In what a United States Court of Appeals has described as a “bizarre case,” a debtor unnecessarily filed bankruptcy, hid assets from the trustee, lied to the court and ultimately ended up with a 24-month prison sentence followed by three years of probation.
In July, 2010, Michael Free, a sole proprietor who owned Electra Lighting and Electric Company and Freedom Firearms (a dealer in World War II-era firearms) filed bankruptcy, ostensibly to prevent a foreclosure. In his schedules he listed $1.3 million in real property and $368,990 in personal property, including $250,000 in firearms. He claimed $671,000 in liabilities. Quick arithmetic shows he had about $1 million excess assets over his liabilities. Initially he filed Chapter 13 but it was later converted to Chapter 7.
Throughout the course of his bankruptcy Free hid assets from the bankruptcy trustee and the court, refused to cooperate with the trustee, ignored court orders and sold assets that belonged to his bankruptcy estate, using the money from the sale of those items to purchase items at auction from the trustee. Eventually both the bankruptcy court and the trustee became weary of Mr. Free’s shenanigans and referred the case to the FBI for investigation of possible bankruptcy fraud.
This resulted in a prosecution for bankruptcy fraud. After a five day jury trial Free was convicted on all counts. Because his sentence is governed in large part by the Sentencing Guidelines, which rely on the amount of loss caused by the fraud, an interesting issue arose. The bankruptcy trustee was ultimately able to find and sell enough assets that all of Free’s creditors were paid in full. Free’s criminal defense attorney argued that because of this there was no loss caused by his fraud and Free should be sentenced accordingly.
The district court and the Third Circuit Court of Appeals didn’t buy that argument. Both said that Free intended to cause loss equal to the amount of the value of the assets he hid, which were close to $1 million. These assets were in addition to those Free listed in his schedules. Although the Court of Appeals did not agree with the 14-level enhancement imposed by the District Court, it remanded the case for resentencing and suggested that the lower court could apply an upward departure from the Guidelines for “significant disruption of a governmental function.”