《楊清泉律師專欄》PLEADING 5th AMENDMENT MAY RESULT IN DENIAL OF BANKRUPTCY ...(PART I)

Everyone knows that the 5th amendment is the constitutional guarantee against self-incrimination. That amendment guaranties your right not to testify against yourself. But what if the debtor pleads the 5th amendment in a bankruptcy? Imagine a situation where debtor runs a travel agency business. Because of cash flow problems, the travel agency fails to issue airline tickets that have been paid for several months before the intended departure date. Let’s assume that travel agent was paid $250,000 for airline tickets that cannot be issued because the business has failed. If travel agent does not produce accurate documents showing where the money went, and in response to direct examination by creditor or trustee asking questions clarifying where the money went, debtor responds by pleading the 5th amendment and keeping quiet, an adverse inference from debtor’s refusal to testify may be drawn and put the debtor’s case squarely within the ambit of Section 727(a)(3). That section of the bankruptcy code denies a discharge to a debtor who “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.”

The level of sophistication of debtor is also material in this situation. A debtor with a grade school education who sells hot dogs in a cart on the sidewalk may be able to get away without keeping business documents. But a lawyer dealing with multi-million dollar transactions is another story. In Re O’Hara, debtor was a lawyer and sophisticated businessman who owned multi-million dollar operations. He participated in more than twenty other corporate entities. Two of these provided state and county level government agencies with financial-land-health care consulting services, and another developed an educational software product that was sold nationwide. He had assets of more than $1.7 billion and liabilities of $7.5 billion. Given this level of sophistication, the court held the debtor to a higher standard in his maintenance of accurate business records than the hot dog seller. It was undisputed that a number of the debtor’s major business transactions were mysteriously shrouded from the court’s purview. The court added that the accuracy of the debtor’s current records was questionable given his inability of unwillingness to produce the underlying financial records. When plaintiff’s counsel asked debtor to clarify his bank records, he pleaded his 5th amendment privilege, and refused to confirm or deny whether he used approximately $150,000 of borrowed money to satisfy foreign gambling debts. “Mr. Debtor, did you use the $150,000 of borrowed money to pay your gambling debts in Macao?” Answer: “Are you talking to me? What borrowed money? What gambling debts? I’ve never been to Macao, is that in Mexico? My mother told me never to gamble with borrowed money. I refuse to answer that question on the ground that I will incriminate myself.”

《楊清泉律師專欄》PLEADING 5th AMENDMENT MAY RESULT IN DENIAL OF BANKRUPTCY DISCHARGE(PART II)