The recent dismissal of real estate developer Scott Chappelle’s defamation lawsuit against East Lansing Info by Judge Joyce Draganchuk — a lawsuit that centered on the ELi article that first reported Chappelle’s criminal indictment — has some ELi readers asking ELi: What is the substance of the allegations in the federal indictment against Chappelle?
In this edition of Ask ELi to Investigate, we answer that question.
By way of background, following his June 2020 indictment, Chappelle had been in months-long plea negotiations with federal prosecutors, but those efforts to avoid a trial stalled around September 2021. Since then, Chappelle has hired new legal counsel and the opening date of the trial is currently set for May 2, 2022.
Attorneys now representing Chappelle — Timothy D. Belevetz and Meredith Wood of the Ice Miller firm — did not respond to ELi’s request for comment on the criminal case. The Justice Department prosecutors working the case, Timothy Peter VerHey and Melissa Siskind, also did not respond. (It is not unusual for attorneys in a criminal case not to respond to requests for comment.)
Broadly, what does the federal indictment allege?
The 21-page-long indictment returned by a federal grand jury in June of 2020 and signed by federal prosecutor VerHey presents the United States Attorneys’ case that Chappelle allegedly committed an assortment of white-collar crimes.
In total, eight criminal counts in the indictment include two counts of tax evasion, two counts of filing a materially false document, two counts of making false statements to IRS Criminal Investigation special agents, one count of filing a materially false tax return, and one count of bank fraud.
The indictment identifies a number of businesses connected to Chappelle:
- Terra Management Company;
- Strathmore Development Company Michigan, LLC;
- Terra Holdings, LLC;
- Terra Lawn and Snow Removal, LLC;
- Mid Michigan Rental Properties, LLC;
- Abbott Road Commons, LLC;
- Covenant Investment Group, LLC;
- and Crouch Investment Group, LLC.
As explained below, several of the charges against Chappelle relate to tax obligations for East Lansing-based businesses, including some businesses involved in the failed “City Center II” project in East Lansing’s downtown.
The introduction to the indictment notes that Chappelle has been an attorney licensed in Michigan and has been a licensed Certified Public Accountant.
The indictment explains that he had a leadership capacity with companies named in the indictment and says Chappelle was responsible for “the companies’ bookkeeping system, and approving payroll,” as well as having “signed the companies’ tax returns” in the cases of East Lansing-based Terra Management, Terra Holdings, and Strathmore Development.
The next ten pages of the indictment review the government’s case for alleging Chappelle committed various crimes. This is broken down into six subsections.
So, what did Chappelle allegedly do?
The government alleges tax evasion and related false statements.
Federal law requires employers to collect payroll taxes and then transfer the withholdings to the Internal Revenue Service (IRS). These withholdings are referred to as “Trust Fund Taxes” because employers keep the funds in a trust before transfer.
If a business fails to pay what is due on time, it can apply for a payment plan with the IRS. The IRS can also impose a penalty for late or unpaid payroll taxes. Someone who owes such penalties can try to negotiate a settlement called an Offer in Compromise, which involves forms submitted under penalties of perjury.
The Department of Justice (DOJ) alleges that Chappelle, as president of Terra Management, did not pay the full amount of payroll taxes owed for a period running for “at least” the second quarter of 2007 through the third quarter of 2009, according to the indictment.
The indictment states that the IRS subsequently assessed penalties for the first quarter of 2008 through the second quarter of 2009 and “attempted to collect the unpaid taxes from Chappelle individually.” The total amount levied against Chappelle in that time period was more than $377,000, per the indictment.
Around September 2009, the DOJ claims, in response to the IRS taking action, Chappelle stopped operating this business as Terra Management and began operating it as Strathmore Development.
“Nothing about the operation of the business changed other than the name and tax identification number,” the indictment reads.
According to the indictment, Chappelle then did the same thing with Strathmore Development, again failing to fully pay over payroll taxes for several quarters. According to the indictment, Strathmore’s total liability then exceeded $454,000.
Then, the indictment claims, around 2015, Chappelle changed the name of the business again, with Strathmore Development being succeeded by Terra Holdings. (The first company named was called “Terra Management,” and this one, “Terra Holdings.”) Again, the indictment says that nothing changed except for the business name and tax identification number.
Later, around September 2018, while aware he was under criminal investigation, according to the indictment, Chappelle “caused a false Form 941 [related to payroll withholdings] for Terra Holdings for the third quarter of 2016 to be mailed to an IRS Criminal Investigation (‘IRS-CI’) special agent for filing with the IRS.”
As with many IRS forms, if a person knowingly makes a false statement on the Form 941, they may be charged with a felony.
The indictment alleges that Chappelle falsely stated on the Form 941 that Terra Holdings didn’t have any employees and didn’t pay any wages for the third quarter of 2016. The indictment says that Chappelle “knew that Terra Holdings had employees and paid wages during that quarter because he approved submissions to a payroll company.”
According to the indictment, Chappelle also claimed Terra Holdings was, in fact,” entitled to a refund of all federal tax deposits that it made during the quarter.”
Chappelle re-submitted and “caused to be re-submitted” the same allegedly false form in January 2019, according to the indictment.
The next subsection of the indictment outlines what the DOJ calls “Chappelle’s Efforts to Evade the Payment” of the money owed to the IRS.
Here, the indictment alleges that Chappelle “made false representations about his income and assets,” claiming that Chappelle didn’t disclose that he owned a vacation home/property in Harbor Springs, Michigan, in the name of Crouch Investment Group, valued at more than $2 million in November 2009.
The IRS rejected Chappelle’s Offer in Compromise in 2011 and notified Chappelle that it had “determined that [his] offer was submitted solely to hinder or delay [the IRS’s] collection actions which are expected to collect significantly more than the amount [Chappelle had] offered,” according to the indictment.
The indictment alleges that Chappelle went through several rounds of this with the IRS and that Chappelle sought to prevent the IRS from collecting what was supposedly owed by, “among other means, paying personal expenses directly out of business bank accounts, acquiring new assets, including a one million dollar yacht, rather than paying his liabilities to the IRS, purchasing a condominium and a house in the name of nominee entities rather than his own name, and fraudulently causing the proceeds of a cash-out refinance to be paid to a third party instead of to Chappelle directly.”
The indictment then outlines Chappelle’s alleged “Efforts to Evade the Payment of Strathmore Development Company’s Trust Fund Tax Liabilities.”
According to the indictment, Chappelle sent a letter to an IRS revenue officer in June 2014 stating that Strathmore Development didn’t have any funds to pay the outstanding tax liability. The indictment counters that Strathmore Development and Terra Holdings (the successor company to Strathmore Development) “had bank deposits that totaled more than $5 million in 2014.”
The government alleges other false statements and evasions through the use of various companies.
The indictment also outlines alleged bank fraud in the form of “False Statements to a Mortgage Company.”
Around February 2014, per the indictment, Chappelle applied with Union Savings Bank for a mortgage loan to refinance the mortgage on the Harbor Springs property.
On the loan application, the DOJ claims, Chappelle falsely stated that he was not a party to a lawsuit when he was a party to at least two, and falsely stated he was not delinquent on federal debts when he owed the IRS taxes and assessed penalties.
The DOJ also alleges that Chappelle submitted fraudulent bank statements to Union Savings Bank when applying for the mortgage.
According to the indictment, a bank statement submitted for Strathmore Development falsely showed that account balance to be about $700,000 when it was really a little under $11,000.
Chappelle is also alleged to have falsely claimed on the loan application that a company called “Chasco Management and Lending Services” held a lien on the Harbor Springs property which needed to be paid off with money from the Union Savings Bank loan.
The claim about the lien held by Chasco, according to the indictment, induced Union Savings Bank to wire over $642,364.75 of the refinance mortgage proceeds to an account in the name of Crouch Investment Group. Chappelle then allegedly transferred funds from Crouch Investment Group “to accounts in his name and the name of Strathmore Development.”
We have so far been unable to locate any company with the name “Chasco Management and Lending Services.” State of Michigan records do show a “Chasco Investment Properties LLC” with the registered agent listed as Thomas Eckhardt, a long-time attorney for Chappelle.
“The false and fraudulent statements and documents influenced USB’s [Union Savings Bank’s] decision to approve a mortgage loan in the amount of $2,250,000,” the indictment reads.
Finally, the indictment alleges false statements to IRS Criminal Investigation special agents.
In short, during an interview in May 2016 with IRS special agents, Chappelle allegedly made false statements about not purchasing any real estate in the past three years when he had allegedly purchased a condo in East Lansing in his own name and a house in Powell, Ohio, in the name of one of his companies. The indictment states that Chappelle “resided in the house in Powell, Ohio with his girlfriend and her children.” (These purchases were at issue because of questions about his assets.)
Based on records available through the tax assessor’s office and reports to ELi from readers, the East Lansing condo referred to in the indictment appears to have been one in the City Center condominium – the brick-faced apartments along M.A.C. Avenue’s east side above CVS and Omi Sushi. (That apartment is now owned by someone else.)
Chappelle allegedly claimed his son lived at the East Lansing condo and paid for the mortgage on the property “primarily with his son’s student loan funds” when the IRS says the son didn’t live there and one of Chappelle’s companies made some of the condo mortgage payments. The tax assessor’s record shows Chappelle purchasing the condo in 2015 and transferring it to Mid Michigan Rental Properties LLC (one of the companies mentioned in the indictment with regard to the Harbor Springs property) in 2017.
What is the potential punishment that Chappelle is facing?
It’s important to remember that everything in the indictment, and therefore this report on the indictment, is merely alleged by the DOJ. Chappelle is, as all criminal defendants are, innocent until proven guilty.
If he were to be convicted and found guilty of all of these crimes, Chappelle would potentially facing decades in prison, in addition to “a period of supervised release, restitution, and monetary penalties.” According to the press release from the DOJ announcing the charges in June 2020, with a conviction, the bank fraud charge alone carries a possible sentence of 30 years in prison.
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