Huntington National Bank v. McCann , 268 F. App'x 359 ( 2008 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 7, 2008
No. 06-20488
Charles R. Fulbruge III
Clerk
In The Matter Of: MICHAEL ANDREW McCANN
Debtor
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HUNTINGTON NATIONAL BANK,
Appellee-Cross Appellant,
v.
MICHAEL ANDREW McCANN,
Appellant-Cross Appellee.
Appeal from the United States District Court
for the Southern District of Texas,
Houston Division.
USDC No. 4:06-cv-872
Before JOLLY, HIGGINBOTHAM, and ELROD, Circuit Judges.
PER CURIAM:*
Appellant Michael McCann deposited numerous altered and counterfeit
checks into accounts serviced by Appellee Huntington National Bank. He
appeals the district court's judgment following a trial in the bankruptcy court
*
Pursuant to Fifth Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in Rule 47.5.4.
No. 06-20488
declaring him liable to Huntington under Michigan law for breach of transfer
and endorsement warranties. He also appeals the bankruptcy court's finding
that his liability to Huntington constitutes debt that is non-dischargeable in
bankruptcy. Huntington cross-appeals the district court's rejection of its
racketeering claim. We affirm.
I. Factual and Procedural History
Appellant McCann is a Texas dentist. From 2001 through 2002, McCann,
through his Michigan connection Kenneth Vandenberg, deposited numerous
checks into a Michigan account serviced by Huntington. These checks were
subsequently returned to Huntington from the respective drawee banks as
forged or altered. As the bankruptcy court would later determine, McCann
somehow obtained checks payable to various third parties, added his name to the
checks as an alternative payee, then sent them to Vandenberg in Michigan for
deposit. McCann sent for deposit other checks that were not only altered but
wholly counterfeit. McCann was able to withdraw significant funds from the
Huntington account before the bank discovered the fraud.
Huntington initially filed suit in the U.S. District Court for the Western
District of Michigan, claiming damages of almost $300,000. However, on June
25, 2004, McCann filed for bankruptcy in the Southern District of Texas, thereby
triggering an automatic stay of Huntington's Michigan suit under 11 U.S.C. §
362. Huntington filed a complaint in McCann's bankruptcy proceeding, claiming
McCann was liable for breach of various warranties established by Michigan
statutes governing the exchange of negotiable instruments. Huntington also
claimed that it was entitled to treble damages due to McCann's violation of the
Racketeer Influenced and Corrupt Organizations Act (RICO), codified at 18
U.S.C. §§ 1961-1968.1
1
Although violating RICO may also give rise to criminal liability, § 1964
creates a private right of action for those injured by another party's violation of
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No. 06-20488
The bankruptcy court found that McCann incurred liability under
Michigan law as a transferor and endorser of the altered checks. The court also
found that:
(1) McCann "knew that the checks . . . he endorsed were counterfeit,
forged, or altered and that he was not an authorized payee of the
checks;" (2) "McCann intended Huntington to rely" on McCann's
false representations; (3) "Huntington did rely on those"
representations; and (4) Huntington suffered damages as a result.
These findings, according to the bankruptcy court, triggered numerous
provisions in the bankruptcy code each of which renders fraudulently incurred
debt non-dischargeable.2
In its final order, the bankruptcy court: (1) awarded Huntington
$252,867.55 in damages for McCann's breach of transfer and endorsement
warranties; (2) awarded Huntington $81,550 in attorney's fees; and (3) declared
these awards to be non-dischargeable debt. The bankruptcy court, on
jurisdictional grounds, severed Huntington's RICO claim for district court
review. Notwithstanding its decision to defer adjudication of Huntington's RICO
claim the bankruptcy court issued Proposed Findings of Fact and Conclusions
of Law in which it recommended to the district court a RICO judgment in
Huntington's favor and an award of treble damages in the amount of
$758,602.65. After withdrawing its reference of the case to bankruptcy court,
the district court adopted the bankruptcy court's findings except for the proposed
finding of McCann's liability under RICO.
§ 1962.
2
In declaring McCann’s debt to Huntington non-dischargeable, the
bankruptcy court relied on 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6), each of
which provides an independent basis for designating a specific debt non-
dischargeable. Additionally, because McCann "fraudulently failed to schedule
his assets" in the bankruptcy proceeding, the court, invoking 11 U.S.C. §
727(a)(4), denied discharge as to all of McCann’s debt, including his debt to
Huntington.
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No. 06-20488
McCann, pro se, now argues that: (1) he is entitled to remand because the
Western District of Michigan improperly exercised personal jurisdiction over him
in Huntington's original suit; (2) the bankruptcy court's findings cannot
withstand factual sufficiency review; (3) he was denied due process because the
bankruptcy trustee refused to allow him access to records he claims were
necessary for him to mount a meaningful defense; (4) the bankruptcy court
erroneously denied his motion to suppress evidence obtained by Huntington
through a subpoena; and (5) the bankruptcy court's award of attorney's fees is
"excessive and improper." Huntington cross-appeals the district court's ruling
that it failed to establish McCann's liability under RICO.
II.
A. Personal Jurisdiction
McCann first argues that the Western District of Michigan, where
Huntington filed its initial suit, lacked personal jurisdiction over him. McCann
asserts that the financial distress he suffered as a result of having to initially
defend against Huntington's claims in Michigan caused him to file for
bankruptcy in the Southern District of Texas. His theory is that the Texas
proceedings never would have commenced were it not for the Michigan suit.
Thus, McCann urges the Court to consider whether the Western District of
Michigan's exercise of jurisdiction was proper, and, if it was not, conclude that
such renders the entirely independent Texas proceedings unconstitutional.
It is difficult to fathom McCann's argument that the lower Texas courts
lacked jurisdiction over his person, given that he was the party who initiated the
Texas proceeding. In any event, McCann did not assert lack of personal
jurisdiction in the courts below, nor does he claim to have raised personal
jurisdiction issues in the Western District of Michigan. Parties "may not
advance on appeal new theories or raise new issues not properly [raised] before
the district court . . . ." Little v. Liquid Air Corp., 37 F.3d 1069, 1071 n.1 (5th Cir.
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No. 06-20488
1994) (en banc). Even if McCann did have a plausible argument that the
Western District of Michigan wrongfully exercised personal jurisdiction, he
provides no support for the proposition that the tenuous causal relationship
between the Michigan and Texas suits compromises the legitimacy of the latter.
Thus, McCann has no valid personal jurisdiction argument.
B. McCann's Evidentiary Challenge
McCann next argues that the district court's judgment lacks a factual
basis. He also asserts an affirmative defense not timely raised in the courts
below: that Huntington was negligent in failing to obtain the endorsements of
all payees listed on the checks before accepting them for deposit.
An appellate court reviews "the decision of a district court, sitting as an
appellate court, by applying the same standards of review to the bankruptcy
court's findings of fact and conclusions of law as applied by the district court."
Nesco Acceptance Corp. v. Jay (In re Jay), 432 F.3d 323, 325 (5th Cir. 2005)
(citing Carrieri v. Jobs.com Inc., 393 F.3d 508, 517 (5th Cir. 2004)). "A
bankruptcy court's findings of fact are reviewed for clear error . . . ." Id. "A
finding of fact is clearly erroneous when although there is evidence to support
it, the reviewing court on the entire evidence is left with a firm and definite
conviction that a mistake has been committed." In re Missionary Baptist Found.
of Am., 712 F.2d 206, 209 (5th Cir. 1983) (internal quotation marks and citation
omitted).
Michigan has adopted the Uniform Commercial Code for purposes of
establishing the various warranties that arise in the transfer of negotiable
instruments such as checks. See Starbrite Distrib. v. Excelda Mfg. Co., 454
Mich. 302, 306 n.2 (Mich. 1997). Michigan law provides that:
[a] person who transfers an instrument for consideration warrants
to the transferee and, if the transfer is by endorsement, to any
subsequent transferee . . . (a) [t]hat the warrantor is a person
entitled to enforce the instrument; (b) [t]hat all signatures on the
instrument are authentic and authorized; [and] (c) [t]hat the
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No. 06-20488
instrument has not been altered . . . . A person to whom the[se]
warranties . . . are made and who took the instrument in good faith
may recover from the warrantor as damages for breach . . . .
Mich. Comp. Laws § 440.3416(1)-(2) (LexisNexis 2008) (hereinafter MCL). The
bankruptcy court found that McCann breached various warranties to
Huntington that arose upon endorsement and deposit of the altered checks
because (1) McCann endorsed and transferred the checks to Huntington; and (2)
he did so for consideration. Because McCann has never disputed these two
findings, he relies solely on his affirmative defense of negligence, an argument
premised on Huntington's failure to obtain the endorsements of all payees listed
on the checks, rather than just McCann's, before accepting them for deposit.
The bankruptcy court's factual findings, which amount to a prima facie
case of McCann's liability, are supported by the record and therefore are not
clearly erroneous. Further, McCann failed to raise his affirmative defense of
Huntington's negligence at trial. It is therefore waived. See Little, 37 F.3d at
1071 n.1.
C. Dischargeability
McCann appeals the bankruptcy court's finding that his debt to
Huntington is non-dischargeable under the Bankruptcy Code. The bankruptcy
court held that McCann’s debt to Huntington was non-dischargeable for
numerous reasons, one of which being that McCann incurred that debt through
fraud. To that end, McCann devotes his entire dischargeability argument to
attacking the bankruptcy court's conclusion that he committed fraud against
Huntington, wholly failing to address an independent ground the bankruptcy
court invoked for denying discharge of all of McCann’s debt, including his debt
to Huntington: fraud upon the court.
The bankruptcy court found that McCann "knowingly and fraudulently
failed to schedule his assets and to disclose his income and other financial
affairs" to the court. Such deception supports a denial of discharge under 11
U.S.C. § 727(a)(4). McCann fails to attack this finding on appeal. Accordingly,
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No. 06-20488
because the bankruptcy court's order is supported by an independent ground not
challenged on appeal, the Court need not consider McCann's argument attacking
the bankruptcy court's order on a wholly separate basis. See LLEH, Inc. v.
Wichita County, 289 F.3d 358, 364 (5th Cir. 2002) (noting that this Court may
affirm a lower court judgment for any reason supported by the record); United
States v. Thibodeaux, 211 F.3d 910, 912 (5th Cir. 2000) ("It has long been the
rule in this circuit that any issues not briefed on appeal are waived.").
D. Constitutional Claims
1. Due Process
McCann next argues that he was denied due process when he allegedly
was refused access by the bankruptcy trustee to various records he needed to
mount a meaningful defense. During discovery, McCann housed many of his
important documents in a rented storage unit, which came under the control of
the trustee upon the commencement of bankruptcy proceedings. The trustee
allegedly denied McCann access to those records.
Although he now proceeds pro se, McCann was represented by counsel
during discovery in the bankruptcy proceeding. Neither McCann nor his
attorney filed a discovery motion with the bankruptcy court or the district court
seeking to compel access to the stored records. Indeed, McCann raised this "due
process" argument for the first time in his motion to vacate the judgment of the
bankruptcy court. Because there is no evidence to indicate that McCann was
denied access to the records, and because McCann never alleged such
obstruction when he had the opportunity to do so, the argument is not properly
before the Court. See Little, 37 F.3d at 1071 n.1.
2. Fourth Amendment
McCann next argues that the bankruptcy court erred in denying his
motion to suppress. According to McCann, the government has been preparing
a criminal case against him. Before trial, the Internal Revenue Service (IRS)
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No. 06-20488
obtained a subpoena to search his records. McCann avers that the government
sought a subpoena as a way of circumventing the probable cause requirement
it must normally satisfy to justify a search in the criminal context. He further
believes that Huntington was able to win at trial because the IRS "turned over"
the records it obtained to Huntington for use in the latter's private suit. Under
McCann's theory, the IRS's search without a warrant violated McCann's Fourth
Amendment rights, and therefore Huntington's receipt of the documents
obtained in that search constituted "fruit of the poisonous tree."
The record undermines McCann's argument. Huntington did not obtain
the aforementioned records from the IRS. Rather, Huntington obtained its own
subpoena for McCann's records, which gave it access thereto independent of the
IRS search.
Not only does McCann argue a Fourth Amendment violation, he also
claims a denial of due process by way of the IRS's alleged failure to notify
McCann of its subpoena before searching his documents. The IRS is not a party
to this suit. Therefore, any issues relating to the conduct of the IRS are not
properly before this Court.
E. Attorney's Fees
McCann argues that the bankruptcy court's award of attorney's fees to
Huntington in the amount of $81,550 is "excessive and improper" because
Huntington has "deep pockets." He also argues that there was insufficient
evidence to show that he engaged in fraud. The statute establishing
endorsement and transfer warranties in the exchange of negotiable instruments,
MCL § 440.3416(2), provides for the award of attorney's fees upon a finding of
breach. Thus, even assuming insufficient evidence of fraud, McCann's argument
fails because the bankruptcy court's award of attorney's fees was not predicated
on its finding of fraud. Further, McCann cites no authority for his "deep
pockets" argument. Accordingly, McCann provides no basis on which to conclude
that the award was improper.
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No. 06-20488
F. RICO
In addition to its successful breach of warranty claim, Huntington asserted
a civil racketeering claim under RICO. The bankruptcy court severed
Huntington's RICO claim for district court review but nevertheless issued
Proposed Findings of Fact and Conclusions of Law recommending a RICO
verdict in Huntington's favor. The district court rejected the bankruptcy court's
proposal, and concluded that Huntington failed to establish liability under
RICO. Huntington cross-appeals.
The district court did not indicate the basis for its ruling. The only
asserted explanation for the ruling comes from Huntington, which states that,
during a telephonic hearing the district court concluded that RICO liability was
not established because Huntington failed to prove the existence of an
"enterprise," a necessary element of a RICO claim. In response, Huntington
devotes less than two pages of its brief to arguing that the bankruptcy court's
findings of fact prove a RICO "enterprise." The Court disagrees.
Whether Huntington proved the existence of an "enterprise" sufficient to
satisfy RICO is purely a question of law reviewed de novo. See United States v.
Glinsey, 209 F.3d 386, 392 (5th Cir. 2000). RICO expressly declares unlawful
three distinct types of schemes, each of which may give rise to civil liability. See
18 U.S.C. § 1962(a)-(c). Before the bankruptcy court, Huntington argued
McCann's liability under paragraph (c), which provides that "[i]t shall be
unlawful for any person . . . associated with any enterprise . . . the activities of
which affect interstate . . . commerce, to conduct or participate . . . in the conduct
of such enterprise's affairs through a pattern of racketeering activity . . . ."
"Reduced to its three essentials, a civil RICO claim must involve: (1) a person
who engages in (2) a pattern of racketeering activity (3) connected to the
acquisition, establishment, conduct, or control of an enterprise." Delta Truck &
Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 242 (5th Cir. 1988).
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No. 06-20488
RICO defines an "enterprise" as "any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals
associated in fact although not a legal entity." 18 U.S.C. § 1961(4). Thus, "[a]
RICO 'enterprise' can be either a legal entity or an ‘association in fact’
enterprise." In re Burzynski, 989 F.2d 733, 743 (5th Cir. 1993).
The bankruptcy court found that Vandenberg deposited the checks into
accounts serviced by Huntington at the direction of McCann. Huntington argues
that, at the time of the fraudulent deposits, those accounts were already open for
use by Vandenberg’s "otherwise legitimate Michigan corporations." As such,
Huntington asserted below that McCann, "Vandenberg and . . . Vandenberg's
companies constitute[d] [the] 'enterprise'. . . in that they [were] a union or group
of individuals and businesses associated in fact for the purpose of depositing the
various checks . . . ." Thus, Huntington argues the existence not of a formal
association, but of an "association-in-fact" under § 1961(4).
This Court has previously declined the invitation to expansively define an
association-in-fact enterprise as merely a scheme involving two or more people.
In re Burzynski, 989 F.2d at 743 ("An 'association-in-fact' enterprise perhaps
could have been interpreted broadly to embrace any cooperative endeavor by two
or more persons . . . . Mindful of the wisdom embodied in the federal structure
of our nation, this circuit has eschewed this course."). Rather, to establish an
"association-in-fact" . . . a plaintiff must show "evidence of an ongoing
organization, formal or informal, and . . . evidence that the various associates
function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583
(1981); Shaffer v. Williams, 794 F.2d 1030, 1032 (5th Cir. 1986). The enterprise
must be "an entity separate and apart from the pattern of activity in which it
engages," Turkette, 452 U.S. at 583, and the association must operate "through
a hierarchical or consensual decision-making structure,” Elliott v. Foufas, 867
F.2d 877, 881 (5th Cir. 1989). Importantly, a plaintiff must also "establish that
the association exists for purposes other than simply to commit the predicate
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No. 06-20488
acts.” Id. (citing Montesano v. Seafirst Commercial Corp., 818 F.2d 423, 427 (5th
Cir. 1987)).
In recommending a RICO finding in favor of Huntington, the bankruptcy
court did not discuss whether the scheme in which McCann engaged specifically
satisfied the above requirements. Rather, the factual premise laid by the
bankruptcy court in support of its recommended conclusion that McCann
engaged in a RICO enterprise was its finding that "McCann, Vandenberg, and
the various companies created by Vandenberg . . . [were] associated for the
purpose of depositing the altered, counterfeit, or forged checks . . . ." Nothing in
the bankruptcy court's opinion or recommendation to the district court suggests
that the relationship between Vandenberg, McCann, and the Michigan
corporations existed for purposes other than simply to commit the predicate acts
and reap the resultant rewards. A RICO enterprise cannot be "a 'pattern of
racketeering activity,' but must be 'an entity separate and apart from the
pattern of activity in which it engages.'" Old Time Enters. v. Int'l Coffee Corp.,
862 F.2d 1213, 1217 (5th Cir. 1989) (quoting Montesano, 818 F.2d at 427).
Nor does the record compel the conclusion that the relationship described
by Huntington functioned as a "continuing unit over time through a hierarchical
or consensual decision-making structure." See Elliott, 867 F.2d at 881. Rather,
the evidence suggests that McCann and Vandenberg were merely partners in a
scheme too unsophisticated to be labeled "organized crime," which RICO was
designed to combat. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158,
165 (2001) (noting that RICO's goal is the "undermining [of] organized crime's
influence upon legitimate businesses . . . .").
Because the record fails to demonstrate that McCann committed fraud as
part of an "association-in-fact" under § 1961(4), Huntington cannot, based on the
evidence in the record, prove an "enterprise" for purposes of RICO. Accordingly,
the district court did not err.
AFFIRMED.
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