Seventh Circuit Upholds Attorney's Bankruptcy Fraud Conviction

Circuit level opinions dealing with bankruptcy fraud are none too common, so that when one appears, it is worth taking note. This week, the Seventh Circuit affirmed the conviction of attorney Thomas O'Connell Holstein on nine counts of bankruptcy fraud. United States v. Holstein, No. 09-2822 (7th Cir. 8/18/10). The opinion can be found here.

This was not a high dollar case involving hidden assets or Ponzi schemes, but rather, something more mundane. It was about an attorney who wanted to keep practicing after his license was suspended. In September 2005, Thomas Holstein agreed to an 18 month suspension of his license.

Even though he knew that his suspension would take effect within a few weeks, he continued to take on new clients. Holstein would answer the phone and set up the consultations, but the clients would meet with his paralegal. She would help them fill out the forms and would accept payment from them. His paralegal would then black out the attorney's signature block and indicate that the case was being filed pro se. Since the clients were ostensibly filing pro se, there was no disclosure of fees being paid. The clients usually did not find out that they had filed pro se until they arrived at the first meeting of creditors and there was no lawyer there to represent them. The paralegal testified that she did all this on Holstein's instructions.

After a bench trial, Holstein was convicted on nine counts of bankruptcy fraud and sentenced to a year and a day.

In order to establish bankruptcy fraud it is necessary to show: (1) that he engaged in a fraudulent scheme; (2) that he made misrepresentations to the bankruptcy court; (3) in order to further the scheme. To be found guilty of falsifying documents before the bankruptcy court, the government had to show that he "falsified . . . any document with the intent to impede, obstruct or influence" a bankruptcy matter.

On appeal, Holstein made the following arguments:

Holstein argues that the government failed in its proof because he had no involvement in any of the consultations with the clients or in filing the fraudulent bankruptcy petitions. For almost the entire time, according to Holstein, he was drunk and secluded at his summer home. He claims the evidence showed that Vega acted alone. Vega met with the clients, filled out the petitions and accepted the fees. Holstein was rarely if ever in the office. He points to several possible motives Vega may have had for filing the petitions pro se, including keeping her job and retaliating against Holstein for a failed romance. If Vega acted alone, she would be solely responsible for the misrepresentations.

As a sort of alternative argument, Holstein claims the government failed to prove he could have intended to mislead the bankruptcy court about whether the debtors in question were represented by counsel. Even if he directed Vega’s actions in filing the pro se petitions, the fact that he paid the debtors’ filing fees with Lawline
checks precludes any inference that he intended to defraud the court. Lawline was “universally associated” with Holstein, he argues, and he would never have used the checks bearing his firm’s name if he wanted to mislead the court. Other lawyers did appear on the clients’ behalf in some of the cases, which Holstein claims is further proof that he never intended to conceal the fact that the clients were represented by counsel. (emphasis added)

Slip Op., pp. 4-5.

The Court was not impressed. Among other things, it found that his argument that use of the Lawline checks indicated that the clients were represented by counsel undercut his argument that his paramour paralegal acted alone.

With no evidence in the record to cast doubt on the district court’s findings, Holstein’s appeal boils down to challenging the Judge determinations as to the credibility of the witnesses. Such a tactic is “doomed at the outset.” (citation omitted).

Slip Op., p. 6.

On the one hand, this case should prompt a monumental "Well duh!" Taking money from clients to represent them in a bankruptcy proceeding and then sending them into court on a pro se basis is one of the worst ethical violations an attorney can commit. The petition preparer rules were intended to remedy just this type of misconduct. What makes this case astonishing is that the attorney was willing to run this risk to bring in a few thousand dollars more once his suspension took effect. The scheme was bound to unravel once the clients started showing up at creditors' meetings wondering where there lawyer was. His defense of I was drunk at my summer home was not likely to arouse much sympathy. Similarly, his attempt to throw his paralegal under the train by attributing the scheme to a spurned lover was similarly doomed to fail.

While it shouldn't be necessary to make the point, this case illustrates that consumer bankruptcies are serious business and that bad things can happen to people who cut corners and try to make a fast buck.

Hat-Tip to Manny Newburger who alerted me to this case.