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Media Alerts - United States of America v. Michael Free - Third Circuit
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October 10, 2016
  United States of America v. Michael Free - Third Circuit
Headline: Sentencing guidelines allow harm enhancement only for economic harm inflicted or intended by bankruptcy fraudster

Area of Law: Federal Sentencing

Issues Presented: How is "loss" calculated under the Federal Sentencing Guidelines when a defendant commits bankruptcy fraud, but all of his creditors receive payment in full?

Brief Summary: Michael Free filed for bankruptcy, despite having more than sufficient assets to pay his debts. Thereafter, Free hid assets worth hundreds of thousands of dollars from the Bankruptcy Court. Free's actions eventually led to criminal charges and convictions for four counts of bankruptcy fraud. The Third Circuit upheld his conviction even though the creditors were paid in full because of overwhelming evidence that Free concealed assets and lied repeatedly to the trustee and the court. The Third Circuit vacated his sentence because it was enhanced based on the estimated value of the assets Free concealed and the amount of debt he sought to discharge, rather than on any economic loss he inflicted or intended to inflict on his creditors. It remanded for resentencing and directed the lower court to consider sentencing under this standard but noted that Free's manifest disrespect for the judicial system could merit an upward departure from the Guidelines.

Extended Summary: In 2010, Michael Free filed for bankruptcy, despite having more than sufficient assets to pay his debts. Thereafter, Free hid assets, mostly rare WW II-era guns, worth hundreds of thousands of dollars from the Bankruptcy Court. Free's actions eventually led to criminal charges and convictions for multiple counts of bankruptcy fraud. The Court noted that "[t]he oddity of this entire situation is best summarized by the fact that, despite all of Free's prevarications, his creditors received 100 cents on the dollar from Free's bankruptcy estate."

The Federal Sentencing Guidelines increase a bankruptcy fraudster's recommended sentence based on the amount of loss he causes, or intends to cause, to his victims. At Free's sentencing hearing, the District Court therefore needed to make a determination as to the amount of loss caused or intended to be caused by Free's crimes. Instead, the District Court chose to treat the estimated value of the assets that Free concealed from the Bankruptcy Court and the amount of debt sought to be discharged as the relevant "loss" under the Guidelines. This resulted in a Guidelines range of 21 - 27 months' imprisonment. The District Court ultimately sentenced Free to 24 months' incarceration on each count, to run concurrently, and to a term of supervised release of three years.

The Third Circuit found the evidence of Free's guilt indisputable and rejected his argument that he did not commit fraud because his creditors received full payment. Free was properly convicted of four counts under 18 U.S.C. § 157. "One commits bankruptcy fraud under § 157 by (1) devising a scheme to defraud, and (2) filing a document in a bankruptcy proceeding or making [a] false or fraudulent statement in relation to the bankruptcy proceeding for the purpose of executing or concealing the fraudulent scheme," and there was ample evidence from which a reasonable jury could have concluded that Free did precisely that. Moreover, the Court clarified that no fraudulent losses need to occur for a debtor to violate § 157; "[f]iling itself is the forbidden act." Thus, the Court found the evidence that Free filed fraudulent documents with the Bankruptcy Court to be overwhelming. Finally, the Court stated counts V and VI involved violations of 18 U.S.C. §§ 152(1) and 152(2), noting that "[a] debtor violates § 152(1) by failing to "reveal the existence of his assets to the United States Trustee,"' and § 152(2) outlaws "knowingly and fraudulently mak[ing] a false oath" in relation to a bankruptcy case. The Court again found the evidence of Free's guilt to be irrefutable.

Second, the Third Circuit vacated the sentence, holding that the District Court erred in its calculation of "loss" under the Sentencing Guidelines. The Court concluded that treating the value of Free's concealed assets as "loss," was out-of-step with the structure of the Guidelines and inconsistent with its own precedent. Because the District Court did not clearly find whether Free intended to deprive his creditors of this, or of any amount, the enhancement was not warranted. Instead, the Third Circuit instructed the District Court to determine whether Free intended to cause a loss to his creditors, or what he sought to gain from committing the crime.

The Third Circuit acknowledged the District Court's view that it is "sensible to punish fraudsters who conceal assets of greater value more harshly than defendants who conceal assets of lesser value." In fact, the Court explained that in the vast majority of cases, the loss calculation will have precisely this effect because, "generally speaking, the reason defendants conceal assets in bankruptcy is to benefit themselves at the expense of their creditors." Nonetheless, the Third Circuit found that the District Court failed to make explicit factual findings as to whether Free had such an intent: "While we are sympathetic with the District Court's desire to punish Free in a manner commensurate with his disrespect for the judiciary, we nonetheless conclude that inflating Free's loss figure based on a theory of abstract harm to the judiciary is not an appropriate way to calibrate his sentence under the Guidelines."

In conclusion, the Third Circuit added that even if the District Court finds no such intended loss, Free may not receive a lower sentence on remand. The Court explained Free's repeated lying to the Bankruptcy Court and his manifest disrespect for the judicial system could merit an upward departure or variance from the Guidelines, urging the District Court to examine these issues to determine an appropriate sentence consistent with the statutory sentencing factors and the applicable Sentencing Guidelines. Accordingly, the Third Circuit vacated the District Court's judgment and remanded the case for resentencing.

The full opinion can be found at http://www2.ca3.uscourts.gov/opinarch/152939p.pdf

Panel: Fuentes, Shwartz, and Restrepo, Circuit Judges

Argument Date: July 12, 2016

Date of Issued Opinion: October 6, 2016

Docket Number: No. 15-2939

Decided: Vacated and remanded

Case Alert Author: Brooke Hutchins

Counsel: Martin A. Dietz, Esquire, for Appellant; Rebecca R. Haywood, Esquire, for Appellee.

Author of Opinion: Circuit Judge Fuentes

Circuit: Third Circuit

Case Alert Circuit Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 10/10/2016 12:56 PM     3rd Circuit  

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