Going Broke Badly: Celebrities Committing Bankruptcy Fraud
Recently, lawyers for 50 Cent fought against the appointment of a bankruptcy examiner to investigate Instagram photos the rapper posted of himself lying next to piles of hundred dollar bills. In one picture, the bills spelled out the word “BROKE.” The humor of the photos was lost on the Office of the U.S. Trustee, who viewed the postings as disrespectful of the bankruptcy process and possible evidence that 50 Cent committed bankruptcy fraud by concealing assets from his creditors. In its examiner motion, the UST states that it has “serious concerns about the veracity of the financial information” provided by the debtor, in light of his social media posts and discrepancies between his original bankruptcy schedules and statement of financial affairs and subsequent amendments.
For his part, 50 Cent, whose real name is Curtis James Jackson III, argued that the stacks were fake dollars from a prop house, and that the pictures furthered his personal brand as a rap mogul in the face of his very public and embarrassing fall into bankruptcy. The Grammy-winning artist sought chapter 11 protection in July 2015 after a court entered a $5 million judgment against him resulting from a sex tape that he had posted online. He had also lost a major arbitration fight over music licensing rights. 50 Cent was not sanctioned by the bankruptcy judge for his social media antics, but he is certainly treading on thin ice and will need to win the judge back as he seeks approval for his proposed plan of reorganization.
Bankruptcy judges do not take lightly a debtor’s concealment of assets, underreporting of income or other bad acts. Misbehavior under the U.S. Bankruptcy Code unfortunately happens somewhat regularly and is dealt with harshly to protect the integrity of the entire system. It is not uncommon to see a trustee or a disgruntled creditor accuse a debtor of filing incomplete statements of assets and liabilities, lying in a section 341 meeting, attempting to hide assets or having taken on prepetition debts under false pretenses. All of these bad acts describe different types of bankruptcy fraud.
Bankruptcy fraud seems to occur most often in individual cases, where a debtor’s lapses in disclosure might be due to poor record-keeping rather than actual bad intentions. Committing bankruptcy fraud can and does have severe consequences, ranging from fines and penalties to prison time. There is no available evidence that celebrities abuse the bankruptcy process more often than non-famous debtors, although their cases tend to attract a lot of attention when such accusations are raised. 50 Cent’s case and several other recent celebrity bankruptcies give us a good excuse to discuss bankruptcy fraud and its potential consequences.
The accessibility and fairness of the U.S. bankruptcy system are among its best attributes. Generally speaking, the system treats “rich” debtors, like 50 Cent, who disclosed $20 million in assets against $36 million in liabilities, the same as it treats the less fortunate (the rich arguably may have access to better legal advice, however). Congress designed the Bankruptcy Code and the Bankruptcy Rules to apply as equally to average Joes as they are to destitute Real Housewives, shamed Dance Moms and allegedly penniless rap artists. And, unlike the general public, U.S. bankruptcy judges do not seem capable of becoming star struck. Celebrities who are caught abusing the system can be treated as harshly as anyone else.
Bankruptcy fraud can carry serious consequences. Under 18 U.S.C. § 151, the U.S. Attorney can bring charges against a debtor who has committed bankruptcy fraud. Proof of fraud requires showing that the defendant knowingly and fraudulently made a misrepresentation of material fact. The misrepresentations usually show up in the petition, the statements and schedules, the transcript of the section 341 meeting with creditors or one of the debtor’s periodic required reports. Bankruptcy fraud carries a sentence of up to five years in prison, a fine of up to $250,000, or both. 18 U.S.C. § 152.
Intentionally omitting and concealing material facts in her statements and schedules landed Real Housewife of New Jersey Teresa Giudice 11 and a half months in federal prison last year. Ms. Giudice and her husband, Joe, filed a joint chapter 7 case in 2009. They later admitted to 41 counts of fraud, including bankruptcy fraud, stemming in part from failing to file tax returns for 5 years and failing to report, among other things, Teresa’s Real Housewives income. In accepting the plea, Teresa agreed to a sentence that included a 15 month prison sentence (she was later released early), a $200,000 fine, additional restitution and access granted to the trustee to additional assets to pay creditors. Joe Giudice reported for his own prison sentence a few months after his wife’s release. The Giudice family’s level of remorse was questioned by some who took offense to Teresa’s “welcome home” gift of a $90,000 SUV from Joe.
Like the Giudice’s, Abby Lee Miller is a reality TV star who was recently accused of committing bankruptcy fraud. Ms. Miller, who owns a dance studio and has starred in 6 seasons of the Lifetime Network show “Dance Moms,” is accused in a federal indictment of failing to report most of her income from the show. She filed a chapter 11 case in the Western District of Pennsylvania in December 2010, listing assets of approximately $325,000 and liabilities in excess of $350,000. After she filed a plan of reorganization in 2012, but before the confirmation hearing, the bankruptcy judge assigned to the case viewed an episode of the popular show and realized that her income of $15,000 – $25,000 per episode far exceeded what she had reported to the court. The judge cancelled the confirmation hearing and federal prosecutors became involved. She is accused of diverting much of her income into unreported bank accounts. Her case is currently pending.
Even if federal prosecutors do not pursue charges against a debtor for bankruptcy fraud, a bad-behaving debtor may still face consequences. Under section 523(a)(2)(A) of the Bankruptcy Code, an individual debtor can lose the ability to be discharged from “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud…”. 11 U.S.C. § 523(a)(2)(A). In other words, the main objective of bankruptcy – a fresh start free from prepetition debts – can be inaccessible if the debt was obtained by false representations.
Additionally, section 727(a)(7) of the Bankruptcy Code provides that the court will not grant a discharge if the debtor has committed certain specified acts on or within one year before the date of the bankruptcy. These include, among other things, if the debtor has transferred or concealed assets within one year of the case or during the case; concealed or destroyed financial records; failed to adequately explain any loss of assets or deficiency of assets to meet the debtor’s liabilities; or refused, in the case, to obey any lawful order of the court. Debtors who file false statements and schedules or who fail to turn over tax returns and other important financial information risk losing the benefit of the discharge.
It is difficult to tell whether celebrities commit bankruptcy fraud more often than average or if we just pay more attention when they do. It seems certain, though, that when they are caught in the act, they face the same consequences as anyone else.