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United States of America v. Brian Hollnagel

September 20, 2011

UNITED STATES OF AMERICA, PLAINTIFF,
v.
BRIAN HOLLNAGEL, BCI AIRCRAFT LEASING, INC., CRAIG PAPAYANIS, JASON R. HYATT, WILLIAM HATAMYAR, JEFFREY MEYER, MARTIN COLLIER, AND ROBERT CARLSSON, DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge:

MEMORANDUM OPINION AND ORDER

Defendants Brain Hollnagel, BCI Aircraft Leasing, Inc, and Craig Papayanis have moved the Court to conduct an evidentiary hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978), and to suppress certain evidence obtained during the execution of a search warrant. For the reasons discussed in detail below, Defendants' motion is denied.

BACKGROUND

On September 8, 2010, a federal grand jury returned a twenty-one count Superseding Indictment charging Defendants Brian Hollnagel, BCI Aircraft Leasing, Inc. ("BCI"), Craig Papayanis, and others with engaging in a fraudulent financing scheme that deprived investors, financial institutions and others of money and property. As described in the Superseding Indictment, Defendant Hollnagel owned BCI and served as its president and chief executive officer. BCI was a privately-owned Illinois corporation that obtained funds from individual and institutional investors to create limited liability corporations ("LLCs") for the purpose of purchasing, selling, and leasing commercial aircraft. In return for their investments, the investors would receive a monthly distribution from the LLC, as well as a share of any profits the LLC received if it sold its aircraft. Defendant Papayanis held various positions at BCI, including managing director and chief financial officer.

The allegations in the Superseding Indictment set forth an elaborate scheme by which Defendant BCI, by and through its officers and others, defrauded financial institutions and individual investors in order to secure funds, fraudulently misrepresented the LLCs' finances to investors, and withheld profits that should have been allocated to the LLCs' investors following the sale of aircraft, retaining them instead for their own benefit. The Superseding Indictment specifically alleges that Defendants (i) deprived investors of profits they should have received following the sale of the commercial aircraft affiliated with their investments, and (ii) lied to investors following those sales about "reinvesting" their investment capital into other commercial aircraft purchases when, in fact, they did no such thing.

The Superseding Indictment alleges that Defendant Papayanis was a vice president at Coast Business Credit where he acted "as the loan officer on term loans and a line of credit made to BCI totaling over $40 million." While employed at Coast Business Credit, BCI and Hollnagel allegedly bribed Papayanis by offering him employment at BCI. This bribe allegedly was in exchange for Papayanis's assistance to help BCI and Hollnagel obtain the line of credit from Coast Business Credit. Shortly after Papayanis provided BCI and Hollnagel assistance in obtaining their line of credit, Papayanis began working for BCI.

On April 3, 2007, Special Agent Nicholas Zagotta (the "Affiant") of the Internal Revenue Service -- Criminal Investigation Division ("IRS-CID") submitted an Application and Affidavit for Search Warrant (the "Affidavit") to United States Magistrate Judge Morton Denlow. The Search Warrant sought permission to search the premises known as 330 North Wabash Avenue, Suite 2801 in Chicago, Illinois. This location is BCI's business office space.

Defendants argue that the information presented to the Magistrate Judge in support of the search warrant was either incorrect or materially misleading and incomplete, and that the Affiant had information that would have made the application/affidavit both correct and complete. Defendants contend that if the Affiant had included this information, probable cause would not have existed to issue the search warrant "of the scope involved here." Defendants ask the Court for a Franks hearing.

LEGAL STANDARD

In Franks v. Delaware, 438 U.S. 154, 98 S.Ct. 2674, 57 L.Ed.2d 667 (1978), the Supreme Court held that intentionally or recklessly submitting false statements in an affidavit submitted in support of a search warrant violates the Fourth Amendment. The affidavit, however, has a "presumption of validity." Id. at 171. In order to obtain a Franks hearing, Defendants must establish that the Affiant knowingly, intentionally, or with reckless disregard for the truth made a false statement in the affidavit submitted in support of the warrant, and that the false statement is necessary to the finding of probable cause. Id. See also United States v. Rickmon, __ F.3d __, 2011 WL 3862747 at *4 (7th Cir. Sept. 1, 2011). A hearing is also warranted if the affiant intentionally or recklessly omitted material information from the affidavit in support of the search warrant. United States v. Carmel, 548 F.3d 571, 577 (7th Cir. 2008). The omitted facts "must be 'material' to the probable cause determination." United States v. Norris, 640 F.3d 295, 302 (7th Cir. 2011). See also United States v. McDuffy, 636 F.3d 361, 363 (7th Cir. 2011) ("an omitted detail is material only if its inclusion would upset a finding of probable cause"). As the Seventh Circuit has made clear, the "standard is not whether the affidavit contains a false statement, but whether the affiant knew or should have known that a statement was false." United States v. Schultz, 586 F.3d 526, 531 (7th Cir. 2009), citing United States v. Jones, 208 F.3d 603 (7th Cir. 2000).

When a confidential informant provides the basis for information in the supporting affidavit for a search warrant, "[i]t is not enough to show that an informant lied to the government officer, who then included those lies in the complaint." United States v. Johnson, 580 F.3d 666, 670 (7th Cir. 2009), citing United States v. McAllister, 18 F.3d 1412, 1417 (7th Cir. 1994). "Instead, the evidence must show that the officer submitting the complaint perjured himself or acted recklessly because he seriously doubted or had obvious reason to doubt the truth of the allegations." Johnson, 580 F.3d at 670, citing Jones, 208 F.3d at 607; United States v. Williams, 737 F.2d 594 (7th Cir. 1984). Furthermore, "conclusory, self-serving statements are not enough to obtain a Franks hearing." Id. at 671. Defendants' burden in meeting this standard is "substantial," and "Franks hearings are rarely required." Johnson, 580 F.3d at 670, citing United States v. Maro, 272 F.3d 817, 821 (7th Cir. 2001). In meeting their burden, Defendants "must offer direct evidence of the affiant's state of mind or circumstantial evidence that the affiant had obvious reasons for omitting or falsifying facts." United States v. Benabe, 2011 WL 3624961 at *11 (7th Cir. Aug. 18, 2011), citing United States v. Souffront, 338 F.3d 809, 822 (7th Cir. 2003).

The Seventh Circuit has also held that defendants cannot meet the high standard of a Franks hearing by arguing that the police could have done more work on a case. Johnson, 580 F.3d at 671, citing United States v. Swanson, 210 F.3d 788, 791 (7th Cir. 2000). "Even if the police's failure to corroborate the informant's claims was negligent, 'a little negligence-actually even a lot of negligence-does not the need for a Franks hearing make.'" Id.

ANALYSIS

I. The Affidavit

On April 3, 2007, Special Agent Zagotta executed his Affidavit in support of the search of BCI's premises before the Magistrate Judge. His 21 page affidavit represented that the IRSCID and the Federal Bureau of Investigation ("FBI") were investigating Defendants Hollnagel and BCI. Based on the investigation, his affidavit represented that probable cause existed to believe that Defendant Hollnagel had committed violations of 8 U.S.C. §§ 1341, 1343, 1346 and 2, and 26 U.S.C. § 7206(1). He further noted that the affidavit was "submitted for the limited purpose of establishing probable cause to support the search warrant" and did not include details of all aspects of the investigation. (R. 181-1, Affidavit ¶ 4.) Part of the information in the affidavit was based on interviews of Cooperating Witness-1 ("CW-1"), BCI's former Senior Vice President of Finance, who worked at BCI from approximately February 2006 to December 2006. CW-1 began cooperating with the government in October 2006. Some of the information also came from Investor One whose family member had invested in BCI Prime Investment 2004-05. (Id. at ¶ 36.) BCI Prime Investment 2004-05 was an LLC formed in 2004 for the purpose of acquiring an aircraft. (Id. at ¶ 33.) In addition, the affidavit contained information obtained by law enforcement agents involved in the investigation who had conducted interviews and reviewed extensive documentation, including BCI's website, tax records, and court documentation.

Based on his review of the evidence and his training and experience, Agent Zagotta represented that probable cause existed "to believe that Hollnagel, through BCI, is involved in a scheme to defraud investors and BCI of money, property and their intangible right to Hollnagel's honest services as evidenced by the BCI [Prime] 2004-05 investment, the note issued by Investor One and Hollnagel's personal use of corporate assets. Moreover, there is probable cause to believe that Hollnagel has ...


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