decided: January 23, 1995; As Amended January 23, 1995.
Appeal from the United States District Court for the Middle District of Pennsylvania. (D.C. Criminal Nos. 92-00218-01 and 02).
Before: Sloviter, Chief Judge, Becker, Stapleton, Mansmann, Greenberg, Hutchinson, Scirica, Cowen, Nygaard, Alito, Lewis, Roth, McKee and Garth, Circuit Judges.
Defendants Darus Zehrbach and Alex Mervis appeal from jury verdicts convicting them each of two counts of bankruptcy fraud and one count of conspiracy to commit bankruptcy fraud, in violation of 18 U.S.C. § 152 (1988) and 18 U.S.C. § 371 (1988). In their appeals, Zehrbach and Mervis asserted two grounds for reversal. First, they argued that the district court erred in instructing the jury that the government need not prove, as an essential element of the crime, that they knew their actions to be illegal. Second, they asserted that comments made by the prosecutor in his closing argument, regarding two of the defense witnesses, triggered a rule of per se reversal under United States v. DiLoreto, 888 F.2d 996 (3d Cir. 1990). Their appeals were first heard by a panel of this court. On the basis of the panel decision, Zehrbach and Mervis petitioned for rehearing in banc, which was granted as to both issues. For the reasons that follow, we will overrule our ruling in DiLoreto, insofar as it established a per se rule,*fn1 and we will affirm the convictions.
In the late summer or fall of 1989, appellant, Darus Zehrbach, a West Virginia businessman doing business under the name of Consolidated Assets Management Corporation ("CAMCORP"), formulated a plan to purchase the assets of bankrupt aircraft manufacturing companies. Zehrbach became particularly interested in Taylorcraft Aviation Corporation ("Taylorcraft"), a company located in Lock Haven, Pennsylvania, that was in the process of a Chapter 7 liquidation proceeding.*fn2 Zehrbach retained the Pittsburgh investment banking firm, Drizos Investments, Inc., to facilitate the acquisition by locating other investors and securing financing.
Appellant, Alex A. Mervis, a stock broker and a licensed pilot, had recently become an employee at Drizos Investments. Because of his aviation background, he was assigned to Zehrbach's project. Steven Drizos supervised Mervis's work on this assignment. Robert Smith of Capital Resources Group, a firm affiliated with Drizos Investments, was brought in to help with financing. Eventually, Mervis located John Polychron, a North Carolina investor, who agreed to become a limited partner in an association in which Zehrbach was to be the general partner.
The bankruptcy trustee for Taylorcraft was Charles Szybist, an attorney in Williamsport, Pennsylvania. Szybist contacted a number of potential bidders in an attempt to generate an offer that would be substantial enough to create a base for aggressive bidding. In September 1989, Szybist received a bid of $155,000 from Leander Research, Manufacturing and Distributing, Inc. ("Leander"). Using this as his base, Szybist notified creditors and other parties in interest of the offer, inviting higher bids to be submitted by October 23, 1989. The notice provided that Leander and all other higher, qualifying bidders would be permitted to participate at a final private auction to be held on October 30, 1989.
Three new parties, including Zehrbach through CAMCORP, entered bids. T. Chester Baker made a bid of $156,000; Starman Brothers Auctions bid $160,000; and CAMCORP bid $165,000. CAMCORP's bid had been agreed upon at a joint meeting between Zehrbach, Polychron, Drizos, Smith, and Mervis. Because the names of the bidders were released, the Zehrbach group was in a position to contact the other bidders. Zehrbach instructed Mervis to negotiate a "buy-out" of their bidding positions. Baker, for reasons unrelated to the case, lost interest in the acquisition. The other parties remained serious. According to Mervis, he did not hesitate to follow Zehrbach's instructions because Zehrbach was a bankruptcy expert who "did this all of the time."
Steven Starman, of Starman Brothers Auctions, testified at trial that he would have bid up to "$200,000 plus" for Taylorcraft. Appendix ("App.") at 189. On October 25, Starman received a call from Mervis who asked what it would take to keep Starman out of the bidding process. Starman agreed to withdraw from the bidding for a payment of $40,000, with $10,000 to be paid up-front and the remainder by January 1990. A draft agreement was sent from Mervis's office at Drizos Investments to Starman for his signature and return. The document mischaracterized the nature of the payment as made "in return for services renderd [sic]." Starman also received a form of notice that he was to sign, have notarized, and send to the bankruptcy Judge, informing the bankruptcy court of his withdrawal from the bidding process. Upon receiving these documents, Starman consulted his attorney, David Buelt, a specialist in trusts and estates, who redrafted the agreement to state that Starman Brothers Auctions was being paid to forgo its right to bid at the October 30 sale of Taylorcraft's assets. Steven Starman did not question Buelt about the legality of the agreement but merely expressed concerns about its enforceability. The parties executed the amended agreement, and, once Starman had received the initial $10,000 by wire transfer, he telephoned Szybist to inform him that he would no longer be participating in the bidding for Taylorcraft.
Leander Eckard, the president of Leander and the only other potential bidder, testified at trial that he would have been willing to bid up to approximately $250,000 for the purchase of Taylorcraft. App. at 179. Sometime shortly after the October 23 close of bidding, Mervis had contacted Eckard to discuss how much it would cost to purchase his bidding position. Although at first Eckard was not interested, he began to reconsider his position after he encountered difficulty in obtaining financing for the potential acquisition. Eckard's initial request was for a payment of $100,000, but Zehrbach instructed Mervis to negotiate a lower figure. On October 26, Eckard and Mervis agreed on a $50,000 fee with $30,000 payable immediately and the remainder covered by a promissory note and security in one of the Taylorcraft airplanes. Eckard had planned to fly from Seattle, Washington, to visit the Taylorcraft plant the next day, October 27, the last business day before the auction on October 30. He agreed to meet Mervis at the Pittsburgh airport to finalize the bid buy-out.
To document the agreement with Eckard, Mervis contacted Charles Vollmer, a Pittsburgh attorney. Vollmer had worked with Drizos Investments in the past. Mervis and Vollmer met at 7:30 a.m. on October 27. Vollmer prepared three documents before departing for a 10:00 a.m. appointment. These documents were (1) a Letter of Intent for the limited partnership between Zehrbach and Polychron, which had not yet been formally created; (2) a letter to Polychron on Vollmer's firm letterhead with instructions on making the $30,000 wire transfer to Eckard; and (3) a bid buy-out agreement reflecting the terms of the negotiations between Mervis and Eckard. Like the revised agreement with Starman, the bid buy-out agreement stated that, in exchange for the payment, Leander "agreed to sell to TAC [Taylorcraft Acquisition Corporation, Zehrbach's group] all of its rights . . . [with regard to its bid for Taylorcraft] and, further, agreed not to participate either in its own right or through third parties in the bidding process."
At the time he drafted the documents, Vollmer knew very little about the transaction and had not conducted any legal research on the issues. After drafting the bid buy-out agreement, Vollmer expressed his uneasiness about the transaction to Mervis, stating that he "hoped this thing [was] legal."
During the afternoon of October 27, after Vollmer was able to consult two other attorneys and to do some legal research, he faxed a letter to Mervis and Smith explaining:
Under the terms of the Agreement, Taylorcraft Acquisition Corporation would buy out Leander's "position" in the Bankruptcy Court. Prior to this morning, I had thought that the "position" that was being bought out, if indeed there was one being bought out, was that of a secured creditor. I simply remarked to Alex that, "I hope this [is] legal."
Mr. Vollmer then quoted, verbatim, the language of 18 U.S.C. § 152, the statute under which Zehrbach and Mervis were later charged. Vollmer's letter concluded:
At this point, I must advise you that in my opinion, there is a possibility that this action violates these criminal provisions. Unless this matter is somehow reworked so that it is not a possible violation, such as a possible joint venture with Leander, I cannot recommend that you participate any further. Please advise.
In the interim, after meeting with Vollmer, Mervis had gone to the airport to meet Eckard. Mervis gave Eckard the buy-out agreement, which Zehrbach had signed, and a $30,000 certified check. Mervis assured Eckard of the legality of the transaction, stating that his attorney had approved it. Eckard had already called Szybist to inform him that he would not be coming to view the Taylorcraft plant or to place a bid.
Upon Mervis's return to his office that afternoon, he was informed of the Vollmer letter which questioned the legality of the bid buy-out scheme. Vollmer, Mervis, and Smith then held a conference call with Zehrbach to inform him of Vollmer's concerns. Zehrbach dismissed Vollmer's opinion, suggesting that Vollmer did not know what he was talking about. After Drizos and Smith requested a second legal opinion, Zehrbach contacted his West Virginia attorney, James D. Crane, who had bankruptcy experience. Crane affirmed the legality of the transaction, but he characterized it as a joint venture that had merged bidding interests. Crane was never informed that two bidders had been paid to withdraw their bids.
After both Starman and Leander withdrew from the bidding process just days before the auction was to occur, Szybist called Mervis and spoke of his concern that the other bidders "were having some difficulties." In response, Mervis suggested not that there had been payments to withdraw, but rather that "we had formed a joint venture and we had merged our bidding interest." Szybist decided to postpone the auction from October 30 to November 15 and to make it public rather than private. At the auction, the Zehrbach-Polychron group was the only bidder. Szybist accepted its bid of $165,000.
Shortly after the final sale, Szybist contacted the FBI about the circumstances surrounding the withdrawal of the Starman and Leander bids. After an FBI investigation, Mervis and Zehrbach were indicted, tried, and convicted of one count of conspiracy to commit bankruptcy fraud, in violation of 18 U.S.C. § 371,*fn3 and of two counts of bankruptcy fraud, pertaining to actions with regard to Starman and Eckard, in violation of 18 U.S.C. § 152.*fn4 Specifically, Zehrbach and Mervis were charged with conspiring to pay two bidders for the assets of Taylorcraft to refrain from bidding in a bankruptcy auction, with actually paying the bidders to refrain from bidding, and with purchasing the assets as the sole bidders.
Because the defendants did not substantively contest the actions attributed to them, the sole issue at trial was that of intent. Mervis and Zehrbach defended themselves on the basis of their good faith belief that they had done nothing illegal. Zehrbach's position, as stated by his counsel, was that Zehrbach had made a mistake, just as the three attorneys involved in the transaction, Buelt, Vollmer, and Szybist, had made a similar mistake, and that Zehrbach could not have had fraudulent intent. Mervis testified that he was working on a joint venture to merge the bidding interests. Mervis also emphasized that Drizos and Smith had supervised his involvement in the project. Mervis's counsel argued that because Mervis was acting in good faith to form a joint venture, he had no intention to deceive. The government contended, on the other hand, that Zehrbach and Mervis knowingly paid the other bidders to withdraw from the auction, thereby keeping down the price paid for the Taylorcraft assets and, as a consequence, cheating the creditors of Taylorcraft and the bankruptcy trustee.
This question of good faith and knowledge of the law became an issue in the formulation of the jury charge. The district Judge proposed first to list the essential elements of the substantive offense and to follow that with a detailed Discussion of the requirements that the acts be performed "knowingly" and "fraudulently." He would then, as Zehrbach and Mervis requested, give an instruction on "good faith."
Although Zehrbach and Mervis fully concurred in the scope and content of the good faith instruction,*fn5 they challenged a portion of the "knowingly" instruction, in which the court stated that "the government is not required to prove that a defendant knew that his acts were unlawful." When the district Judge stated that he was going to leave this sentence in the instructions, counsel for Mervis requested, "May I have argument on that just to preserve my objection on the record?" App. at 608 (emphasis added). The district Judge replied: "Sure. I know you objected to that." Id. Counsel for Zehrbach then argued that the instruction had "the potential of confusing the jury." Counsel suggested:
By telling the jurors that the government is not required to prove that the defendant knew his acts were unlawful, the jurors may misconstrue that to mean that it is not relevant that the defendant did not know that his acts were unlawful.
Id. at 609. Counsel asked that the sentence be deleted "in the interest of clarity" because of the potential for confusion and "because the instructions clearly stated the burden of the government and [did] not state that [proof of knowledge of illegality] [was] one of the burdens of the government, because it [hadn't] been suggested that this is one of the burdens of the government and because it [would] not be suggested that is one of the burdens of the government . . .." Id.
The following excerpt from the jury charge, which fills twenty-six pages of trial transcript in its entirety, places the remark in context. Topic headings have been inserted for the ease of the reader. The instructions were as follows:
In order to meet its burden of proof [on the bankruptcy counts] as to either defendant the government must establish beyond a reasonable doubt each one of the following elements: First, that the defendant gave or offered any money, property, remuneration, compensation, reward, advantage or promise of any of those things to another in exchange for that other person's acting or forbearing to act; second, that the action or forbearance, in exchange for which the money, property, advantage or promise thereof was given or offered, was in a case under Title 11 of the United States Code, the bankruptcy law; third, that the defendant gave or offered the money, property, advantage or promise thereof knowingly; and fourth, that the defendant did so fraudulently.
Now, in order to find a defendant guilty of bankruptcy fraud, therefore you must find beyond a reasonable doubt that the giving or offering of money, property, remuneration, compensation, reward, advantage or promise thereof was done knowingly. An act is done knowingly if it is done voluntarily and intentionally and not because of mistake or accident or other innocent reason. In other words, an act is done knowingly if the defendant is aware of the act and is not committing the act through ignorance, mistake, or accident. The government is not required to prove that a defendant knew that his acts were unlawful.
It is also necessary . . . that you find beyond a reasonable doubt that the defendant knew that his acts were in connection with a bankruptcy proceeding. You may consider evidence of a defendant's words, acts or omissions along with all ...