In The Courts

Ninth Circuit Holds State Court Property Judgment Should Have Been Admitted in Criminal Tax Case

In United States v. Boulware, 2004 WL 2035198 (9th Cir. Sept. 14, 2004), the defendant appealed his convictions for filing false tax returns, tax evasion, and conspiracy to make false statements to a federally-insured financial institution, in part on the ground that the district court abused its discretion by excluding evidence of a state-court judgment. The court of appeals found that portion of the appeal meritorious and reversed the conviction.

The federal charges against the defendant centered around allegations that he had supported by a lavish lifestyle by siphoning money from his company Hawaiian Island Enterprises (HIE) and failing to pay taxes on that money, some of which allegedly was laundered in Asian and Pacific banks. As the defendant moved toward a divorce from his wife, he had his girlfriend hold a large sum of HIE's cash for safekeeping so that he could afford to purchase his wife's one-half interest in HIE and prevent it from being liquidated. Ultimately, his girlfriend refused to return much of the money with which she had been entrusted, so the defendant sued her in state court. The jury in the state court case found that the money at issue belonged to HIE, not the girlfriend, and so had to be returned.

In his federal trial for tax fraud and tax evasion, the district court would not allow the defendant to introduce evidence of the state court judgment to prove that a large portion of the money at issue belonged to HIE and so should not have counted toward his tax liability. The Ninth Circuit found the exclusion to be an abuse of discretion. Although the court of appeals did not accept the defendant's argument that the state court judgment should have a preclusive effect to conclusively establish ownership of the money, the court did believe that the defendant should have been allowed to introduce the state court judgment as evidence tending to show that the defendant had given the money to his girlfriend as company money to hold in trust. This fact was relevant to rebut the government's allegations that the defendant had concocted the story about his girlfriend acting as a sort of trustee for the money. Furthermore, the court found that the state court judgment fell under an exception to the hearsay rule because the judgment was a statement in a document affecting an interest in property. Because the issue of who owned the money was central to the government's case against the defendant, the court of appeals reversed the conviction.

Sixth Circuit Defines 'Concealment' in Bankruptcy Fraud Statute

In United States v. Wagner, 2004 WL 2021261 (6th Cir. Sept. 13, 2004), the defendant appealed his conviction for bankruptcy fraud arguing in part that there had been insufficient evidence at trial to support his conviction. The court of appeals affirmed. The defendant had been a real estate owner and manager who had filed a pro se Chapter 11 bankruptcy case after more than seventy foreclosure proceedings were filed against him. After filing, the debtor refused to voluntarily cooperate with the United States Trustee assigned to his case, and failed to show up for several meetings. The debtor also put together documentation to show that he had received a mortgage from the Small Business Administration that he had not received, and filed the mortgage papers with the court to resist the conversion of his case from a Chapter 11 to a Chapter 7 proceeding. The defendant's case subsequently was converted into a Chapter 7 proceeding and a Trustee came in to take over his company and assets. In continued resistance to the Trustee, the defendant then locked up the residential properties that the Trustee was supposed to sell to liquidate the estate so he could not show them to prospective purchasers.

The court of appeals found that the debtor's conduct in locking up the houses qualified as “concealment” of assets. The court made this finding while recognizing that the Trustee was only temporarily inconvenienced from having access to the property to be able to sell it. The bankruptcy fraud statute provides that “a person who (1) knowingly and fraudulently conceals from a … trustee … charged with the control or custody of property … belonging to the estate of a debtor … shall be fined under this title … ” 18 U.S.C. ' 152(1). The court determined that this provision was designed to cover all the methods a defendant could use to “to keep assets from being equitably distributed among creditors.” Id. at *6 (quoting United States v. Goodstein, 883 F.2d 1362, 1369 (7th Cir. 1989)). Accordingly, the court affirmed the conviction.

Ninth Circuit Holds State Court Property Judgment Should Have Been Admitted in Criminal Tax Case

In United States v. Boulware, 2004 WL 2035198 (9th Cir. Sept. 14, 2004), the defendant appealed his convictions for filing false tax returns, tax evasion, and conspiracy to make false statements to a federally-insured financial institution, in part on the ground that the district court abused its discretion by excluding evidence of a state-court judgment. The court of appeals found that portion of the appeal meritorious and reversed the conviction.

The federal charges against the defendant centered around allegations that he had supported by a lavish lifestyle by siphoning money from his company Hawaiian Island Enterprises (HIE) and failing to pay taxes on that money, some of which allegedly was laundered in Asian and Pacific banks. As the defendant moved toward a divorce from his wife, he had his girlfriend hold a large sum of HIE's cash for safekeeping so that he could afford to purchase his wife's one-half interest in HIE and prevent it from being liquidated. Ultimately, his girlfriend refused to return much of the money with which she had been entrusted, so the defendant sued her in state court. The jury in the state court case found that the money at issue belonged to HIE, not the girlfriend, and so had to be returned.

In his federal trial for tax fraud and tax evasion, the district court would not allow the defendant to introduce evidence of the state court judgment to prove that a large portion of the money at issue belonged to HIE and so should not have counted toward his tax liability. The Ninth Circuit found the exclusion to be an abuse of discretion. Although the court of appeals did not accept the defendant's argument that the state court judgment should have a preclusive effect to conclusively establish ownership of the money, the court did believe that the defendant should have been allowed to introduce the state court judgment as evidence tending to show that the defendant had given the money to his girlfriend as company money to hold in trust. This fact was relevant to rebut the government's allegations that the defendant had concocted the story about his girlfriend acting as a sort of trustee for the money. Furthermore, the court found that the state court judgment fell under an exception to the hearsay rule because the judgment was a statement in a document affecting an interest in property. Because the issue of who owned the money was central to the government's case against the defendant, the court of appeals reversed the conviction.

Sixth Circuit Defines 'Concealment' in Bankruptcy Fraud Statute

In United States v. Wagner, 2004 WL 2021261 (6th Cir. Sept. 13, 2004), the defendant appealed his conviction for bankruptcy fraud arguing in part that there had been insufficient evidence at trial to support his conviction. The court of appeals affirmed. The defendant had been a real estate owner and manager who had filed a pro se Chapter 11 bankruptcy case after more than seventy foreclosure proceedings were filed against him. After filing, the debtor refused to voluntarily cooperate with the United States Trustee assigned to his case, and failed to show up for several meetings. The debtor also put together documentation to show that he had received a mortgage from the Small Business Administration that he had not received, and filed the mortgage papers with the court to resist the conversion of his case from a Chapter 11 to a Chapter 7 proceeding. The defendant's case subsequently was converted into a Chapter 7 proceeding and a Trustee came in to take over his company and assets. In continued resistance to the Trustee, the defendant then locked up the residential properties that the Trustee was supposed to sell to liquidate the estate so he could not show them to prospective purchasers.

The court of appeals found that the debtor's conduct in locking up the houses qualified as “concealment” of assets. The court made this finding while recognizing that the Trustee was only temporarily inconvenienced from having access to the property to be able to sell it. The bankruptcy fraud statute provides that “a person who (1) knowingly and fraudulently conceals from a … trustee … charged with the control or custody of property … belonging to the estate of a debtor … shall be fined under this title … ” 18 U.S.C. ' 152(1). The court determined that this provision was designed to cover all the methods a defendant could use to “to keep assets from being equitably distributed among creditors.” Id. at *6 (quoting United States v. Goodstein , 883 F.2d 1362, 1369 (7th Cir. 1989)). Accordingly, the court affirmed the conviction.