Filed: Mar. 24, 1995
Latest Update: Mar. 02, 2020
Summary: 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 bankruptc
Summary: 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..
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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
