U.S. v. Holzer

• Decision Date: 19 February 1988
• Docket Number: No. 86-1879,86-1879
• Citation: 840 F.2d 1343
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Reginald J. HOLZER, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1343

840 F.2d 1343

56 USLW 2499

UNITED STATES of America, Plaintiff-Appellee, v. Reginald J. HOLZER, Defendant-Appellant.

No. 86-1879.

United States Court of Appeals,

Seventh Circuit.

Argued Jan. 8, 1988.

Decided Feb. 19, 1988. ^*

Edward L. Foote, Winson & Strawn, Chicago, Ill., for defendant-appellant.

Lawrence E. Rosenthal, Asst. U.S. Atty., Anton R. Valukas, U.S. Atty., Chicago, Ill., plaintiff-appellee.

Before CUMMINGS, POSNER, and EASTERBROOK, Circuit Judges.

POSNER, Circuit Judge.

A jury found Reginald Holzer, formerly an Illinois state trial judge, guilty of mail fraud, 18 U.S.C. Sec. 1341, extortion, 18 U.S.C. Sec. 1951 (Hobbs Act), and racketeering, 18 U.S.C. Sec. 1962 (Racketeering Influenced and Corrupt Organizations, or RICO, Act). Judge Marshall imposed concurrent sentences of 18 years on the extortion and racketeering charges and 5 years on the mail fraud charges. We affirmed. 816 F.2d 304 (7th Cir.1987). Holzer petitioned for certiorari, challenging only the mail fraud counts. While his petition was pending, the Supreme Court decided McNally v. United States, --- U.S. ----, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), reversing the conviction of a public official for mail fraud based on the same "intangible rights" doctrine on which Holzer's conviction for mail fraud had been based. At the suggestion of the Solicitor General, the Court remanded our decision in this case for reconsideration in light of McNally. --- U.S. ----, 108 S.Ct. 53, 98 L.Ed.2d 18 (1987). We invited briefs and argument. Holzer asks us to direct his acquittal of mail fraud and order a new trial for extortion and racketeering, while the government asks us to stand by our previous decision and affirm the judgment in its entirety.

The facts that led up to Holzer's prosecution and conviction are fully stated in our previous opinion. Over a period of many years Holzer had extracted a long series of bribes, most of them in the form of "loans" that he did not intend to repay, from lawyers with cases before him or from persons who sought appointment as receivers. The government characterized this conduct as a scheme to defraud (among others) the State of Illinois, its citizens, and the parties on the other side of the cases from the lawyers who bribed him, of the right to the administration of justice by an honest judge. The government made no effort to show at trial, however, that Holzer had received any money or property from the victims of the fraud (citizens, litigants, lawyers), as opposed to the lawyers and receivers who were his accomplices. At the time of trial and appeal it was well established in the lower federal courts that no such showing was required to convict a public official of mail fraud; a scheme to deprive persons of their "intangible rights" to honest government was a "scheme or artifice to defraud" within the meaning of the mail fraud statute.

McNally changed this. A Kentucky official named Gray participated in a scheme to funnel commissions on insurance purchased by the state to an insurance agency in which Gray and a private citizen named McNally had a financial stake. The two were indicted and convicted of mail fraud (McNally as Gray's aider and abettor) for having deprived the citizens of Kentucky of their right to honest government. The Supreme Court reversed both men's convictions because the mail fraud statute "does not refer to the intangible right of the citizenry to good government." 107 S.Ct. at 2879. Holzer, similarly, was indicted for defrauding citizens, litigants, lawyers, and court appointees (presumably applicants for receivership passed over in favor of those who bribed Holzer) "of their rights to have the business of the Circuit Court of Cook County [Holzer's court] conducted honestly, fairly and impartially, free from corruption, collusion, bias, partiality, dishonesty, breach of duty, conflict of interest, extortion, bribery and fraud, and in accordance with the laws of the State of Illinois...." And, in defining "scheme ... to defraud," the prosecutor told the jury that such a scheme is "basically a plan to deprive someone of something of value. The thing of value that the Government says was lost here is what the lawyers call intangible rights." The jury instructions stated in like vein that "a scheme means some plan to deceive another and to deprive another of something of value, including intangible rights." It might seem obvious, therefore, that McNally governs this case and that Holzer's conviction of mail fraud must be vacated. But the government disputes this, citing several decisions since McNally in an effort to show that McNally is distinguishable from the present case.

In United States v. Runnels, 833 F.2d 1183 (6th Cir.1987), a divided panel of the Sixth Circuit affirmed a mail fraud conviction where the jury had been instructed on an "intangible rights" theory. A lawyer had bribed the defendant, who was the president of a local union, to refer claims by union members for workmen's compensation to the lawyer. The court pointed out that under state law Runnels had a fiduciary duty to the union members that he breached when he took the bribes, and therefore a constructive trust was impressed on the bribes at the moment of receipt. See 5 Scott, The Law of Trusts Secs. 462.4, 502, at pp. 3421, 3555 (3d ed. 1967). The court reasoned that Runnels' action in retaining the bribes rather than turning them over to the union members deprived the latter of property belonging to them, so that Runnels had deprived them not only of their "intangible" right to an honest administration of the union but also of their tangible right to a dishonest administrator's ill-gotten gains. Likewise, argues the government in our case, when Holzer took bribes he became by operation of state law the trustee of those moneys, with the result that, by failing to turn them over to the state, he deprived the state of property belonging to it. "When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386, 122 N.E. 378, 380 (1919) (Cardozo, J.).

McNally may have fallen athwart the same principle, except that the prosecutor in McNally had never argued that the defendants' conduct violated a fiduciary duty imposed by state law and that therefore the insurance premiums they had received and retained were actually the state's property. The absence of any statutory or case authority in Kentucky for imposing a constructive trust on payments improperly received by agents of the state or their accomplices suggests that more than oversight may have been involved; the situation is different in Illinois, as we shall see. A further complication in McNally was that the moneys the defendants had received were not bribes pure and simple. The state would have paid the commissions to some insurance agency, perhaps in the same amount--perhaps indeed to the same agency. The deprivation really was of an intangible right.

In United States v. Richerson, 833 F.2d 1145 (5th Cir.1987), the defendant had been convicted of mail fraud for accepting kickbacks from suppliers of his employer. The jury instructions had contained "intangible rights" language. The court held that this was not plain error. (As Richerson had not objected to the instruction on intangible rights, he had to show that the instruction was plain error in order to obtain a reversal.) The employer had been hurt in its pocketbook: to finance the kickbacks, suppliers had, with Richerson's connivance, submitted false invoices to his employer and the invoices had been paid. That feature is missing here except under the constructive-trust theory of Runnels.

In Carpenter v. United States, --- U.S. ----, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987), the Supreme Court upheld the conviction of a journalist employed by the Wall Street Journal who had made unauthorized disclosure of sensitive financial information that he had collected for use in writing the Journal 's "Heard on the Street" column. Treating the information as a trade secret of the Journal, the Court held that the journalist had defrauded his employer by depriving it of the exclusive use and enjoyment of its trade secret. Carpenter, like Richerson, is readily distinguishable from McNally and the present case. If an employee receives a payment intended for his employer and pockets it rather than hands it over, he has defrauded the employer, and it is only a small step to the conclusion that it is also fraud to deprive the employer of a trade secret that the employee created for the employer. (Of course the Journal still had the information, but the secrecy was gone.) It is another thing to say that retaining a bribe deprives one's employer of property; the money was never intended for the employer. The constructive-trust device (a legal fiction if ever there was one) is ordinarily used to require a person who has acquired property by fraud or other misconduct to convey it to the true owner. American National Bank & Trust Co. v. United States, 832 F.2d 1032, 1035 (7th Cir.1987). If Holzer had defrauded the Circuit Court of Cook County of money (or other property, but this detail is irrelevant in this case), the employer would have had a constructive trust in the money--though pointing this out would be an unnecessary step in the analysis, since the case would be governed by Carpenter in any event. Holzer's employer may, as we shall see, have had (and may still have) a constructive trust in the bribes, too. But taking one's employer's property by fraud (Carpenter ) and failing to convey the receipts of bribery to one's employer are not the same acts. The bribes become the employer's property through the fiction of a constructive trust not because he bargained for them but to make sure that the dishonest employee does not profit from...