United States v. Pennell

• Court: Court of Appeals for the Fifth Circuit
• Decided: May 4, 2005
• Docket: 03-50926
• Status: Published

Opinion

United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS May 4, 2005 FOR THE FIFTH CIRCUIT Charles R. Fulbruge III Clerk

No. 03 - 50926

UNITED STATES OF AMERICA,

Plaintiff - Appellee

v.

TERRY RAY PENNELL,

Defendant - Appellant

Appeal from the United States District Court for the Western District of Texas

Before DAVIS, SMITH and DeMOSS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Defendant-Appellant Terry Ray Pennell (Pennell), appeals his

conviction on four counts of money laundering under 18 U.S.C. §

1956 on the ground that the evidence is insufficient to support

his conviction. In addition, Pennell challenges the calculation

of loss in his pre-sentence investigation report (PSR) and also

argues that the district court committed Booker error by using

extra-verdict facts to compute the loss under a mandatory

guidelines regime. We affirm the conviction but vacate the

sentence and remand for re-sentencing.

-1- I.

Defendant Pennell was the President and sole owner of Rescom

DataTech, Inc. (Rescom), a data cabling company located in

Pflugerville, Texas. City National Bank (CNB)was a financial

institution, located in Austin, Texas, which owned the Business

Manager Software program (BMS). BMS allowed CNB to engage in

“factoring” agreements, that is, agreements whereby CNB advanced

money to small business owners which assigned its accounts

receivables to the bank as collateral for their loans.

In March 1999, Pennell, on behalf of Rescom, opened a BMS

account with CNB. The factoring agreement authorized and

required Pennell to provide CNB with all invoices that

represented Rescom’s completed work for which payment was due.

In turn, CNB deposited 80 percent of the value of the invoices

less a fee into Rescom’s operating account and 20 percent into a

“reserve account” for Rescom. Rescom was required to maintain a

balance of 20 percent of all outstanding invoices in the reserve

account. If the invoiced customer failed to pay the invoice

within 120 days of submission, the agreement required Rescom to

buy back the invoice from CNB. Once CNB received full payment

for the amount loaned on an invoice, the 20% reserve was released

and available for Rescom’s use.

Under the agreement, Rescom’s balance on outstanding

receivables in the reserve account could not exceed $250,000. In

-2- June of 1999, this was increased to $400,000.

Beginning in March 1999, Pennell began transmitting invoices

to CNB. For every transmitted invoice, CNB transferred 80

percent of the total invoiced amount to Rescom’s operating

account, less a fee. Consistent with the agreement, twenty

percent of the invoiced amount was placed in the reserve account.

The record indicates that, though he knew he could only

submit invoices for completed work to CNB, Pennell nevertheless

submitted a number of invoices for both work not yet performed

(premature invoices), which totaled $479,000, and work that was

never in fact contracted to be performed (bogus invoices),

totaling $362,000. These invoices, combined with the legitimate

Rescom invoices for completed work, amounted to a total of

$1,200,000.

Around October or November 1999, Tom McDonald (McDonald)

took over the BMP and noticed that Rescom’s receivable term was

very slow and its account unprofitable. McDonald and Pennell

discussed several issues, including an increase in CNB’s fee,

Rescom’s obligation to maintain the reserve account at a level of

20% of the value of the outstanding invoices and the need for

Rescom to submit current financial statements to CNB for

analysis. Shortly after this meeting, McDonald informed Pennell

that, because some receivables were about to reach the 120-day

mark, Rescom needed to replenish the reserve by temporarily

placing 100% of the proceeds from all incoming invoices into the

-3- reserve account (rather than the usual 80/20 split). At this

time, Rescom was also required to repurchase a number of overdue

invoices. McDonald memorialized this discussion with Pennell in

a letter dated January 18, 2000. In response, Pennell told

McDonald that he expected to acquire a large account generating

receivables in the range of $150,000 to $200,000 from George M

Construction (George M), a large Houston, Texas construction

company.

In late 1999, after Rescom completed four or five small

projects for George M, Pennell met with Charlie Cox (Cox), a

George M foreman. Pennell told Cox that he wanted to submit an

invoice to George M in the amount of $200,000 so he could then

sell it to CNB, in order to cover an invoice from a cancelled

job. Cox informed Pennell that he would ignore any such invoice

because Rescom had not done that much work for George M. On

January 27, 2000, Pennell submitted five invoices to CNB, four of

which were to George M, and CNB disbursed funds to Pennell’s

accounts. Among these invoices was Invoice #2956, a bogus

invoice which purported to cover work for George M in the amount

of $196,348. Rescom submitted several other bogus George M

invoices.

After CNB advanced funds on invoice #2956, Pennell

transferred $63,718.24 to the reserve account to replenish it.

The reserve had dipped below its required 20% because Pennell had

been forced to buy back several old premature and bogus invoices

-4- which purportedly covered work done for Gonzales Independent

School District (GISD) and Carroll Systems.

In March 2000, after McDonald repeatedly attempted to

contact George M about George M’s failure to pay on its invoices,

CNB learned that Invoice #2956 was fraudulent. CNB then

terminated the agreement with Rescom.

In August 2000, Pennell filed for bankruptcy.

Pennell was indicted on various offenses, including bank

fraud (count 1), 13 counts of wire fraud (counts 2 - 14),

bankruptcy fraud (count 15), three counts of money laundering

under 18 U.S.C. § 1957 (counts 16 - 18); and four counts of money

laundering under § 1956 (counts 19 - 22). Count 15 was severed

and dismissed. The remaining counts were tried to a jury. The

district court granted acquittal as to count 1, and the jury

acquitted Pennell of one of the wire fraud counts (count 2). On

the other counts (Counts 3 - 14 and 16 - 22), the jury found

Pennell guilty. At sentencing, Pennell objected to the

calculated loss amount in his PSR and the fact that this amount

was not found by the jury. The court overruled Pennell’s

objections and sentenced him to 41 months’ imprisonment.

II.

Pennell argues first that the district court erred in

overruling his motion for acquittal on the § 1956 money

-5- laundering counts1 (counts 19 - 22). We apply de novo review to

a challenge to the sufficiency of the evidence, viewing the

evidence in the light most favorable to the verdict and upholding

the verdict if, but only if, a rational juror could have found

each element of the offense beyond a reasonable doubt. U.S. v.

Brown, 186 F.3d 661, 664 (5th Cir. 1999), citing U.S. v. Giraldi,

86 F.3d 1368, 1371 (5th Cir. 1996), U.S. v. Restrepo, 994 F.2d

173, 182 (5th Cir. 1993). That is, we “do not evaluate whether

the jury’s verdict was correct, but rather whether the jury’s

decision was rational”. U.S. v. Miles, 360 F.3d 472, 477 (5th

Cir. 2004).

1 18 U.S.C. § 1956 provides in relevant part that:

Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity - (A)(i) with the intent to promote the carrying on of specified unlawful activity...; or (B) knowing that the transaction is designed in whole or part - (i) to conceal or disguise the nature, the location, the sources, the ownership, or the control of the proceeds of specified unlawful activity... has committed the offense of money laundering under this section.

-6- Under § 1956, the government was required to prove the

following elements to convict Pennell: (1) Pennell conducted or

attempted a financial transaction, (2) which he knew involved

proceeds arising from unlawful activity, (3) with the intent to

promote or further those illegal actions, or (4) with the

knowledge that the transaction’s design was to conceal or

disguise the nature or source of the illegal proceeds. See U.S.

v. Brown, 186 F.3d at 668, citing U.S. v. Cavalier, 17 F.3d 90,

92 (5th Cir. 1994).

Pennell does not contest the first two elements of the money

laundering charge, but rather, maintains that the government

failed to provide evidence to establish either the third or

fourth elements of this test. Pennell contends that, rather than

being used for the promotion or furtherance of fraud, the funds

were used to pay Rescom’s ordinary business expenses and so his

actions do not constitute money laundering under § 1956. See

U.S. v. Brown, 186 F.3d 661 (5th Cir. 1999). Considering the

evidence in the light most favorable to the verdict, we are

satisfied that the money laundering counts are supported by

sufficient evidence.

Counts 19 and 20 of the indictment involved Pennell’s

transfer of funds from the Rescom operating account to repurchase

premature invoices #2868 and #2875. Counts 21 and 22 charged

Appellant with similar transfers from the operating account to

-7- the reserve account to facilitate the buy back of bogus invoices

# 2830, 2850, 2853, and 2938.

As the government argues, the evidence shows that Appellant

submitted invoice 2956 to CNB in January of 2000. The government

established that this invoice, made out to George M. in the

amount of $196,349.00 was a bogus invoice. Charlie Cox, George

M’s construction superintendent, testified that Rescom did not do

the work detailed in the invoice. These fraudulently obtained

funds were then deposited into Rescom’s operating account and, as

of January 27, 2000, constituted 94.70% of the funds in the

operating account.

After this transfer, Pennell used funds from the reserve

account to repurchase the overdue invoices underlying Counts 19 -

22. All six of those invoices (#s 2830, 2850, 2868, 2875, 2938)

were established by the Government to be either premature or

bogus invoices. Given that Pennell knew that #2956 was a bogus

invoice, the jury could reasonably have found that Pennell

knowingly used the proceeds from a bogus invoice to fund the

repurchase of other bogus and premature invoices in order to

facilitate his illegal scheme. The jury was entitled to find

that Pennell had good reason to believe that CNB would terminate

its relationship with Pennell if he failed to replenish the

reserve account and repurchase the past due fraudulent invoices.

Under this view of the evidence, Pennell made these transactions

to induce CNB to continue to advance funds on the fraudulent

-8- Rescom invoices. Thus, we find that the evidence was sufficient

to support Pennell’s conviction on the four counts of money

laundering under § 1956.

III.

A.

Pennell argues that the district court erred in calculating

the amount of the loss under U.S.S.G. 2B.1.1(b)(1). The district

court computed the loss at $835,294.59.

At sentencing, and on appeal, Appellant Pennell argues that

the court should have selected for sentencing purposes the net

loss to CNB ($234,552.48) or, at most, the total of the bogus

invoices ($359,613.17) and should have included none of the

“premature” invoices ($479,681.42) in calculating loss. He

contended that none of the counts of conviction were based on

premature invoices. Appellant does not seriously challenge the

propriety of the court’s inclusion of the $359,613.17 in bogus

invoices in the loss calculation. These invoices obviously fall

within the meaning of “intended loss” since Appellant

intentionally placed the bank at risk for the full value of these

invoices. See U.S. v. Sowels, 998 F. 2d 249, 251 (5th Cir.

1993). Because the premature invoices were submitted to CNB

before Rescom completed the work and before payment was due, the

invoices were not receivables when furnished to CNB. If, for any

reason, Rescom had not completed the job, CNB was at risk of

-9- losing all funds it advanced on these invoices.

We conclude, therefore, that the district court did not err

in including the premature invoices in the amount of loss

calculation.

B.

Appellant also argues that the district court committed

Booker error by using extra-verdict facts to compute the loss

under a mandatory Guideline regime in violation of his Sixth

Amendment rights. He contends that he preserved this objection

in the district court when he made the following statement:

Mr. Orr: The base offense level, we think, should be calculated on a net loss to the victim, and it’s inappropriate to include the premature invoices using the terminology we all used a trial. We feel that that shouldn’t be in there because they were intended to be repaid clearly. They were repaid. What we’re talking about is getting money in advance as opposed to perhaps fraudulently, and he wasn’t convicted of any of those.

So we think it’s entirely inappropriate to punish him for anything that he wasn’t convicted of. And if you do that, that gets him down to the next lower level of between 200 to 400.

Record, Volume 7, page 2, line 15-3 - page 3, line 1. In the

context of the entire statement, we conclude that counsel’s

objection simply challenged the Court’s calculation of the amount

of the loss under U.S.S.G. 2 B 1.1(b)(1). We do not read the

-10- objection as one addressing the use of the Guidelines as

mandatory or depriving the defendant of his Sixth Amendment right

to jury trial.

Because the error was not preserved, we apply plain error

review. As the Court stated, in U.S. v. Cotton, “an appellate

court may not correct an error that the defendant failed to raise

in the district court unless there is ‘(1) error (2) that is

plain and (3) that affects substantial rights.’” U.S. v. Cotton,

535 U.S. 625, 631 (2002). If all three conditions are met, an

appellate court may then exercise its discretion to notice a

forfeited error but only if (4) the error seriously affects the

fairness and integrity or public reputation of judicial

proceedings.” Id.

The first two prongs of the plain error test are easily met.

As discussed above, the district court erred in using extra-verdict

facts - not admitted by Pennell - to calculate the amount of the

loss under a mandatory Guidelines regime. Since the Supreme

Court’s decision in Booker, this error is also plain in the sense

that it is “clear” or “obvious”. U.S. v. Olano, 507 U.S. 725, 734

(1993). It is enough that the law was settled at the time of

appellate consideration to make the error plain. Johnson v. U.S.,

520 U.S. 461, 468 (1997).

The third prong of the plain error test is more difficult for

the appellant to establish. Appellant bears the burden of showing

-11- that the error affected his substantial rights. This means that

Pennell must establish that the sentencing Court’s use of a

mandatory rather than an advisory Guidelines scheme actually

affected the sentence. To carry this burden the appellant must

ordinarily point to statements in the record by the sentencing

judge demonstrating a likelihood that the judge sentencing under an

advisory scheme rather than a mandatory one would have reached a

significantly different result. See U.S. v. Mares, No. 03-21035,

2005 U.S. App. LEXIS 3653, at *27-28 (5th Cir. 2005).

Although Appellant has a difficult burden to establish that

the error affected his substantial rights, we are persuaded that he

has carried his burden in this case.

In ruling on Pennell’s objection to the Court’s interpretation

of the Guidelines preference for computation of loss based on

intended loss rather than actual loss the court stated:

Court: All right. I think I have to overrule your objection. Once again, I say that from many standpoints of fairness and justice, it might be better to sentence people just based on actual loss, but I don’t think that’s the way the guidelines are written or the appellate courts interpreted them in most cases. So I feel constrained to overrule your objection.

Vol 7, page 9, lines 17 - 23. Based on this statement, we are

persuaded that it is likely that if the district court had thought

that he was at liberty to select a loss figure other than intended

loss he would have done so and would have arrived at a lesser

sentence.

-12- The district court sentenced Pennell at the bottom of the

Guideline range and also made the remark - pointed to by the

government - that this ”would be sufficient to bring about a just

resolution of this case.” While the district court may not have

considered the sentence it imposed unjust, this does not negate the

statement quoted above that had he been free to do so he would have

selected a different loss figure which would have resulted in a

lesser sentence.

Finally under the fourth prong of plain error review we

consider whether the “plain error” at sentencing “seriously

affected the fairness, integrity or public reputation of judicial

proceedings.”

The district court in this case indicated that “fairness and

justice” might be better served if defendants such as Pennell were

sentenced based on actual loss rather than intended loss which

would result in a lesser sentence than the one the district court

felt constrained to impose. Under these circumstances, Pennell has

carried his burden to establish the fourth prong of the plain error

test. This is consistent with this Court’s opinion in U.S. v.

Gracia-Cantu, 302 F.3d 308 (5th Cir. 2002).

The dramatic increase in the recommended imprisonment range and in Gracia-Cantu’s actual term of imprisonment affected his substantial rights. See United States v. Williamson, 183 F.3d 458, 464 (5th Cir. 1999)(concluding that a two-fold increase in prison time affected the defendant’s substantial rights). Such a sentencing error also seriously affects the fairness, integrity, or public reputation of the judicial proceedings. See United States v. Aderholt, 87 F.3d 740, 744 (5th Cir.

-13- 1996) (finding that “the fairness and integrity of this judicial proceeding were seriously affected” by sentencing calculation errors). Thus, the district court’s sixteen-level enhancement of Gracia-Cantu’s offense level constituted plain error.

Id. at 313. We leave open the question of whether a panel can,

under these or similar circumstances, vacate a sentence and instead

of requiring resentencing, permit the district court to determine

whether it would have imposed the same sentence had it known the

Guidelines were advisory and based on this decision, determine

whether it wishes to reinstate the same sentence or resentence the

defendant. See United States v. Crosby, 397 F.3d 103 (2d Cir.

2005).

IV.

For the reasons stated above, we affirm Pennell’s conviction

We, however, vacate his sentence and remand this case to the

district court for resentencing consistent with Booker.

-14-