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Bad Forms And Bankruptcy Fraud – The Fifth Circuit Vacates A Conviction Based On An Ambiguous Form

Today, of course, is Valentine’s Day. And, so, today’s post is a story of marriage, love (presumably), and bankruptcy fraud.

Scott and Debra Spurlin

Scott and Debra Spurlin had a number of assets and bank accounts.

1221951_to_sign_a_contract_2.jpgThey owned Golden Athletics LLC, which, in turn, owned their three cars. They owned Golden Choice Financial, which owned the house they lived in. They owned International Oil, Gas, and Mineral Management, Inc., which owned an account from which Mr. Spurlin wrote checks to Mrs. Spurlin.

They also had a number of bank accounts.

When it came time to file for bankruptcy, however, the Spurlins said that they had one bank account – with $157 in it; that their assets were only $3,364; and that they owned only one company, Spurlin and Associates. Spurlin and Associates filed for bankruptcy the day after the Spurlins did. The Spurlins did not disclose the other companies that the owned, which, in turn, owned their house and cars.

During the course of the bankruptcy, they also answered a form about Mrs. Spurlin’s father. More on that below.

The Spurlins Are Charged With Bankruptcy Fraud

The Spurlins were indicted for bankruptcy fraud under 18 U.S.C. §152(1) for not disclosing their other assets, and for making a false statement in a bankruptcy proceeding under 18 U.S.C. 152(3). Mr. Spurlin was also indicted under, 18 U.S.C. §157(1), for filing for bankruptcy to hid a separate fraud scheme.

After trial, the Spurlins were convicted on all counts. In United States v. Spurlin, the Fifth Circuit reversed Mr. Spurlin’s conviction for making a false statement in bankruptcy.

The rest of their convictions stand, however.

The Form

The Spurlins’ conviction for making a false statement was based on three questions on a form that the bankruptcy trustee created.

They were asked:

4. Are your parents living? Father _______ Mother _______ Are your spouses’ parents living? Father _______ Mother ____

5. If not, was any property left by your parent(s) at the time of death? _________
6. Do you understand that should you inherit anything during the next 6 months it will be necessary for you to advise me (your Trustee) in writing within 10 days? ______

The Spurlins answered that Mrs. Spurlin’s father had died, and answered “no” to question 5 – indicating that he did not die with any property.

In fact, Mrs. Spurlin’s father did have property when he died. He just didn’t leave any property to the Spurlins.

The government argued that they filed out line 5 incorrectly – and thereby made a false statement in bankruptcy. The jury agreed, apparently.[FN1]

Making A False Statement In Bankruptcy

As the Fifth Circuit explained, to prove a violation of 18 U.S.C. 152(3) the government must prove:

(1) there was a bankruptcy proceeding;

(2) defendant made a declaration or statement under penalty of perjury in relation to the proceeding;

(3) the declaration concerned a material fact;

(4) the declaration was false; and

(5) defendant made the declaration knowingly and fraudulently.

Here, there was no question that elements (1), (2), and (3) were met. There was a bankruptcy proceeding and the form indicated clearly that it was filled out under penalty of perjury. The standard for materiality is very weak – as the Fifth Circuit said, quoting the district court,

The court described a material fact as one that “has a natural tendency to influence or is capable of influencing the decision of the decision maker to whom it was addressed.” The assets available in bankruptcy will influence how the trustee handles the bankruptcy, because bankruptcy is about distributing the available assets.

What Did The Form Ask?

The Spurlins and the government disagree, however, about whether the statement was false.

The Spurlins argued that that, given the context in which it was asked, question 5 really means “Did the deceased parent leave any property to you?” not just whether they left any property at all.

The Fifth Circuit agreed. Very few people die without any property of any kind – if you adopted the government’s reading of the question it wouldn’t get any useful information. Moreover, the whole point of the question is to find out about assets of the people in bankruptcy – why would the Trustee care about other assets that people’s parents left?

And, so, Mr. Spurlin’s conviction on this count was reversed for insufficient evidence – because the statement wasn’t clearly false, there was not enough evidence for a jury to convict him.

Mrs. Spurlin’s Testimony

Mrs. Spurlin, however, did not fare as well.

Mrs. Spurlin testified at trial. On cross, the government asked her how she interpreted question 5 of the form that she filled out.

Here’s the exchange:

Q. And the question did not ask whether or not you owned any property following your parents’ death, did it?

A. No.

Q. It simply asked: Was there any property left by your parents at the time of death?

A. Correct.

Q. And the answer given here is no?

A. Correct.

Q. And that wasn’t accurate, was it?

A. No. I did not fill this out, ma’am.

The Fifth Circuit found this concession to be fatal. Because she admitted that the answer to question 5 was false, the court of appeals determined that the jury had enough evidence to decide that the answer was false, as to her.[FN2]

This strikes me as odd. If the answer is false, it’s false, and if the answer is true it’s true. I could see Mrs. Spurlin’s answer being relevant to whether she intentionally made a false statement, but that’s not what’s up for debate.

I think, rather, that this is simply an example of why it’s very bad for a person to admit to an element of a crime – it gets very hard to undo that later.

[FN1] – Though, frankly, there’s so much going on in the rest of this case I think there’s reason to doubt how much the jury actually thought about how to interpret this question.

[FN2] – Mrs. Spurlin’s defense was that she didn’t fill out the form. The Fifth Circuit rejected that as a defense, since she still said everything was accurate under penalty of perjury. In other words, it isn’t an element of making a false statement in bankruptcy that you fill out the form yourself.