Bankruptcy Fraud Convictions Reversed: Annamalai Annamalai v. Warden, Eleventh Circuit Court of Appeals, Filed January 17, 2019

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Bankruptcy Fraud Convictions Reversed: Annamalai Annamalai v. Warden, Eleventh Circuit Court of Appeals, Filed January 17, 2019

In Annamalai Annamalai v. Warden, the Eleventh Circuit reversed the defendant’s convictions for bankruptcy fraud, money laundering, and conspiracy to harbor a fugitive, although additional bank fraud, tax fraud, perjury, and obstruction convictions were affirmed.

The court of appeals also found that Annamalai’s loss amount was not proven by the government. The trial court sentenced Annamalai based on a loss calculation greater than $400,000, but the court of appeals found that the loss amount that was proven at trial was just over $100,000 and remanded the case for resentencing.

Although there’s plenty to unpack in this opinion, below I’m going to discuss the bankruptcy fraud convictions and why they were reversed.

Bankruptcy Fraud Convictions Reversed

Annamalai operated the “Hindu Temple” in Georgia, which “generated income in part by charging fees for religious and spiritual products and services, including religious ceremonies and horoscopes.”

Although charging for religious or spiritual products and services is commonplace and not illegal in and of itself, Annamalai was charged with various counts of fraud for:

  • Charging unauthorized fees for services that were not requested or provided;
  • Refusing to refund the fees;
  • Submitting false documents with followers’ signatures to “prove” they had ordered the services when followers disputed the fees with the bank; and
  • Providing altered audio recordings of conversations with followers to law enforcement in an attempt to justify the disputed charges.

Annamalai was also charged with bankruptcy fraud, however, based on payments received after the bankruptcy trustee had closed the Hindu Temple.

After the Hindu Temple filed for bankruptcy and the trustee closed the business, Annamalai opened a new business called the “Shiva Vishnu Temple,” where he resumed the practice of charging followers for religious and spiritual services.

The trustee claimed that proceeds paid to the Shiva Vishnu Temple were a part of the estate of the Hindu Temple, and, therefore, Annamalai was fraudulently concealing property that belonged to the Hindu Temple’s bankruptcy estate.

The Shiva Vishnu Temple Funds Were Not Part of the Hindu Temple Estate

The court of appeals disagreed, noting that all funds that the government claimed were evidence of bankruptcy fraud were acquired after the Hindu Temple filed for bankruptcy:

All of the substantive bankruptcy fraud charges were based on funds that the Shiva Vishnu Temple acquired or received after the Hindu Temple filed for bankruptcy in August of 2009 and after the trustee shut it down in early November of 2009.

Although the government claimed that the Shiva Vishnu Temple was operated as an “alter ego” of the Hindu Temple, the government did not prove this at trial. Government witnesses clearly stated at trial that they did not know that and could not prove it:

The trustee opined that money that was due to the Hindu Temple “was diverted” to the Shiva Vishnu Temple, and if so it “may have been [the bankruptcy estate’s] money,” but he admitted that he did not “know that for a fact.” Id. Indeed, when asked how he knew that someone in October of 2010 was using the name of the Hindu Temple to elicit post-bankruptcy credit card payments from followers, the trustee said he did not “know that” and could not “prove that.” Id. at 1214.

What does the government have to prove in a bankruptcy fraud case?

What are the Elements of Bankruptcy Fraud?

In the context of a Chapter 11 bankruptcy, “18 U.S.C. § 152(1) prohibits knowingly and fraudulently concealing from a bankruptcy trustee (and certain other persons) “any property belonging to the estate of a debtor.”

The government must prove:

(1) the existence of a bankruptcy proceeding;

(2) the existence of property belonging to the bankruptcy estate; and

(3) the defendant’s knowing and fraudulent concealment of that property from the trustee, custodian, marshal, or other officer of the court charged with custody and control of that property.

Money that was received after the beginning of the bankruptcy case and money that was received by the second corporation (Shiva Vishnu Temple) was not part of the bankruptcy estate and therefore was not knowingly and fraudulently concealed from the trustee.

What is the Bankruptcy Estate?

Knowing and fraudulent concealment of property belonging to the bankruptcy estate is bankruptcy fraud – but what is the bankruptcy estate?

The bankruptcy estate consists only of property that existed at the time the bankruptcy proceedings began – payments and property received after the beginning of the bankruptcy case are not part of the estate:

We begin with § 541(a)(1), which provides that the bankruptcy estate consists of “all legal and equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 U.S.C. § 541(a)(1) (emphasis added). While state law generally creates and defines property interests, see Butner v. United States, 440 U.S. 48, 55 (1979), the bankruptcy estate “succeeds only to those interests that the debtor had in property prior to the commencement of the bankruptcy case.” In re FCX, Inc., 853 F.2d 1149, 1153 (4th Cir. 1988) (emphasis added).

The bankruptcy estate “is determined at the time of the initial filing of the bankruptcy petition[.]” Because Annamalai was charged with bankruptcy fraud based on payments provided for “new services” after the Hindu Temple filed for bankruptcy – and the services were provided by the new corporation, the Shiva Vishnu Temple – the court of appeals reversed the bankruptcy fraud convictions.

Can You Open a New Company After Filing for Bankruptcy?

When your business files for Chapter 11 bankruptcy, you can open a new business and any payments made to the new business are not ordinarily considered the property of the old business’ bankruptcy estate:

Further, the trustee and the IRS investigator testified (correctly in our view) that nothing prevented Mr. Annamalai—who was not the debtor—from opening a new temple like the Shiva Vishnu Temple and providing religious services to followers after the Hindu Temple filed for bankruptcy. See In re BBeautiful, No. 2:16-bk-10799-ER, 2017 WL 932945, at *5 (Bankr. C.D. Cal. Mar. 8, 2017) (explaining that new post-bankruptcy business relationships established by the principal of the corporate debtor did not constitute property of the estate).

Money or property received by the new business (the Shiva Vishnu Temple, in this case) is not the property of the bankruptcy estate and therefore, absent additional evidence of fraud, cannot be the basis for bankruptcy fraud charges against the owner of the old business.

Federal Bankruptcy Fraud Defense in Columbia, SC

Elizabeth Franklin-Best is a federal white collar criminal defense and federal appeals lawyer located in Columbia, SC.

For more information, call us at (803) 331-3421 or send us an email to set up a consultation about your case.

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