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Bankruptcy Basics: Bankruptcy Fraud can lead to Truth or Consequences

By Karen Oakes, Southern Oregon Bankruptcy Attorney

In earlier posts, two bankruptcies filed by debtors appearing in Bravo Television reality shows were discussed.   Terese Giudice who appears on Real Housewives of New Jersey and Sonja Morgan who appears on Real Housewives of New York City each filed banruptcy.   Ms. Giudice filed a chapter 7 bankruptcy (consumer bankruptcy); Ms. Morgan filed a Chapter 11 bankruptcy (for high income consumers or bigger businesses).   My opinion was that Ms. Morgan chose wisely and that perhaps Ms. Giudice had not.    The events since the filing demonstrate the importance of filing accurate and thoroughly complete schedules.

On  June 30, 2010, the Chapter 7 Trustee filed an adversary proceeding, objecting to the discharge of debts for the Giudices.  The Chapter 7 trustee alleges that assets were concealed or withheld by the debtors and that as a consequence, their debts should not be discharged.  On August 3, 2010, the Giudices answered the lawsuit, denying that they had concealed any property or withheld any information from the court.  On September 2, 2010,  the United States Trustee filed an adversary proceeding in the Guidici case in New Jersey.   That adversary proceeding, or lawsuit, objects to the discharge of the debts of the Giudices.   The United States Trustee functions as a prosecutorial arm of the federal bankruptcy system and is a division of the United States Department of Justice.    The lawsuit paperwork recounts the actions of the Giudices from the inital papers filed through September.    The United States Trustee alleges that there were numerous inaccuracies in the initial papers and then lists the amendments.    Mr. and Mrs. Giudice appeared at their 341 meeting with the trustee and acknowledged some of their property was not listed.    Amendments were filed after that meeting.   The Giudices then appeared at a 2004 examination (separately).   At that examination, the Giudices acknowledged that additional property was not listed.   Amendments were filed which listed more property.   The UST alleges that even after the amendments that the Giudices still failed to list even more property.   Through their attorney, on October 4, 2010, the Giudices filed an answer to the lawsuit, admitting that there were errors but denying intential omissions were made.    The Giudice answer alleges that a further amendment will be filed with the Court which will complete their bankruptcy filing.   

Complicating matters further are other adverary proceedings filed against the Giudices in their bankruptcy case.   One of those was filed by Joseph Mastropole, Mr. Giudice’s ex-business partner, who is objecting to any discharge as Mr. Mastropole alleges that Mr. Giudice is liable on a mortgage held by Mastropole and that a fraudulent document was recorded by Giudice releasing the Mastropole mortgage.     In that case, while on the stand, Mrs. Giudice testified that she did not sign the bankruptcy papers and was unaware of the bankruptcy until after it was filed.    Apparently, during a bankruptcy court hearing, Mr. Giudice admitted to the forgery of his wife’s name on the bankruptcy papers; that admission has now caused the Essex County, NJ prosecutor to become interested in filing forgery charges against Mr. Giudice.   In the Mastropole adversary proceeding, Mr. Mastropole alleges that the Giudices have a pattern of fraud and deceit (Mastropole had filed a state court case which was put on hold when the Giudices filed for bankruptcy protection).   The Mastropole case was combined with another adversary proceeding filed by John Testa as the two cases were based on the same or similar facts.

According to the United States Trustee website:

The Program was established by the Bankruptcy Reform Act of 1978 (11 U.S.C. § 101, et seq.) as a pilot effort encompassing 18 districts.  It was expanded to 21 Regions nationwide, covering all  federal judicial districts except Alabama and North Carolina (those two states have bankruptcy administrators, as explained by my colleague, Susanne Robicsek). … The Program is funded by the United States Trustee System Fund, which consists primarily of fees paid by parties and businesses invoking Federal bankruptcy protection.   The primary role of the U.S. Trustee Program is to serve as the “watchdog over the bankruptcy process.”  As stated in the USTP Mission Statement, the USTP Mission is to promote integrity and efficiency in the nation?s bankruptcy system by enforcing bankruptcy laws, providing oversight of private trustees, and maintaining operational excellence. …The Attorney General is charged with the appointment of United States Trustees and Assistant United States Trustees. The Executive Office for U.S. Trustees in Washington, D.C., provides general policy and legal guidance, oversees the Program’s substantive operations, and handles administrative functions.

The debtors are in a very bad position.  The local prosecutor is investigating criminal charges, the United States trustee is objecting to their discharge, and the Department of Justice is likely to become involved for federal criminal charges.  All of these agencies and the attorneys involved in the other two adversary proceedings are all paying attention to the answers given in any court proceeding.      Bankruptcy fraud is a serious matter, as explained by my colleague, Dana Wilkinson, even for small businessmen.  Back in 2006, the government announced “Operation Truth or Consequences“, a cooperative effort by many federal agencies to work together to fight bankruptcy fraud.

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Full post as published by Bankruptcy Law Network on December 24, 2010 (boomark / email).