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United States v. Hollnagel

United States District Court, Seventh Circuit

September 24, 2013

UNITES STATES OF AMERICA, Plaintiff,
v.
BRIAN HOLLNAGEL and BCI AIRCRAFT LEASING, INC., Defendants.

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge.

On March 14, 2012, a jury convicted Defendants BCI Aircraft Leasing, Inc. ("BCI") and Brian Hollnagel ("Mr. Hollnagel") (collectively, "Defendants") of wire fraud and obstruction of justice - Counts One, Two, Three, Four, Five, Six, and Twelve of the Second Superseding Indictment. The Second Superseding Indictment included a claim for forfeiture under 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c). The government and Defendants disagree about how much money Defendants must forfeit in connection with their convictions. The Court conducted a hearing on forfeiture and the appropriate loss amount, which included four witnesses and numerous exhibits containing thousands of pages. For the reasons explained below, the Court concludes that no funds are subject to forfeiture.

BACKGROUND

Mr. Hollnagel is the owner, president, and chief executive officer of BCI. Defendants' convictions stem from loans and investments they obtained in conjunction with BCI's business of buying, selling, and leasing commercial airplanes. In addition to obstruction of justice, the jury convicted Defendants of a scheme to defraud investors, financial institutions, and others. Specifically, as detailed in the Court's Opinion denying Defendant's motion for judgment of acquittal and motion for new trial, incorporated here by reference (R. 595, Op.), the evidence at trial showed that Defendants made misrepresentations to financial institutions and investors to obtain funding for BCI's operations, and failed to invest certain investors' money in the specific limited liability company and/or aircraft purportedly associated with their investment. The deal Defendants offered to investors consisted generally of the following: (1) investors would invest in airplanes via an investment LLC based on the promise that BCI would purchase particular planes on lease to airlines; (2) BCI would pay investors a monthly preferred return; and (3) BCI would pay investors a share of the profits from the sale of the airplanes. (Op. at 31.) The government proved at trial that Defendants defrauded investors by raising funds for investment LLCs where: (1) BCI never purchased the planes, or (2) the investors never held any interest in the planes. ( Id. at 31-32.) The Court discusses facts regarding each particular investment below as they pertain to the forfeiture calculation.

ANALYSIS

28 U.S.C. § 2461(c), together with 18 U.S.C. § 981(a)(1)(C), allows for criminal forfeiture under the mail and wire fraud statutes. See U.S. v. Venturella, 585 F.3d 1013, 1016 (7th Cir. 2009); see also U.S. v. Black, 526 F.Supp.2d 870, 877-78 (N.D. Ill. 2007) (collecting cases). Pursuant to 18 U.S.C. § 981(a)(1)(C), the government can seek forfeiture of any property, real or personal, which constitutes or is derived from proceeds traceable to Defendants' wire fraud. Here, the government has alleged that the "interests subject to forfeiture... include but are not limited to... all proceeds from the in excess of $10 million raised and caused to be raised by defendant BCI from investors." (R. 370, Indict. at 47-48.) Defendants contend, however, that there is nothing to forfeit because they did not retain any profits from the fraud, in part because Defendants returned each investor's original investment, and made additional monthly distributions to the investors.

I. The Applicable Meaning of "Proceeds"

Because Section 981(a)(1)(C) states that property which "constitutes or is derived from proceeds traceable to" the fraud is subject to forfeiture, the Court must apply one of the definitions of "proceeds" contained in Section 981(a)(2). The Court previously addressed this issue in a July 16, 2013 order, after reviewing briefing by the parties, and concluded that the definition of "proceeds" contained in Section 981(a)(2)(B) applies here.

A. Section 981(a)(2)(B) Applies

As the Court explained in its previous order, the definition of "proceeds" contained in Section 981(a)(2)(A) ("Provision A") applies to cases "involving illegal goods, illegal services, unlawful activities, and telemarketing and health care fraud schemes." 18 U.S.C. § 981(a)(2)(A). Provision A "encompasses inherently unlawful activities, such as robbery, that are not captured by the words illegal goods' or illegal services.'"[1] (R. 597 at 2) (citing U.S. v. Mahaffy, 693 F.3d 113 (2d Cir. 2012); U.S. v. Nacchio, 573 F.3d 1062, 1088-89 (10th Cir. 2009); In re 650 Fifth Ave. & Related Prop., 777 F.Supp.2d 529, 550-51 (S.D.N.Y. 2011); U.S. v. Kalish, No. 06-cr-656, 2009 WL 130215, at *6-7 (S.D.N.Y. Jan. 13, 2009)); see also U.S. v. Contorinis, 692 F.3d 136, 145 n. 3; U.S. v. Exec. Recycling, Inc., ___ F.Supp.2d ___, No. 11-cr-003760WJM, 2013 WL 3010821, at *17-18 (D. Colo. Jun. 17, 2013)). By comparison, Section 981(a)(2)(B) ("Provision B") applies to cases "involving lawful goods or lawful services that are sold or provided in an illegal manner." 18 U.S.C. § 981(a)(2)(B). Consequently, the Court previously held that Provision B provides the applicable definition of "proceeds" in this case because Defendant's fraudulent financing scheme was not an inherently unlawful activity, but rather involved lawful goods or services sold or provided in an illegal manner.[2] ( Id. at 3 (citing Mahaffy, 693 F.3d at 138 ("the proper measure of forfeiture... is net, not gross gain")); see also Nacchio, 573 F.3d. at 1088-89 (requiring the defendant to forfeit the net profits rather than the gross proceeds of his insider trading offenses); Exec. Recycling, 2013 WL 3010821 at *18 (applying Provision B because the predicate act - electronics recycling - was not inherently unlawful, rather the defendants conducted their recycling business in an unlawful manner "by misrepresenting to customers where and how their electronic materials would be handled and failing to obtain the required export documentation")).

Because Provision B applies here, "proceeds' means the amount of money acquired through the illegal transactions resulting in the forfeiture, less the direct costs incurred in providing the goods and services." 18 U.S.C. § 981(a)(2)(B). The government bears the burden of establishing the property subject to forfeiture by a preponderance of the evidence. See U.S. v. Funds in the Amount of 574, 840, No. 12-3568, 2013 WL 2507635, at *4 (7th Cir. Jun. 11, 2013) ("The burden of proof is on the government to establish, by a preponderance of the evidence, that the property is subject to forfeiture.") (citing 18 U.S.C. § 983(c)(1)) ( U.S. v. Funds in Amount of Thirty Thousand Six Hundred Seventy Dollars, 403 F.3d 448, 454 (7th Cir. 2005); U.S. v. $92, 203.00 in U.S. Currency, 537 F.3d 504, 508-09 (5th Cir. 2008)); U.S. v. Ali, 619 F.3d 713, 720 (7th Cir. 2010); see also Seventh Circuit Pattern Crim. Jury Instrs. at 264, 18 U.S.C. §981(a)(1)(C) Forfeiture (stating that the government must prove each element by a preponderance of the evidence). Provision B, however, requires Defendants to prove any direct costs warranting a reduction of the forfeiture amount. See 18 U.S.C. § 981(a)(2)(B).

B. The Parties' Interpretations of Provision B

The government and Defendants offer wholly divergent theories on how to calculate the proceeds subject to forfeiture pursuant to Provision B. The government contends that the "lawful goods or lawful services" which Defendants "sold or provided in an illegal manner" are the "securities that purportedly offered ownership of LLCs that owned aircraft, when in fact such securities offerings were fraudulent." (R. 601, Amend. Mot. at 3.) Under the government's theory, the only direct costs which the Court should deduct are commissions which BCI paid to Robert Carlsson and others to raise funds from investors. ( Id. at 4.) As a result, the government claims that Defendants should forfeit "all of the fraudulently-raised investor proceeds of $27, 406, 368, minus the $1, 876, 178 in commissions paid to raise the funds, and the assets that can be traced to those proceeds, " totaling $76, 612, 704.[3] (Amend Mot. at 2-3; Gx Net Proceeds.) According to the government, "distributions to investors were not direct costs of fraudulently raising the financing, but instead were sent to lull the investors into falsely believing that they owed a tangible investment that was secure." (Amend. Mot. at 5.)

Defendants argue that BCI has no net profits after paying investors and its costs, and therefore, has nothing to forfeit. (R. 580, Resp. at 15.) According to Defendants, the "security" which constitutes the lawful good or service which Defendants provided was

an investment that came with a bundle of attributes, including arguendo that the LLC owned a direct interest in one or more particular aircraft and that rent payments would support distributions every month, but also including the promise that monthly distributions would be paid, that capital would be returned, that BCI would manage the investments as it saw fit in order to generate those returns, that investors would have no personal liability for financing, maintenance costs and the like, and that BCI could sell or exchange the aircraft if it thought it appropriate to do so. (R. 602, Amend. Resp. at 3.) Defendants argue that the direct costs of providing these securities include the "costs of operation, financing and disposition of aircraft, " as well as the payments BCI made to the investors in the form of monthly distributions or a repurchase of their capital. ( Id. at 2, 4.) Defendants' calculus results in direct costs that are greater than the receipts BCI received relating to these investments. As a result, Defendants argue that there are no proceeds subject to forfeiture.

The Court agrees with Defendants that, pursuant to Provision B, the relevant "proceeds" here are the net profits which Defendants obtained from the investment transactions at issue, which include costs beyond just the commissions related to the acquisition of the investor capital. Indeed, forfeiture, as a general matter, is a gain-based analysis, which "seeks to disgorge any profits that the offender realized from his illegal activity." U.S. v. Webber, 536 F.3d 584, 603 (7th Cir. 2008); see also U.S. v. Segal, 495 F.3d 826, 839 (7th Cir. 2007); U.S. v. Genova, 333 F.3d 750, 761 (7th Cir. 2003); U.S. v. Emerson, 128 F.3d 557, 567 (7th Cir. 1997). Further, the text of Provision B defines proceeds in terms of net gain to a defendant by deducting direct costs incurred. See 18 U.S.C. § 981(a)(2)(B); see also U.S. v. Contorinis, 692 F.3d 136, 146-47 (2d Cir. 2012). Provision A, in contrast, defines proceeds as "property of any kind obtained directly or indirectly as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and is not limited to the net gain or profit realized from the offense. " 18 U.S.C. § 981(a)(2)(A) (emphasis added). Provision B does not include such language. See 18 U.S.C. § 981(a)(2)(B). Notably, the Supreme Court has stated that the meaning of proceeds in Provision B is "profits" rather than receipts. U.S. v. Santos, 553 U.S. 507, 512, 128 S.Ct. 2020, 2024 (2008). The question becomes what amount of profits BCI made from the transactions at issue.

II. Applying Provision B to the Transactions at Issue Here

Contrary to the government's contention, because Provision B defines proceeds as profits rather than receipts, it is not appropriate to calculate proceeds here based on a snapshot in time of the moment at which BCI obtained money from investors. The government's calculation of proceeds, therefore, misguidedly includes only the amount of money that each investor invested with BCI and the costs BCI paid to obtain those investments, namely commissions, rather than considering the entire duration of each transaction, including the amounts repaid to investors. The government's calculation also includes additional assets which it claims can be traced to those proceeds (the "Additions"). (Amend Mot. at 2-3; Gx Net Proceeds.)

To adequately calculate proceeds, the government needed to analyze each investment transaction from - to borrow a phrase from the government - "womb to tomb, " which Defendants attempted to do. Without such a comprehensive analysis, the government's calculation does not capture the entirety of the transactions at issue. Indeed, the government did not charge Defendants with static conduct. Rather, the government charged - and proved - a fraudulent financing scheme that included conduct over many years, beginning with misrepresentations that occurred at the time when Defendants obtained funds from investors and continuing as Defendants misled investors every month regarding where their distributions came from and whether the LLCs had acquired certain aircraft. ( See Op.) Consequently, as explained further below, the government's calculation of proceeds for each transaction based on limited snapshots in time is improperly limited.[4]

Although Defendants provided the Court with a purportedly complete "womb to tomb" analysis of the transactions, Defendants contend that the Court need not delve into each line item of their analysis, nor reach the Additions which the government proffers. Specifically, Defendants contend that, if the Court accepts that the distributions to investors and the return of their capital contributions - both of which are not disputed - are direct costs, its analysis can end there because those costs are greater than the receipts - namely the investor contributions - which the government proved.[5] The Court agrees. Defendants have undisputedly returned to each investor all of his or her capital - plus distributions - and, therefore, can deduct as costs more money than the government has proven Defendants obtained as receipts.[6]

The government contends that the Court should not deduct the funds returned to the investors because the return of the investors' contributions was "restitution" by Defendants after they learned of the criminal investigation in March 2007. (Amend. Mot. at 5.) The forfeiture statute at issue, however, does not view this timing as material. Rather, Provision B allows Defendants to deduct any and all direct costs "incurred in providing the goods or services." 18 U.S.C. §981(a)(2)(B). Indeed, as discussed above, Provision B targets the profits that Defendants enjoyed, not net gains or intended losses. Defendants returned the investors' investments over time while running BCI. In addition, Defendants returned some of the funds at issue here before they learned on the investigation.

Furthermore, the government's reliance on U.S. v. Emerson, 128 F.3d 557 (7th Cir. 1997), to support its contention that Defendants' repayment of investors "was after-the-fact restitution, not a direct cost' incurred" is misguided.[7] (Amend. Mot. at 5.) First, these payments to investors were part of the transactions with these investors for purposes of the forfeiture analysis. Indeed, as discussed below, Defendants promised that they would pay the investors distributions and return their capital, and they undisputedly did. Although Defendants did not pay all of the investors in the manner in which they promised because the funds did not stem from rental payments on particular aircraft as Defendants had represented, Defendants still incurred the cost of paying the investors as promised. These payments, therefore, constitute a deductible cost of the fraudulent transactions. Second, in Emerson, the Seventh Circuit addressed the issue of whether a district court can "reduce the amount of restitution by the value of the forfeited property." 128 F.3d at 566. Here, the government has not sought restitution and has conceded that restitution is not appropriate because Defendants repaid all of the money. Emerson, therefore, is inapposite to the forfeiture question here.

Moreover, as explained below regarding each transaction, even if the Court analyzed the transactions further than Defendants contend is needed, namely by considering the Additions the government seeks and other evidence adduced at the hearing, the result would be the same - no funds subject to forfeiture. The Court addresses each transaction in turn.

A. BCI 2002-1, LLC-KLM/Bridgeview Bank

The government seeks forfeiture of $7, 852, 882 related to fraud inflicted upon BCI 2002-1, LLC investors, known as the KLM transaction. (Gx Net Proceeds; Amend. Mot. at 6.) As part of this forfeiture amount, the government seeks both the $2, 850, 000 of loan proceeds Defendants received from Bridgeview Bank and the $5, 645, 000 that Defendants raised from BCI 2002-1, LLC investors. (Amend. Mot. at 7.) Specifically, Defendants raised $4, 950, 000 from BCI 2002-1, LLC investors before BCI obtained the loan from Bridgeview Bank. The evidence at trial showed that BCI pledged the BCI 2002-1, LLC's investors' interests to Bridgeview as collateral to obtain a $2, 850, 000 loan for BCI's own ...


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