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United States v. Bauer: 5TH AMENDMENT | BANKRUPTCY FRAUD - criminal prosecution for bankruptcy fraud; evidence; attorney's testimony

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 08-1043
___________
United States of America, *
*
Appellee. *
*
v. **
Cyril J. Bauer, *
*
Appellant. *
___________
Appeals from the United States
No. 08-1209 District Court for the
___________ District of Minnesota.
United States of America, *
*
Appellee. *
*
v. **
Rae Orene Bauer, *
*
Appellant. *
___________
Submitted: November 11, 2008
Filed: December 29, 2008
___________
Before WOLLMAN, BEAM, and BENTON, Circuit Judges.
___________
1The Honorable James M. Rosenbaum, United States District Judge for the
District of Minnesota.
-2-
WOLLMAN, Circuit Judge.
Cyril and Rae Bauer (whom we shall refer to by their first names when
appropriate to the context) were charged with twelve counts of bankruptcy fraud and
money laundering in violation of 18 U.S.C. 153, 152(1), 152(2), 1956(a)(1)(A)(i),
and 1956(c)(7)(D). A jury found them guilty on all counts, and they were sentenced
to forty-one months imprisonment. The Bauers appeal, arguing that the district court1
erred in admitting certain evidence. Additionally, Cyril contends that the district court
erred when it denied his motion for severance and his motion to exclude statements
made by Rae. We affirm.
I.
In February 2002, the Bauers filed a joint petition for Chapter 7 bankruptcy in
the District of Minnesota, seeking discharge of approximately 1,000 in debt. They
submitted schedules listing the value of their home at ,000 and claimed that the
home was encumbered by mortgages totaling ,000. Because the Bauers had no
equity in their home and did not list any other property that was subject to claims by
the estate, their bankruptcy was treated as a no asset case. The Bauers debts were
discharged, and the case was closed on June 11, 2002.
Shortly before the case was closed, however, a fire destroyed the Bauers home,
and they submitted an insurance claim that valued the house at 0,000. In the
process of settling the insurance claim, the Bauers insurance company contacted the
bankruptcy trustee, Michael Iannacone. Based on the discrepancy between the
Bauers insurance claim and their original valuation of their home, Iannacone
successfully moved the bankruptcy court to reopen the case. The Bauers amended
their original petition to reflect the equity in their home, and they attempted to switch
-3-
from a federal to a state exemption scheme in order to prevent the equity from
becoming property of the estate. Concluding that the Bauers had acted in bad faith
when they initially valued their home at ,000, the bankruptcy court denied the
Bauers request to alter their exemption scheme.
In the process of litigating the exemptions, Iannacone discovered that the
Bauers had substantial funds in an Individual Retirement Account (IRA) that they had
not disclosed in their initial bankruptcy filings. On March 5, 2003, the Bauers
amended their schedules to include information about the IRA, but they maintained
that the funds were exempt from the bankruptcy estate. The bankruptcy court
disagreed, and it instructed the Bauers to give Iannacone access to both the insurance
proceeds and the IRA funds.
Notwithstanding the bankruptcy courts order, the Bauers converted the assets
into cash and either spent or hid the money. Beginning on March 5, 2003, Cyril made
a series of ,000 currency withdrawals from the IRA that totaled more than
6,000. On April 24, 2003, the Bauers cashed an insurance check for 4,535.
Rae later claimed to have spent her share of the cash, and there is evidence that Cyrils
share remains buried on a Wisconsin farm. None of the money was made available
to Iannacone or the Bauers creditors.
As the Bauers bankruptcy case proceeded in the latter half of 2003, they
became openly recalcitrant. In September 2003, Rae began filing a series of defiant
affidavits with the bankruptcy court, asserting therein a number of unusual arguments.
She declared, for example, that
Affiant does not and does not intend, to make a use of any and all
calendars, including the Gregorian calendar: Bull of Gregory XIII, dated
at Tusculum, in the year of the Dominical Incarnation 1582, in the Sixth
before the Calends of March, in the Tenth Year of his Pontificate and,
Act of Parliament, 24, G.2, c.23, A.D. 1751 and Lord Chesterfields
-4-
letters to his son, February 28 (0.S.0), 1751, March 18 (O.S.), 1751,
Location information in item herein is to FORM and is NOT submission
to any foreign jurisdiction.
In similar style, Rae denied the existence and jurisdiction of the bankruptcy court,
expressed her refusal to turn over her assets, and asserted that the entire bankruptcy
proceeding was a mistake. Cyril, who separated from Rae in July 2003, wrote a letter
to the bankruptcy judge in October 2003, acknowledging that the court had found him
in contempt for refusing to turn over the insurance proceeds and IRA funds.
In February 2007, the Bauers were charged with twelve counts of bankruptcy
fraud and money laundering. Before trial, Cyril unsuccessfully moved to sever his
case from Raes. Both parties sought to exclude orders and statements from the
bankruptcy court. The government voluntarily agreed not to introduce orders or
proceedings in which the bankruptcy judge had held the Bauers in contempt or found
that they had acted with dishonest or fraudulent intent. The government was,
however, permitted to introduce an audio recording of a hearing held on September
11, 2003, in which the bankruptcy judge warned the Bauers not to abscond with estate
assets.
At trial, the central issue was whether the Bauers had acted with intent to
defraud the bankruptcy court and their creditors. The Bauers attempted to show that
the errors and omissions in their bankruptcy filings were the result of sloppy attorneys
and poor legal advice. To contradict this assertion, the government introduced
testimony from the lawyers who represented the Bauers in their initial bankruptcy
filing. The government also introduced, among other things, the recorded bankruptcy
hearing and the statements the Bauers had made in their separate communications with
the bankruptcy court.
On appeal, the Bauers argue that the district court erred by admitting statements
from the bankruptcy court, and they raise additional issues individually. Cyril asserts
-5-
that his severance motion was improperly denied, and he maintains that the
governments introduction of Raes out-of-court statements violated his rights under
the Sixth Amendments Confrontation Clause. Rae argues that testimony from her
bankruptcy attorneys violated her attorney-client privilege. She also contends that the
evidence was insufficient to sustain her conviction.
II.
The Bauers take issue with the district courts admission of statements from the
bankruptcy court. They focus particularly on the September 11, 2003, hearing, in
which the bankruptcy judge warned the Bauers that concealing estate property was a
federal felony and that prosecution would result if they acted in contravention of a
court order.
We review a district courts admission of evidence for abuse of discretion.
United States v. Myers, 503 F.3d 676, 682 (8th Cir. 2007). Relevant evidence is
generally admissible, and it should be excluded only if its probative value is
substantially outweighed by the danger of unfair prejudice. Fed. R. Evid. 403.
Evidence is unfairly prejudicial if it tends to suggest decision on an improper basis.
Myers, 503 F.3d at 682 (quoting Wade v. Haynes, 663 F.2d 778, 783 (8th Cir. 1981)).
The statements from the bankruptcy judge were clearly relevant to the
prosecutions case. The primary issue for the jury was the Bauers intent, and the
bankruptcy judges hortatory language was especially probative of the Bauers state
of mind when they failed to follow the courts instructions. The Bauers argue,
however, that the admonition of the bankruptcy judge was unfairly prejudicial because
it suggested that a judicial officer believed the Bauers had acted wrongfully. We
disagree.
-6-
The statements in question did not indicate that the Bauers had committed
fraud. Rather, they alerted the Bauers to the fact that absconding with estate assets
was a violation of federal lawevidence that contradicted the Bauers assertion that
their subsequent behavior was an innocent mistake. As Cyril acknowledges, the
government attempted to eliminate any prejudice from the bankruptcy proceedings
through redactions and stipulations. The government omitted, for example, a
proceeding in which the bankruptcy court found the Bauers in contempt. Moreover,
the district court carefully instructed the jury that the bankruptcy was a separate
proceeding and should not be confused with the Bauers criminal trial. In these
circumstances, therefore, the district court did not abuse its discretion by admitting the
statements from the bankruptcy proceedings.
III.
Cyril contends that the district court erred when it refused to sever his trial, and
that it violated his Confrontation Clause rights by admitting statements made by Rae.
Cyril concedes that joinder was proper under Federal Rule of Criminal Procedure 8(b),
but he insists that joint trial unfairly prejudiced him. Specifically, he argues that he
was harmed by the governments introduction of Raes defiant affidavits. A denial
of a motion to sever will not be reversed unless clear prejudice and an abuse of
discretion are shown. United States v. Noe, 411 F.3d 878, 886 (8th Cir. 2005)
(quoting United States v. Pherigo, 327 F.3d 690, 693 (8th Cir. 2003)). Although there
is a strong presumption against severing properly joined cases, severance is
necessary if a jury is unable to compartmentalize the evidence against separate
defendants. Id.
We conclude that the affidavits did not prejudice Cyril, who himself aptly
characterizes the filings as virtually nonsensical. He nevertheless argues that the
affidavits were damaging because they referred to him as Raes spouse and referred
to jointly owned property. But even if the jury took the filings as a serious affront to
2Cyril also argues that admission of the affidavits violated the hearsay rule.
This argument fails because the affidavits were not admitted to prove the truth of
Raes assertions, but to prove that she acted intentionally when she provided false
information and disregarded orders from the bankruptcy court. See Fed. R. Evid.
801(C).
-7-
the bankruptcy court, the affidavits did not purport to speak for Cyril. The
government elicited testimony from Iannacone that the affidavits were filed solely by
Rae, and the jury also heard testimony that the Bauers were separated when the
affidavits were filed. To the extent that the affidavits referred to Cyril at all, they
provided undisputed information that the jury already knew: namely, that the case
involved a joint bankruptcy in which the Bauers had jointly owned property. There
is no reason to believe that the jury ascribed the statements in Raes affidavits to Cyril,
or that Cyril suffered prejudice from their admission.
The same analysis applies to Cyrils Confrontation Clause arguments. Citing
Bruton v. United States, 391 U.S. 123 (1968), Cyril argues that the affidavits should
have been redacted to eliminate any reference to him. Bruton requires redaction when
the government introduces an out-of-court statement from one co-defendant that
directly accuses or incriminates another. See Gray v. Maryland, 523 U.S. 185, 194
(1998). As the Supreme Court has explained, the prejudicial impact of such
statements is so strong that it cannot be cured by a limiting instruction. Id. at 192.
The Bruton rule does not come into play here, however, because Raes statements
were not accusatory and they did not incriminate Cyril.2
IV.
Rae argues that her attorneys testimony violated her attorney-client privilege
and that the evidence was insufficient to sustain her conviction.
3As the government points out, it is not certain that the subject matter at
issueinformation communicated from the Bauers to their attorneys for the purpose
of disclosure in publicly filed bankruptcy scheduleswas even protected by the
privilege. See United States v. Cote, 456 F.2d 142, 145 n.3 (8th Cir. 1972) (noting
that the attorney-client privilege does not attach to information which the taxpayer
intends his attorney to report in the contents of a tax return).
-8-
At trial, the attorneys who assisted the Bauers in their original Chapter 7 filing
offered testimony that the Bauers were responsible for the inaccurate information that
appeared on their bankruptcy schedules. Rae argues that this testimony violated her
attorney-client privilege.3 Whatever privilege Rae may have had, it is clear that she
waived it by choosing to make her attorneys performance the central element of her
defense. See Baker v. General Motors Corp., 209 F.3d 1051, 1055 (8th Cir. 2000) (A
waiver of the attorney-client privilege may be found where the client places the
subject matter of the privileged communication at issue.).
We also reject Raes assertion that the evidence was insufficient to sustain her
conviction. We review the sufficiency of the evidence de novo, viewing evidence
in the light most favorable to the government, resolving conflicts in the governments
favor, and accepting all reasonable inferences that support the verdict. United States
v. Hakim, 491 F.3d 843, 845 (8th Cir. 2007) (quotation omitted). The verdict will be
upheld if there is any interpretation of the evidence that could lead a reasonableminded
jury to find the defendant guilty beyond a reasonable doubt. Id. (quoting
United States v. Hamilton, 332 F.3d 1144, 1149 (8th Cir. 2003)).
The evidence against the Bauers was substantial. To establish that the Bauers
knew the true value of their home when they submitted their original bankruptcy
schedules, the government produced tax records and testimony from the Bauers
financial planner. There was also evidence that the Bauers turned down an offer of
0,000 for their house just after they had listed its value at ,000. Records from
the Bauers insurance claim further demonstrated that they realized the inaccuracy of
-9-
their initial valuation. Similarly, the government introduced evidence that the Bauers
were aware of their obligation to disclose information about the money in Cyrils
IRAthe most compelling piece of which was Cyrils systematic depletion of the
IRA funds after he revealed its existence to the bankruptcy court. The jury was also
presented with the Bauers separate communications to the bankruptcy court, in which
they expressly refused to cooperate with court orders. And lastly, the undisputed
evidence showed that the Bauers converted the IRA funds and insurance check into
cash and spent or buried the more than 0,000 proceedsall without surrendering
anything to the trustee, the court, or their creditors. This evidence was clearly
sufficient to support the jurys verdict.
V.
The convictions are affirmed.
______________________________
 

 
 
 

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