USA. v. Gellene, 98-2985

• Decision Date: 17 August 1999
• Docket Number: No. 98-2985,98-2985
• Citation: 182 F.3d 578
• Parties: (7th Cir. 1999) UNITED STATES OF AMERICA, Plaintiff-Appellee, v. JOHN G. GELLENE, Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 578

182 F.3d 578 (7th Cir. 1999)

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. JOHN G. GELLENE, Defendant-Appellant.

No. 98-2985

United States Court of Appeals, Seventh Circuit

Argued December 8, 1998

Decided July 20, 1999

Rehearing and Suggestion for Rehearing En Banc Denied August 17, 1999^*

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 97 CR 221--J.P. Stadtmueller, Chief Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Before COFFEY, RIPPLE and MANION, Circuit Judges.

RIPPLE, Circuit Judge.

John G. Gellene, a partner at the law firm of Milbank Tweed Hadley & McCloy ("Milbank") in New York, represented the Bucyrus-Erie Company ("Bucyrus") in its Chapter 11 bankruptcy. Mr. Gellene filed in the bankruptcy court a sworn declaration that was to include all of his firm's connections to the debtor, creditors, and any other parties in interest. The declaration failed to list the senior secured creditor and related parties. Mr. Gellene was charged with two counts of knowingly and fraudulently making a false material declaration in the Bucyrus bankruptcy case, in violation of 18 U.S.C. § 152, and one count of using a document while under oath, knowing that it contained a false material declaration, in violation of 18 U.S.C. § 1623. Although Mr. Gellene admitted that he had used bad judgment in concluding that the representations did not need to be disclosed, he asserted that he had no fraudulent intent. After a six-day trial, on March 3, 1998, the jury returned guilty verdicts against Mr. Gellene on all three counts. Mr. Gellene was sentenced to 15 months of imprisonment on each count, to run concurrently, and was fined $15,000.

I BACKGROUND

A. The Bucyrus Bankruptcy Proceedings

Bucyrus, a manufacturer of mining equipment based in South Milwaukee, Wisconsin, had retained Milbank to represent it in general corporate matters in the 1980s. Between 1988 and 1992, Bucyrus' financial transactions, including a leveraged buy-out, left the company with more than $200 million in debt. During that time, the head of Milbank's Mergers and Acquisitions Department, Lawrence Lederman, managed the Bucyrus account. In 1993, Lederman brought in Mr. Gellene, a bankruptcy attorney at Milbank, to work on the financial restructuring of Bucyrus.

At that time, the major parties with an interest in Bucyrus included Goldman Sachs & Co., Bucyrus' largest equity shareholder, which held 49% of the Bucyrus stock; Jackson National Life Insurance Company ("JNL"), Bucyrus' largest creditor, which held approximately $60 million in unsecured notes; and South Street Funds, a group of investment entities, which held approximately $35 million in senior secured notes and leasehold interests.¹ South Street Funds was managed and directed by Greycliff Partners, an investment entity which consisted of financial advisers Mikael Salovaara and Alfred Eckert, former employees of Goldman Sachs.

On February 18, 1994, Bucyrus filed its Chapter 11 bankruptcy petition in the Eastern District of Wisconsin.² Because the legal representation of a debtor is subject to court approval, Bucyrus submitted an application requesting that Milbank be appointed to represent it in the bankruptcy. Pursuant to Bankruptcy Rule 2014, the application included the required sworn declaration disclosing "any connection" that Milbank had with "the Debtors, their creditors, or any other party in interest."³ Ex. 22, ¶ 5. Mr. Gellene, Milbank's lead attorney in the Bucyrus bankruptcy, under oath disclosed that his firm had previously represented Goldman Sachs and JNL in "unrelated" matters and would continue to represent Goldman Sachs in non-Bucyrus proceedings. See id. at ¶ 6. Mr. Gellene did not disclose any of Milbank's representations of South Street, Greycliff Partners or Salovaara.

The United States Trustee and JNL filed objections to Mr. Gellene's Rule 2014 declaration. They sought additional information regarding Milbank's representation of Goldman Sachs and questioned whether there was a sufficient conflict of interest to bar Milbank's retention as counsel for the debtor.

On March 23, 1994, the bankruptcy court conducted a hearing on the issue. It requested that Mr. Gellene submit a second declaration containing more detail about possible conflicts of interest.⁴ The court specifically commented: "If you represent them [Goldman Sachs] in other matters, then I think it's important to state precisely what arrangements have been made internally to separate what you're doing in this matter with the recommendation in other matters." Tr. 917-18.

On March 28, 1994, Mr. Gellene signed a second sworn Rule 2014 statement providing details about Milbank's representation of Goldman Sachs and the "Chinese wall" that the firm planned to put in place. It also disclosed its prior representation of two other creditors, Cowen & Co. and Mitsubishi International. The declaration then stated:

Besides the representations disclosed in my declaration dated February 18, 1994, after due inquiry I am unaware of any other current representation by Milbank of an equity security holder or institutional creditor of [Bucyrus].

Ex. 27, ¶ 7. Mr. Gellene again did not disclose any representation by Milbank of South Street, Greycliff Partners or Salovaara. However, at the time of both declarations, Milbank was doing their legal work, including the representation of Salovaara when his partner, Alfred Eckert, sued him.⁵

At Milbank, one partner recognized that there might be a conflict of interest between Milbank's representation of Salovaara in the Salovaara- Eckert dispute and its representation of Bucyrus in its bankruptcy proceedings. At a meeting on December 22, 1993, with Mr. Gellene, Lederman and Milbank partner Toni Lichstein, all of whom were working on the Bucyrus bankruptcy and the Salovaara-Eckert dispute, Lichstein raised the possibility of conflict. Both Lederman and Mr. Gellene stated it was not a problem. Lichstein raised the issue again in March 1994 after she, representing Salovaara, had attended a South Street investors' meeting at which South Street's investment in Bucyrus was discussed. At that time, Mr. Gellene responded that Salovaara was not a creditor of Bucyrus and that all disclosure obligations had been satisfied. However, Lederman suggested that, if Lichstein had further concerns, Salovaara should obtain other counsel. After that, Milbank's representation of Salovaara in his dispute with Eckert slowed and eventually ended. By December 1994, Lederman had resigned his representation of South Street/Greycliff and had written off the billings generated in a tangential matter, a Colorado bankruptcy⁶ (about $16,000), and in the Salovaara-Eckert dispute (more than $300,000). Mr. Gellene also wrote off $13,000 in fees and expenses on the Bucyrus bankruptcy billings.⁷ Mr. Gellene never informed anyone at Bucyrus of the other Milbank representations.

Meanwhile, the Bucyrus bankruptcy creditors' committee worked through the summer and fall of 1994 to see if it could formulate a plan that would satisfy the major creditors.⁸ By late fall, a compromise was reached and all the parties to the Bucyrus bankruptcy agreed to the new plan of reorganization.

Thereafter, Milbank filed a petition requesting compensation for its work on the bankruptcy case. In November 1995, a hearing was held on Milbank's application for more than $2 million in legal fees and expenses. The United States Trustee and JNL both opposed the application. Mr. Gellene was lead attorney for Milbank at those hearings. However, when he testified in support of his firm's request for fees, Milbank partner David Gelfand was the attorney who put on Mr. Gellene's testimony. Gelfand presented Mr. Gellene's sworn declarations to him on the stand. Mr. Gellene testified that the supplemental Rule 2014 declaration had disclosed Milbank's relationship with Goldman Sachs and thus that the court had been fully aware of that relationship. However, Mr. Gellene did not testify that his firm had represented and was continuing to represent South Street and Greycliff. The United States Trustee did not learn of that representation until the late fall of 1996. The court ultimately awarded Milbank approximately $1.8 million in fees and expenses.⁹

In late 1996, JNL discovered that Milbank had represented Salovaara in his dispute with Eckert at the same time it was representing Bucyrus. JNL then filed a motion in the bankruptcy court in December 1996 seeking disgorgement of Milbank's fees. Mr. Gellene did not respond to the motion. On February 24, 1997, when his partners became aware of the motion and asked him about it, Mr. Gellene responded falsely that the answer was due in a few days. Mr. Gellene even altered the JNL filing to conceal the date it had been signed. When that deception was uncovered, however, Mr. Gellene admitted to Lichstein and Gelfand that he had lied about the response due date.

In March 1997, Mr. Gellene filed a third declaration with the bankruptcy court. In it, he explained that he had made an error in legal judgment by omitting Milbank's representations of South Street and of Salovaara and took "full personal responsibility for failing to disclose these matters to the court." Tr. 1247.

B. The Federal Criminal Charges

On December 9, 1997, a federal grand jury returned a three-count indictment against Mr. Gellene, charging him with two counts of bankruptcy fraud and with one count of perjury. It alleged that Mr. Gellene had lied three times in the course of a bankruptcy case: twice when he filed the Rule 2014 declarations knowing that they were false and once when he used the supplemental declaration, while under oath at a bankruptcy hearing, knowing that it contained a false material declaration.

At Mr. Gellene's trial, the government produced evidence of other false representations by the defendant, evidence that was admitted under Rule 404(b) of...