United States v. Cmercl Technol Inc ( 2004 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED JANUARY 9, 2004 December 17, 2003
UNITED STATES COURT OF APPEALS
For the Fifth Circuit Charles R. Fulbruge III
Clerk
No. 01-10815
UNITED STATES OF AMERICA, on behalf of
Small Business Administration,
Plaintiff-Appellee,
VERSUS
COMMERCIAL TECHNOLOGY, INC., ET AL.,
Defendants,
COMMERCIAL TECHNOLOGY, INC.,
Defendant-Appellant.
Appeal from the United States District Court
For the Northern District of Texas, Dallas
Before DeMOSS, DENNIS, and PRADO, Circuit Judges.
DeMOSS, Circuit Judge:
Commercial Technology, Inc. ("CTI") was found by a jury to
have violated the Texas Uniform Fraudulent Transfer Act (“TUFTA”)
when it transferred real property to Electric & Gas Technology,
Inc. (“EG&T”), a related entity. On appeal, CTI claims that there
was insufficient evidence supporting the jury’s findings that CTI
violated TUFTA, that the district court erred in its admission of
Fed. R. Evid. 404(b) evidence, and that the district court erred in
denying CTI's motion for judgment as a matter of law on its statute
of limitations claim.
BACKGROUND & PROCEDURAL HISTORY
In 1985, Caddo Capital Corporation (“Caddo”) loaned CTI
$150,000. Caddo was a Small Business Investment Company licensed
by the Small Business Administration (“SBA”). Caddo loaned the
funds to CTI under the Small Business Investment Act, a federal
program designed to increase the availability of capital to small
businesses by channeling federal funds to such companies.
In December 1986, Caddo sued CTI in state court after CTI
defaulted on its payment obligations under the promissory note. On
June 21, 1988, Caddo obtained a final judgment against CTI for
$105,000, plus interest, attorney’s fees, and court costs. On
June 28, 1988, the Dallas County Clerk’s Office issued, filed, and
recorded an abstract of judgment against CTI in favor of Caddo.
Almost three years later, on May 30, 1991, Caddo assigned all of
its rights in the judgment to the United States (the “government”),
on behalf of the SBA.
In 1997, approximately one year before the judgment originally
obtained by Caddo was to become dormant under Texas property law,
the government retained the services of a company to identify
potential assets of CTI.1 The government contractor made contact
1
Section 34.001(a) of the Texas Civil Practice and Remedies
Code provides that a judgment is dormant if a writ of execution is
not issued within ten years after the rendition of the judgment.
If the writ is issued after the ten-year period, the judgment
becomes dormant and execution may not be issued unless it is
revived. Id. In the instant case, the judgment against CTI was
2
with Mort Zimmerman, the President of CTI, by letter in April and
May 1997. Neither CTI nor Zimmerman responded to either of the
government’s letters.2 Between June 1997 and May 1998, the
government continued its investigation into the existence of CTI’s
assets. A title search in Dallas County revealed one piece of real
property in CTI’s name—an office building located at 13636 Neutron
Road in Dallas, Texas (the “Neutron Road Property”). Ownership by
CTI was confirmed by an examination of the public records for the
Dallas County Appraisal District and the Farmers Branch property
records.
On May 22, 1998, the government obtained a writ of execution
on the Neutron Road Property; however, attempts at levying the writ
proved unsuccessful. The government thereafter sought to renew the
Caddo abstract of judgment. On June 23, 1998, the government
recorded a new abstract of judgment (the “First Government
Abstract”) against CTI for the amounts due it under the assignment
from Caddo. The First Government Abstract was later replaced by a
corrected abstract of judgment (the “Corrected Abstract”), which
was issued on July 28, 1998, and recorded with the Dallas County
rendered on June 28, 1988, establishing June 28, 1998, as the ten-
year deadline by which the government was required to obtain a writ
of execution.
2
On June 9, 1997, Zimmerman caused CTI to execute a security
agreement pledging the Neutron Road Property as collateral on a
personal loan to Zimmerman in the amount of $140,000 by First Texas
Bank.
3
Clerk’s Office on August 4, 1998.3
In November 1999, the government sought to enforce its
judgment against CTI through the judicial sale of the Neutron Road
Property. However, CTI contested the sale, alleging that it only
owned the Neutron Road Property until May 13, 1987. The events
that are alleged to have transpired on May 13, 1987, bear great
weight on this case, and therefore a detailed summary account of
these alleged actions is necessary.
CTI claims that on May 13, 1987, while the suit brought
against it by Caddo was pending, CTI transferred the Neutron Road
Property to one of its subsidiaries, E>. The Neutron Road
Property had originally been part of the security for a 1983
commercial loan between CTI and Allied American Bank for which CTI
executed a note secured by deed of trust in favor of Allied
American Bank. By May 1987, a number of other liens had attached
to the Neutron Road Property as well. On May 13, 1987, Allied
American Bank transferred the deed of trust and lien to First Texas
Bank, for which Allied American Bank was paid $617,667.67.
Also on May 13, 1987, CTI executed a new deed of trust on the
Neutron Road Property in favor of First Texas Bank for an
obligation owed by E> to First Texas Bank in the principal amount
of $617,667.67. CTI also executed a hypothecation agreement
3
The First Government Abstract was inadequate because it
failed to include the amount of the judgment as required by
statute. TEX. PROP. CODE § 52.003(a)(6).
4
(“Hypothecation Agreement”) dated May 13, 1987, by which CTI agreed
to allow the Neutron Road Property to be pledged as security for
future loans from First Texas Bank to E>. The deed of trust and
Hypothecation Agreement were recorded in the Dallas County Clerk’s
Office on May 18, 1987, and the transfer of lien was recorded on
June 5, 1987.
However, it was not until November 24, 1998——more than eleven
years after the deed of trust, Hypothecation Agreement, and
transfer of lien were executed and recorded——that CTI recorded a
warranty deed and purchase agreement (both dated May 13, 1987),
which purported to show that the Neutron Road Property had been
sold by CTI to E> on May 13, 1987. CTI argued that the original
warranty deed and purchase agreement had been lost by the title
company, which CTI claimed had gone bankrupt and thus had failed to
record the instruments.
Notwithstanding CTI’s contention that it no longer owned the
Neutron Road Property, the government filed a complaint in district
court in November 1999, seeking a judicial sale of the Neutron Road
Property to satisfy its judgment against CTI pursuant to the
Federal Debt Collections Procedure Act (“FDCPA”), 28 U.S.C. § 3001
et seq. After the district court entered an order denying the
government’s initial application for enforcement of judgment and
sale of real property,4 the government amended its complaint in
4
The magistrate determined that the government was not
entitled to relief under the FDPCA because the original promissory
5
August 2000, adding a claim against CTI under TUFTA, TEX. BUS. &
COMM. CODE § 24.001 et seq. The essence of the government’s TUFTA
claim was its challenge of the purported May 13, 1987, transfer of
the Neutron Road Property from CTI to E>.
In 2001, the TUFTA case was tried to a jury, which found that
CTI had violated the Act by fraudulently transferring the Neutron
Road Property to E>. Specifically, the jury determined that E>
did not take the property in good faith nor for reasonably
equivalent value. CTI now timely appeals.
STANDARD OF REVIEW
We review de novo a district court's ruling on a motion for
judgment as a matter of law. Mississippi Chem. Corp. v. Dresser-
Rand Co., 287 F.3d 359, 365 (5th Cir. 2002). However, when an
action is tried by a jury, such a motion is a challenge to the
legal sufficiency of the evidence supporting the jury's verdict.
Brown v. Bryan County, OK, 219 F.3d 450, 456 (5th Cir.
2000)(citation omitted). Accordingly, we consider the evidence,
"drawing all reasonable inferences and resolving all credibility
determinations in the light most favorable to the non-moving
party." Id. “This Court grants great deference to a jury's verdict
and will reverse only if, when viewing the evidence in the light
most favorable to the verdict, the evidence points so strongly and
note between Caddo and CTI was not a “debt” owing to the United
States as defined by the federal statute because Caddo was not an
instrumentality of the government. See 28 U.S.C. § 3002(3)(A).
6
overwhelmingly in favor of one party that the court believes that
reasonable jurors could not arrive at any contrary conclusion.”
Dahlen v. Gulf Crews, Inc., 281 F.3d 487, 497 (5th Cir. 2002).
We review a district court's evidentiary rulings for abuse of
discretion. United States v. Sanders, 343 F.3d 511, 517 (5th Cir.
2003). If we find an abuse of discretion, we review the error
under the harmless error doctrine. Id.
DISCUSSION
I. Whether there was sufficient evidence to support a jury
finding that CTI transferred the Neutron Road Property to E>
in violation of TUFTA.
On appeal, CTI argues that it did not violate TUFTA because:
(1) the transfer of the Neutron Road Property occurred on May 13,
1987; and (2) E> paid value for the property.
A. When the Neutron Road Property was “transferred” for purposes
of TUFTA.
CTI offers two theories to support its contention that the
transfer of the Neutron Road Property occurred on May 13, 1987.
First, it insists that the Hypothecation Agreement executed on May
13, 1987, was sufficient to convey title to the Neutron Road
Property from CTI to E>. In the alternative, CTI insists that
the copies of the warranty deed and the purchase agreement it
recorded on November 24, 1998, were previously executed on May 13,
1987, and that the 1987 date should control. In response, the
government points to numerous CTI corporate documents that appear
to not only contradict relevant bank documents, but also the
7
testimony of CTI's own witnesses.
1. The Hypothecation Agreement
In order to determine whether there was a conveyance of the
Neutron Road Property from CTI to E> on May 13, 1987, we must
first establish the legal effect of the Hypothecation Agreement.
In the Hypothecation Agreement, CTI pledged the Neutron Road
Property as collateral so that First Texas Bank would extend credit
to E>. The Hypothecation Agreement stated in pertinent part:
[F]or the purpose of enabling [E>] to obtain credit
therefor, . . . [CTI hereby certifies that] the said
property has been duly assigned, released, transferred,
and delivered by [CTI] to [E>], and by these presents
[CTI] hereby assign[s], release[s], and transfer[s] unto
[E>] all of [CTI’s] right, title, and interest in and
to said property, and hereby expressly authorize[s]
[E>] to pledge or hypothecate all or any part of said
property for the indebtedness aforesaid, and all renewals
and extensions thereof, and also for any and all other
indebtedness of the same borrower to you . . . .
(Emphasis added).
The Texas Property Code provides that “[a]n instrument that is
properly recorded in the proper county is ... notice to all persons
of the existence of the instrument.” TEX. PROP. CODE § 13.002(1); see
also Resolution Trust Corp. v. Kemp, 951 F.2d 657, 661 (5th Cir.
1992). Texas law extends this principle further, recognizing that
“an instrument properly recorded is notice, not only of facts
therein expressly set forth, but also of all other material facts
which an inquiry thereby reasonably suggested would have
disclosed.” Housman v. Horn, 157 S.W. 1172, 1173 (Tex. Civ. App.
8
1913) (citation omitted); see also Westland Oil Dev. Corp. v. Gulf
Oil Corp., 637 S.W.2d 903, 908 (Tex. 1982) (“It is well settled
that a purchaser is bound by every recital, reference and
reservation contained in or fairly disclosed by any instrument
which forms an essential link in the chain of title under which he
claims.”) (internal quotations and citations omitted); Lang v. City
of Nacogdoches, 942 S.W.2d 752, 758 (Tex. App.—Tyler 1997, writ
denied) (“[A] person is charged with constructive notice of the
actual knowledge that could have been acquired by examining public
records, and that constructive notice in law creates an
irrebuttable presumption of actual notice.”).
CTI contends that the government should be charged, as a
matter of law, with constructive knowledge of the contents of the
Hypothecation Agreement and with all other facts that a follow-up
inquiry would have revealed. Matter of Estate of Matejek, 928
S.W.2d 742, 744 (Tex. App.—Corpus Christi 1996, writ denied); see
also Resolution Trust Corp., 951 F.2d at 660-61. The government’s
response has two elements. First, it argues that the Hypothecation
Agreement simply did not function to transfer title. The
government relies on the general principle that a hypothecation
agreement is a pledge, i.e., an encumbrance rather than a deed
translative of title or ownership. Second, the government contends
that whether the Hypothecation Agreement gave constructive notice
of the transfer is an issue of fact, not law.
As a general matter, the government is correct in its
9
assertion that to hypothecate is “to pledge (property) as security
or collateral for a debt, without delivery of title or possession."
BLACK'S LAW DICTIONARY 747 (7th ed. 1999) (alteration in original).
However, whether a hypothecation necessarily involves delivering
title or possession does not appear to address the fact that even
a pledge could fall under TUFTA’s definition of “transfer.” TUFTA
defines “transfer” broadly to include “every mode, direct or
indirect, absolute or conditional, voluntary or involuntary, of
disposing of or parting with an asset or an interest in an asset,
and includes payment of money, release, lease, and creation of a
lien or other encumbrance.” TEX. BUS. & COMM. CODE § 24.002(12)
(emphasis added). Even if the Hypothecation Agreement could not
transfer title to the Neutron Road Property, the encumbrance
created by the Hypothecation Agreement may well have been a
“transfer” under TUFTA.
However, before we address whether a hypothecation is a
“transfer” under TUFTA, we must first determine the true meaning
and scope of the Hypothecation Agreement at issue here. In
construing a contract under Texas law, courts must examine and
consider the entire writing and give effect to all provisions such
that none are rendered meaningless. Int’l Turbine Servs., Inc. v.
VASP Brazilian Airlines, 278 F.3d 494, 497 (5th Cir. 2002). There
are two steps to an ambiguity analysis of a contract. Flagship
Hotel, Ltd. v. City of Galveston, 117 S.W.3d 552, 561 (Tex.
App.—Texarkana 2003, writ denied). First, a court applies the
10
applicable rules of construction and decides if the contract is
ambiguous. Id. If the court finds the contract is ambiguous, the
trier of fact considers the parties' interpretation and other
extraneous evidence. Id.
CTI certified in the Hypothecation Agreement that the Neutron
Road Property was “duly assigned, released, transferred, and
delivered” by CTI to E>, adding that CTI assigned, released, and
transferred to E> “all of [CTI’s] right, title, and interest in
and to said property.” On its face, this portion of the instrument
appears to fully contemplate an absolute transfer of the Neutron
Road Property from CTI to E>. However, when read with the
provision immediately following the above statement, this
conclusion is called into doubt. The next provision of the
Hypothecation Agreement states that CTI “hereby expressly
authorize[s] [E>] to pledge or hypothecate all or any part of
said property for the indebtedness aforesaid.” If CTI had truly
transferred the Neutron Road Property to E> outright, then CTI’s
express authorization to E> to pledge or hypothecate the Neutron
Road Property as collateral for future loans would certainly be
unnecessary. It seems odd to transfer “all right, title, and
interest” in real property to someone and at the same time
expressly authorize that person to do certain things with the
property after the transfer has been effectuated. In addition, the
Hypothecation Agreement provides that E> may pledge the Neutron
Road Property as collateral for any and all indebtedness it seeks
11
to create “at any time before this authorization shall have been
revoked in writing.” CTI’s retention of a power to revoke further
indicates that the Hypothecation Agreement was not intended to be
an outright conveyance of the Neutron Road Property.
Although CTI contends that the Hypothecation Agreement served
to transfer the Neutron Road Property to E>, a simple reading of
the instrument reveals that it is susceptible to more than one
interpretation. As such, an ambiguity exists as to the meaning and
scope of the Hypothecation Agreement. Therefore, to determine the
legal effect of the instrument, it becomes necessary to look at the
intent and conduct of the parties.
As noted previously, CTI argues that it sold the Neutron Road
Property to E> on May 13, 1987. However, it was not until
November 23, 1998, that the corresponding warranty deed and
purchase agreement reflecting this transfer were recorded in the
Dallas County Clerk’s Office. Substantial evidence shows that, in
these intervening eleven years, CTI held itself out as the owner of
the Neutron Road Property. For instance, government tax records
show CTI as the owner of the Neutron Road Property as late as
December 1998. Specifically, during the period from 1987 to 1998,
both the Dallas County Appraisal District and the Dallas County Tax
Collector issued property tax statements to CTI as owner of the
Neutron Road Property. In addition, on November 24, 1993, CTI,
through Zimmerman, executed a deed of trust, security agreement, an
assignment of rent, and a financing statement involving the Neutron
12
Road Property to secure the indebtedness and obligations therein to
CIT Group/Credit Finance, Inc., another creditor. This deed of
trust was filed of record with the Dallas County Clerk’s Office on
December 7, 1993. Moreover, on April 23, 1997, CTI, through
Zimmerman, executed a deed of trust to secure a promissory note
payable to First Texas Bank. This deed of trust was filed of
record with the Dallas County Clerk’s Office on June 5, 1997.
Based on the terms of the Hypothecation Agreement and the
conduct of CTI and E> after executing the agreement, we interpret
the Hypothecation Agreement as simply being a pledge from CTI to
E> as collateral for obtaining future loans and not as an
instrument conveying title to E>.
2. Warranty Deed and Purchase Agreement
In the alternative, CTI claims that although the warranty deed
and purchase agreement were recorded in November 1998, both
instruments were actually executed on May 13, 1987. Therefore, CTI
argues that title to the Neutron Road Property was passed from CTI
to E> on the date of execution, not the date of recordation.
At trial CTI was unable to satisfactorily explain to the jury
why it had two different, but executed, versions of each document
dated May 13, 1987. Examination of the two copies of the warranty
deed and the two copies of the purchase agreement reveal that the
signatures and text alignment are different. In addition, the
notary blocks bear different and inconsistent dates for expiration,
13
and one version of the notary block is handwritten whereas the
other is typed. CTI also failed to explain how the title company
it claimed had gone bankrupt managed to properly file and record
the deed of trust, transfer of lien, and Hypothecation Agreement,
but failed to file and record the warranty deed and purchase
agreement when all five instruments were allegedly executed
simultaneously on May 13, 1987.
CTI fails to direct this Court to any compelling evidence
indicating that E> has been the owner of the Neutron Road
Property since May 1987, or conversely, that CTI was not the owner
of the property from 1987 to 1998. Therefore, we conclude that
evidence clearly shows that CTI was the owner of the Neutron Road
Property until at least November 23, 1998.
B. Reasonably Equivalent Value
In its second argument, CTI contends that E> paid reasonably
equivalent value for the Neutron Road Property. However, CTI fails
to articulate specific reasons to overturn the jury's verdict.
Additionally, we have already determined that the actual transfer
at issue occurred in November 1998 when CTI recorded the warranty
deed and purchase agreement in the Dallas County Clerk’s Office.
There has never been any evidence proffered by CTI that shows E>
paid any such value either in 1987 or 1998. In the absence of any
compelling evidence or specific arguments from CTI, there is ample
evidence in the record to support the jury’s finding that no
14
equivalent value was ever paid by E> to CTI.
As such, we conclude that the jury had sufficient evidence
with which to conclude that CTI conveyed the Neutron Road Property
to E> in November 1998 in violation of TUFTA.
II. Whether the Neutron Road Property was an “asset” as defined by
TUFTA.
CTI argues that the Neutron Road Property was not an "asset,"
as defined by TUFTA, when it was transferred from CTI to E>.5
Specifically, CTI claims that, in 1987, there was no equity in the
Neutron Road Property because the property was subject to numerous
liens. The government responds by referring to documentation
revealing that various lending institutions accepted the Neutron
Road Property as security from CTI on numerous occasions from 1987
through 1998.
In order for CTI to prevail on its argument that the Neutron
Road Property was not an “asset” at the time CTI claims it was
transferred, CTI must prove, as a preliminary matter, that the
“transfer” occurred on May 13, 1987. As previously discussed,
there was sufficient evidence presented to the jury to support its
finding that the Neutron Road Property was not conveyed on May 13,
1987, but rather that the conveyance occurred when CTI recorded the
warranty deed and purchase agreement on November 24, 1998.
5
TUFTA defines an "asset" as "the property of a debtor," but
an asset does not include, among other things, “property to the
extent it is encumbered by a valid lien.” TEX. BUS. & COMM. CODE §
24.002(2)(A).
15
Therefore, CTI must show that the Neutron Road Property was not an
asset at the time of the recordation in 1998.
CTI focuses the entirety of its analysis of whether the
Neutron Road Property was an asset on the period of time leading up
to and including 1987. CTI fails to provide any evidence as to the
absence of equity in the Neutron Road Property at the relevant time
period in 1998. Meanwhile, there are numerous portions of the
record revealing that the Neutron Road Property was the subject of
security for at least eight separate loans between 1987 and 1998.
It is axiomatic that a creditor would not extend a loan, much less
eight separate loans, when the collateral made the basis for that
loan lacked equity. Therefore, we find that there is sufficient
evidence to support the jury's finding that the Neutron Road
Property was an "asset" as contemplated by TUFTA when the property
was transferred in 1998.
III. Whether the Hypothecation Agreement put the government on
constructive notice of CTI’s “transfer” of the Neutron Road
Property to E>, thereby triggering the relevant statute of
limitations.
The gravamen of CTI’s statute of limitations argument is that
the instruments that were recorded in 1987——particularly the
Hypothecation Agreement——gave the world constructive notice that
the Neutron Road Property had been transferred from CTI to E>.
Stated differently, CTI claims Caddo (and therefore the government)
can be charged with knowledge of the purported transfer because the
Hypothecation Agreement said as much.
16
We have previously concluded that CTI was the owner of the
Neutron Road Property until at least November 23, 1998. As such,
whether the government was put on notice of the existence of the
Hypothecation Agreement is irrelevant to our inquiry. Because the
relevant transfer made the subject of the government’s TUFTA suit
is CTI’s recordation of the warranty deed and purchase agreement on
November 23, 1998, the focus of our inquiry is whether the
government filed suit within the appropriate limitations period
with respect to that date.
TUFTA states that “a cause of action with respect to a
fraudulent transfer . . . is extinguished unless action is brought
. . . within four years after the transfer was made.” TEX. BUS. &
COMM. CODE § 24.010(a)(1), (2). The government first filed suit
under the FDCPA, seeking to satisfy its judgment against CTI on
November 23, 1999, less than one year after CTI recorded the
warranty deed and purchase agreement and well within the four-year
statute of limitations. The government’s second amended complaint
added the TUFTA claim in August 2000. It is well settled that for
limitation purposes, under Fed. R. Civ. P. 15(c), an amendment to
a complaint will relate back to the date of the original complaint
if the claim asserted in the amended pleading “arises out of the
conduct, transaction, or occurrence set forth or attempted to be
set forth in the original pleading." In re Coastal Plains, Inc.,
179 F.3d 197, 216 (5th Cir. 1999) (internal quotation marks and
17
citations omitted). It is clear that the government’s original
complaint and its second amended complaint both arose from its
claim that CTI fraudulently transferred the Neutron Road Property
to E>. Therefore, we find that CTI’s statute of limitations
claim is without merit.
IV. Whether the trial court committed reversible error by
permitting the jury to hear evidence concerning a prior
conviction of CTI’s President and CEO.
CTI argues that the district court erred in admitting
allegedly inflammatory evidence against Mort Zimmerman, the
President and CEO of both CTI and E>. The evidence at issue
consists of an SBA form completed by Zimmerman as part of a loan
application he submitted on behalf of E> in 1994. The
application form (“Government Exhibit No. 104") contained a section
entitled "Statement of Personal History" in which Zimmerman denied
ever being charged with, arrested for, or convicted of any criminal
offense. However, in a published 1981 opinion, the D.C. Circuit
makes reference to the fact that Zimmerman, pursuant to an
indictment returned in the United States District Court for the
Southern District of Florida, in a matter involving sales of
securities of another company, was fined $30,000 and placed on five
years' probation on his plea of guilty to three counts of
securities fraud and one count of mail fraud. SEC v. Savoy Indus.,
Inc., 665 F.2d 1310, 1312 n.3 (D.C. Cir. 1981). The trial court
admitted Government Exhibit No. 104 into evidence and permitted the
18
government to cross-examine Zimmerman on the discrepancy between
his responses provided in the loan application and his prior guilty
plea.
CTI argues that the loan application is inadmissible as a
"prior bad act" under Fed. R. Evid. 404(b), and the improper
admission of such evidence necessitates a new trial. In response,
the government contends that the extrinsic evidence and the charged
actions in this case, i.e., orchestrating fraudulent schemes
through personal and representative misrepresentations and
omissions, are not only relevant, but identical and thus should be
accorded great probative value.
Normally, whether the district court erred in admitting
Rule 404(b) evidence depends on whether its decision satisfies the
two-prong Beechum test adopted by this Court for examining the
admissibility of extrinsic evidence. Sanders, 343 F.3d at 517
(citing United States v. Beechum, 582 F.2d 898, 911 (5th Cir.
1978)). Under the Beechum analysis, the court must first determine
whether the extrinsic evidence is relevant to an issue other than
the defendant's character, i.e., motive, opportunity, intent,
preparation, plan, knowledge, identity, or absence of mistake or
accident. Id. at 518. Second, "the evidence must possess probative
value that is not substantially outweighed by its undue prejudice
and must meet the other requirements of Rule 403." Id. (citation
omitted).
19
However, based on a review of the record, it appears that
CTI’s attorney failed to properly object to the introduction of
Government Exhibit No. 104 on 404(b) grounds. Instead, CTI’s
counsel simply objected to the authentication of Zimmerman’s
signature on the application.6 We find, therefore, that CTI’s
objections to the district court did not properly preserve the
6
The following is an excerpt from the trial transcripts
detailing the government’s introduction of the 1994 SBA loan
application:
The Court: Do you wish to offer this exhibit at this
time?
[The government]: We do wish to offer this exhibit at
this time.
The Court: Any objection?
[CTI’s attorney]: And that is No. 104? I believe we
have already ruled on that preliminarily, judge.
The Court: Do you object to it?
[CTI’s attorney]: Yes.
The Court: State the grounds for your objection.
[CTI’s attorney]: In front of the jury?
The Court: That is what I am asking you to do. State
the grounds for your objection. State the legal grounds
for your objection without argument. I thought we set
these ground rules at the pretrial conference.
[CTI’s attorney]: Lack of personal knowledge as to the
signature of Mr. Zimmerman for one; could not
authenticate.
The Court: Any further objections?
[CTI’s attorney]: Aside from what we talked to [sic] at
the sidebar, no.
The Court: State for the record at this time the
grounds for your objection to this exhibit. You have
testified the lack of authenticity as to Mr. Zimmerman’s
signature. Do you have any further objections?
[CTI’s attorney]: No, your honor.
...
The Court: If Mr. Zimmerman takes the stand, . . . is
he going to deny his signature?
[CTI’s attorney]: Probably not, your honor.
20
issue it now raises on appeal and we thus review CTI’s Rule 404(b)
challenge under the plain error doctrine. See Fed. R. Evid. 103(d).
Error is plain only when it is clear or obvious and it affects
the defendant's substantial rights. United States v. Hickman,
331 F.3d 439, 443 (5th Cir. 2003). A defendant's substantial
rights are only affected if the error affected the outcome of the
district court proceedings. Id. (citation and quotation omitted).
The defendant bears the burden of persuading the court that any
such error was prejudicial. United States v. Daniels, 281 F.3d 168,
184 (5th Cir. 2002). Reversal for plain error is appropriate only
in extreme circumstances where a miscarriage of justice would
otherwise occur. United States v. Williams, 132 F.3d 1055, 1059
(5th Cir. 1998).
Rule 404(b) prohibits the use of prior bad acts as proof of
the defendant’s character. However, even had CTI made the proper
404(b) objection, Government Exhibit No. 104 and the corresponding
testimony could have been admitted to prove intent to defraud.
Even were we to conclude otherwise, such error would nonetheless
not have risen to the level where CTI’s substantial rights would
have been affected, i.e., that the outcome of the trial would have
been different. The district court set specific limitations on the
scope and nature of the government’s inquiry on the subject.
Specifically, the district court limited the government’s cross-
examination of Zimmerman to his failure to answer the SBA’s
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application truthfully and did not allow the government to examine
Zimmerman in depth concerning the specific facts underlying his
prior indictments or convictions. Thus, we find that the district
court’s admission of Government Exhibit No. 104 was clearly not
plain error.
CONCLUSION
Having carefully reviewed the record of this case, the
parties' respective briefing and arguments, and for the reasons set
forth above, we affirm the jury’s findings that CTI transferred the
Neutron Road Property to E> in violation of TUFTA, that E> did
not take the property in good faith or for reasonably equivalent
value, and that the government’s claim was not barred by the
statute of limitations. In addition, we find that the district
court did not err in permitting testimony regarding the past
criminal conviction of CTI’s president.
AFFIRMED.
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