Earlier this week, the 11th Circuit Court of Appeals issued a ruling in the bankruptcy fraud case of United States v. Turner. Here are the relevant facts:
Mr. Turner owned a parcel of rental property that was destroyed by fire. His insurance carrier issued a check to him for $40,000. Two days after receiving this check, Mr. Turner filed Chapter 13. Three days after filing, Turner deposited the check, used $11,500 to pay off the mortgage on the destroyed property and kept the rest of the money.
Several weeks after these financial transactions, Mr. Turner filed his bankruptcy schedules. He did not list receipt of the $40,000 check. He also claimed that the balance on the rental property mortgage was $50,000, rather than $11,500.
The bankruptcy trustee discovered these inaccuracies and moved to convert Mr. Turner’s case to Chapter 7, which the court approved. Three years later the United States attorney filed an action against Turner for bankruptcy fraud for making false statements and he was convicted. The 11th Circuit agreed to consider Turner’s appeal.
The appellate court denied Mr. Turner’s appeal and he is now serving a 27 month sentence in federal prison.
This case is interesting on several levels:
- the United States attorney will pursue bankruptcy fraud cases arising out of Chapter 13
- the amount of the fraud here was, relatively speaking, quite small at only $40,000, yet it resulted in a sentence of over two years
- Turner was indicted for fraud more than two years after he originally filed
It would be interesting to know what Mr. Turner was thinking when he engaged in this fraud. He scheduled the mortgage lender for the destroyed property, which means that he should have realized that they would receive notice of his filing and that they would file a proof of claim. Further, Mr. Turner paid off the mortgage lender for the destroyed property – he did not try to keep all of the cash he received.
Perhaps Mr. Turner thought that the amount at issue – $40,000 – was so small given the millions of dollars passing through the bankruptcy system that no one would even notice or care, and that if he was caught he could simply offer to turn over the money. If this is what he was thinking, his conclusions were mistaken.
Here is the message I am getting from the Turner case:
- when the Bankruptcy Code requires various disclosures, you must disclose. These are not optional. This is why, by the way, I insist that every bankruptcy client in my office must complete a written intake questionnaire and that any significant updates or corrections to the information disclosed must be in writing.
- the United States trustee takes bankruptcy fraud seriously – even when relatively small dollars are involved in a consumer Chapter 13 case
- penalties are harsh in bankruptcy fraud cases. Not only did Mr. Turner lose his freedom for more than two years, I suspect that he spent many thousands of dollars trying to defend himself as well