[Congressional Record Volume 146, Number 78 (Tuesday, June 20, 2000)]
[Senate]
[Pages S5383-S5389]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
BANKRUPTCY REFORM
Mr. GRASSLEY. Mr. President, I rise this morning to speak on the
topic of bankruptcy reform. As many of my colleagues may know, Congress
is on the verge of enacting fundamental bankruptcy reform. Earlier this
year, the Senate passed bankruptcy reform by an overwhelming vote of
83-14. Almost all Republicans voted for the bill and about one-half of
the Democrats voted for it as well. Despite this, a tiny minority of
Senators are using undemocratic tactics to prevent us from going to
conference with the House of Representatives.
As I'm speaking now, the House and Senate have informally agreed on
99 percent of all the issues and have drafted an agreement which has
bicameral and bipartisan support. The remaining three issues are sort
of side shows, and I'm confident we'll be able to move from the one
yard line to the end zone. My remarks this morning relate the agreement
we've reached on the core bankruptcy issues and the continuing need for
bankruptcy reform.
As I've stated before on the Senate floor, every bankruptcy filed in
America creates upward pressure on interest rates and prices for goods
and services. The more bankruptcies filed, the greater the upward
pressure. I know that some of our more liberal colleagues are trying to
stir up opposition to bankruptcy reform by denying this point and
saying that tightening bankruptcy laws only helps lenders be more
profitable. This just isn't true. Even the Clinton administration's own
Treasury
[[Page S5384]]
Secretary Larry Summers indicated that bankruptcies tend to drive up
interest rates. Mr. President, if you believe Secretary Summers,
bankruptcies are everyone's problem. Regular hardworking Americans have
to pay higher prices for goods and services as a result of
bankruptcies. That's a compelling reason for us to enact bankruptcy
reform during this Congress.
Of course, any bankruptcy reform bill must preserve a fresh start for
people who have been overwhelmed by medical debts or sudden, unforeseen
emergencies. That's why the bill that passed the Senate--as well as the
final bicameral agreement--allows for the full, 100 percent
deductibility of medical expenses. This is according to the
nonpartisan, unbiased General Accounting Office. Bankruptcy reform must
be fair, and the bicameral agreement on bankruptcy preserves fair
access to bankruptcy for people truly in need.
These are good times in our Nation. Thanks to the fiscal discipline
initiated by Congress, and the hard work of the American people, we
have a balanced budget and budget surplus. Unemployment is low, we have
a burgeoning stock market and most Americans are optimistic about the
future.
But in the midst of this incredible prosperity, about 1\1/2\ million
Americans declared bankruptcy in 1998 alone. And in 1999, there were
just under 1.4 million bankruptcy filings. To put this in some
historical context, since 1990, the rate of personal bankruptcy filings
has increased almost 100 percent.
With large numbers of bankruptcies occurring at a time when Americans
are earning more than ever, the only logical conclusion is that some
people are using bankruptcy as an easy out. The basic policy question
we have to answer is this: Should people with means who declare
bankruptcy be required to pay at least some of their debts or non?
Right now, the current bankruptcy system is oblivious to the financial
condition of someone asking to be excused from paying his debts. The
richest captain of industry could walk into a bankruptcy court tomorrow
and walk out with his debts erased. And, as I described earlier, the
rest of America will pay higher prices for goods and services as a
result.
I would ask my liberal friends to think about that for a second. If
we had no bankruptcy system at all, and we were starting from scratch,
would we design a system that lets the rich walk away from their debts
and shift the costs to society at large, including the poor and the
middle class? That wouldn't be fair. But that's exactly the system we
have now. Fundamental bankruptcy reform is clearly in order.
Mr. President, I want my colleagues to know that the bicameral
agreement preserves the Torricelli-Grassley amendment to require credit
card companies to give consumers meaningful information about minimum
payments on credit cards. Consumers will be warned against making only
minimum payments, and there will be an example to drive this point
home. As with the Senate-passed bill, the bicameral agreement will give
consumers a toll-free phone number to call where they can get
information about how long it will take to pay off their own credit
card balances if they make only the minimum payments. This new
information will truly educate consumers and improve the financial
literacy of millions of American consumers.
The bicameral agreement also makes chapter 12 of the Bankruptcy Code
permanent. This means that America's family farms are guaranteed the
ability to reorganize as our farm economy continues to be weak. As we
all know from our recent debate on emergency farm aid, while prices
have rebounded somewhat, farmers in my home State of Iowa and across
the Nation are getting some of the lowest prices every for pork, corn,
and soybeans. And fuel prices have shot up through the roof. The
bicameral agreement broadens the definition of ``family farmer'' and
permits farmers in chapter 12 to avoid crushing capital gains taxes
when selling farm assets to generate cash flow. It would be highly
irresponsible of my liberal friends to continue blocking bankruptcy
protections for our family farmers in this time of need.
The bicameral agreement is solidly bi-partisan and will pass by a
huge margin when it comes up for a vote. The bill is fair and contains
some of the broadest consumer protections of any legislation passed in
the last decade. So, how can any person possibly argue against a bill
which strengthens consumer protections while cracking down on abuses by
the well-to-do?
The tiny handful of fringe radicals who oppose bankruptcy reform have
waged a disinformation campaign worthy of a Soviet Commissar. A recent
article in Time Magazine is a case in point. This article purports to
prove that bankruptcy reform will harm low-income people or people with
huge medical bills. This article is simply false.
What's most interesting about this Time article is what it fails to
report. Time, for instance, fails to mention that the means test, which
sorts people who can repay into repayment plans, doesn't apply to
families below the median income for the State in which they live. The
Time article then proceeds to give several examples of families who
would allegedly be denied the right to liquidate if bankruptcy reform
were to pass. Each of these families, however, would not even be
subjected to the means test since they earn less than the median
income. While this sounds technical, it's important--not even one of
the examples in the Time article would be affected by the means test.
For the convenience of my colleagues, I have collected the actual
bankruptcy petitions of the families referred to in the Time article,
and I will provide them to any Senator.
Time fails to mention the massive new consumer protections in our
bankruptcy reform bill. Time fails to mention the new disclosure
requirements on credit cards regarding interest rates and minimum
payments. In short, the Time article fails to tell the whole truth. I
think that the American people deserve the whole truth.
The truth is that these bankruptcies represent a clear and present
danger to America's small businesses. Growth among small businesses is
one of the primary engines of our economic success.
The truth is bankruptcies hurt real people. Sometimes that will be
inevitable. But it's not fair to permit people who can repay to skip
out on their debts. I think most people, including most of us in
Congress, have a basic sense of fairness that tells us bankruptcy
reform is needed to restore balance. Let me share what my constituents
are telling me.
I ask unanimous consent to have some of their comments printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
What Real People Are Saying About Bankruptcy Reform
``The present [bankruptcy laws] are a joke . . . One local
man has declared bankruptcy at least four times at the
expense of suppliers to him. He just laughs at it . . .''--
Washington, Iowa.
``It is way too easy to avoid responsibility.''--Cedar
Falls, Iowa.
``If one assumes debt they need to pay it off . . . We've
got to take responsibility for our purchases!''--
Independence, Iowa.
``Too many people use bankruptcy as an out, we need to make
sure people are held accountable for all their debts.''--
Harlan, Iowa.
``Personal responsibility is a must in our country . . .
Sickness or loss of a job is one thing, but the majority of
people just don't pay, but spend their money elsewhere
knowing they can unload the debt with the help of the
courts.''--Fort Madison, Iowa.
``I think people taking bankruptcy should have to pay the
money back . . . They should have learned to work for and pay
for what they get.''--Cedar Rapids, Iowa.
``It is insane that such a practice has been allowed to
continue, only causing higher prices to the consumer . . .
Debtors should be required to repay their debt.''--Des
Moines.
``Bankruptcies are out of hand. It's time to make people
responsible for their actions--do we need to say
this!!!??''--Keokuk, Iowa.
``We need to make people more responsible for their
decisions, while at the same time protecting those who fall
on hard times. I realize that this is a delicate balance, but
the way it is now, there is very little shame in going this
route.''--Floyd, Iowa.
``People need to be more responsible for their debts. As a
small business owner, I have had to withstand several large
bills people have left with me due to poor management and
bankruptcy.''--Fontanelle, Iowa.
``Bankruptcy reform will force the American people to
become more responsible for their actions, bankruptcy does
not seem to carry any degree of shame; it is almost regarded
as a right or entitlement.''--Cedar Rapids, Iowa.
``Many don't think the business is who loses. We make it
too easy now.''--Waverly, Iowa.
[[Page S5385]]
Mr. GRASSLEY. Mr. President, bankruptcy reform will happen. Our cause
is right and just, and average Americans are strongly supportive of
restoring fairness to the bankruptcy system.
I am going to yield the floor now. Before I do, I thank Senator
Biden, who is next to speak on this subject. If it had not been for
Senator Biden working with us in a bipartisan way to get bankruptcy
reform, it would never have passed by the wide margin of 84-13. He is a
sincere person working on this. He has contributed immensely to it.
I yield the floor.
The PRESIDING OFFICER. The Senator from Delaware is recognized for 10
minutes.
Mr. BIDEN. Mr. President, let me begin by thanking my colleague from
Iowa. He and I have worked together on a lot of issues. We tend to
approach issues from a slightly different perspective but often end up
in the same place, and that is the case here.
My concern in the reform of the bankruptcy code was not as much
driven by those who were avoiding debt as his was but about making sure
the overall consumer is protected. When people avoid debts they can
pay, it is a simple proposition: My mother living on Social Security
pays more at the department store to purchase something, my sons, who
are beginning their careers, and my daughter pay more on their credit
card bill because someone else does not pay.
In recent days, a number of my colleagues have brought the Time
magazine article to my attention and to the attention of the Senator
from Iowa and others. If you took a look at the Time magazine article
and read it thoroughly, you would think we were about to tread on the
downtrodden, deserving Americans who are about to be, and I quote from
the article, ``soaked by the Congress.'' My colleagues have pointed
this out to me. They find it a very disturbing article. It tells a tale
of corruption and greed and heartlessness, claims that hard-working,
honest, American families are about to be cut off from the fresh start
promised by the bankruptcy code, and that lenders, who have driven
these families into economic distress, are about to kick them when they
are down.
Most shocking in the article, perhaps, from my perspective, is the
claim that the U.S. Congress, by passing the bankruptcy reform
legislation which passed out of here overwhelmingly, will make all this
happen. As I said, it is a very disturbing article. It is hard to see
how anyone, in my view, could vote for bankruptcy reform if, in fact,
the essence of the article were true. But I remind my colleagues that
bankruptcy reform legislation, not this imaginary legislation described
in the article, passed the House by a vote of 313-108, and the Senate
by 84-13. So this article claims a vast majority of both our parties in
both Houses of Congress are conspirators in an alleged plot to hit
those who are down on their luck.
The problem with this portrayal is the bankruptcy reform bill now in
conference is the antithesis of what they have said. Their article is
simply dead wrong. I do not ever recall coming to the floor of the
Senate in my 28 years and saying unequivocally: One of the most
respected periodicals and magazines in the country, with a major
article, is simply dead, flat, absolutely wrong. I don't recall ever
being compelled to do that or being inclined to do that.
I will make one admission at the outset. It is the intent of the
bankruptcy reform to tighten the bankruptcy system; that is true, to
assure that those who have the ability to pay do not walk away from
their legal debts. The explosion of bankruptcy in the early and mid-
1990s revealed a problem with our system and the reform legislation is
a response to that by the strong bipartisan vote of both Houses.
I am more on that liberal side, as my friend from Iowa talks about. I
admire his pride that everybody should pay their debts, and I think
they should.
I am more inclined to let someone go than to hold them tightly. I
admit that part. But I came here with this reform legislation because
all these bankruptcies are causing debts to be driven up by other
people. Interest rates go up on credit cards, not that credit card
companies do not like high interest rates anyway. Interest rates go up
on automobile loans. Interest rates go up all over the board. The cost
of borrowing money goes up when people who can pay do not pay. It means
innocent middle-class people and poor folks end up paying more.
Yes, bankruptcy reform is intended to require more repayment by those
who can afford it, more complete and verified documentation, and to
generally discourage unnecessary and unwarranted filings. When the
bankruptcy system is manipulated by those who can afford to pay, we all
pay.
This article claims that bankruptcy reform legislation is driven
solely by the greed of lenders, that abuse of the bankruptcy code is a
myth created by those who want to wring more money out of those who do
not have more money. That is not the position of the Justice
Department.
I ask unanimous consent that a document entitled ``U.S. Trustee
Program'' be printed in the Record at the end of my statement.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See Exhibit 1.)
Mr. BIDEN. Mr. President, back to the Time article. One would think
there was no reason to tighten up the current system, that those of us
who support bankruptcy reform--a large bipartisan majority--had lost
our hearts, our souls, and possibly our minds. Some folks might find
that easy to believe, but if they simply compare the language of the
legislation to the case studies in the article, they will find that in
virtually every significant claim and detail, the charges leveled
against this reform legislation are not true. They are simply false;
they are flat wrong; and they are easily and conclusively refuted by a
quick look at the facts.
First, a little primer on the bankruptcy code reform. Chapter 7 of
the bankruptcy code requires a liquidation of any assets and a payout
to as many creditors as possible from the proceeds. Chapter 13 allows
the filer to keep a home, a car, and so on, but requires them to enter
into a repayment plan. The irony is, chapter 13 was put in to help
people from the rigors of chapter 7. I do not have time to go into
that, but it is a basic premise that is missed by the article.
The bankruptcy reform legislation that is the cause for such alarm in
this article asks a question that I think most Americans would be
surprised to learn is never even asked under the present system. The
question is: Do you have the ability to pay some of those debts that
you want forgiven?
If the answer is yes, then you will have to file for bankruptcy under
chapter 13 and have what they call a workout, a repayment plan. No
one--I repeat, no one--who needs it would ever, as this article puts
it, be denied bankruptcy assistance. That cannot happen now, and it
will not happen under this legislation. So it is not the idea you are
denied bankruptcy, it is how you file for bankruptcy--under chapter 7
or chapter 13.
Only a few filers of bankruptcy, no more than 10 percent of those now
filing under chapter 7--maybe even less--would see any change at all in
their status. Those who have demonstrated an ability to pay would be
told to file under chapter 13 and would follow the kind of repayment
plan their resources would allow.
A key point must be stressed: Chapter 13 is not some kind of debtor's
prison. It is a practical solution to the problem of too many creditors
chasing a debtor with too few resources. The article suggests that any
change in the availability of chapter 7 will be the equivalent of the
whip and the lash and the restoration of debtor's prison. The truth is
different.
Chapter 13 was added to the bankruptcy code in the 1930s as the more
desirable alternative to the draconian liquidation required under
chapter 7. It was conceived as the ``wage earner's'' form of
bankruptcy, for those who had an income and the ability to pay some of
their creditors but who needed protection of the system to keep their
creditors from hounding them.
Although this may seem like a quaint notion these days, it was
intended to preserve some of the debtor's dignity at a time when
bankruptcy carried more of a stigma for some people than it does today.
A profoundly mistaken view of the difference between chapter 7 and
chapter 13 is not the most serious flaw in
[[Page S5386]]
this article. The real impact of this article comes from its stories of
hard-working, honest, everyday American families who have fallen on
hard times. These are the people who will, according to the article,
find the door to a fresh start shut to them.
As disturbing as these stories are, they are all based on a
demonstrably false premise. As the Senator from Iowa said, virtually
none of the low- to moderate-income working families whose stories were
so compellingly told in that article would be touched by the reforms
affecting the availability of chapter 7.
That is right. In each and every case, given their income and their
circumstances as presented, those families and individuals who were
talked about in the article would still be eligible for chapter 7
protection. The central claims about the impact of bankruptcy reform on
the families described in this article are flat wrong.
I know a lot of my colleagues have been concerned about these
charges, and I urge them to take a simple test. Compare the financial
circumstances of the individuals in the article and the stories that
are told with the terms of our bankruptcy legislation. My colleagues
will see the claims that these families will be cut off are not true.
They are wrong chiefly because the reform legislation contains what
we call a safe harbor which preserves chapter 7, with no questions
asked, for anyone earning the median income or less for the region in
which they live. This is a protection I sought along with other
supporters of bankruptcy reform. It was a key element of the Senate
bill, and it has been accepted in conference.
There is even more protection: Those with up to 150 percent of the
median income will be subject to only a cursory look at their income
and obligations, not a more detailed examination.
These provisions provide that the door to chapter 7 remains open for
just the kind of family the article claims will be most hurt.
I will not chronicle all of them, but I ask you to listen to this one
story. Of all the cases chronicled in the article, I read most
carefully the story of Allen Smith of Wilmington, DE, my hometown. A
World War II veteran, he had worked in our Newark, DE, Chrysler plant
until the downsizing of the 1980s cost him his job.
Struck by cancer, my constituent from Wilmington, DE, was also hit
with the tragedy and expense of his wife's diabetes and then her death.
Health care costs drove him deeper and deeper into debt, and he filed
for bankruptcy under chapter 13. Further financial troubles led to the
failure of his chapter 13 plan, and he was then switched to chapter 7
under which he will lose his home to pay some of his obligations.
I searched in vain to find any relevance of this profound human
tragedy to the bankruptcy reform legislation. To the extent it has
anything at all to do with the supposed point of the story, Mr. Smith's
story is presented to show us someone who is going to lose his home in
bankruptcy, because he is now in chapter 7, exactly what the authors
previously argued should be the preferred chapter for individuals in
his circumstances. His sad story is an argument for catastrophic health
insurance, not against bankruptcy reform.
They contrast his case with that of a wealthy individual who uses the
protection of the present bankruptcy code by purchasing an expensive
home under Florida's unlimited homestead exemption to protect assets
from creditors. One would never know it from reading the article, but
in the Senate we voted to get rid of that unlimited exemption that now
is in the law.
More recently, the conferees have agreed to eliminate precisely the
kind of abuse criticized in this article. The article discusses at
length a case that has nothing to do with reform but criticizes an
abuse that is actually fixed by this reform bill.
There are other profound inconsistencies and factual errors in the
article, including the assertion that medical expenses would not be
considered in calculating a filer's ability to pay or would not be
dischargeable after bankruptcy or that family support payments, such as
child support or alimony, would be a lower priority than a credit card
debt. None of these assertions is true.
However, without these errors, there would be no article.
In many cases, in terms of the new, additional protections for family
support payments and improved procedures for reaffirmations, filers in
the kind of circumstances chronicled in the other stories in this
article would be better off, not worse off, when this legislation
passes.
I know my colleagues have expressed their worries about this article.
I truly ask them, look at the language of the legislation, look at the
articles that are written, and you will find that, although this is not
a perfect bill, that none of the families chronicled in that article
would be affected at all except their circumstances improved, if in
fact anything was to happen.
I know that my colleagues who have expressed their worries about this
article are sincere in their concern about the fairness of bankruptcy
reform legislation. I urge them to apply the simple test of fairness to
this article, to compare the situations of those families in the
article to the actual provisions in the bankruptcy reform legislation.
They will find those families's access to the full protection of
Chapter 7 unchanged by this bill.
I ask them to do it for themselves: they don't have to take my word
for it.
This is not a perfect bill. It is not the even bill that I would have
written by myself. But it is a bill that can pass that test.
I thank the Chair and I thank my colleagues assembled on the floor
for the additional 4 minutes. I realize it is a tight day and time is
of the essence. I appreciate their courtesy.
I yield the floor.
Exhibit 1
[Bankruptcy Criminal Cases 1999]
U.S. Trustee Program
(Criminal Cases: The United States Trustee Program's duties include
policing the bankruptcy system for criminal activity, referring
suspected criminal cases to the appropriate law enforcement agencies,
and assisting in investigating and prosecuting those cases. Some
significant bankruptcy-related criminal cases are described here)
1999
alabama
Attorney John C. Coggin III of Birmingham, Ala., was
sentenced July 26 to 36 months in prison for conspiracy
consisting of bankruptcy fraud, money laundering, and false
statements to a federal officer. Coggin hid more than
$200,000 that was due to creditors in his bankruptcy case,
using a corporation set up for that purpose.
arizona
Bankruptcy petition preparer Richard S. Berry of Tempe,
Ariz., was sentenced April 20 in the District of Arizona to
six months in prison for criminal contempt of court, after
being fined $1 million in 1998 for willfully violating
Bankruptcy Court orders. Since January 1997, several court
orders addressed Berry's violations of the Bankruptcy Code's
provisions regulating bankruptcy petition preparers. The
Bankruptcy Fraud Task Force for the District of Arizona
sought criminal contempt charges against Berry based on his
violation of a January 1997 Bankruptcy Court order limiting
his fees.
Lawrence R. Costilow of Tucson pleaded guilty February 19
to two counts of bankruptcy fraud arising from his actions as
a creditor in a Chapter 7 bankruptcy case. Costilow loaned
$50,820 to a married couple, obtaining an unsecured
promissory note in return. After the spouses filed for
bankruptcy, Costilow altered the note so it purposed to take
a security interest in their property. Costilow recorded the
note and later testified in bankruptcy court as to it
validity.
california
Sherwin Seyrafi of Encino, Calif., pleaded guilty December
28 in the District of Arizona to bankruptcy fraud, misuse of
a Social Security number, and failure to file a corporate tax
return. The counts for bankruptcy fraud and misuse of an SSN
arose from Seyrafi's filing of a bankruptcy petition with the
knowledge that it contained a false spelling of his name and
a false Social Security number.
Judy Scharnhorst Brown, a Spring Valley, Calif., real
estate broker, was sentenced Nov. 9 in the Southern District
of California to 15 months in custody followed by three years
of supervised release and ordered to pay $75,000 in
restitution and fines for a bankruptcy fraud and mail fraud
scheme. On March 30, a jury convicted Brown on one count of
conspiracy, three counts of bankruptcy fraud, and eight
counts of mail fraud after a two-week jury trial.
On April 21 a federal jury in Los Angeles convicted
Faramarz Taghilou of Castaic, Calif., on two counts of
concealing his private airplane in his Chapter 7 bankruptcy
case. Taghilou failed to disclose in his bankruptcy documents
that he owned a Cessna 310Q insured for $120,000 and was
paying monthly leasing fees to have the airplane kept at Van
Nuys airport. Additionally, Taghilou's bankruptcy schedule
omitted a
[[Page S5387]]
creditor who had placed a mechanic's lien on the airplane;
the debtor paid that creditor two weeks after filing for
bankruptcy.
Theresa Marie Thompson-Snow pleaded guilty March 17 in the
Central District of California to false representation of a
Social Security number and bankruptcy fraud. Through an
error, Thompson-Snow obtained loan documents belonging to a
college classmate--now an English professor--with a similar
name. She subsequently assumed the professor's identity to
obtain thousands of dollars in credit, and ultimately filed
for bankruptcy in her victim's name.
Tricia Mendoza of Norwalk, Calif., was sentenced Jan. 11 to
one year in prison and ordered to pay almost $250,000 in
restitution for embezzling from a Chapter 13 trustee
operation. Mendoza, who was the trustee office's
receptionist, changed names and addresses in the computer
system to the name and address of an accomplice, thereby
diverting payments intended for creditors to an address she
controlled.
Stephen Martin Zuwala was sentenced June 9 to 57 months in
federal prison and 36 months supervised release, and ordered
to pay more than $50,500 in restitution, based on his
conviction on five counts of mail fraud, three counts of
criminal contempt, and four counts of misuse of a Social
Security number. Non-lawyer Zuwala contacted individuals
facing home foreclosure and offered assistance through
``little-known federal relief programs'' that turned out to
be filing for bankruptcy. Zuwala typically charged $500 to
$1,000 per case, but disclosed only part of his fees in
documents filed with the Bankruptcy Court. All criminal
contempt counts arose from Zuwala's violation of a prior
judgment obtained by the United States Trustee to permanently
enjoin him from preparing bankruptcy documents for filing in
the Northern and Eastern Districts of California.
Bankruptcy petition preparers Regina Green and Raymond Zak
were sentenced April 15 based on their earlier convictions
for criminal contempt and bankruptcy fraud. Because of
misconduct, Green and Zak had been ordered by the Bankruptcy
Court for the Northern District of California to stop
preparing bankruptcy petitions, and they were prosecuted for
violating that order. Green was sentenced to seven months in
prison for contempt of court and forgery, and Zak was
sentenced to six months in a halfway house for bankruptcy
fraud. Both defendants were ordered to pay restitution and
were barred from acting as bankruptcy petition preparers.
colorado
James Francis Cavanaugh pleaded guilty Oct. 8 to bankruptcy
fraud in the District of Colorado. When Cavanaugh filed for
bankruptcy, he falsely stated that he had sold certain horses
from his Colorado horse breeding operation for $10,000,
although he had earlier valued the horses at $124,000. He
also failed to disclose to the bankruptcy court that he had
interests in two bank accounts in Missouri.
florida
After a jury trial in the Middle District of Florida,
certified public accountant Kenneth A. Stoecklin was
convicted July 8 for embezzlement from the bankruptcy estate
of Chapter 11 debtor Commonweal Inc. and obstruction of the
administration of the internal revenue laws. Stoecklin, the
controlling corporate officer of Commonweal Inc., transferred
substantially all of his assets to the real estate
development company in an apparent attempt to avoid an
individual income tax liability exceeding $137,000. He
subsequently withdrew funds from an account established to
provide the government with ``adequate protection'' pending
the outcome of tax-related litigation.
Warren D. Johnson Jr. was sentenced June 23 to 97 months
imprisonment and ordered to pay more than $5 million
restitution after being convicted of bankruptcy fraud, bank
fraud, and money laundering. During a June 1998 bond hearing,
Johnson testified that he had no interest in stocks or other
assets in the Turks and Caicos Island, when he actually held
around $25 million worth of stock in a publicly traded
company. In addition, Johnson claimed he was indigent and
could not pay restitution despite the fact that the
controlled more than $10 million in assets placed in the
names of family members and off-shore shell corporations.
Johnson's bankruptcy convictions resulted from a 1992
bankruptcy case in which he claimed over $7.2 million in debt
and no assets, when he actually expected to receive at least
$1.2 million in real estate sale profits. Johnson laundered
approximately $250,000 of these profits by transferring the
funds to his wife and then using them for living expenses.
The bank fraud conviction resulted from Johnson's filing
false financial statements to obtain a $600,000 loan that he
did not repay.
Georgia
The District Court for the Northern District of Georgia
entered judgment on December 13 against David Alvin Crossman
of Atlanta following his guilty plea to one count of filing a
false income tax return and one count of bankruptcy fraud.
Crossman set up a car leasing scheme under which he created
false financial statements and tax returns to lease cars as
if he were fleet leasing for a business, and then re-leased
the vehicles to individuals with poor credit. In his
individual and corporate Chapter 7 bankruptcy cases, he
failed to turn over lease payments to the bankruptcy
trustees.
Craig D. Butler pleaded guilty Sept. 17 to bankruptcy fraud
and income tax evasion. In October 1995, Butler filed a
bankruptcy petition in which he made false representations
and statements to evade payment of federal income taxes.
During the bankruptcy case, Butler, who formerly practiced
medicine in Albany, Ga., used funds of his professional
corporation to pay his personal expenses and those of his
family members, while designating the payments as business-
related expenditures.
Hawaii
On December 10 a federal jury in the District of Hawaii
found attorney Stacy Moniz of Kaneohe guilty of filing a
false income tax return, structuring cash transactions to
evade currency reporting requirements, failing to report the
receipt of $15,000 cash in the operation of his law office,
making false statements to the IRS, and making a false
statement under penalty of perjury in a bankruptcy
proceeding. The bankruptcy count arose from Moniz's falsely
reporting a client to be a creditor in his August 1997
bankruptcy case.
Arthur Kahahawai pleaded guilty Oct. 4 in the District of
Hawaii to two counts of bankruptcy fraud. Kahahawai concealed
from the bankruptcy trustee and his creditors a $71,517
workers' compensation settlement that he received less than
one month before filing for bankruptcy.
Miyoko Mizuno, a/k/a Miyoko Proctor, pleaded guilty in the
District of Hawaii Sept. 24 to concealment of assets in her
bankruptcy case. The debtor attempted to discharge
approximately $185,000 in unsecured debts by filing for
Chapter 7 bankruptcy. She listed no interests in real
property, when in fact she had deeded to her son a
condominium and her residence while retaining a life interest
in both properties, which could generate substantial rental
income.
Edward O'Kelley, former owner and president of HOJE
Construction, was sentenced April 23 in the District of
Hawaii to 33 months in prison for bankruptcy fraud
(concealment of assets and fraudulent transfer), and money
laundering. O'Kelley had been found guilty in a jury trial
for his role in putting HOJE Construction into Chapter 7
bankruptcy and hiding its assets in bank accounts in Alaska
and Texas. HOJE performed subcontracting work on military
projects in Hawaii and Alaska from 1992 through 1995.
O'Kelley and HOJE operations manager Harry Jordan conspired
to hide more than $450,000, which the bankruptcy trustee
recovered.
Harry Jordan pleaded guilty to bankruptcy fraud Feb. 8 in
the District of Hawaii; he was sentenced to one year
probation with one month home confinement, and ordered to pay
$75,000 in restitution. The court took into account that
Jordan, the former operations manager of HOJE Construction
Inc., cooperated with the United States Attorney and
testified against HOJE president Edward O'Kelley, who was
found guilty of bankruptcy fraud and money laundering. HOJE
performed subcontracting work on military projects in Hawaii
and Alaska from 1992 to 1995, when it filed for bankruptcy.
More than $450,000 in concealed assets have been recovered.
Illinois
A federal jury in the Northern District of Illinois Oct. 22
convicted Vincent M. Gramarossa on two counts of bankruptcy
fraud and eight counts of money laundering. Gramarossa
defrauded bankruptcy creditors by skimming more than $580,000
from his business, a State Farm Insurance agency in suburban
Chicago. Gramarossa's confirmed Chapter 11 reorganization
plan directed that he pay half his profits to creditors, but
Gramarossa devised a scheme under which he diverted
commissions to conceal approximately one-third of his
commissions.
Indiana
Bankruptcy debtors' attorney David T. Galloway of Porter
County, Ind., pleaded guilty April 5 in the Northern District
of Indiana to criminal contempt and agreed to resign from the
practice of law for three years. Galloway served as counsel
for a Chapter 7 debtor who concealed a pending personal
injury action from the bankruptcy case trustee. The debtor
testified at the Section 341 meeting of creditors that his
medical debts resulted from illness. After the Section 341
meeting, the United States Trustee's office in South Bend,
Ind., and the case trustee investigated the nature of the
medical debts, leading to the discovery of the personal
injury lawsuit.
Kentucky
Debtors Daniel Caldera and Martha Kay Caldera of
Elizabethtown, Ky., were sentenced Oct. 20 in the Western
District of Kentucky for bankruptcy fraud. Daniel Caldera
pleaded guilty to concealing a $101,295 payment from C&S
Carpentry Service Inc.'s bankruptcy estate. He was
sentenced to 21 months imprisonment plus two years
supervised release, and ordered to pay $11,272 in
restitution. Martha Kay Caldera pleaded guilty to filing a
bankruptcy petition containing a materially false
declaration--that she and/or her spouse did not own an
annuity when in fact her spouse did. She was sentenced to
24 months probation, including six months of home
incarceration.
Louisiana
Former district attorney James A. Norris, Jr. was sentenced
June 22 in the Western District of Louisiana to 33 months in
prison
[[Page S5388]]
and three years supervised release, and ordered to pay
$490,000 in restitution for bankruptcy fraud. On March 10, a
jury found Norris guilty of four counts of making false oaths
in a bankruptcy proceeding, in connection with his four
statements under oath that he had burned $500,000 cash in his
backyard. In 1989, Norris withdrew approximately $500,000
from his law partnership's account in a dispute over business
decisions; his former law partners ultimately obtained a
court judgment against him and filed an involuntary
bankruptcy petition against him.
Attorney Betty L. Washington was sentenced Jan. 20 in the
Eastern District of Louisiana to 33 months in prison, and
ordered to pay approximately $5,000 in restitution, based on
a jury verdict finding multiple counts of fraud, including
bankruptcy fraud. In her Chapter 7 bankruptcy case Washington
concealed her right to receive legal fees from a client.
Further, as part of a scheme to obtain more than $20,000 in
automobile loans, Washington tried to mislead a bank into
believing her bankruptcy case had been concluded.
Maine
On June 8 Catherine Duffy Petit was sentenced in the
District Court for the District of Maine to 15 years and
eight months in prison and three years supervised release,
and ordered to forfeit nearly $164,000 and to pay restitution
of nearly $8 million, based on her conviction on 54 counts
(reduced by the court from 78) of conspiracy, bankruptcy
fraud, securities fraud, and other violations. Petit and co-
conspirators had raised almost $7 million--ostensibly for
litigation expenses--by selling interests in Petit's state
court suit against a bank.
Massachusetts
On July 8 attorneys Wendy Golenbock and Cheryl B. Stein of
Weston, Mass., were each sentenced in the District of
Massachusetts to 21 months in jail for bankruptcy fraud. The
attorneys attempted to conceal their property interest in a
Cape Cod, Mass., vacation home from their bankruptcy trustee
and creditors. In March 1999, a jury found them guilty of
bankruptcy fraud and conspiracy to commit bankruptcy fraud.
Prosecutors in Boston announced Feb. 9 the settlement of
charges filed against Sears, Roebuck & Co. for improper debt
collection from Chapter 7 debtors. Sears agreed to pay a $60
million criminal penalty, which is the largest ever paid in a
bankruptcy fraud case. The monies will be deposited into the
Crime Victims' Fund. Sears already paid over $180 million in
restitution and $40 million in civil fines to state attorneys
general, in connection with civil settlements in the case.
Minnesota
Mark John McGowan of Mound, Minn., was sentenced Sept. 1 to
one year in prison and two years of supervised release for
bankruptcy fraud and perjury. In his Chapter 7 bankruptcy
schedules, McGowan listed a $100,000 house that he claimed
exempt as his homestead although he actually rented the house
and had no intent to occupy it.
Daniel J. Bubalo of Edina, Minn., was sentenced June 8 to
21 months in prison and ordered to pay $85,000 in restitution
following his conviction on two counts of bankruptcy fraud.
After Bubalo's bankruptcy case was converted from Chapter 11
to Chapter 7, and without the Chapter 7 trustee's knowledge,
Bubalo sold for $70,000 a Duluth, Minn., bar valued at
$175,000. He later testified that the property's status had
not changed since his case was converted.
Missouri
Keith D. Linhardt of Warrenton, Mo., pleaded guilty Feb. 12
in the Eastern District of Missouri to bankruptcy fraud and
perjury. Linhardt admitted that he concealed financial
accounts as well as his interests as primary beneficiary of
seven life insurance policies--totaling more than $1.5
million--on his wife, who died on a camping trip in April
1998. In July 1998, at his Section 341 meeting with
creditors, Linhardt testified to the trustee concerning his
non-debtor spouse as though she were alive. On January 15,
1999, Linhardt pleaded guilty to second degree murder of his
wife and was sentenced to life in prison. He also pleaded
guilty to four counts of insurance fraud and was sentenced to
20 years in prison, consecutive to the life sentence.
New Jersey
Michelle A. Pruyn of Medford, N.J., pleaded guilty Oct. 1
in the District of New Jersey to concealing company income
from her creditors, the Bankruptcy Court, and the IRS during
her Chapter 7 bankruptcy case. Pruyn was the former president
and owner of Sigma Acquisition Corp., Televid Media Buying
Inc., and other New Jersey-based video production-related
companies. She concealed assets worth at least $240,000 from
the court and her creditors by failing to disclose her
equitable interest in a Pennsauken, N.J., commercial building
and the existence of an investment account held in the name
of the Cogan Corp., to which she diverted part of the
receipts of Sigma and the other companies she owned.
Alexander Alegria of Fords, N.J., pleaded guilty July 21 to
filing a false bankruptcy petition. He admitted that he
falsely stated his Social Security number on the petition and
that he sought to discharge approximately $25,000 in debt he
had incurred under the false SSN.
Nevada
John and Rena Kopystenski of Las Vegas were sentenced on
December 2 to 21 months in prison and ordered to pay $67,000
in restitution after pleading guilty in the District of
Nevada to bankruptcy fraud, money laundering, and aiding and
abetting. The Kopystenskis were principals of debtor Quality
Ice Cream Inc., which went through several bankruptcies under
different names with essentially the same assets.
New York
Joseph W. Kennedy Jr. of Rochester, N.Y., was sentenced
Nov. 3 to 27 months in prison and three years supervised
release, and ordered to pay $235,000 in restitution, based on
his conviction on three counts of bankruptcy fraud. Kennedy
failed to disclose in his Chapter 7 schedules that he owned
one insurance agency and was a 47 percent shareholder and
officer in another insurance agency.
Kenneth Stenzel of Queens County, N.Y., was sentenced Aug.
31 in the Eastern District of New York to five years
probation and ordered to pay restitution of $5,920 payable to
the Chapter 7 trustee, based on his guilty plea to bankruptcy
fraud. Stenzel intentionally made a materially false
statement by stating in his bankruptcy schedules that he was
unemployed, when he was actually earning more than $5,000 a
month as a computer programmer.
Garden City, N.Y., attorney Brent Kaufman pleaded guilty
July 26 in the Eastern District of New York to two counts of
bankruptcy fraud arising from the filing of two false proofs
of claim on behalf of a fictitious creditor. Kaufman, an
associate with a Chapter 7 bankruptcy trustee's law firm,
admitted embezzling $117,000 from five bankruptcy estates.
ohio
Albert J. DeSantis, formerly of Columbus, Ohio, and Upper
Arlington, Ohio, was sentenced August 26 to 51 months
imprisonment based on his plea of guilty to charges of
bankruptcy fraud, money laundering, and witness tampering.
The former Columbus, Ohio, real estate developer filed for
Chapter 11 bankruptcy relief but failed to list assets
exceeding $920,000 in value, including a residence and a bank
account. He also counseled two employees to withhold
information from the federal grand jury that was
investigating his conduct in the bankruptcy case.
oklahoma
Mary Ann Adams and John Quincy Adams pleaded guilty Sept.
15 to bank fraud in connection with their concealment of more
than $90,000 in assets after a bank foreclosed upon their
property. The Adamses, who owned an implement company, hid
tractor and combine parts, transferred real property, and
concealed personal property including certificates of
deposits.
Jesse Joseph Maynard and Samuel Bruce Love were convicted
Sept. 1 in the Western District of Oklahoma on eight counts
arising from the October 1993 bankruptcy filing on behalf of
First Assurance & Casualty Co. Ltd. The defendants concealed
more than $270,000 in bankruptcy estate assets from the
Chapter 7 trustee, and transferred monies from the bankruptcy
estate post-petition.
oregon
Bankruptcy petition preparer Robert Tank pleaded guilty
April 9 to criminal contempt of court in the District of
Oregon. In 1996, the United States Trustee obtained an order
fining Tank approximately $10,000 and prohibiting him from
engaging in certain deceptive practices or practicing law in
Oregon. Tank violated the order, and the United States
Trustee obtained a national permanent injunction against him.
Tank continued to prepare bankruptcy petitions, and engaged
in a series of violations of various orders.
Former Chapter 11 trustee Thomas G. Marks was sentenced
March 15 in the District of Oregon to twelve months plus one
day in prison, three years probation, and payment of
restitution, for embezzling funds in three Chapter 11
bankruptcy cases where he acted as a fiduciary after the case
was confirmed. The United States Trustee discovered the
embezzlement of approximately $108,000 based on an inquiry
from Marks' former business partner. The United States
Trustee obtained Marks' resignation as fiduciary in the
cases, and arranged the appointment of successor fiduciaries
to pursue bond claims relating to the losses.
pennsylvania
On Nov. 15 the District Court for the Eastern District of
Pennsylvania sentenced Philadelphia attorney Steven Bernosky,
and barred him from practicing law for three years, for
embezzling approximately $14,000 from a Chapter 11 bankruptcy
estate. Bernosky served as debtor's counsel in the Chapter 11
bankruptcy case of Morris Schiff Co. The debtor company's
property was sold for approximately $14,150, and Bernosky
improperly deposited a check for the sale proceeds into his
personal account. Bernosky made partial restitution of
$11,000 before sentencing and produced a check for the
balance at the sentencing hearing. He was sentenced to five
years probation and ordered to pay a $2,500 fine. He pleaded
guilty April 7 after a one-count information was filed March
31.
Chester Wiles was sentenced June 7 in the Eastern District
of Pennsylvania to 24 months incarceration for false
declaration in bankruptcy, to a concurrent 18-month term of
incarceration on 12 other counts, and to five years of
supervised release; he was also ordered to pay approximately
$225,000 in restitution and a special assessment fine of
$1,300. Wiles had assumed the identity of a
[[Page S5389]]
deceased person and fraudulently obtained credit in the
decedent's name for 2\1/2\ years, before filing for
bankruptcy twice in the decedent's name. He pleaded guilty to
13 counts including false statement in bankruptcy, bankruptcy
fraud, false statements to obtain a HUD-insured mortgage,
false statements in loan and credit applications, credit card
fraud, wire fraud, interstate transportation of stolen goods,
and use of an unassigned Social Security number.
south carolina
Auctioneer J. Max McCaskill pleaded guilty Nov. 2 in the
District of South Carolina to two counts of embezzlement from
bankruptcy estates. McCaskill was a former Bankruptcy Court
deputy clerk and a former employee of a bankruptcy trustee in
South Carolina. While employed to auction bankruptcy estate
property, he sold the property but failed to turn over the
proceeds to the bankruptcy trustee.
texas
Tronnald Dunnaway of Richardson, Texas, was sentenced Oct.
3 to 13 months in jail and three years supervised release and
ordered to pay $23,959 in restitution for his role in a
bankruptcy foreclosure scam. Dunnaway pleaded guilty in June
on the eve of trial; on June 22, his co-defendant Shelby
Daniels was found guilty of 14 counts of bankruptcy fraud in
connection with the scam. Daniels and Dunnaway contacted
homeowners facing foreclosure, offering to help them with
their mortgage problems. They persuaded the homeowners to
transfer a part interest in their homes to companies
controlled by, or individuals working with, the scam
operators. Those companies and individuals then filed for
bankruptcy to delay foreclosure on the properties, but
the victims ended up losing their homes.
On June 22, after a five-day jury trial, Shelby Daniels of
Dallas was found guilty of 14 counts of bankruptcy fraud for
his role in a bankruptcy foreclosure scam. Daniels
represented himself as a real estate consultant and contacted
homeowners facing foreclosure, persuading them to transfer a
part interest in their homes to companies he controlled or
individuals working with him. The companies and individuals
filed for bankruptcy to delay foreclosure. Homeowners paid
Daniels a $500 ``set up'' fee plus $500 per month, assuming
he was working to address their mortgage problems. They ended
up losing their homes. On the eve of trial, Tronnald
Dunnaway, who was indicted with Daniels, pleaded guilty to
one count of bankruptcy fraud.
Virginia
Lee W. Smith Sr., the principal in the Chapter 11 case of
Lee's Contracting Services Inc., was sentenced Nov. 10 to 21
months in prison after pleading guilty to one count of
bankruptcy fraud and one count of tax evasion. Smith diverted
monies from the corporation to personal accounts during the
pendency of the Chapter 11 case, which was ultimately
dismissed because the debtor owed more than $1 million in
unpaid employee withholding taxes.
The District Court for the Southern District of West
Virginia August 4 sentenced Donald S. Pritt to 30 months
imprisonment, three years of supervised release, and
restitution of $193,990 following his conviction on one count
of mail fraud and two counts of bankruptcy fraud. Pritt
claimed to be permanently disabled following an all-terrain
vehicle accident. He filed disability insurance claims under
several recently issued policies and engaged in litigation
with the insurance companies and ATV manufacturer. Pritt was
ordered to pay in excess of $600,000 in attorney fees to the
manufacturer. The bankruptcy counts arose from his transfer
and concealment of assets, which began after the state court
litigation and continued during the bankruptcy case.
Ethel Mae Martin was sentenced June 15 in the Eastern
District of Virginia to 27 months in prison and 3 years of
supervised release for one count of bankruptcy fraud. Martin
used at least three Social Security numbers to obtain credit
and filed her bankruptcy petition using a fourth SSN.
Elizabeth Baker pleaded guilty June 8 to one count of
making a false oath in connection with her bankruptcy. Baker
and her husband filed a Chapter 13 petition in 1995; when her
husband later died, Baker received over $99,000 in life
insurance proceeds. She converted the bankruptcy case to a
Chapter 7 liquidation but did not disclose the receipt of
funds to the bankruptcy trustee. Baker's bankruptcy discharge
was revoked after the trustee discovered the receipt of funds
as well as Baker's false testimony that there were no assets
other than those listed in the bankruptcy schedules.
Wisconsin
The Court of Appeals for the Seventh Circuit July 20 upheld
the March 1998 conviction of attorney John Gellene for false
material declarations in a bankruptcy proceeding, and upheld
the trial court's sentencing determinations. Gellene did not
disclose that his law firm represented a senior secured
creditor as well as the Chapter 11 debtor, giving rise to a
conflict of interest in representation. He was convicted
after a jury trial in the Eastern District of Wisconsin,
sentenced to 15 months in prison, and fined $15,000. In its
ruling, the Appeals Court rejected Gellene's argument that
his false statements were not material, finding it beyond
doubt that ``a misstatement in a Rule 2014 statement by an
attorney about other affiliations'' is material.
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