Lies and false claims jeopardize husband and wife’s bankruptcies

The purpose of the Bankruptcy Code, broadly stated, is to (1) convert the estate of the debtor into cash and distribute it among creditors and (2) give the debtor a fresh start with such exemptions and rights as the bankruptcy statute leaves untouched. To that end, absolute honesty is necessary among all parties; fraud by either the debtor in hiding assets from creditors or by creditors in submitting false claims is dealt with harshly. The decision of In re Disciplinary Proceeding Against McGrath aptly demonstrates this principle.

The beginnings of the controversy

The attorney and a co-counsel represented his wife and her health-care corporation in an employment dispute with a former employee. The company lost on summary judgment, but the former employee won her counterclaims in a jury trial. After the loss of the summary judgment, but before jury verdict, the attorney took steps to hide his and his wife's personal and community assets, seeking to frustrate any potential judgment against the health-care corporation and him and his wife personally. After the judgment for the former employee and against the health-care corporation, the attorney and his wife's marital community, the hiding of assets continued, both before and after the attorney filed a Chapter 7 bankruptcy for himself and a Chapter 11 bankruptcy for the health-care corporation.

The bankruptcy filing

As recounted by the Bankruptcy Court, the bankruptcy filings submitted by the attorney on behalf of his wife and the health-care corporation contained numerous misstatements and omissions of material information, including, for example, that the attorney was the spouse of his wife and an officer of the health-care corporation. In addition, the attorney also failed to disclose many assets of the health-care corporation. Because of these omissions, misstatements, and fraudulent encumbrances, the paperwork filed painted a false picture of bankruptcy estates with limited assets that were either exempt or fully encumbered. The bankruptcy trustee discovered this and other misconduct and disciplinary proceedings were instituted.

Criminal bankruptcy fraud

The federal bankruptcy fraud statute criminalizes the concealment or fraudulent transfer of bankruptcy assets, presentation of a false claim against an estate, and the making of any false statement or declaration under penalty of perjury if the concealment or misstatement is material and done "knowingly and fraudulently." The court rejected the defense that the mistakes were not knowing and fraudulent, but were the result of negligence since the attorney prepared the filings at the "11th hour" and was going to amend them later-this "spin" was simply not supported by the evidence.

The purpose of bankruptcy is to provide the debtor a fresh start, breathing room from what is often the crushing burden of too much debt. However, the price of that fresh start may be absolute honesty in your finances and your financial dealings. Given the complexities of the Bankruptcy Code itself, and in preparing yourself and your financial history for complete transparency, consider consulting with an attorney skilled in bankruptcy planning and preparation.