Summary:
The U.S. Attorney filed a Criminal Information against the Male Debtor on March 24, 2011, alleging that he had conspired to defraud a federal crop insurance program by making over $60,000 in false claims for tobacco crops he had sold under false names to hide production. The Debtors filed Chapter 11 bankruptcy on November 19, 2011. On February 22, 2012, the Male Debtor plead guilty to one count of conspiracy to make false statements, to make materially false statements and to commit mail fraud and wire fraud in violation of 18 U.S.C. § 371 and was sentenced to five years of probation, excluded from participation in federal crop insurance programs for two years starting in the 2013 crop year, and ordered to make restitution to the United States Department of Agriculture (“USDA”) in the amount of $66,142. On April 12, 2012, the Bankruptcy Administrator sought the appointment of a Trustee under 11 U.S.C. § 1104(a), after learning of the criminal prosecution and conviction, believing she had no discretion in the matter.
Finding that there “must be some temporal connection between past fraudulent conduct and the
current management of the debtor” in order to require appointment of a Chapter 11 Trustee, the Bankruptcy Court held that “the single episode of fraudulent conduct was four years ago, too long
to prevent such an inference without more.” The Male Debtor’s guilty plea, cooperation with federal authorities, the failure of the United States (the primary party injured by the fraud) to join the motion for the appointment of a trustee, and the opposition of the post-petition financier also weighed against such appointment.
Commentary:
This is an example of where the Bankruptcy Administrator’s independence, otherwise preferable to the interference from the United States Trustee, can be problematic. Where the UST, as a subordinate of the Department of Justice, would be able (willing?) to take direction from the U.S. Attorney, here the B.A. was precluded from discretion/restraint. It is not even clear that, had the B.A. and U.S. Attorney each known of the pending criminal prosecution and bankruptcy, that the plea in the criminal case could have involved the B.A. and resolved the issues regarding appointment of a trustee.
For a copy of the opinion, please see:
Smith- Appointment of Chapter 11 Trustee following Criminal Conviction.pdf
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