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U.S. v. LEE

January 20, 2000

UNITED STATES OF AMERICA
V.
ROBERT C. LEE.



The opinion of the court was delivered by: Dalzell, District Judge.

MEMORANDUM

We consider here whether certain allegations against a criminal defendant can be prosecuted under the Bankruptcy Fraud statute, 18 U.S.C. § 157, a question which places us on the line between civil and criminal penalties for wrongful acts. As this statute is relatively new, having been passed in 1994, and has to date gone unconstrued,*fn1 we address this issue at some length.

I. Procedural Background

On January 13, 2000, the Government filed a ten-count Superseding Indictment*fn2 charging Robert Lee with three counts of mail fraud, one count of conspiracy to defraud the United States, two counts of tax evasion, two counts of filing of false tax returns, and one count of bankruptcy fraud.*fn3 In advance of the trial scheduled to begin next Monday, Lee has moved to dismiss Count 10*fn4 of the Superseding Indictment, arguing that his actions, as the Government alleges them, do not amount to a violation of that statute.

II. The Government's Allegations*fn5

Robert Lee was an officer of Ostomy Specialists ("Ostomy"), a medical supply company that filed for bankruptcy under Chapter 11 of the Bankruptcy Code on May 4, 1995. Ostomy then became a debtor-in-possession, and Lee, as a corporate officer of the debtor, became a fiduciary of the bankrupt estate. After Ostomy declared bankruptcy, Lee proposed to lease*fn6 some low-air-loss beds to Ali Industries ("Ali")*fn7 because Ostomy was no longer able itself to lease them directly to patients, since Ostomy had been suspended as a Medicare provider on February 15, 1995.

As it happens, the owner of Ali was an employee of Lee's in another business, and, according to the Government, Ali's owner had no experience in billing Medicare. The lease was to run from October 4, 1995 to May 15, 1996. Evidently because of the relationship between Ali's owner and Lee, and because of disputes over the level of compensation appropriate for Lee to earn on the lease, the creditors objected to the proposed lease and wrangling ensued in Bankruptcy Court. Only on April 29, 1996*fn8 did Lee actually file with the Bankruptcy Court a consent order providing the agreed payment provisions. Under the terms of the lease as filed with the Bankruptcy Court, Ali could keep twenty percent of any monies collected from Medicare for the release of the beds, and Ostomy would receive the remaining eighty percent. According to this April 29 consent order, Lee and his business partner would receive the lesser of (1) ten percent of the net receipts from Ostomy's lease of the beds to Ali or (2) $500.00 per week.*fn9

Notwithstanding that final Bankruptcy Court approval was not obtained until late April of 1996, the lease had actually gone into effect the previous October.*fn10 The Government alleges that in December, 1995, the owner of Ali Industries hired, at Lee's prompting, Lee's then-fiancee, and later wife,*fn11 to act as a consultant to Ali on the bed lease contract. Ali paid Lee's wife at least $90,000*fn12 during December 1995 and January 1996; this payment was, the Government claims, an improper indirect payment to Lee.

On these alleged facts, the Government charges Lee with Bankruptcy Fraud, specifically under 18 U.S.C. § 157(2). The Government argues that the consent order that Lee filed in Bankruptcy Court on April 29, 1996 failed to disclose that he was receiving indirect payments from Ali through his to-be wife, and that, consequently, this filing served to execute or conceal a scheme or artifice to defraud, namely, Lee's negotiation of the lease and the arrangement for his fiancee to be hired as a consultant so Lee could funnel money to himself.

III. The Statute

18 U.S.C. § 157*fn13, "Bankruptcy Fraud", states:

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 —

(1) files a petition under title 11;

(2) files a document in a proceeding under ...

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