U.S. v. Shriver, 87-2279

• Decision Date: 29 March 1988
• Docket Number: No. 87-2279,87-2279
• Citation: 842 F.2d 968
• Parties: , 25 Fed. R. Evid. Serv. 384 UNITED STATES of America, Plaintiff-Appellee, v. William F. SHRIVER, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 968

842 F.2d 968

56 USLW 2645, 25 Fed. R. Evid. Serv. 384

UNITED STATES of America, Plaintiff-Appellee, v. William F. SHRIVER, Defendant-Appellant.

No. 87-2279.

United States Court of Appeals Seventh Circuit.

Argued Jan. 14, 1988.

Decided March 29, 1988.

Robert N. Meyeroff, Milwaukee, Wis., for defendant-appellant.

Matthew L. Jacobs, Asst. U.S. Atty., Patricia J. Gorence, U.S. Atty., Milwaukee, Wis., for plaintiff-appellee.

Before FLAUM and RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

FLAUM, Circuit Judge.

William F. Shriver was convicted on three counts of knowingly making false statements to influence a federally insured bank in violation of 18 U.S.C. Sec. 1014 (1982). ¹ Shriver appeals his conviction on three grounds: (1) the district court erred in admitting the impermissibly prejudicial testimony of a businessman, William Wooten, whose company had prior business dealings with Shriver; (2) there was insufficient evidence to convict Shriver on counts II and III; and (3) the judge erroneously instructed the jury that Shriver's statements to the bank were material. We affirm on all issues.

I.

In late 1982, Shriver formed Auto Shield, Inc. Early in the following year Auto Shield entered into a franchise agreement with Tuff Kote Dinol, Inc. ("Tuff Kote") which entitled Auto Shield to provide Tuff Kote rustproofing services to the public ("the franchise agreement"). Auto Shield had substantial obligations to Tuff Kote under the franchise agreement. These obligations included a promissory note owed to Tuff Kote representing the unpaid portion of a $19,000 franchise fee, specified royalty payments, and commitments to purchase equipment and material from Tuff Kote. ² Auto Shield borrowed approximately $72,000 from Lakeview Bank to get its business started.

On August 17, 1983, Auto Shield borrowed $95,000 from First Illinois Bank of Evanston ("First Evanston"). Auto Shield used approximately $65,000 of the loan proceeds to repay a substantial portion of its loan from Lakeview Bank and allocated the remainder to working capital. This loan was secured by a "blanket" security interest in all of Auto Shield's receivables, inventory and equipment. ³ Shriver also personally guaranteed the loan to Auto Shield and secured the guaranty with a security interest in his residence. Auto Shield continued to borrow from First Evanston. Its total obligation to First Evanston was consolidated into a 5-year note for $143,500 on March 4, 1984. At the time Auto Shield signed this note, it was experiencing financial difficulties. It made what was to be the last payment to First Evanston on March 15, 1984.

In mid-1984, Shriver personally borrowed a total of $20,000 from two different banks. In April he borrowed $10,000 from the First National Bank of Lake Forest ("First Lake Forest"), and in June he received a $10,000 loan from Midwest National Bank of Lake Forest ("Midwest National").

Shortly thereafter, Tuff Kote notified Auto Shield that it was terminating the franchise agreement. Beginning with a letter dated October 28, 1983, Tuff Kote sent a series of letters notifying Auto Shield that payments for equipment and materials purchased by Auto Shield on account were delinquent. Auto Shield's failure to correct this situation resulted in the notice of termination being sent on July 2, 1984.

On July 23, 1984, Shriver, acting in his capacity as President of Auto Shield, borrowed $10,000 from First Bank Southeast National Association ("Bank Southeast"). ⁴ Shriver's statements in this transaction resulted in his indictment and eventual conviction. First, Shriver signed a personal financial statement which stated that he individually did not have any outstanding notes payable to other banks or outstanding contingent liabilities. At this time, however, Shriver's two $10,000 loans (in the form of notes payable) from Midwest National and First Lake Forest were still outstanding. Shriver's personal guaranty of Auto Shield's loan from First Evanston was also outstanding. Count I of the indictment charged Shriver with failing to disclose this information to Bank Southeast in violation of Sec. 1014.

Second, Shriver, acting as president of Auto Shield, signed a "Chattel Security Agreement" which granted a security interest to Bank Southeast in Auto Shield's inventory and equipment and stated that this collateral was free of any prior encumbrances, liens, or security interests. This representation was incorrect because the security interest Auto Shield had granted to First Evanston was still outstanding. Count II charged Shriver with making this false statement.

Finally, Shriver also signed a "General Business Security Agreement" which again warranted that Auto Shield owned the collateral covered by the Chattel Security Agreement and stated that it was free and clear of any other encumbrances and security interests. The General Business Security Agreement also warranted that Auto Shield was not in default under any other agreement for the payment of money. Evidence was introduced at trial, however, which indicated that Auto Shield was in default both on its loan from First Evanston and under its franchise agreement and promissory note with Tuff Kote at the time Shriver signed the General Business Security Agreement. Nonetheless, the indictment did not charge Shriver with a violation of Sec. 1014 resulting from his failure to disclose Auto Shield's default on the Tuff Kote franchise agreement. Rather, count III of the indictment was limited to: (1) Shriver's false representation that Auto Shield's assets were not subject to a prior security interest, and (2) Shriver's failure to disclose Auto Shield's default on its loan with First Evanston.

Shriver's first trial ended in a hung jury. On July 15, 1987, he was re-tried and found guilty by the jury on all three counts. Shriver was sentenced to four years probation. He was required to spend the first 180 days of his probation at a community treatment center where he had work release privileges, but was forbidden from consuming alcohol. ⁵ He was also required to make restitution of $13,700 to Bank Southeast.

II.

Shriver first argues that the district court erred by admitting into evidence the testimony of Tuff Kote's representative, William Wooten. The substance of Wooten's testimony related to the formation and terms of the franchise agreement between Auto Shield and Tuff Kote and Auto Shield's ultimate failure to comply with this agreement. Shriver claims that Wooten's testimony was irrelevant to the issue of whether he made misrepresentations to a bank. He argues that because no one claimed that he made misrepresentations to Tuff Kote, Wooten's testimony was introduced solely to create the impression that he lacked good character. In Shriver's view, this testimony created a danger of prejudice that outweighed any probative value the evidence may have had as to any crime charged in the indictment and should have been excluded under Federal Rules of Evidence 403 and 404(b).

Rule 404(b), commonly known as the "prior bad acts" rule, states that:

Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity or absence of mistake or accident.

Fed.R.Evid. 404(b) (emphasis added). The purpose of the rule is to prevent evidence of a defendant's crimes or acts from being admitted merely to suggest that "a man with such a defect of character is more likely than men generally to have committed the act in question." 2 J. Weinstein & M. Berger, Weinstein's Evidence Sec. 404. Admission of evidence of other "bad acts" is permissible if it is offered for purposes other than to show that the defendant "acted in conformity with his character." Id. The government argues that Wooten's testimony was properly admitted because it was probative of Shriver's knowledge of comparatively sophisticated business matters and his motive for making the alleged misrepresentations.

Initially we note that Wooten's testimony that Shriver negotiated and signed the franchise agreement on behalf of Auto Shield does not put in issue Shriver's character or otherwise suggest any propensity to commit a crime. Testimony that a person entered into a bona fide contract with a major franchisor in order to open a rustproofing business does not introduce the danger of prejudicial effect that Rule 404(b)'s prohibition against "character" evidence is intended to prevent. This evidence demonstrated that Shriver had some experience with relatively sophisticated business transactions and thereby helped show that he understood how security interests were created and their legal significance; this evidence does not speak to his character and is not prejudicial. We therefore hold that the district court properly admitted Wooten's testimony as to the formation and details of the franchise agreement.

In contrast, evidence that Auto Shield defaulted on the Tuff Kote franchise agreement implicates Shriver's character and is potentially inadmissible under Rules 404(b) and 403. First, a contract default is an "act" within Rule 404(b) and as defendant argues in his brief, a default may suggest to the jury that the defendant is a "deadbeat" and therefore is the type of person who would lie to a bank to obtain money. More importantly, the failure to disclose the default was also a false statement which potentially violated Sec. 1014, although no charges were brought. Paragraph 2 of the General Business Security Agreement which Shriver signed as President of Auto Shield in conjunction with the July 24, 1984 loan from Bank Southeast states that the "Debtor warrants that while any of the obligations are unpaid: ... (g) ... Debtor is not in default under any agreements for the payment of money." ⁶ (emphasis...