Debt Restructuring Fraud

DEBT RESTRUCTURING fraud is a method whereby an individual or an officer of a corporation with outstanding debt obligations knowingly and fraudulently conceals or transfers assets belonging to the estate of the debtor, prior to a Chapter 11 bankruptcy filing, with the intent to defraud creditors and avoid legitimate debts.

Debt restructuring fraud, referred to as fraudulent transfer or concealment, is defined within the bankruptcy fraud statute, codified at 18 U.S.C. §152, and states, “A person who 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[Page 246] Title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation shall be fined not more than $250,000 or imprisoned not more than five years, or both.”

The prospect of business failure can lead executives to attempt various forms of debt restructuring fraud.

Generally, 18 U.S.C. §152 requires that the fraudulent transfer and concealment of assets by the debtor occur knowingly and fraudulently. Precise definitions of “knowingly” and “fraudulently” are provided within 18 U.S.C. §152. Accordingly, the term “knowingly” means, “the defendant is aware of his or her act or failure to act and that his or her conduct is undertaken voluntarily and intentionally and not because of mistake or accident or other innocent reason.” The term “fraudulent” means, “the conduct was willful and done voluntarily and intentionally and with the intent to deceive, cheat, or defraud. An intent to defraud is accompanied, ordinarily, by a desire or purpose to bring about some gain or benefit to oneself or to cause some loss to some person.”

In order to sustain a conviction under 18 U.S.C. §152, the government must prove beyond a reasonable doubt that the defendant “knowingly and fraudulently, concealed from an officer or the creditors, in a Title 11 case, property belonging to the estate of the debtor.”

In many cases involving debt restructuring fraud, business owners blatantly transfer corporate assets prior to a bankruptcy filing for their own personal benefit. Examples of obvious fraudulent transfers include: transfer of corporate funds to pay the owner's personal debts; transfers to third parties who in turn provide insiders with significant gains; and cash transfers directly to the owner of the corporation for no legitimate business purpose or activity.