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United States v. Hurtgen

March 20, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
P. NICHOLAS HURTGEN, DEFENDANT.



The opinion of the court was delivered by: John F. Grady, United States District Judge

MEMORANDUM OPINION

The court has under consideration the motion of the defendant P. Nicholas Hurtgen to dismiss the counts of the Superseding Indictment that are brought against him. He is charged with three counts of mail fraud, three counts of wire fraud and one count of extortion.

The principal figure named in the indictment is the defendant Stuart Levine, who at the relevant times was a member of the Illinois Health Facilities Planning Board, a commission of the State of Illinois whose approval (in the form of a "Certificate of Need," or "CON") is required before any hospital, medical office building or other medical facility can be built. Generally speaking, the indictment alleges that Levine, Hurtgen and a third defendant, John Glennon, devised and intended to devise a scheme to defraud the State of Illinois of its right to the honest services of Levine as a member of the Planning Board by requiring certain entities, in order to obtain Planning Board approval of their construction projects, to hire Kiferbaum Construction Company, owned by Jacob Kiferbaum, to do the construction work. It was a part of the scheme that Kiferbaum would inflate the cost of each of the construction projects to include an amount of money that he would then pay as a kickback to Levine. (Indictment ¶ 3 at 8-11.) The kickback for the construction of an addition to the Chicago Medical School ("CMS") was approximately $700,000 and, for the CMS student dormitory, another $1 million. Through a complicated series of transactions involving a charitable trust known as the North Shore Supporting Organization, Levine allegedly obtained a total of $3 million for himself and additional $3 million from another individual "through the use of the $1 million that was fraudulently obtained from CMS by LEVINE and Kiferbaum." (Id. ¶ 3(c) at 10.)

It is further alleged that the scheme included Levine's solicitation of a kickback of approximately $1.5 million from Kiferbaum in connection with the construction of Mercy Hospital's Crystal Lake facility. (Id. ¶ 3(d) at 10-11.) It is alleged that Kiferbaum agreed to pay the kickback "with the exact amount and manner of the payments to be determined at a later date." Levine allegedly secured the Planning Board approval of the project in return for the promised kickback.

Other paragraphs of Count One describe these transactions with the various entities in greater detail, but the important thing to note for purposes of the present motion is that the defendant Hurtgen is not alleged to have had any involvement in these transactions or to have had any knowledge of them. The only facility in regard to which Hurtgen is charged is Edward Hospital, located in Naperville, Illinois.

The indictment alleges that Hurtgen was Levine's intermediary in conveying to Edward Hospital the fact that, unless it hired Kiferbaum, the Planning Board would not approve Edward Hospital's plan to build a hospital and medical office building in Plainfield, Illinois. (Id. ¶ 3(e) at 11.) It is alleged:

Kiferbaum understood, as a result of his recent prior dealings with LEVINE, in the course of which Kiferbaum had already paid more than $1.6 million in kickbacks and had agreed to pay more, that LEVINE would direct him to pay a kickback in connection with the Edward Hospital projects. (Id. ¶ 3(a) at 22.) Significantly, this sentence alleges that "Kiferbaum understood," not that "Kiferbaum and Hurtgen" understood. All that is alleged as to Hurtgen is that "HURTGEN assisted in the scheme because he wanted his employer, Bear Stearns, to receive the financing work for the new hospital." (Id. ¶ 8 at 22.)*fn1

A further allegation that may have been intended by the drafter of the indictment to imply knowledge of the kickback scheme by Hurtgen, but falls far short of it, is the following allegation against Levine, describing his failure to disclose the circumstances concerning the Edward Hospital application:

Notwithstanding his position as a member of the Planning Board, LEVINE intentionally concealed from and failed to disclose to the Planning Board material facts relating to its consideration of Edward Hospital's applications for permits to build the Plainfield hospital and medical office building, including LEVINE's arrangement with Kiferbaum and HURTGEN to pressure Edward Hospital to hire Kiferbaum Construction Company so that Kiferbaum would pay a kickback at LEVINE's direction and Bear Stearns would receive the financing work when the projects went ahead, as well as LEVINE's ex parte contacts, both directly and through HURTGEN and Kiferbaum, with Edward Hospital officials regarding Edward Hospital's pending CON applications. (Id. ¶ 8(t) at 29 (emphasis added).) This is not an allegation that Hurtgen knew of the kickback.

Hurtgen's basic argument is that, in failing to allege that he knew of the kickback, the indictment does not allege an offense under 18 U.S.C. §§ 1341 and 1346.*fn2 The government's position is that a monetary gain to the defendant or another, or a monetary loss to the employer, is not necessary in order to constitute a deprivation of "the intangible right of honest services" under 18 U.S.C. § 1346. It argues that, on the contrary, a violation by Levine of his fiduciary duty to the Planning Board and the State of Illinois to report his ex parte communications with Edward Hospital, as well as his acting "in excess of his lawful authority" by "steering" the construction contract to Kiferbaum, regardless of whether he was to receive a kickback or not, constituted violations of Illinois criminal statutes and would thereby qualify as deprivations of his honest services.

DISCUSSION

Each side cites a number of cases from this and other Circuits on the meaning of "honest services." We think two Seventh Circuit cases and one Supreme Court case provide the answer we need.

The most helpful case is United States v. Bloom, 149 F.3d 649 (7th Cir. 1998), because of its clarity and the fact that it was decided after Congress enacted § 1346 in response to the Supreme Court decision in McNally v. United States, 483 U.S. 350 (1987).

The Bloom case involved facts quite different from those at bar, and this is generally true of prosecutions based on the honest services theory. Factual distinctions abound, and much time can be wasted in attempting to compare and distinguish the various scenarios. The more important thing is to try to find the principle of law separating conduct that is a federal crime from conduct that is not. Bloom is addressed to that question. The defendant was a Chicago alderman who, in his capacity as a private attorney, gave a client advice as to how to use a proxy bidder at a tax scavenger sale and thereby avoid a substantial amount of real estate taxes. 149 F.3d at 650-51. One of the government's theories was that this deprived the City of Chicago of Bloom's honest services as an alderman because the City would have received a portion of the unpaid taxes. The government relied on § 1346, which had been enacted in 1988, prior to the tax sale. See id.

The district court dismissed this portion of the indictment, and, on an interlocutory appeal from the dismissal, the Seventh Circuit affirmed. The Court rejected the government's argument that every conflict of interest on the part of an alderman-attorney, such as Bloom, amounts to an indictable offense under § 1346:

The United States seeks to persuade us that Vrdolyak*fn3 establishes the much broader rule that aldermen and other public employees may not do anything in their private lives that acts against the City's interests--but if its rule were that broad, then every city employee would be required to shop exclusively in Chicago in order to maximize its receipts from sales taxes, and would be guilty of a federal felony if he bought a pair of boots through the mail from L.L. Bean.

Id. at 654. The Court went on to say:

Doubtless there is a limiting principle and some conflicts of interest are tolerable; a member of General Motors' board of directors is (legally) entitled to drive a Ford; but it is frightening to contemplate the prospect that the federal mail fraud statute makes it a crime punishable by five years' imprisonment to misunderstand how a state court in future years will delineate the extent of impermissible conflicts. Then we would have a federal common-law crime, a beastie that many decisions say cannot exist. E.g., United States v. Bass, 404 U.S. 336, 348, 92 S.Ct. 515, 30 L.Ed. 2d 488 (1971); United States v. Hudson, 11 U.S. (7 Cranch) 32, 3 L.Ed. 259 (1812); United States v. Reynolds, 919 F.2d 435, 438 (7th Cir. 1990). See also McNally, 483 U.S. at 360, 107 S.Ct. 2875. Courts have applied this no-common-law-crimes principle to mail fraud prosecutions by holding that violations of state-law fiduciary duties do not turn into mail fraud just because the mails are used in the process. "Not every breach of every fiduciary duty works a ...


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