue any order “necessary or appropriate to carry out the provisions” of the Bankruptcy Code.10 Notably for offending trustees and examiners, if a trustee or examiner is removed in one case, that person is simultaneously “removed in all cases in which such trustee or examiner is then serving unless the court orders otherwise.”11
Significantly, this crime, unlike all other bankruptcy crimes in chapter 9 of title 18 of the U.S. Code, does not require any mens rea.12 The statute does not require that persons act “knowingly and fraudulently,”13 merely “knowingly.”14
Two questions are immediately presented: Who is subject to removal from office, and, are there no exceptions, such as for retail cases, to the prohibition?
Who Are the Other Officers of the Court?
The persons criminally liable for the purchase of estate assets are “a custodian, trustee, marshal or other officer of the court.”15 A trustee is obviously identifiable. A custodian under the Bankruptcy Code is a receiver, assignee, trustee or other agent appointed under nonbankruptcy law who took possession of the debtor’s property prior to the commencement of the bankruptcy case.16 A marshal is not a position established under the Bankruptcy Code.17
The Bankruptcy Code establishes other elected or appointed positions, examiners,18 members of statutory committees19 newly added in 2005, consumer privacy ombudsmen,20 and patient care ombudsmen.21 A chapter 11 DIP has all the powers and most of the duties of a trustee.22 All of these positions either contain a disinterestedness requirement23 or carry with them fiduciary duties, since each position empowers the person who holds it to act on behalf of others.24 The same can be said of the officers and director of a DIP,25 and the professional persons who are retained and compensated only with the court’s approval.26 Does either having a disinterestedness requirement or fiduciary duty in a bankruptcy case equate with being an “officer of the court” for purposes of the prohibition on purchasing estate assets? The phrase “officer of the court” cannot be construed as either meaningless or superfluous.27 It must apply to someone. In the absence of a better rule for determining who an “officer of the court” is, having a position established by the Bankruptcy Code and either a disinterestedness requirement or a fiduciary duty ought to qualify. 28
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. Please note that this article will be continued in the May 2007 (Part II) issue of ABI’s 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). The person who is the subject of this statute is “a custodian, trustee, marshal or other officer of the court.” Id., §154.
2Id., §154. The fine is either $5,000, 18 U.S.C. §3571(a)(7) (for an infraction), see 18 U.S.C. §3559(a)(9) (classifying a crime for which no imprisonment is authorized as an infraction); or double the defendant's pecuniary gain or the estate's pecuniary loss, 18 U.S.C. §3571(d).
3 18 U.S.C. §154.
4In Tighe, Maureen A., "Criminal Bankruptcy Fraud: A Summary of Existing Law," 67th Annual Meeting of the National Conference of Bankruptcy Judges, 2-45, 2-54 (1993), the author, then an Assistant U.S. Attorney, later the U.S. Trustee for Region 16 and now a U.S. Bankruptcy Judge for the Central District of California, noted that as of 1993, there were no reported cases under 18 U.S.C. §154. This author’s research has similarly come up with no reported cases.
511 U.S.C. § 324(a). This provision was used in a case in which the author was involved. The chapter 11 trustee who was the subject of this motion resigned before the hearing, after the United States Trustee had joined in seeking the trustee’s removal. The trustee admitted to purchasing estate assets – at fixed, retail prices – from a small retail operation conducted at the showroom of the debtor, which was principally a wholesaler.
6Id., §§1104 and 1112.
7Id., §§1107(a) and 1108. Such restrictions could presumably include the removal of officers or directors who violate the prohibition.
8See id., §1102(a)(4) (added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23, hereafter “BAPCPA”).
9Id., §§327(a) and 1103(a).
10Id., §105(a).
11Id., §324(b).
12Compare 18 U.S.C. §§152-153, 155-157 with id., §154.
13Id., §§152-153 and 155 (“knowingly and fraudulently”); see id., §157 (“a scheme or artifice to defraud”); see also §156 (“knowing attempt . . . to disregard the requirements of title 11”). In this context, “fraudulently” means with intent to deceive. United States v. Diorio, 451 F.2d 21, 23 (2d Cir. 1971), cert. denied, 405 U.S. 955 (1972).
14[K]nowingly . . . means the defendant realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake or accident.” United States v. Defazio, 899 F.2d 626, 635 (7th Cir. 1990) (internal quotations omitted). “Knowingly” encompasses not deliberately closing one's eyes to facts. Id.; United States v. Ramsey, 785 F.2d 184, 190-91 (7th Cir.), cert. denied, 476 U.S. 1186 (1986). See, generally, Klestadt, Tracy L. and Holly, Wayne, “Bankruptcy Crimes Under the Federal Criminal Code,” N.Y.L.J. (Jan. 22, 1998) at 1, col. 1. (hereafter “Klestadt & Holly”).
1518 U.S.C. §154.
1611 U.S.C. §101(11); see id., §543 (requiring custodians to turn over property of the estate to the trustee, unless the court orders otherwise).
17A marshal was a position under the Bankruptcy Act of 1898. See Bankruptcy Act §§1(22), 2a(3), 2a(5) and 69a, and former 11 U.S.C. §§1(22), 11(a)(3), 11(a)(5) and 109(a) (repealed 1978).
1811 U.S.C. §1104(c).
19Id. §§705 and 1102; see id., §1114 (committees of retired employees).
20Id., §332 (added by BAPCPA).
21Id., §333 (added by BAPCPA).
22Id., §1107(a).
23 An appointed trustee or an elected chapter 11 trustee must be disinterested. Id., §§701, 1104(b) and 1104(d). There is no disinterestedness requirement for an elected chapter 7 trustee. Id., §702. Ombudsmen and examiners must also be disinterested. Id., §§332, 333 and 1104(d).
24See Restatement (Second) of Torts §874, comment a (“A fiduciary relation exists between two persons who one of them is under a duty to act or to give advice for the benefit of the other person upon matters within the scope of their relation.”) In particular, the members of a committee owe a fiduciary duty to their constituency. Westmoreland Human Opportunities Inc. v. Walsh, 246 F.3d 233, 256 (3d Cir. 2001).
25CFTC v. Weintraub, 471 U.S. 343, 355 (1985); see Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 (6th Cir. 1982). See generally, Bogart, Daniel B., “Liability of Directors of Chapter 11 Debtors-in-Possession: ‘Don't Look Bank -- Something May Be Gaining on You,’” 68 Am. Bankr. L.J. 155, 212-15 (1994).
26For example, attorneys are frequently said to be officers of the court. See, e.g., In re Synder, 472 U.S. 634, 644 (1985) (an attorney becomes “an officer of the court, and like the court itself, an instrument or agency to advance the ends of justice”) (quoting People ex rel. Karlin v. Culkin, 248 N.Y. 465, 470-71, 162 N.E. 487, 489 (1928) (Cardozo, J.). In addition, those involved in supervising the sale of assets of the estate may be viewed as officers of the court, because a contract to purchase assets out of a bankruptcy estate is viewed as being made with the court itself. Arnold Print Works Inc. v. Apkin (In re Arnold Print Works Inc.), 815 F.2d 165, 169-70 (1st Cir. 1987) (Breyer, J.) (sustaining core jurisdiction over controversies arising out of post-petition contracts); accord, In re California Eastern Airways, 95 F. Supp. 348, 351 (D. Del. 1951); In re Alan Wood Steel Co., 1 B.R. 167, 169 (Bankr. E.D. Pa. 1979).
27See Pennsylvania Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 562 (1990) (“Our cases express a deep reluctance to interpret a statutory provision so as render superfluous other provisions.”); United States v. Menasche, 348 U.S. 528, 538-39 (1955) (“It is our duty to give effect, if possible, to every clause and word of the statute.”) (internal quotation omitted).
28It may be suggested that limiting the rule to only those having a disinterestedness requirement or only those having a fiduciary duty would be better. Such a limitation should be rejected because it is both over-inclusive and under-inclusive. For example, elected chapter 7 trustees have no disinterestedness requirement. Even if trustees were not explicitly mentioned in the statute, excluding such elected trustees would make no sense. Similarly, examiners without any expanded powers—that is to say, those who merely investigate and report, do not act on behalf of any constituency in the case, and as a result, may be held not to owe any fiduciary duty. Nevertheless, they have been held to be a “court fiduciary,” In re Baldwin United Corp., 46 B.R. 314, 316 (Bankr. S.D. Ohio 1985); and therefore, should clearly be deemed to be an “officer of the court” for purpose of the statute.