Assertion of 5th Amendment Right to Remain Silent in Bankrupt


Assertion of 5th Amendment Right to Remain Silent Does Not Mean Debtor Did Not Have Full and Fair Opportunity to Defend

The following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

Brown v. Manty (In re Brown), 427 B.R. 715 (D. Minn. 3/29/10) (Tunheim, J.).

Case Summary:

Assertion of 5th Amendment Right to Remain Silent Does Not Mean Debtor Did Not Have Full and Fair Opportunity to Defend

The SEC had commenced an action against two businesses (Brawta and Jamerica), and Sherwin Brown, who managed Jamerica and Brawta, for a number of securities violations, stemming from Brown’s alleged misappropriation of investors’ funds. Brown appeared at a deposition, but asserted his Fifth Amendment privilege and refused to testify on behalf of Brawta or Jamerica. The SEC filed a motion for summary judgment. Brown submitted interrogatory answers that he had previously supplied to the SEC, which explained that the transactions had been legitimate. The district court declined to consider the interrogatory answers because allowing Brown to rely on the answers when he had later refused to answer questions about the subject matter at his deposition would be fundamentally unfair and would allow him to manipulate the discovery process. The district court granted the SEC’s summary judgment motion, finding in part that Brown violated federal securities laws by acting with “severe recklessness” in misappropriating Brawta funds.

During the SEC proceedings, Brown filed a chapter 7 petition. Manty, the receiver for Brawta, sued Brown in his bankruptcy case to recover the funds that he misappropriated from Brawta investors for his own personal use. She also sought an order excepting the debt from Brown’s bankruptcy discharge, and limiting his exemptions to the extent that his interests in the property were traceable to misappropriated funds. She filed a motion for summary judgment, arguing that Brown was collaterally estopped from relitigating the issues and facts relating to his fraudulent conduct because the district court had already adjudicated those issues in its summary judgment order. Judge Kishel granted the summary judgment motion on the basis that all of the facts and issues had been established by the district court order. Brown appealed to the district court.

The district court affirmed. Although Brown argued that collateral estoppel should not have been applied because he did not have a full and fair opportunity to litigate in the previous action because he invoked the Fifth Amendment, the district court found that the “actually litigated” requirement was satisfied. Brown had actively participated in the action. On the issue of his exemptions, the district court noted that the record demonstrated that Brown had used $347,000 of the Brawta funds to make payments on his mortgages, which was sufficient to establish no genuine fact dispute of fraudulent conduct or bad faith. Similarly, despite Brown’s submission of an affidavit that the funds in his 401(k) account were from legitimate sources, the bankruptcy court did not err in finding no genuine fact dispute that the funds were traceable to the Brawta funds, and denying the exemption on the basis of fraudulent conduct or bad faith.

The bankruptcy court had also imposed a constructive trust on the equity in Brown’s homestead and on a portion of his 401(k) account on the basis of unjust enrichment. The district court found that Brown had not brought forth evidence demonstrating a genuine fact dispute on that issue, and that there was sufficient evidence tracing the equity and a portion of the 401(k) savings to the misappropriated funds. Finally, the district court agreed with the bankruptcy court that the previous order of the district court established that the Brawta debt was incurred through fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny under 11 U.S.C. s 523(a)(4). The district court had previously found that Brown controlled Jamerica, provided investment advisory services to Jamerica clients, and that he encouraged them to invest in Brawta, which he created and controlled; that Brown misappropriated the Brawta funds for personal use; and, although not a required finding, that he acted with intent to defraud investors.

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.

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