Bankruptcy Litigation
If the perpetrator or participant in a fraud is pursued civilly, he or she often files for protection in the bankruptcy courts. If Chapter 13 is available, intentional fraud cannot be discharged but other types of fraudulent acts can be. Often the victim wants to teach the perpetrator a lesson and appears in the bankruptcy court even though the chance of recovery is small. The victim hopes either to eject the perpetrator from the protection of the bankruptcy court protection, obtain a exception from discharge, or win a nondischargeable judgment.
Victim Rights in Bankruptcy
There are several possible courses of action against the perpetrator in bankruptcy but often there is little guarantee of success. "Success" usually means obtaining a nondischargeable judgment which can last a total of 20 years in the states of Oregon and Washington. The victim has 20 years to keep track of the perpetrator and attempt to collect the judgment. Collection costs can be expensive and rarely are recovered from the perpetrator.
Under 523(a)(2) the victim must prove that the perpetrator committed the fraud "intentionally" with knowledge that his conduct was fraudulent. 523(a)(4) disallows certain fiduciaries from discharging the debt.
In securities fraud cases, the perpetrator generally claims to have been also fooled by the fraud and points to the fact that he sold the fraudulent investment to his own friends and family. The Sarbanes Oxley Act added a provision to protect investors (523(a)(19)) from discharge for violation of securities laws. Most state securities laws do not require proof of intent for a civil (noncriminal) violation of the law.
Preventing the Discharge in Bankruptcy
In order to protect your rights under Section 523 of the Bankruptcy Act (the anti-discharge provisions), the victim must sue the debtor in bankruptcy. This separate lawsuit can be less expensive that bringing the action in other courts depending on the facts and circumstances.
Debtor fails to schedule debt or property
One of the recurring issues faced when pursing a fraud perpetrator in bankruptcy court is the failure to list claims or property. The rules are complex and require expertise.
Options
Despite the difficulties, it is sometimes justified to fully explore the possible action that could be take against a perpetrator or participant in a fraud who files for bankruptcy protection. Tollefsen Law Office PLLC can assist with evaluation of your options.