U.S. v. Krenning

• Citation: 93 F.3d 1257
• Decision Date: 22 August 1996
• Docket Number: No. 94-30726,94-30726
• Parties: UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. Earl W. KRENNING, Richard P. Rushton, and Steven L. Schmittzehe, Defendants-Appellants, Cross-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1257

93 F.3d 1257

UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. Earl W. KRENNING, Richard P. Rushton, and Steven L.

Schmittzehe, Defendants-Appellants, Cross-Appellees.

No. 94-30726.

United States Court of Appeals,

Fifth Circuit.

Aug. 22, 1996.

Marvin Opotowsky, Assistant U.S. Attorney, Stephen A. Higginson, Assistant U.S. Attorney, Office of the United States Attorney, New Orleans, LA, for United States of America, plaintiff-appellee-cross-appellant.

Herbert V. Larson, Jr., New Orleans, LA, for Earl W. Krenning, defendant-appellant-cross-appellee.

Claude John Kelly, III, Office of the Federal Public Defender, New Orleans, LA, for Richard P. Rushton, defendant-appellant-cross-appellee.

Edward J. Castaing, Jr., New Orleans, LA, for Steven L. Schmittzehe, defendant-appellant-cross-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, KING and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Defendants Earl W. Krenning, Richard P. Rushton, and Steven L. Schmittzehe appeal their convictions for multiple counts of mail fraud and for conspiracy to commit mail fraud. The Government appeals the sentences imposed by the district court. We affirm the Defendants' convictions, vacate their sentences, and remand for resentencing.

I

In late 1987, Krenning and a group of investors formed a new Louisiana insurance company called Sovereign Fire and Casualty Insurance Company ("Sovereign Insurance"). The investors also set up a holding company, Sovereign Holding, Inc., which owned 100% of the stock in Sovereign Insurance. The Commissioner of Insurance at that time required a new domestic casualty insurance company to have an initial reserve surplus of $1,500,000. In return for a contribution of certain assets from a prior company and $150,000 cash, Krenning received a twenty-five percent interest in the holding company, equal in value to $500,000. Krenning also allowed one of the investors, Robert Dutschke, to contribute, in lieu of cash, a building whose stated value, $685,000, was greatly exaggerated. ¹ Finally, in order to obtain the certificate of authority to operate an insurance company from the Commissioner of Insurance, who retained discretion to deny an application even after the $1,500,000 minimum had been met, Krenning delivered to the Commissioner's home in New Orleans an envelope containing $10,000 in cash. ² The Commissioner of Insurance signed the certificate of authority four days later.

Sovereign Insurance began operating in early 1988, with Krenning as president and chief executive officer. Rushton was a senior financial officer and headed up the claims department. The company sold primarily "10/20/10" automobile insurance, which was the minimum liability insurance required under Louisiana law. From the beginning, there was considerable internal dissention between Krenning and his fellow investors regarding the running of the company. Sovereign Insurance's performance suffered, and the company's inability to maintain adequate reserves meant that it would soon not be permitted to sell further insurance policies. By the end of 1988, the shareholders in Sovereign Holding had reached a consensus that Krenning should be forced to resign. Instead, Krenning and two other shareholders, including Rushton, offered to purchase the entirety of the dissatisfied shareholders' stock and debentures for roughly $1,500,000. After an initial attempt to purchase the stock using stolen bank drafts, Krenning eventually successfully executed the transaction using approximately $900,000 of Sovereign Insurance's own funds.

Having depleted the company's reserve fund, Krenning and Rushton immediately began to experience difficulties in making timely claims payments. At this time, Sovereign Insurance had close to a $1 million reserve deficiency which needed to be addressed before the annual statement was prepared as of the year's end. Without an adequate reserve surplus, the Commissioner of Insurance would soon take control of the company and shut it down. Accordingly, Krenning and Rushton carried out the first of several schemes designed to place worthless or overvalued assets on the books of Sovereign Insurance in order to conceal the deficiency from the Department of Insurance, and thereby continue to operate as an insurance company.

In what became known as the "Falcon Pipeline Deal," a promissory note was executed indicating that Sovereign Insurance loaned Falcon Pipeline Company, Inc. ("Falcon") $500,000, although no loan was actually made. The loan was collateralized by a mortgage on a pipeline owned by Falcon and valued by Krenning and Rushton on Sovereign Insurance's quarterly and annual financial statement at over $750,000. The pipeline had not been in use since 1984, and the estimated salvage value of the pipeline and attached easements, leases, compressors and dehydration facility was put at $18,000. At the same time, Falcon purchased a two-year 9% debenture note from Sovereign Holdings on basically the same terms and conditions as the promissory note between Falcon and Sovereign Insurance.

A side agreement was created between Sovereign Insurance and Falcon which indicates the true nature of the transaction between the parties. Falcon paid Sovereign Holdings nothing for the debenture note. Instead, Sovereign Holding made two monthly payments to Falcon. The first, an interest payment, was immediately retransmitted from Falcon to Sovereign Insurance under the first loan agreement. ³ The second, a $5,000 monthly management fee, was retained by Falcon as its payment for the insurance company's use of the pipeline asset. In essence, Sovereign Insurance "rented" the asset from Falcon. The debt appeared only on Sovereign Holding's balance sheet, while Sovereign Insurance was able to show an asset, falsely valued at $500,000. The side agreement also provided that the pipeline mortgaged to Sovereign Insurance under the first loan agreement was not at risk if the insurance company should become impaired or insolvent. Finally, the entire series of transactions were then backdated to December of 1988, in order to allow Sovereign Insurance to claim the asset on its 1988 annual statement to the Commissioner of Insurance. ⁴

Before Sovereign Insurance was finally liquidated in May of 1991, several similar deals were executed placing overvalued or nonexistent assets on the books of Sovereign Insurance. All of these subsequent deals took place after Schmittzehe joined Sovereign Insurance in April of 1989 as comptroller and, later, as treasurer. The "Marble Falls Deal" involved the "renting" of a $450,000 mortgage secured by a convention center in Arkansas, the appraisal value of which, $1.9 million, was based on conditions which were never fulfilled. Here too a side agreement was executed explaining the true nature of the transaction, and assurances were given that the property was not at risk in the event of foreclosure on the underlying note. As the situation grew more dire, the Defendants resorted to listing four mortgage-backed debenture notes totalling $1.28 million (the "Torrey Deal"). Although the Torrey Deal was in fact never completed, the Defendants specifically stated on the 1990 annual statement that it had been "consummated." The Defendants also listed four short-term promissory notes supposedly collateralized by Bay Agency/Sunbelt property, totalling $720,000. These notes, which had no real economic substance, were backdated for purposes of listing them on the 1990 annual statement, and were then later canceled by Schmittzehe. In this manner Sovereign Insurance continued to operate, selling insurance policies until the company finally collapsed in May of 1991. Several thousand unpaid claims totalling an estimated $9 million remained unpaid following the liquidation of Sovereign Insurance.

A grand jury issued a fifteen count indictment charging Krenning, Rushton, Schmittzehe, Robert V. Bishop, Sr., and George C. Cavin, Jr., with mail fraud, in violation of 18 U.S.C. § 1341 (counts one through thirteen); and with conspiracy to commit mail fraud, in violation of 18 U.S.C. § 371 (count fifteen). ⁵ A jury returned a verdict of guilty as to Krenning, Rushton, and Schmittzehe on all counts. Bishop and Cavin were acquitted on all counts. Krenning received a sentence of seventy-one months, and was ordered to pay $100,000 in restitution. Schmittzehe received a sentence of thirty-seven months, and was ordered to pay $50,000 in restitution. Rushton received a sentence of forty-six months, and was ordered to pay $10,000 in restitution. All defendants filed timely notices of appeal. The Government also filed a timely notice of appeal, alleging errors in sentencing.

II

All three Defendants challenge their convictions on sufficiency of the evidence grounds. Accordingly, we must determine "whether, after viewing the evidence and all inferences that may reasonably be drawn from it in the light most favorable to the prosecution, any reasonably minded jury could have found that the defendant was guilty beyond a reasonable doubt." United States v. Leahy, 82 F.3d 624, 633 (5th Cir.1996) (internal quotation marks omitted). The evidence need not exclude every reasonable theory of innocence or be entirely inconsistent with every conclusion except that of guilt. Id. If a reasonable trier of fact could find the defendant guilty beyond a reasonable doubt based on the evidence presented at trial, we will affirm the conviction. United States v. Smith, 930 F.2d 1081, 1085 (5th Cir.1991); United States v. Triplett, 922 F.2d 1174, 1177 (5th Cir.), cert. denied, 500 U.S. 945, 111 S.Ct. 2245, 114 L.Ed.2d 486 (1991).

A

Krenning contends that there was insufficient evidence to support his convictions for mail fraud and conspiracy to commit mail fraud. A conviction for conspiracy under 18 U.S.C. § 371 requires the Government to prove beyond a...