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It is indeed a rare instance where this newsletter wanders into the criminal law arena. However, there is one aspect of criminal law which is worth noting in the context of lending institutions.

North Dakota Century Code section 12.1-23-08 is entitled "Defrauding Secured Creditors." This statute criminalizes various acts by debtors which negatively impact a creditor's ability to collect on an obligation. Specifically, the following acts are considered criminal:

1. When an owner creates a security interest in property and then intentionally alters, conceals, destroys, encumbers, transfers or otherwise hinders enforcement of a security interest,

2. When a person commits the above described acts with the intent to prevent collection of the underlying debt, or

3. The person makes a false statement as to the existence (or nonexistence) of a security interest at the time of a sale of the property.

N.D.C.C. § 12.1-23-08. Committing the acts in either paragraph 2 or 3 is considered a class C felony if the property has a value in excess of $500.00. Id. All other violations would be class A misdemeanors. Id.

One interest aspect of this statute is that a violation of paragraph 1 above requires the person committing the offense to be the owner of the property. However, violations of paragraphs 2 or 3 do not limit the people who may be prosecuted to the property owners.

This statute, although not widely used, has raised some interesting points of law. First, a criminal complaint may be filed before the obligation is due if the obligation contains an acceleration clause. State v. Patten, 353 N.W.2d 26 (N.D. 1984). Second, a debtor's refusal to apply sale proceeds of secured property to the underlying debt demonstrates an intent to prevent collection of a debt. State v. Heintze, 482 N.W.2d 590 (N.D. 1992). Third, an inability to fully account for secured property, by itself, is not sufficient for a guilty verdict. State v. Miller, 357 N.W. 2d 225 (N.D. 1984).

Lastly, a debtor's sale of collateral, failure to remit proceeds and evidence that the creditor did not authorize another application of the proceeds was sufficient to find the debtor guilty of preventing the collection of a debt. State v. Martinsons, 462 N.W.2d 458 (N.D. 1990).

Although most cases will not warrant contacting the proper prosecuting officials, some cases may be so egregious that civil remedies do not do justice when considering the conduct involved. Unfortunately, even the most egregious case creates a dilemma. Obviously, the creditor's ultimate concern is realizing a full recovery. And, a creditor's assistance with a criminal prosecution and/or conviction for defrauding a secured creditor may reduce the chances of a full recovery.

As many of you are aware, last May the U.S. House of Representatives passed its version of the bill reforming bankruptcy laws. This February, the Senate passed its version. Now, the two bills will go into a conference committee to be refined and sent back for passage. Although it is difficult to determine when any bankruptcy reform will be passed, Assistant U.S. Trustee Bruce Gering believes that some reform legislation will be passed yet this year.

There are several provisions of the Senate version which are very interesting. First, it contains a "needs based bankruptcy" provision designed to reduce the number of Chapter 7 filings by raising the eligibility standards. Specifically, there would be a presumption of abuse if the debtors monthly income (less expenses) times 60 is greater than the lesser of 25% of the debtor's unsecured nonpriority debt or $15,000. Second, debtors must participate in credit counseling prior to filing a petition and finish an instructional course on personal finance management before being eligible for a discharge. Third, debtors would be eligible to file bankruptcy petitions every 8 years, instead of every 6. Lastly, unsecured debts of more than $250 for luxury goods or cash advances within 90 days of filing would create a presumption of fraud.