United States v. Smithson

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 24, 1995
• Docket: 94-40096
• Status: Published

Opinion

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

_______________________

No. 94-40096 _______________________

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

versus

JON D. SMITHSON and BILLY D. PYRON,

Defendants-Appellants.

_________________________________________________________________

Appeal from the United States District Court for the Eastern District of Texas _________________________________________________________________

(March 24, 1995)

Before WISDOM, JONES, and EMILIO M. GARZA, Circuit Judges.

Edith H. Jones, Circuit Judge:

Billy D. Pyron and Jon D. Smithson were convicted of

fraudulently concealing two real estate option contracts from the

bankruptcy court in connection with Pyron's chapter 7 liquidation

case. Pyron and Smithson appeal portions of the jury instructions

and the calculation of their sentences. We affirm the convictions

but vacate the sentences and restitution order because the district

court incorrectly valued the option contracts at the date of

bankruptcy in calculating the loss occasioned by appellants' crime.

U.S.S.G. § 2F1.1. DISCUSSION

Billy Pyron is a real estate developer who makes his

living locating tracts of undeveloped land with promising

development potential. Pyron's strategy is to acquire an option to

purchase the land within a specified period of time. During the

option period, he attempts to add value to the land by procuring

zoning changes or making other advantageous improvements, and

searches for investors to buy the land. Smithson was an attorney

who had previously represented Pyron in a chapter 11 bankruptcy

case.

On May 7, 1991, Pyron purchased an option to buy a

twenty-five acre parcel of land, (the "Pirtle property"), for

$10,000 in earnest money. On June 19, 1991, Pyron purchased an

option to buy another piece of property, (the "TeamBank building"),

for $150 and $20,000 in earnest money.1

In September of 1991, Pyron again sought the counsel of

Smithson to assist him in filing a chapter 7 bankruptcy petition.2

Smithson agreed to help prepare the petition, but referred Pyron to

another attorney, Ken Raney, to represent him in the bankruptcy

case.3 Smithson prepared the petition and schedules and forwarded

them to Raney, who filed the documents on behalf of Pyron. Pyron

1 The earnest money for both contracts and for the extensions was advanced by an investor, Robert Ground. 2 Smithson was also handling Pyron's divorce at the time.

3 Apparently Smithson believed that his representation of Pyron in the chapter 7 case would have created a conflict of interest because Smithson was a creditor from the earlier chapter 11 proceeding.

2 also inquired of Smithson whether the two options could be kept out

of his bankruptcy estate, ostensibly to protect Ground's

investment.

On September 10, 1991, Pyron assigned the Pirtle option,

for no consideration, to Tyler Broadway Crossing, Inc., and the

TeamBank option to 100 Independence, Inc., two corporations created

by Smithson for the purpose of receiving these options.4 Pyron

filed his chapter 7 petition on September 12, 1991. Absent from

Pyron's schedules of assets and transfers was any reference to the

two options that Pyron had owned just two days earlier.

On September 16 or 21, 1991,5 the TeamBank option was set

to expire. However, on October 3, 1991, Pyron negotiated a two

week extension by paying an additional $5,000 in cash and $10,000

in earnest money. Pyron bought another four week extension for

$5,000 in cash and $10,000 in earnest money on October 23, 1991

before the Teambank option was exercised and the deal was finally

closed on November 18, 1991.

Pyron's efforts to procure a buyer for the Pirtle

property were not as fruitful. On November 30, 1991, the Pirtle

option expired and the $10,000 in earnest money was forfeited. On

February 4, 1992, Pyron bought a second option for $2,000 to

purchase approximately half of the original Pirtle property. At

its expiration on April 3, Pyron bought an additional sixty day

4 The sole shareholder of the corporations was Ground, the provider of the earnest money for the option contracts. 5 The language of the option created some uncertainty as to which date was actually correct.

3 extension of his option with a $20,000 note. On June 3, 1992, the

option expired and the earnest money was again forfeited. The

Pirtle property was eventually sold to an unrelated investor who

reimbursed Pyron $31,476.42 for commission, fees, and expenses

incurred in improving the Pirtle property.

On February 26, 1992, Assistant United States Bankruptcy

Trustee, Tim O'Neal met with Smithson and Pyron to discuss an

anonymous tip O'Neal had received alleging that Pyron was hiding

assets from the bankruptcy estate. At the meeting, Smithson and

Pyron confessed that they had omitted the option contracts from

Pyron's schedule of assets but maintained that the omissions were

inadvertent. Although Smithson and Pyron informed O'Neal that the

TeamBank option had been exercised, they did not disclose that they

had both acquired an interest in the TeamBank building as

compensation for their roles in closing the deal.6 O'Neal was not

convinced that the omission had been inadvertent and referred the

case to the United States Attorney's Office and the Federal Bureau

of Investigation.

Pyron and Smithson were charged in a seven count

indictment relating to the failure to include on Pyron's bankruptcy

statements and schedules the transfer of the option contracts to

the two corporations. The jury found them guilty on the five

counts relating to the bankruptcy fraud and concealment, but

acquitted them on two counts relating to money laundering. Both

6 Pyron and Smithson received 24% and 9% respectively of the shares of the 100 Independence, Inc., the corporation that owned the TeamBank building as its only asset.

4 were sentenced to 27 months in prison and ordered to pay

$278,730.42 in restitution.

On appeal, both Pyron and Smithson challenge the adequacy

of the jury instructions and the propriety of their sentences.

Jury Instructions

We afford the district courts substantial latitude in

formulating the jury instructions and review a district court's

refusal to give a requested jury instruction for abuse of

discretion. United States v. Chaney, 964 F.2d 437, 444 (5th Cir.

1992). To prevail on a challenge to a jury instruction on appeal,

a party must demonstrate that the requested instruction (1) was a

correct statement of the law, (2) was not substantially covered in

the charge as a whole, and (3) concerned an important point in the

trial such that the failure to instruct the jury on the issue

seriously impaired the defendant's ability to present a given

defense. Id.

Pyron's primary defense at trial was good faith reliance

on advice of counsel. Pyron contended that he innocently sought

the advice of Smithson who devised the scheme to create the

corporations and transfer the options to those corporations. Pyron

maintained that he trusted Smithson to obey the law in the

transactions. Smithson's testimony that the plan was his idea

corroborated Pyron's defense. Pyron contends that his ability to

present this defense was improperly impaired by the district

court's refusal to utilize his requested definition of the word

"knowingly" in the jury instructions.

5 The court instructed the jury, "An act is done

'knowingly' when that act is done voluntarily and intentionally,

not because of mistake or accident." Pyron argues that the phrase

"or other innocent reason" should have been appended to the

definition. This, according to Pyron, would have allowed the jury

to conclude that even though Pyron knowingly concealed the options

from the bankruptcy estate, he did so innocently, i.e., by relying

on his counsel in good faith. As given, contends Pyron, the jury

instruction precludes the jury from accepting his good faith

reliance defense because the concealment was not a mistake or

accident.

In defining "knowingly," the district court adopted the

definition set forth in the Pattern Jury Instructions, Criminal

Cases, Special Instruction 1.35 at 49 (5th Cir. 1990 Ed.), which

did not include the requested phrase. Immediately preceding the

definition of "knowingly" in the jury instructions were two careful

and detailed instructions relating to Pyron's good faith reliance

defense. In addition, Pyron's attorney advanced this defense to

the jury in closing argument, and neither the government nor the

judge said anything to negate the viability of this defense if

believed by the jury. We are satisfied that the two paragraphs

immediately preceding the definition of "knowingly" adequately

apprised the jury of the good faith reliance defense and that

Pyron's ability to present the defense was not improperly impaired.

Next, Pyron and Smithson both challenge the language of

the jury instruction regarding what was properly considered as part

6 of the "estate of the debtor" for purposes of count four charging

concealment of assets. The jury instruction at issue is based upon

28 U.S.C. § 152, which criminalizes concealing assets from the

bankruptcy court.7 The district court instructed the jury in

accordance with section 152:

The term 'estate of a debtor' means all rights, title, share, or interests in property owned by a debtor at the time a bankruptcy petition is filed. The term 'estate of a debtor' may also include interests in property owned by the debtor within one year before the date of the filing of the petition.

Pyron and Smithson argue that this definition is inadequate and

misleading. Their requested instruction, substantially longer and

very complex, is based on the proposition that "estate of a debtor"

is a legal term that should have been defined in accordance with

section 541 of the bankruptcy code. This court recently rejected

a similar attempt to superimpose the technicalities of bankruptcy

law upon the plain language of § 152. United States v. West, 22

F.3d 586, 590 (5th Cir.), cert. denied, ____ U.S. ____, 115 S. Ct.

584 (1994), West bodes ill for appellants' contention, but we need

not resolve the issue definitively because, at best, it strikes at

one of the five counts of conviction. The challenged jury

instruction pertained to Count IV. Even if it were erroneous,

7 Section 152 provides in relevant part: "Whoever knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or from creditors in any case under title 11, any property belonging to the estate of a debtor; * * * Shall be fined not more than $5,000 or imprisoned not more than five years, or both." 18 U.S.C. § 152 (1994 Supp.).

7 appellants' convictions of the other counts of bankruptcy fraud

remain intact. Any error would be harmless.

Appellants' final allegation of error concerns whether

the jury was adequately admonished, as appellants requested, that

property acquired by the debtor post-petition was not part of the

estate. The court's instruction explicitly charged the jury that

the estate of the debtor included property owned by a debtor at the

time the petition was filed and might also include property owned

by the debtor within one year before the petition was filed. To

instruct additionally that property acquired after the petition was

filed was not in the debtor's estate would have been redundant.8

The requested instruction was substantially covered in the charge.

Sentencing Guidelines

The more challenging facet of this appeal lies in

appellants' assertion that the district court improperly enhanced

their sentences eight levels under section 2F1.1 of the Sentencing

Guidelines based upon an erroneous calculation of loss caused by

their crimes. We review factual findings under the guidelines for

clear error. United States v. Mackay, 33 F.3d 489, 496 (5th Cir.

1994).

The base offense level for fraud under the guidelines is

six. U.S.S.G. § 2F1.1. Section 2F1.1 provides for an incremental

increase in the offense level based upon the amount of loss caused

8 Appellants' contention that paragraph 65 of the charge erroneously permitted the jury to include property acquired post-petition is without merit. While this instruction refers to a post-petition time period, it is contained in count four for concealment of assets which alleges that appellants concealed property belonging to the estate of the debtor. The post-petition time period refers to when the options were concealed, not when they were acquired.

8 by the fraud. The district court, after granting appellants a

hearing, adopted the Presentence Report's (PSR) calculation of the

total loss.

Application Note eight to section 2F1.1 of the guidelines

permits the court to utilize the offender's gain from committing

the fraud in determining the appropriate increase in offense level

when the amount of loss is difficult to determine. The PSR

attempted to do that. The PSR calculated the total gain to be

$278,730.42 by adding the current value of Pyron's shares in 100

Independence Center Inc.,9 plus the current value of Smithson's

shares,10 plus Smithson's legal fees earned in connection with the

purchase of the TeamBank building,11 plus the expenses recovered by

Pyron in connection with the sale of the Pirtle property.12 This

calculation was clearly erroneous for several reasons.

The first error was committed in valuing the TeamBank

option. There is a fundamental distinction between owning an

option to buy a building and owning the building itself. Two days

before Pyron filed his bankruptcy petition, he owned an option to

purchase the TeamBank building for $575,000. Pyron, with the

9 The PSR multiplied Pyron's 24% ownership of the outstanding shares by the current appraised value of the Teambank building ($703,800) which totaled $168,912. 10 The PSR multiplied Smithson's 9% ownership of the outstanding shares by the current appraised value of the Teambank building ($703,800) which totalled $63,342. 11 Smithson was paid $15,000 for the legal work he performed in executing the purchase of the TeamBank building on behalf of the corporation. 12 Pyron was paid $31,476.42 by the ultimate purchaser of the Pirtle land. This was apparently reimbursement for expenses incurred and commission and fees received for his efforts in the unrelated sale of Pirtle land.

9 assistance of Smithson, transferred this option to a corporation

for no consideration. What they concealed from the bankruptcy

trustee was an option, not a building. The sentence enhancements

must be based upon the value of the option, which is the "property"

that would have been transferred to the trustee, and not on the

subsequent value of the building purchased when the option was

exercised.

All parties agree that the option was difficult to value

on the date the petition was filed. In fact, some testimony

suggested that the option had little or no value at all. The

government does not dispute that had the TeamBank option been

disclosed, the bankruptcy trustee would have been unable and

unwilling to borrow the purchase price to exercise the option. The

bankruptcy trustee is in the business of collecting and liquidating

assets, not real estate management and development. The loss to

the estate resulting from the concealment was, for all practical

purposes, zero. However, as provided by Application Note eight to

section 2F1.1 of the guidelines, the gain to the offenders by

holding the option can be used as an alternative valuation method.

Although appellants' gain is also difficult to calculate,

a reasonable approximation based upon the available evidence is

feasible. The bankruptcy trustee signed an affidavit estimating

the value of both options to the estate at approximately $5,000.

Evidence was also presented that the purchase price of the TeamBank

option was $150 cash plus $20,000 in earnest money. The court may

additionally consider as evidence the value of the TeamBank option

10 at the date of bankruptcy was the $5,000 that was paid on October

3, 1991 to extend the option expiration period and to avert the

forfeiture of the $20,000 in earnest money. It is imperative,

however, that the value ascribed to the options cannot be measured

after their first post-petition expiration dates. On remand, the

district court must decide the value of the TeamBank option based

on this standard; this, and only this, is what the appellants

gained by concealing the options from the bankruptcy estate.

Second, the PSR included the $15,000 legal fee collected

by Smithson in its valuation of the appellants' gain from the

fraud. However, the government does not dispute that Smithson

received the $15,000 for his legal work in executing the purchase

of the TeamBank building on November 18, 1991 - long after the

concealed option expired.13 Therefore, compensation for legal

services rendered after the petition was filed and not performed in

furtherance of the fraudulent concealment14 cannot be considered

gain to the appellants for purposes of section 2F1.1 of the

guidelines.

Third, the PSR attributed to the appellants the

$31,476.42 that Pyron received from the subsequent sale of the

Pirtle land to an unrelated purchaser. On May 7, 1991, Pyron put

13 It is of no consequence that the corporation purchased an extension on the Teambank option; the gain realized by Smithson and Pyron from concealing the option was extinguished when the initial option period expired. 14 The government argues that the purchase of the building by the corporation was "directly tied to the concealment of the option." There is no evidence of this. The building was purchased two months after the concealed option would have expired had it been disclosed. At that point in time, there was no longer any property that belonged to the estate left to conceal.

11 up $10,000 in earnest money for an option to purchase the Pirtle

property for $2,400,000. On September 10, 1991, Pyron, with the

assistance of Smithson, transferred the Pirtle option to Tyler

Broadway Crossing, Inc. for no consideration. On September 11,

1991, the day before the petition was filed, the option was

extended to September 30, 1991. On November 30, 1991, the final

extension expired and the earnest money was forfeited. Later Pyron

paid $2,000 for a second option on approximately half of the

original Pirtle land. On April 3, 1992, Pyron executed a note for

$20,000 in exchange for a sixty day extension of the option.

Nevertheless, the option expired and the $20,000 was forfeited.

The property was ultimately purchased by an unrelated party who

paid Pyron $31,476.42 for commission, fees, and expenses incurred

in improving the Pirtle property and an adjacent piece of property.

As the above chronology demonstrates, the option contract

that Pyron and Smithson concealed from the bankruptcy court

irretrievably expired and the earnest money was forfeited.

Therefore, appellants did not ultimately realize any monetary gain

from the concealment.

Like the TeamBank option, the Pirtle option was

essentially worthless to the bankruptcy estate because the trustee

could not and would not have raised the $2,400,000 purchase price

to exercise the option. To the extent that the money Pyron

received from the ultimate sale of the Pirtle land was traceable to

post-petition efforts and expenditures, it is not properly included

in the calculation under section 2F1.1. However, the amount

12 received by Pyron in connection with the Pirtle property may have

some probative value in determining what the option was worth prior

to its expiration. On remand, the court must determine, as with

the TeamBank option, the value prior to its expiration of the

option to purchase the Pirtle property.15

Pyron also appeals the separate two-level enhancements he

received for more than minimal planning under section

2F1.1(b)(2)(a) and as an organizer or leader of a criminal

enterprise under section 3B1.1(c) of the guidelines. There is no

clear error in these additions to his base offense level.

Moreover, Pyron's contention that application of enhancements for

both of these offense characteristics amounts to impermissible

"double counting" is meritless. See United States v. Godfrey, 25

F.3d 263, 264 (5th Cir.), cert. denied, _ U.S. _, 115 S.Ct. 429

(1994).

CONCLUSION

The convictions of Billy D. Pyron and Jon D. Smithson are

AFFIRMED. However, we VACATE the sentences and the restitutionary

orders of both Pyron and Smithson and REMAND to the district court

with instructions to re-sentence the appellants consistent with

this opinion. The amount of restitution ordered, if any, should be

consistent with the court's valuation of loss on remand.

AFFIRMED in Part, VACATED and REMANDED in Part.

15 It is important to note that this opinion concerns the valuation of options for purposes of calculation of loss from fraud under the sentencing guidelines. It is not intended, nor should it be interpreted, to limit in any way the rights of the bankruptcy trustee or other creditors afforded them under the Bankruptcy Code or other laws.

13 14