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United States v. Wheeler

September 2, 2008


Appeal from the United States District Court for the Northern District of Indiana, South Bend Division. No. 06 CR 59-Robert L. Miller, Jr., Chief Judge.

The opinion of the court was delivered by: Cudahy, Circuit Judge.


Before CUDAHY, KANNEand SYKES, Circuit Judges.

A jury convicted James Wheeler of embezzling, stealing or otherwise converting employee contributions to his company's health insurance and 401(k) funds in violation of 18 U.S.C. §§ 669 and 664. The district court sentenced him to concurrent 63 and 60 month sentences and three years' supervised release. On appeal, Wheeler raises two challenges to his conviction. First, he contends that the district court erred in defining the mens rea element of the offense under § 669. He also argues that the court admitted impermissible prior act evidence in violation of Federal Rule of Evidence 404(b). In addition to challenging his conviction, Wheeler challenges his sentence on the grounds that the district court imposed an enhancement that lacked evidentiary support. We affirm Wheeler's conviction and sentence.

I. Background

James Wheeler is a former paper salesman with an entrepreneurial streak. His enterprising spirit motivated him to invest in several financially troubled printing companies. By his account, he hoped to turn the companies around and make a profit. A more cynical view, advanced by the government, is that he used at least one of the companies as a personal piggybank, paying himself large managerial fees while the struggling company failed to make good on its debts and obligations to its employees. Wheeler's conduct with respect to that company, Gallery Graphics, was the subject of the criminal prosecution leading to this appeal.

Wheeler's foray into the corporate turnaround business began in 2001 when he purchased Hiney Printing, a family-run business in Akron, Ohio. In April 2002, Wheeler leased Fortran Printing (Fortran), another printing company facing a doubtful financial future. That same year, Wheeler and his business partner, James Lundquist, approached First Business Capital (FBC) seeking financing to purchase Peterson Printing, a medium-sized family-operated company in South Bend, Indiana. Wheeler and Lundquist reached an agreement with FBC under which Wheeler would personally guarantee $900,000 of a $3,000,000 line of credit from FBC and would contribute $200,000 of paper stock as capital to Peterson Printing. After the Peterson Printing sale closed in June 2002, Wheeler and Lundquist became managers of the new venture, which they renamed Gallery Graphics South Bend (Gallery Graphics). The day-to-day operations at Gallery Graphics were handled by its president, Michael Kile, and its chief financial officer (CFO), Larry Parks. The financial situation of Gallery Graphics declined quickly after the sale to Wheeler. Wheeler had pledged to provide $200,000 of paper stock pursuant to his agreement with FBC, but he never did so. He withdrew $150,000 from Gallery Graphics less than one month after purchasing the company, ostensibly in order to purchase paper for the company. Gallery Graphics never received the paper. The company also paid him $148,000 in management fees and $28,000 to pay legal bills and credit card expenses. In early 2003, FBC stopped funding Gallery Graphics due to Wheeler's repeated failure to fulfill promises to provide money and paper to the company.

Beginning in December 2002, as Gallery Graphics' financial situation grew increasingly precarious, Wheeler became more involved in the day-to-day operations of the company, directing Kile and Parks as to which bills to pay. In early 2003, Wheeler directed Gallery Graphics not to pay either the health or the retirement plan. But employees who participated in the company health plan authorized Gallery Graphics to withhold contributions from their paychecks. Likewise, the contributions of employees who participated in the company's 401(k) plan were automatically withheld from their paychecks. These funds were placed in Gallery Graphics' general operating account and were supposed to be forwarded by check to the insurance and retirement plans. Starting in 2003, however, the funds that were withheld from employees' paychecks to pay the premiums for those plans were diverted for other purposes.

Based on the company's nonpayment of premiums, the health insurance company that carried the health insurance plan cancelled the company's coverage in May 2003, retroactive to January 2003. In total, approximately $42,000 of employee health insurance contributions and $11,000 of employee 401(k) contributions that had been withheld from employees' paychecks never reached the coffers of the respective plans. By late spring of 2003, Gallery Graphics was on its last legs. On May 12, 2003, Wheeler wired $100,000 to the company to help fund its final payroll. Two days later, on May 14, the health insurance company sent employees a notice stating that their insurance coverage had been cancelled. Around this time, FBC installed a receiver and began liquidating Gallery Graphics' assets.

In May 2006, Wheeler was indicted for embezzling his employees' premiums. Count I of the indictment charged him with knowingly and willfully embezzling $42,020.26 in health insurance premiums in violation of 18 U.S.C. § 669. Count II charged him with willfully embezzling $11,702.53 of his employees' 401(k) contributions in contravention of 18 U.S.C. § 664. Wheeler's jury trial began on September 18, 2006. During the trial, the government introduced evidence relating to Wheeler's nonpayment of employee contributions at Fortran. The evidence showed that when Wheeler was in charge at Fortran, insurance premiums were deducted from employees' paychecks but were never remitted to the insurance plan, resulting in cancellation of coverage. Ultimately, Fortran went into receivership. The court permitted the introduction of this evidence (the Fortran evidence) over defense counsel's objection. After a five-day trial, the jury convicted Wheeler on both counts.

At sentencing, Wheeler objected to the amount of loss calculation in the Pre-Sentence Investigation Report (PSR). The amount of loss represented the sum of the unpaid insurance premiums, unpaid 401(k) contributions and medical claims that were incurred by employees but went unpaid due to the cancellation of their health insurance coverage. The PSR included in the loss amount all unpaid medical claims from the time Wheeler acquired Gallery Graphics in June 2002 through June 2003. Wheeler objected to the inclusion of claims incurred by employees in June 2003 on the grounds that the company "was dissolved in late April, early May 2003." The government responded to his objection by suggesting that the court use May 12, 2003 as the cut-off date. That is, the government urged the court to include all unpaid claims that arose prior to the date Wheeler funded the company's final payroll. The court accepted the government's recommendation as to the cut-off date. Using May 12, 2003 as the cut-off date eliminated $3,073 from the amount of loss figure in the PSR, yielding a total loss of $210,902.84. Under the Sentencing Guidelines, a loss in excess of $200,000 corresponds to a twelve-level increase in a defendant's base offense level. U.S.S.G. § 2B1.1. After accounting for adjustments to Wheeler's base offense level, the district court concluded that Wheeler's total offense level was 26. When considered alongside a criminal history category of I, his offense level yielded a guideline range of 63 to 78 months' incarceration. After reviewing the sentencing factors set forth in 18 U.S.C. § 3553(a), the court sentenced Wheeler to 63 and 60 months on Counts I and II respectively, to be served concurrently, as well as three years' supervised release and restitution of $210,902.84. Wheeler filed a timely notice of appeal on March 28, 2007.

II. Analysis

Wheeler raises three challenges to his conviction and sentence. First, he argues that the district court erred in failing to instruct the jury that conduct done "knowingly and willfully" under 18 U.S.C. ยง 669 must be done in contravention of a known legal duty. Second, he contends that the district court abused its discretion when it permitted the government to introduce the Fortran evidence. Finally, Wheeler argues that the court's ...

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