Case o' The Week: Old Colleagues Tussle over Bussell (bankruptcy fraud)

Even former Ninth Circuit Judge Hufstedler (left) couldn't swing a defense win in this tragic bankruptcy case. See United States v. Bussell, __ F.3d __, 2005 WL 1620313 (9th Cir. July 12, 2005), available here. The case catches the eye for the suicide of a co-defendant (Bussell's husband) during trial. Of broader importance, however, is the Ninth's dicussion of bankruptcy fraud defenses.

Players: Former Ninth Circuit Judge Shirley Hufstedler (now of MoFo) for defendant Bussell.

Facts: Letentia Bussell and her husband John were charged with bankruptcy fraud. Id. at *1. John apparently committed suicide during trial by jumping from a window – the jury was informed that he was absent, but not told why. Id. at *1-*1. Letentia Bussell was convicted of bankruptcy fraud after a "hard-fought and lengthy trial." Id.

Issue(s): 1. Was the court’s instruction on the missing co-D plain error?

2. Were the bankruptcy form’s inquiries too ambiguous to support a conviction?

3. Did the court abuse its discretion in its "good faith" instruction on the bankruptcy fraud counts?

4. Did the court err by imposing restitution for "intended" vs. "actual" loss?

Held: 1. Suicidal co-D: As a matter of first impression, "the district court adopted precisely what we have suggested might be the ‘better’ approach: simply informing the jury that John was no longer a defendant in the case." Id. at *3.

2. Ambiguous Bankruptcy Petition: While ambiguous questions cannot serve as a basis for prosecution, in the context of these questions "we would affirm the determination of the district court even under de novo review." Id. at *6-*7.

3. Good Faith Instruction: The "good faith" jury instructions were not an abuse of discretion. Id. at *8.

4. Restitution: Reverses, holding that "the amount of restitution [is] limited by the victim’s actual losses." (internal quotation and citation omitted) (emphasis in original).

Of Note: The tragic suicide of the co-D is what catches the eye in this opinion, and there is an important (and discouraging) discussion of FRE 606(b) and juror declarations relating to this issue. Id. at *2. The most important aspect of the case, however, is the Court’s tolerance of arguably ambiguous questions on the bankruptcy petition form. Id. at *6. The rule that emerges is that the defense of "ambiguity" is contextual. Id. at *6-*7. In this case, "ambiguous" terms were answered correctly in other parts of the petition, or opportunities to disclose assets were not taken in response to other, clearer questions. Id. The flip side of this analysis, however, is that with better facts this contextual analysis may present a viable defense for bankruptcy fraud cases.

How to Use: Making lemonade out of lemons, Bussell can be used as an endorsement of a "good faith" instruction. In this case, the district court explained "that a person who acted in good faith – that is, based on a belief or opinion honestly held – was not punishable under these statutes merely because the belief or opinion turn[ed] out to be inaccurate, incorrect or wrong. Criminal punishment was instead reserved for those people who knowingly defraud or attempt to defraud." Id. at *8 (internal quotations omitted). While the defense wanted more from this instruction, at minimum the Ninth has endorsed this good faith instruction for bankruptcy fraud cases. Id.

For Further Reading: This year, more Americans will file for bankruptcy than will get a divorce, suffer a heart attack, or graduate from college. See MSNBC article here. Harvard Law Professor Elizabeth Warren has done a shocking study on skyrocketing bankruptcy petitions, and written a book on the subject called, "The Two-Income Trap." Id. (You may have heard her sobering interview on NPR). See interview here. With rising bankruptcy petitions, expect more bankruptcy fraud cases to defend in the upcoming years.

Steven Kalar, Senior Litigator N.D. Cal. Website available at www.ndcalfpd.org