United States v. Messner

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
FEB 19 1997
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee,
v.
No. 96-3146
RONALD ROE MESSNER,

Defendant-Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. No. 95-CR-10020-01)

Stephen M. Joseph, Redmond & Nazar, LLP, Wichita, Kansas, for Defendant-Appellant.

Montie R. Deer, Assistant United States Attorney (Jackie N. Williams, United States
Attorney, with him on the brief), Wichita, Kansas, for Plaintiff-Appellee.

Before PORFILIO, HOLLOWAY, and ANDERSON, Circuit Judges.

PORFILIO, Circuit Judge.
 Defendant Ronald Roe Messner appeals his five-count conviction on a superseding

indictment charging violations of 18 U.S.C. § 152 dealing with bankruptcy related crimes.

On appeal, he contends the district court erroneously: (1) failed to dismiss two of the

charges against him; (2) denied his motion for a new trial on three other charges; (3)

allowed expert legal testimony on a legal issue; (4) ordered restitution; and (5) enhanced

his sentence. Because the only error we find relates to restitution, we affirm in part and

reverse in part.

Mr. Messner filed two petitions for reorganization under Chapter 11 of the

Bankruptcy Code in March 1990. The first was filed as a joint personal petition with

Ruth Ann Messner, and the second was a corporate petition in the name of Commercial

Builders of Kansas, a corporation in which Mr. Messner was an officer and stockholder.

As debtor-in-possession in his personal reorganization, Mr. Messner submitted a

reorganization plan one year later. The bankruptcy court confirmed this plan in April

1991. The case itself, however, remained open and under administration in the

bankruptcy court until November 22, 1994. The corporate reorganization was converted

to a liquidating bankruptcy under Chapter 7. That case was still pending upon the date of

the filing of the indictment.

Mr. Messner was convicted on counts one, two, three, six, and seven of the

superseding indictment. Counts one and two alleged, in 1990, after filing his petition,

Mr. Messner twice failed to disclose a partnership interest he had in commercial property.

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Count three alleged, in 1990, Mr. Messner also failed to disclose a $246,845 promissory

note he had assigned to his son for $10 before filing. Count six alleged, in 1992, Mr.

Messner concealed his receipt of $10,000 in cash from a pre-bankruptcy contractual

interest he had in a residential real estate contract. Count seven alleged, in 1992, Mr.

Messner also concealed his receipt of $10,000 in cash from bonds issued to Commercial

Builders in 1989. Although neither the real estate interest nor the bonds were disclosed in

either of the bankruptcy cases, Mr. Messner concedes they should have been set forth in

the statement of financial affairs of his personal petition.1

Following the verdict, the court sentenced Mr. Messner to serve a twenty-seven

month sentence and pay $72,500 in restitution. We now consider the issues he has raised

in his appeal.

I.

In an artfully conceived argument, Mr. Messner asserts the district court should

have dismissed counts six and seven because he had no duty to disclose his receipt of

assets in 1992. Mr. Messner contends confirmation of the reorganization plan in 1991

dissolved his bankruptcy estate, revesting all estate property--even that which was

undisclosed--back to him. As a result, Mr. Messner argues his status as a debtor-in-

possession and fiduciary to creditors ended in 1991, terminating his duty of disclosure at

1
See page 30 of Appellant’s opening brief.

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that time. He maintains Chapter 11 of the Bankruptcy Code imposes a duty of disclosure

only on debtors-in-possession, and he was not a debtor-in-possession in 1992. He

therefore insists he was under no duty to disclose his receipt of $20,000 and cannot be

guilty of criminal concealment as charged. Admitting the government could have

charged him with not reporting the existence of his interest in the real estate contract and

bonds in 1990, he emphasizes the government failed to do so. He postulates it is not this

court’s province to compensate for the government’s failure to indict him properly by

creating a duty where none exists by statute.

The government takes the opposite position maintaining the bonds and real estate

contract remained in the bankruptcy estate after confirmation of the reorganization plan,

continuing Mr. Messner’s duty of disclosure as a debtor-in-possession. According to the

government, undisclosed property does not revert back to the debtor upon confirmation,

but instead remains in the Chapter 11 estate until either dealt with under a reorganization

plan or abandoned. To have avoided criminal liability here, the government suggests Mr.

Messner should have petitioned the bankruptcy court to reopen the reorganization case to

determine whether the assets should be administered for the benefit of creditors or

abandoned. To hold otherwise, the government argues, would encourage debtors to

conceal assets until confirmation of the reorganization plan, frustrating the full disclosure

and fresh start principles of the bankruptcy process.

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 Because the district court’s denial of Mr. Messner’s motion to dismiss counts six

and seven was based on its interpretation of 28 U.S.C. § 152(7), we review its decision de

novo. United States v. Wood, 6 F.3d 692, 694 (10th Cir. 1993). Applying de novo

review, we believe the district court properly concluded the counts should not have been

dismissed.

Proper review of this issue must begin with the applicable language of the statute

under which Mr. Messner was charged:

Whoever, either individually or as an agent or officer of any
person or corporation, . . . with intent to defeat the
provisions of title 11, knowingly and fraudulently transfers or
conceals any of his property or the property of such other
person or corporation . . . [is guilty of bankruptcy fraud].

18 U.S.C. § 152(7) (1978) (emphasis added).

Recitation of the statutory language immediately emphasizes the fallacies in

defendant’s argument. The first fallacy is that § 152(7) does not apply to him because

the money he acquired after confirmation belonged to him and not the estate. The very

language of § 152(7) itself makes clear culpability will attach to a concealment of a

person’s own property if done for the purpose of defeating bankruptcy. Therefore,

whether the assets from which the money was derived vested in Mr. Messner or

remained in the estate is not significant. Moreover, the plan itself defines the assets of

Mr. Messner’s estate as: “All personal and real property of the debtor, whether tangible

or intangible, . . . as defined in § 541 of the Bankruptcy Code.” Article II, paragraph 2.4,

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of the plan. Therefore, when coupled with 11 U.S.C. § 541(a)(6), which includes in a

bankruptcy estate the “proceeds” of estate assets, this provision of the plan swept into the

estate and the plan itself the money defendant received as proceeds of estate property.

This factor is important because the money Mr. Messner received did not simply

appear in his hands. He received it because it was derived from tangible or intangible

assets he held prior to the filing of either bankruptcy petition. At the very least, then, this

money had to have been the proceeds of estate property by law and by definition.

Even if the plan were not so encompassing, the reach of § 541(a)(6) is. It attaches

to any after-acquired property of the estate and makes that property subject to bankruptcy

jurisdiction. Although, in general, property not owned by a debtor until after the filing of

a bankruptcy petition is not includable in the bankruptcy estate, an exception exists for

after-acquired property comprised of the proceeds of estate property. See 5 Lawrence P.

King, Collier on Bankruptcy, § 541.17 (15th ed. 1996). Thus, even though the money

received by Mr. Messner subsequent to the confirmation of his plan was not itself an

asset at the time of the filing of his petition, it was subject to disclosure as proceeds of

such assets.

We also note another fallacy in Mr. Messner’s defense. Contrary to his

fundamental hypothesis, the confirmation of the plan did not terminate the bankruptcy

proceedings. Indeed, under Article VIII of the plan itself, the bankruptcy court retained

jurisdiction over the case “for one year after the date of the entry of the order of

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confirmation.” Moreover, the plan provided the debtor with specific powers and

responsibilities after confirmation. In fact, the government maintains the Messner case

was not finally closed until November 22, 1994, a date after the transactions which form

the basis for counts six and seven. Thus, Mr. Messner cannot claim the confirmation of

the plan closed the Chapter 11 case and dissolved any fiduciary responsibility he had as

debtor-in-possession.

Because Mr. Messner failed to make the required disclosure, even if the money

were nominally his property, he defeated the purpose of bankruptcy by failing to amend

his bankruptcy filings or otherwise disclose the receipt of the funds. In this case, the

bankruptcy purpose was to marshal the assets of the estate for payment to creditors in

accordance with the terms of the plan. Because Mr. Messner retained the money,

$20,000 was not distributed under the plan as it should have been; hence, the purpose of

the bankruptcy was defeated.

II.

Mr. Messner argues his right to a fair trial on counts one, two, and three was

prejudiced by evidence pertinent to counts six and seven, which should have been

dismissed before trial. He contends the government’s evidence on the dismissable

counts ruined his credibility, devastating his defense to the first three counts.

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 We review the district court’s denial of Mr. Messner’s motion for a new trial

under the abuse of discretion standard of review. United States v. Evans, 42 F.3d 586,

593 (10th Cir. 1994). Applying that standard, we will reverse the district court only if it

“made a clear error of judgment or exceeded the bounds of permissible choice in the

circumstances.” Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (citations

omitted). Because it is based upon a faulty premise, we see no merit in the argument.

Robbed of the contention counts six and seven should have been dismissed, the

issue is deflated. Moreover, because we would analogize the point as the functional

equivalent to a challenge of the joinder of offenses, Mr. Messner bears a “heavy burden”

on appeal to demonstrate real prejudice from the evidence presented on counts six and

seven. United States v. Muniz, 1 F.3d 1018, 1023 (10th Cir. 1993). To prevail, Mr.

Messner must show actual prejudice because “error in the admission or exclusion of

evidence is harmless if it does not affect the substantial rights of the parties, and the

burden of demonstrating that substantial rights were affected rests with the party

asserting error.” K-B Trucking Co. v. Riss Int’l Corp., 763 F.2d 1148, 1156 (10th Cir.

1985). Thus, regardless of how we construe Mr. Messner’s argument, we must affirm

the district court absent a showing that the evidence introduced on counts six and seven

actually prejudiced his right to a fair trial on counts one, two, and three.

Mr. Messner has made no such showing. We see no indication that the jury was

unable to compartmentalize the evidence it considered on each count. Indeed, his

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acquittal on counts four and five suggests the opposite was true. Because the offenses

alleged in counts six and seven occurred at different times than those alleged in counts

one, two, and three, concerned different assets, and were proven by different evidence,

we can see no basis for concluding the admission of evidence pertinent to counts six and

seven prejudiced Mr. Messner’s right to a fair trial on the other counts. The district

court’s denial of a new trial on those counts therefore was proper.

III.

Mr. Messner argues that the district court erred in allowing expert testimony from

Richard Wieland, an attorney in the U.S. Trustee’s Office, regarding a debtor’s post-

confirmation duty of disclosure. Mr. Messner contends Mr. Wieland’s testimony

impermissibly encroached on the trial court’s function to decide the law of the case,

depriving him of his only defense to counts six and seven. The government, by contrast,

argues that the testimony was proper because it assisted the trier of fact in determining

whether Mr. Messner intentionally concealed assets from his creditors to defeat the

provisions of the bankruptcy code. Because Mr. Wieland’s testimony did not address the

ultimate issue of Mr. Messner’s guilt or innocence, the government contends it was

admissible in this instance.

We review a district court’s admission of expert testimony for abuse of discretion.

United States v. Kunzman, 54 F.3d 1522, 1530 (10th Cir. 1995). Though under this

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standard, we will not reverse the district court without a “definite and firm conviction

that [it] made a clear error of judgment or exceeded the bounds of permissible choice in

the circumstances,” Moothart, 21 F.3d at 1504, reversal is appropriate when the court

fails to consider the applicable legal standard for its discretionary judgment. Summers

v. Utah, 927 F.2d 1165, 1168 (10th Cir. 1991) (citations omitted). Given our precedent

on this issue, we believe the district court abused its discretion in allowing expert legal

testimony on a debtor’s post-confirmation duty of disclosure. However, we also believe

the error was harmless.

In Specht v. Jensen, 853 F.2d 805 (10th Cir. 1988) (en banc), we held an attorney

called as an expert witness could not state his view of the law governing the verdict

because “the judge is the sole arbiter of the law and its applicability.” Id. at 807. While

recognizing that legal testimony was not inadmissible in all cases, we explained,

“[W]hen the purpose of the testimony is to direct the jury’s understanding of the legal

standards upon which their verdict must be based, the testimony cannot be allowed. In

no instance can a witness be permitted to define the law of the case.” Id. at 810. Accord

United States v. Kingston, 971 F.2d 481, 486 (10th Cir. 1992) (“[E]ven expert witnesses

are not permitted to give opinions as to what the law is.”). In this instance, the

government admits that Mr. Wieland “testified how an undisclosed asset should be

reported once a [reorganization] plan has been confirmed.” That being the case, it is

evident Mr. Wieland did in fact state his view of the law governing the jury’s verdict.

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Because such testimony is impermissible under Specht, it should not have been admitted

in evidence.

The government’s arguments to the contrary are unpersuasive. While Mr.

Wieland’s testimony may have helped the jury decide whether Mr. Messner’s

concealment was intentional, it nevertheless invaded the judge’s province to define the

law. For the same reason, the government is mistaken in relying on the fact that Mr.

Wieland’s testimony did not address the ultimate issue of guilt or innocence. Finally, the

government’s reliance on United States v. Arutunoff, 1 F.3d 1112 (10th Cir. 1993), is

similarly misplaced.

The court in Arutunoff did not permit expert legal testimony on security

registration requirements, as argued by the government. Rather, the court held that such

testimony constituted harmless error because it correctly stated the law and did not

attempt to apply the law to the facts of the case. Id. at 1118. The government also relies

on the D.C. Circuit’s recent decision in United States v. Sobin, 56 F.3d 1423 (D.C. Cir.

1995), which upheld a trial court’s decision to allow expert testimony on the information

a bankruptcy trustee expects to receive in response to questions contained in a

“Statement of Financial Affairs.” Because the disputed issues at trial were not even

addressed by the legal testimony in Sobin, that decision is distinguishable from the case

at hand. More importantly, however, is the fact that Specht is binding authority in this

circuit.

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 A defendant bears the burden of demonstrating that the court’s erroneous

admission of evidence “affected [his or her] substantial rights.” K-B Trucking Co., 763

F.2d at 1155-56. In this instance, Mr. Messner’s rights could not have been affected by

the district court’s error because Mr. Wieland’s view of the law is correct. It follows,

then, no prejudice occurred in this instance. See Arutunoff, 1 F.3d at 1118 (“To the

extent that the expert accurately discussed the requirements of the law [the defendant]

suffered no harm.”).

IV.

The next question is whether the district court erred in ordering restitution in the

amount of $72,500. Because the court included the acts of which Mr. Messner was

convicted in counts one to three in calculating the amount of restitution, he maintains the

restitution is excessive because those actions caused no losses. He correctly points out

before confirmation of the plan he disclosed his partnership interest in commercial

property that formed the basis of the charges in counts one and two. That disclosure

resulted in the sale of the property for the benefit of creditors. Likewise, he urges no loss

resulted from his failure to disclose the promissory note in count three because the note

was ultimately assigned to the bankruptcy trustee, who sold it for the benefit of the

estate.

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 We review the amount of restitution ordered by the district court for abuse of

discretion. United States v. Diamond, 969 F.2d 961, 965 (10th Cir. 1992). An abuse of

discretion occurs when, for example, the trial court fails to consider the applicable legal

standard upon which its discretionary judgment is based. Summers, 927 F.2d at 1168.

Because a restitution order must be based on actual loss and because no actual loss to

creditors occurred from concealments charged in counts one through three, we conclude

the district court erred in awarding restitution in the amount of $72,500.

Section 3663 of title 18 specifically requires a court ordering restitution to

consider “the amount of the loss sustained by a victim as a result of the offense.” 18

U.S.C. § 3663(a) (1985) (emphasis added).2 Thus, unlike the sentencing guidelines,

which allow a court to consider actual or intended loss for the purposes of sentencing,

see U.S.S.G. § 2F1.1, section 3663 implicitly requires that an award of restitution be

based on the amount of loss actually caused by the defendant’s offense. See United

States v. Gabriele, 24 F.3d 68, 73 (10th Cir. 1994) (upholding restitution order because

amount “represented a mere fraction of the victim’s loss”); United States v. McAlpine,

32 F.3d 484, 490-94 (10th Cir. 1994) (remanding restitution order because district court

failed to specify whether amount represented victims’ losses); United States v. Jordan,

890 F.2d 247, 253 (10th Cir. 1989) (“Actual damages . . . may be properly ordered as

2
The same statutory text has been revised and is now found in 18 U.S.C. § 3663(a)
(1)(B), Pub. L. No. 104-132, 110 Stat. 1232 (Apr. 24, 1996).

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restitution when the amount has been judicially determined pursuant to notice and

hearing.”) (emphasis added). The burden of demonstrating “the amount of the loss

sustained” rests with the government. 18 U.S.C. § 3664(d) (1985).3

In this instance, all of the assets at issue in counts one through three were

eventually added to the bankruptcy estate and liquidated for the benefit of Mr. Messner’s

creditors. Because the same treatment would have resulted had Mr. Messner initially

disclosed his ownership of the assets, it is not evident creditors were actually harmed by

Mr. Messner’s initial attempt to defraud them. At the very least, the government has not

met its burden of proof to establish the amount of loss as required by § 3664(d). We

therefore hold the district court abused its discretion in awarding restitution based on

those counts. On remand, the district court must recalculate the amount of restitution to

take into account this error.

V.

Next, Mr. Messner challenges the district court’s calculation of loss for the

purpose of sentencing. He argues that the district court erred by using his interest in

partnership property rather than his interest in the partnership itself in the calculation.

The court based its determination on the testimony of Mr. Messner’s partner who

believed the property was worth $130,000-$140,000, from which the court arrived at a

3
The same statutory text has been revised and is now found in 18 U.S.C. § 3664(e),
Pub. L. No. 104-132, 110 Stat. 1232 (Apr. 24, 1996) .

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valuation of $135,000 for that property. After subtracting the $70,000 mortgage on the

property, the court estimated the property had an equity value of $65,000, half of which

belonged to Mr. Messner. Yet, because he claims only one witness focused on the

correct property interest for determining the amount of intended loss on counts one and

two, Mr. Messner argues that we should accept his $5,000 loss estimate over the court’s

$32,500 loss estimate as a matter of law.

Mr. Messner also argues the district court erred in basing its valuation of the

promissory note at issue in count three on the price it produced on liquidation.

According to Mr. Messner, the court should have assigned no value to the loss because

the only witness to estimate the note’s fair market value concluded it was unenforceable

and therefore worthless.

Alternatively, Mr. Messner contends the district court’s loss calculation was

improper because he was incapable of costing his creditors the sum arrived at by the

court. Mr. Messner argues after subtracting liquidation costs, the value of the assets at

issue in counts one through three was minimal and would have had little or no effect on

creditors’ willingness to accept his reorganization plan either way.

The government responds the district court’s $32,500 loss estimate on counts one

and two was proper because the parties stipulated the property’s value in 1990 was

$131,000. That is, after subtracting the mortgage balance, this estimate leaves the value

of Mr. Messner’s share at approximately $32,500. The government also urges because

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the $5,000 ultimately paid for Mr. Messner’s partnership interest was merely a

liquidation price, it would not be a proper valuation of the loss. Additionally, the

government argues that the district court’s loss estimate of $20,000 on count three was

conservative, given the face value of the promissory note was $245,845.

We review the factual findings supporting a district court’s offense level

calculation under the clearly erroneous standard. United States v. Smith, 951 F.2d 1164,

1166 (10th Cir. 1991). Under this standard, we will reverse the district court only if we

have a “definite and firm conviction that a mistake has been made.” Cowles v. Dow

Keith Oil & Gas, Inc., 752 F.2d 508, 511 (10th Cir. 1985). Because we are unconvinced

that the district court’s loss estimate for the purposes of sentencing is clearly erroneous,

we must affirm on this issue.

The Sentencing Guidelines specifically provide that “loss is the value of the

money, property, or services unlawfully taken.” U.S.S.G. § 2F1.1, comment. (n.7).

When property is the subject of the loss, its fair market value determines the loss amount,

unless that value is difficult to ascertain or inadequate to compensate for the victim’s

harm. § 2B1.1, comment. (n.2). If the defendant’s intended loss is greater than the

actual loss resulting from his or her conduct, a court will use the greater, intended loss

amount for the purpose of sentencing. § 2F1.1, comment. (n.7). Because the Guidelines

require loss to be determined objectively, Mr. Messner’s alternative argument, which

proposes valuing the assets upon their subjective worth to creditors, is without merit.

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Indeed, the amount of loss is usually determined by an item’s fair market value. §

2B1.1; United States v. Reddeck, 22 F.3d 1504, 1512 (10th Cir. 1994) (“Calculation of

the lost value requires an objective standard, usually measured by the ‘fair market

value.’”).

Mr. Messner’s remaining arguments on this issue are equally without merit.

Though it is arguable whether the district court’s loss estimate in counts one and two

should have focused on his interest in the partnership rather than partnership property,

this point is without any practical significance. The only asset owned by Mr. Messner’s

partnership was the commercial property; thus, his partnership share in the commercial

property could not have been significantly different from his share in the partnership

itself. Given the fact that Mr. Messner’s own valuation of the partnership interest when

finally disclosed was $56,000, he has little reason to complain on appeal about the

court’s lower loss estimate.

Similarly, Mr. Messner’s argument with the district court’s $20,000 loss estimate

on the promissory note is not convincing given the note’s face value of $245,845.

Obviously, the note had some redeemable value because its obligor paid $20,000 to get it

back.

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VI.

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 Finally, Mr. Messner argues that the district court erred in enhancing his sentence

for violating a judicial process. According to Mr. Messner, the bankruptcy system is not

a “process.” He maintains a process is a directive based upon the same formalities that

undergird orders, injunctions, and decrees. The government, by contrast, contends that

bankruptcy fraud is fraud upon the bankruptcy system. Therefore, it urges us to join the

other circuits which have addressed this issue and held bankruptcy fraud warrants a two-

level sentencing enhancement for violation of judicial process.

We review a district court’s interpretation of the Sentencing Guidelines de novo,

McAlpine, 32 F.3d at 487-88, and agree with the district court that bankruptcy fraud

constitutes a violation of judicial process. Section 2F1.1 of the Sentencing Guidelines

authorizes the imposition of a two-level sentence enhancement when a defendant’s

offense involves a “violation of any judicial or administrative order, injunction, decree or

process.” U.S.S.G. § 2F1.1(b). Thus far, three other circuits have held an enhancement

under this section is proper for defendants convicted of bankruptcy fraud. United States

v. Michalek, 54 F.3d 325 (7th Cir. 1995); United States v. Bellew, 35 F.3d 518 (11th

Cir. 1994); United States v. Lloyd, 947 F.2d 339 (8th Cir. 1991). Central to those

courts’ analyses was the fact that the defendant had “sought protection from his [or her]

creditors under the shelter of bankruptcy” and then “abused the bankruptcy process” by

concealing estate assets. Lloyd, 947 F.2d at 340.

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 Although a textual argument may be made that the term “process” refers only to

“a specific judicial mechanism such as a subpoena or summons,” Michalek, 54 F.3d at

335-36 (Ferguson, J., dissenting), we see no reason to read § 2F1.1 in this manner. The

district court’s interpretation of judicial “process” to embrace judicial proceedings,

including those brought in bankruptcy, is more reasonable. Moreover, this view is in

accord with the essence of the crime of conviction because it recognizes the importance

of protecting the integrity of the bankruptcy system. Bankruptcy fraud undermines the

whole concept of allowing a debtor to obtain protection from creditors, pay debts in

accord with the debtor’s abililty, and thereby obtain a fresh start. When a debtor

frustrates those objectives by concealing the very property which is to be utilized to

achieve that purpose, the debtor works a fraud on the entirety of the proceeding. By

obtaining protection from creditors and, at the same time, denying them of their lawful

and equitable due, a debtor violates the spirit as well as the purpose of bankruptcy. This

artifice strongly supports increasing the perpetrator’s sentence for committing fraud upon

the very source of his financial refuge and salvation.

In sum, we REVERSE the district court’s calculation of the amount of restitution

and REMAND for resentencing on this aspect of the sentence. We AFFIRM the district

court in all other aspects of the case.

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