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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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.
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