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Insolvency Fraud A. Introduction Bankruptcy is a leading cause of concern for the government of the United States. According to The Washington Post, in 1991, bankruptcy cases are increasing by eighteen percent (Walsh). The legal definition of Bankruptcy is the permissible procedure for dealing with debt complications of individuals and businesses (United States Code: Title 11,TITLE 11?BANKRUPTCY Legal Information Institute). Specifically, a case filed under any of the chapters of Title 11 of the United States Code the Bankruptcy Code is frequently acknowledged as insolvency (Fraud Examiners
Manual). Furthermore, if any form of fraud is committed against this part of the legal system, it is known as White Collar Crime. The Bankruptcy Code necessitates various chapters and titles. Fraud is customarily committed under Title 11, which consists of five principal chapters. The chapters are 1, 3, 5, 7, and 11. Chapter 1 deals with the wide-ranging provisions under which how bankruptcy should be accomplished. Chapter 3 deals with the case administration section of the law. Chapter 5 deals with creditors, debtors, and the estate. Chapter 7 deals with the liquidation of the debtors’ assets.
The last and final chapter is allocated to the reorganization of the business or entity (Fraud Examiners Manual). B. Bankruptcy Code Chapter 1 encompasses the definitions, the guidelines of construction, the authorities of the court, and who and whom can be a debtor. Within Chapter one, it contains two main segments, which are 101 and 110. Section 101 deals with the definitions or the language used in bankruptcy proceedings (Fraud Examiners Manual). Section 110 deals with the penalty for individuals who misleadingly prepare bankruptcy petition. Chapter 3 contains many different segments.
Segment one deals with announcement of cases, the filing requirements, and when court appearances become available. Segment two deals with the officer’s qualifications and the qualifications of trustees’. Segment three deals with the general administration, the involved meetings of and between creditors, noticing requirements, and the property of the estate. Segment four deals with administrative powers, the powers of the trustee to protect property of the estate; and leases or sell of property (Fraud Examiners Manual). Chapter 5 contains three different segments.
Portion one deals with the creditor claims, their priority, and their allowance. Furthermore, it also contains the parameterization of claims and distribution of estate assets. Portion two deals with the specific duties of the debtor, the exemptions a debtor can claim, and the discharge of obligations. Portion three deals with property of the estate, recovery of avoidable transfers, contractual rights of the estate and obtaining credit on behalf of the estate (Fraud Examiners Manual). Congress established the bankruptcy administrator program in 1986.
The administrator has six offices throughout Alabama and North Carolina. The administrators’ goal is to oversee and maintain a list of proved credit counseling agencies and debtor education services. This program is separate from the United States Trustee program that works in conjunction with the Department of Justice. C. Involved Parties Additionally when any form of bankruptcy takes place, there are numerous involve parties. The parties include the following: the examiner, the debtor, the creditor, secured creditor, unsecured creditor and the adjustor.
Examiners are customarily appointed in Chapter 11 cases. The examiner is responsible for reconnecting definite allegations or misconduct of fraud. The debtor is well defined under section 01 as either a person or municipality filing under Title 11. A person is termed as an individual, partnership, or corporation. The definition off “person” is very vague so that it can be interpreted in the financial world and on the individual basis. A municipality is stated as a political subdivision, public agency, or an instrumentality of a state (Fraud Examiners Manual).
The creditor is defined as the one who holds a claim. The creditor can be a secured creditor or an unsecured creditor under the code. The secured creditor holds a claim when property is flawlessly a security interest of the bankruptcy. The unsecured creditors are those that have a claim against the debtor that arose before the bankruptcy petition was filed. The adjustor is also acknowledged as operation agents in bankruptcy. The adjustor is an individual that handles the marginal responsibilities of the trustees (Fraud Examiners Manual). The creditors also are entitled to rights and remedies.
The rights and remedies include the right to investigate why the payment was not made. In addition, the creditor has the right to check with other creditors to see if they have received restitution and are able to check with credit bureaus for the debtors credit history. The creditor also has the ability to file a motion for the appointment of a trustee. Also, other creditors are able to Join the petitioning creditor. The moving party must demonstrate that fraud is questioned, and then, a trustee should be appointed to oversee any form of operations of the debtor.
The creditor should also have sufficient documentary and other forms of evidence of fraudulent conduct including declarations provided by witnesses. In addition, a hearing is apprehended so the Judge can hear the supporting and rebutting of the fraud allegations. In certain circumstances, the Judge may appoint an examiner instead of a trustee since t is less invasive. The primary role of the examiner in the case of the creditor is to merely investigate and report to the Judge whether forms of evidence support the allegations of fraud.
The concluding and final right is if the debtor does not file bankruptcy, the creditor may Join numerous other creditors and file involuntary petition against the defaulter (Fraud Examiners Manual). D. Statutes Bankruptcy laws originate throughout the United States Constitution. The founding fathers established bankruptcy laws under article one, section 8 in the constitution under clause eight. The clause states, “To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States,” by this, the clause established bankruptcy.
The Office of the United States Trustee works in conjunction with the United States Department of Justice, which is responsible for administrating bankruptcy cases, appointing trustees, examiners, and the committees for chapter 11. The office is also responsible for overseeing trustees, reviewing employment and various fee applications, and appearing in court on the matters of interest of the estate and creditors. The mission of the office is to “protect and preserve the integrity of the banking system” (Fraud Examiners Manual). The Bankruptcy laws are established in 18 U. S.
C. S 151, 18 U. S. C. S 152, 18 U. S. C. S 156, 18 U. S. C. S 157, and 18 U. S. C. S 1519 (Fraud Examiners Manual). The Legislative branch also created the United States Sentencing Commission in order to formulate a scheme for the balance of tension and proportional sentencing (Sans). The punishment for each individual offense is a fine up to $500,000 and incarceration for not more than five years or both. Out of all of the statutes, 18 U. S. C. S 152 is the most comprehensive statue, which is comprised of nine paragraphs. The statute for both 18 U. S. C. S 151 and 18 U. S. C.
S 152 are enumerated below according to the Department of Justice: “A person who (1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 1 1, from creditors or the United States Trustee, any property belonging to the estate of a debtor; (2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 1 1; (3) knowingly and fraudulently sakes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 1 1; (4) knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 1 1, in a personal capacity or as or through an agent, proxy, or attorney; (5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 1 1, with intent to defeat the provisions of title 1 1; (6) knowingly and redundantly gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 1 1; (7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 1 1, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation; (8) after the filing of a ease under title 1 1 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; or (9) after the filing of a case under title 1 1, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information financial affairs of a debtor, shall be fined under this title, imprisoned not more than years, or both” (Fraud Examiners Manual). The first subsection of the statute deals with the concealment or suppression of property or assets. This paragraph states that estate property consists of assets, records, or whatsoever has any form of value. The following subsection deals with deceptive oaths or also known as false accounts. Deceptive oaths and accounts pertain to examinations (depositions) and testimonies provided by hearings and litigation.
Paragraph three deals with false declarations. False declarations and false oaths are very similar. False declarations are comprised f written documents, schedules and statements of financial affairs, interim statements and operating reports. They are conveyed in petitions, and additional court filings. This section also includes unshorn declarations and the ones sworn under penalty of perjury. The chief purpose of paragraph four is to counteract fictitious or inflated claims from being filed by creditors in bankruptcy cases. Subsection five deals with fraudulent receipt of property. This section works analogous to paragraph one, which implicates to the parties that work with the debtor.
Subsection six deals with extortion and bribery. This subsection mainly deals with the fraudulent destruction or modification of documents. This section is dealt with when a party in the foreseen future is going to be declared insolvent. It is intended to cover the actions by individuals who transfer property that lawfully belong to the creditors of the prospective bankruptcy estate. The last and final subsection of 18 U. S. C. S 1 52 deals with fraudulently concealed documents (Fraud Examiners Manual). Title 18 U. S. C. S 156 is the next federal statute that deals with bankruptcy filings. This section is watchfully interconnected to the petition preparer.
If a bankruptcy case or related proceeding is dismissed because of a knowing attempt by a bankruptcy petition preparer in any manner to disregard the requirements of title 1 1, United States Code, or the Federal Rules of Bankruptcy Procedure, the bankruptcy petition preparer shall be fined… Imprisoned not more than 1 year, or both” (Department of Justice). ” This section deals predominantly with the bankruptcy petition preparer. A bankruptcy petition preparer is any individual other than the debtors’ attorney or any employee of the attorney. Any wrongdoing to this statute is a Class A misdemeanors. Title 18 U. S. C. S 157 is the next statute that deals with bankruptcy and forms of dishonesty. 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 (1) files a petition under title 1 1; including a fraudulent involuntary bankruptcy petition under section 303 of such title (2) files a document in a proceeding under title 1 1; or (3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in elation too proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both” (Department of Justice).
When a defendant accepts a fraud scheme against anyone and then carries it out or conceals the scheme by filing for bankruptcy or by filing any documents in the bankruptcy, this breaches the statute stated. This statute is equally relevant to the defendant who attempts to defraud someone by falsely asserting that a case is in bankruptcy in order to envision the victim’s actions. The central meaning of this statute is the existence of a fraud scheme. According to the Department of Justice, this statute is furthermost suitable to petition mills that are unambiguously committed to the defrauding of landlords. The concluding statute is 18 U. S. C.
S 1519: “However knowingly and willfully obstructs, resists, or opposes any officer of the United States, or other person duly authorized, in serving, or attempting to serve or execute, any legal or Judicial writ or process of any court of the United States, or United States magistrate Judge; or However assaults, beats, or wounds any officer or other person duly authorized, knowing him to be such officer, or other person so duly authorized, in serving or executing any such writ, rule, order, process, warrant, or other legal or Judicial writ or process Shall, except as otherwise provided by law, be fined under this title or imprisoned not more than one year, or both. This section of the statute was added as part of the Serbians – Solely Act of 2002, which was enacted by President George W. Bush. The statute specifically states that anyone who modifies documents, fabricates documents, or destroys documents filed under Title 11 is a crime. Anyone who commits the crime is subject to imprisonment for up too maximum of twenty years. E. Legislation President George W. Bush signed the main piece of legislation into law in 2005. The legislation was titled The Bankruptcy Abuse Prevention and Consumer Act (BACKPACK) of 2005. This act reformed the bankruptcy code for the first time since it was sanctioned in 1978. The legislation includes many requirements for the debtors to go through before declaring bankruptcy (Singer).
The amendments to the Code were not in response to an economic calamity; but rather resulted from a desire to recalibrate the balance of the often-competing interests of debtors and creditors. It was devised to strengthen the rights of creditors, clarify capacities of ambiguity and inconceivably change the dynamics of the debtor-creditor relationship. The first requirement is the administration off Meaner Test. The test is administered when a trustee or creditor can bring a motion to dismiss a chapter seven filing if the debtor’s income is greater than the state median income (Singer). Following the Meaner Test, the debtor is required to have mandatory credit counseling unless they have already received counseling from an approved credit-counseling organization.
The debtor receiving credit counseling must first have counseling in order to become rightfully a debtor. In addition, under this act, the debtor also has responsibilities. The court may not grant Chapter 13 exemptions unless the debtor has completed an educational course in the area of personal finance management (Singer). Furthermore, under this act, debts that are outstanding to a single creditor that totals more than $500 for luxury goods incurred within 90 days of filing and cash advances of $750 within 70 days are acknowledged as non-disagreeable. Additionally, under the act, Chapter 7, the debtor cannot receive a discharge if a previous discharge was received within eight years of the new filing.
Before the revision, the aforementioned charges was six years instead of eight years (Fraud Examiners Manual). This is considered one of the main pieces of legislation enacted by a president. Many of these statutes or acts were enacted because of fraudulent cases. Serbians – Solely was legislated from the fallout of the Enron Corporation. Enron was the first nationwide gas pipeline company established in the United States. Several months before the company declared bankruptcy, it was considered one of the most pioneering, fastest developing, and one of the best-managed establishments in America. Enron produced fraudulent financial statements and they were interweave with Arthur Anderson, one of the top accounting firms in the country.
Enron also setup imitation companies, which are also known as shell companies (U. S. Congressman Deed Royce). The act made strict penalties on accountants and auditors who have influence on the financial statements for biblically traded companies. The act requires that biblically traded companies to be reviewed by an independent auditor from outside of the company. Enron’s everyday operations consisted of buying and selling energy stock. Enron in essence was a learning curve for the government and other national governments in that companies need to be regulated loosely in order to preserve the economy from future risks (U. S. Congressman Deed Royce). F.
Federal Cases Currently in the news nowadays, MFC Global has declared bankruptcy and bankruptcy fraud is directly related to the corporation. Presently, in the case $600 million of funds cannot be exposed (Fraud – The Outrageous MFC Global Scandal Gets Even Worse). There is substantial amount of evidence in the situation that a form of fraud has transpired within the establishment but the law community is uncertain as of what type or kind. In the case, there are a few probes. The first probe is the mysterious wire transfers at MFC Global Inc. ND a $900 million loss in customer funds during the weekend the failing stockbroker was speaking with conceivable buyers.
In addition, CAME, who was the overseer of MFC Global, detected the shortfall on October 30, which was roughly a day before the United States regulators said they were informed of the disappeared funds. This case is laced with fraud and hopefully it will come to fruition in the upcoming future (Fraud – The Outrageous MFC Global Scandal Gets Even Worse). G. Schemes Bankruptcy fraud exists through many different schemes and other premeditated arrangements. The schemes consist of concealment of assets, Opinion or Pyramid, Petition Mill, Multiply Filings, the Planned Busted, and The Bulldoze (CAR Online). These schemes have been used for voluminous years and countless people have tried to perfect them in order to protect themselves fraudulently.
The first style is known as the Concealment of Assets. In this scheme, fraud occurs when an individual or corporation purposely fails to list each one of their assets on his bankruptcy claim form, and knowing that creditors cannot liquidate valuables of which they are not aware. This scheme is the most common that is used by individuals who declare bankruptcy. The next type is known as the Opinion scheme. The Opinion scheme happens when there is a promise of an elevated return on an investment of stock. Once the scheme begins to crumble, many stakeholders cannot recover their investment. One of the most famous cases dealing with this scheme is Bernie Maddox.
Bernie Maddox pled guilty to 11 criminal counts related too Opinion scheme, which additionally included investment adviser fraud, wire fraud, mail fraud, 3 counts of money laundering, perjury, false statements, false filings with the United States Securities and Exchange Commission (SEC), and robbery from an employee benefit plan. Maddox also was sentenced to 150 years in penitentiary. Furthermore, he was issued a $171 billion penalty order, which striped him of his personal property, which included real estate, investments and savings, and all assets (CAR Online). The next type is recognized as a Petition Mill. This type of fraud encompasses a third party. The third party usually stances as a financial advisor, credit counselor, or a paralegal.
This type of scheme occurs when a firm takes all information of the debtor and charges sizeable amounts, while declaring, they are fighting the eviction. In all realism, they have filed for insolvency, ruined the debtor’s credit score, and exhausted the cash resources of the debtor. The following type is known as Multiple Filings. This scheme involves more than one filing of bankruptcy. Usually the debtor will file in various states. The debtor will list the identical assets on every claim, but intentionally fail to include every asset. This scheme is interrelated to the scheme acknowledged as the Concealment of Assets. The next type is known as the Planned Busted. The busted is intentionally planned from the very beginnings of the corporation.
Usually the debtor will obtain merchandise from creditors, and then they will dispose of the goods and not pay the supplier. In addition, in this scheme, a corporation buys an existing corporation and they use that corporation’s respectable credit to acquire commodities, without the intention to pay, and then the corporation disposes the merchandise instantaneously for cash (CAR Online). The concluding and final scheme is recognized as the Bulldoze. The Bulldoze scheme is related to the Planned Busted scheme. It also consists of four subsections, which is comprised of Corporate Raider, White Knight, Parallel Entities, and Assignment for the Benefit of Creditor. The first type occurs when a stable company with liquid assets is obtained in a leveraged takeover.
The corporation then is operated for the exclusive purpose of letting the insiders to plunder the corporation. Thenceforward, Chapter 11 is filed to permit the insiders to complete their conspiracy. The next type known as White Knight occurs when a professional consultant is chartered by a distressed business in order to assist in acquiring new financing procedures. On occasion, the “white knight” is then, given ownership in the business. The consultant takes control of the financial tasks of the business and uses his position of power to convert corporations’ assets. The third type known as Parallel Entities occurs when a business that has been established for a long period starts to go through financial problems.
The insiders within the company generate a new business in the same industry Just before the bankruptcy filing. In addition, the insiders operate the company until they have successfully transferred the debtor’s inventory, receivables, customers and goodwill to the company that was Just created. A lawyer usually assists this type of fraud. The insiders use the debtor to purchase goods and services for the new company with the intention of never reimbursing the Chapter 11 administrative creditors. The last type is known as Assignment for the Benefit of Creditor (BBC) occurs when non-bankruptcy workout misrepresentations are made to creditors and the assets are sold to unidentified insiders for inadequate thought.
Usually the secured creditor approves the transaction because their security improves if the new company is debt free (CAR Online). E. Conclusion After researching the topic of bankruptcy fraud, I have learned that this is currently a great concern for the United States. Whenever there is economic turmoil within a country, bankruptcy in unenviable. Individuals and corporations will continue to try to find ways to protect their assets and investments anyway possible even if fraudulent activities have to occur. I believe the government should watch over bankruptcy filings in the United States with more attentiveness than they presently are now.
The Bernie Maddox case and Enron Corporation case are both great examples of needing tighter regulation in order. Poor regulation could affect the entire world economically. Enron is a great illustration of this because many stakeholders and shareholders invested in the corporation and lost completely everything they had because of fraudulent activities. Presently, the majority of bankruptcy fraud cases are never carried to court. The ones that usually appear in court are only the high dollar amounts. However, many cases are never exposed, or the cases are terminated prematurely for a shortage of evidence. The United States Department of Justice estimates that one out of every ten cases is duplicitous in some style.