U. S. v. Milwitt
9th Circuit Case No. 05-10344
February 5, 2007
Although bankruptcy attorneys, representing either debtors or creditors, do not often deal directly with bankruptcy crimes, and would generally refer such a case to a criminal defense attorney or to the U.S. attorney, respectively, it is nevertheless extremely important to "know it when you see it."
This Ninth Circuit opinion from last year sheds some light on but one of a number of potential bankruptcy crime statutes, 18 U.S.C. § 157. "As opposed to the historic bankruptcy crimes . . which concerns acts committed in the bankruptcy context, the focus of § 157 is a fraudulent scheme outside the bankruptcy which uses the bankruptcy as a means of executing or concealing the artifice." In this case the egregious "truth is stranger than fiction" facts of the crime alone make looking further worthwhile, heightened by the curiosity of finding out why this 9th Circuit panel overturned the defendant's two-year prison conviction, notwithstanding the earnest efforts of the dissenting judge.
The Amazing Facts
In early 1997 the defendant Milwitt put an ad in the "Landlord Tenant Law" heading under the "Attorneys" section of a phone book yellow pages, with the business name "AP Assistance," suggesting that the company provided both legal services through attorneys and pro bono help with "tenants' rights." Milwitt was not admitted to practice law, and never even attended law school. He represented himself as an attorney to tenants having problems with their landlords, and collected fees from them with their understanding that he would represent them in the unlawful detainer actions against them by their landlords. He instructed them not to pay their landlords and at least in some cases had them pay him instead. He filed pro se papers on their behalf in the unlawful retainer actions but, contrary to the tenants' beliefs, did not appear at court on their behalf, and judgments were entered against all the tenants. Then
Milwitt filed bankruptcy petitions on behalf of several of the tenants, without their authorization or knowledge. These bankruptcy petitions listed the relevant landlords as well as fabricated creditors. While the tenants did not know about or authorize the filing of these petitions, Milwitt did tell them that for various reasons they did not have to pay judgments entered against them or move out after receiving eviction notices. The petitions were filed under Chapter 13 of the United States Bankruptcy Code, and the petitions indicated that the debtors would be filing a plan for repayment of the debts.After being convicted of the unauthorized practice of law in state court and being released from state custody he was immediately indicted by the U.S. Attorney on six counts of bankruptcy fraud in violation of 18 U.S.C. § 157, and was convicted in a jury trial on five counts. He appealed. Through the defendant's apparently very able representation by the former prominent (and very recently dissolved!) San Francisco firm of Heller Ehrman, but mostly because of the prosecution's unfamiliarity with bankruptcy crimes, the Ninth Circuit overturned his conviction. About the only thing the majority and dissenting opinions could agree upon was that the prosecution could have done a much better job with both framing the indictments and presenting the evidence at trial.
The Short Answer Why
The conviction was overturned because the Ninth Circuit here determined that "[i]n enacting § 157, Congress made it quite clear that the new crime was a specific intent crime," meaning that it "requires the prosecution to prove that the defendant intended to defraud an identifiable individual." The simple and decisive problem, in the eyes of the majority, was that all the evidence put forward by the prosecution at trial showed how the tenants were victims of Milwitt's fraudulent scheme of fake Chapter 13 petitions, whereas the indictment charged him with fraudulently obstructing the creditors' legal rights. Without any "proof that there was a scheme to defraud the landlords, much less that the bankruptcy petitions had been filed as a means of executing or concealing the scheme," "the evidence presented was insufficient to sustain the verdict, [and so] we reverse the conviction."
This was a case of first impression for the Ninth Circuit but it arrived at this conclusion about the need for "specific intent" by analogizing to its and the U.S. Supreme Court's prior holdings on the wire and mail fraud crimes, upon which § 157 was modeled according to this opinion.
The Disconnect Between the Criminal Statute, the Indictment and the Evidence at Trial
The version of 18 U.S.C. § 157 applicable to this case (subsequently changed by BAPCPA in ways not pertinent) is:
A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—The pertinent language of the indictment is as follows:
(1) files a petition under title 11;
(2) files a document in a proceeding under title 11; or
(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.
By filing the sham petitions, the defendant . . . fraudulently obstructed the creditors’ legal right to collect back rents, and repossess the properties.In contrast, according to the majority "[n]o evidence was presented concerning any scheme to defraud creditors, only debtors. There was no proof that Milwitt received or sought any money or other consideration from the landlords, only that he defrauded the tenants."
The Dissent
The dissenting judge focused on the highly deferential standard of appellate review of a jury verdict, that the Court "must defer to a jury's guilty verdict if, 'after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.' ” He accused the majority arriving at its "specific intent" holding unnecessarily since it was not raised by either party, and then he interpreted the same 9th Circuit and U.S. Supreme Court case law as NOT requiring "that the government prove intent to defraud a specific victim or class of victims." He concluded that with the evidence presented, "a reasonable jury could have found that Milwitt possessed an intent to defraud the landlords."
The majority also appears to believe that Milwitt could not simultaneously possess the intent to defraud the tenants and the landlords. . . . [T]he evidence reveals that Milwitt possessed no shortage of fraudulent intent. . . . .The case went to the jury under proper instructions requiring proof beyond a reasonable doubt that Milwitt defrauded the landlords. Because a reasonable jury could have concluded that Milwitt’s fraudulent intent was not solely directed toward the tenants, but also toward the landlords, Milwitt's conviction must be affirmed.A Critical Consideration
As I stated at the outset, this opinion fixates on 18 U.S.C. § 157, which is a relatively new bankruptcy crime, enacted in 1994 as the "centerpiece" of a new bankruptcy crime statute. In contrast, ever since "[t]he bankruptcy act passed by Congress in 1841 was the first in world history allowing individuals to obtain voluntary discharge of their debts," "Congress has always provided for the imposition of criminal penalties for those who abuse the bankruptcy system. . . . . With some modifications, these core bankruptcy criminal provisions have remained intact to this date, with the essential components codified into 18 U.S.C. § 152." I will address this more common and generally more easily proven bankruptcy criminal provision of § 152 in a future Litigation Report, but mention it here to make clear that this Milwitt opinion provides just a small window into this bankruptcy crimes arena.
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
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