Bankruptcy Fraud: Bankruptcy Trustee Imprisoned for Embezzlement
United States bankruptcy trustees in Massachusetts generally are of the highest integrity. In my 27 years of appearing before US bankruptcy trustees at debtors’ hearings, also called 341 meetings, I have been impressed with their knowledge of the law, their caring nature considering the embarrassing and difficult circumstances of debtors, and their efficiency in moving the multiple cases through the system. This morning, I appeared for a Brockton bankruptcy hearing, and my client was greeted professionally by a trustee that clearly had integrity.
Most of the time Chapter 7 debtors have only assets that are not protected (such as a homestead) by bankruptcy law and the debtor gets a discharge and a fresh start. However, many times the trustee in bankruptcy secures monies, properties or other things of value as a part of the “bankruptcy estate.” Naturally, the law requires an accounting of all that is taken. The trustee’s job is to locate the assets, secure them, sell such things as real estate or goods, and distribute the assets according to the rules to the creditors.
In an amazing breach of confidence, a Connecticut trustee, Michael J. Daly, was recently sentenced to 18 months imprisonment after a bizarre series of circumstances in which he secured assets from the debtor but failed to account for them and, in effect, stole them from the creditors. He was also fined $15,000. As we understand it, Trustee Daily first was charged with embezzling monies from the debtors; $11,100 from a Lehman Brothers printing shop. Attorney Daily was charged with failing to close up the account, called a “debtor in possession” account, promptly. In fact, he “converted” the monies to his business account. He was charged by the United States Attorney’s office and his criminal defense attorney and the Assistant United States Attorney worked out a plea arraignment. This is typical in white collar crimes.
Unfortunately for him, the US Attorney’s Probation Office undertook an investigation to issue a pre-sentence report. Such a report is used to assist the federal judge in determining if a recommended sentence is appropriate.
The pre-sentence report indicated that there were two outstanding matters that had not been before. First, there was the issue of $22,100 in jewelry taken from the Bolin & Company jewelry store and found, by the FBI, in Attorney Daly’s desk drawer. While Attorney Daly’s attorney said it was simply forgotten, and that the court should mitigate this with the fact that Attorney Daly had been ill, the judge found that “many people have illnesses and they don’t commit crimes.”
Second, there was case against Attorney Daly in which a former client claimed that she was owed $80,000 returned fees. This case was quite amazing from what we can gather. Attorney Daly, as Trustee, heard a case in which a woman had filed a simple Chapter 7 bankruptcy. She had $9,000 in debt. However, she had an “asset” in that she had a lawsuit. The lawsuit was a medical malpractice case against Yale New Haven Hospital for negligently diagnosing cancer, removing her reproductive organs, and then realizing that they had been wrong. She won an $11 million jury verdict, however, Attorney Daly, acting as the fiduciary of the “bankruptcy estate” refused to return some of the monies to the victim when he used his position to “fabricate time sheets” regarding that case.
It seems that the federal judge simply had enough.
Given the position of trust the US Department of Justice gives to interim trustees, such as Attorney Daly, finding him stealing from debtors in the system, and then discovering he had stolen even more. Further, that the thefts include jewelry and monies from a woman who was already a victim of medical negligence.