United States v. Fallon, James E. ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
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No. 03-1330
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
JAMES E. FALLON,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Western Division.
No. 01 CR 50046—Philip G. Reinhard, Judge.
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ARGUED SEPTEMBER 16, 2003—DECIDED OCTOBER 24, 2003
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Before FLAUM, Chief Judge, DIANE P. WOOD and WIL-
LIAMS, Circuit Judges.
FLAUM, Chief Judge. In 2002, James Fallon was con-
victed of eleven counts of bank fraud in violation of 18
U.S.C. § 1344(1). He was sentenced to 32 months in prison
and ordered to pay $316,139 in restitution. On appeal,
Fallon argues that he was deprived of a fair trial and that
the district court erred in denying his motion to exclude his
prior convictions. For the reasons set forth herein, we af-
firm the decisions of the district court and, consequently,
Fallon’s conviction.
2 No. 03-1330
I. BACKGROUND
James Fallon and co-defendant Michael Borgetti engaged
in a bank fraud scheme that operated in a manner similar
to a check kite. While working as an independent whole-
saler with the Greater Rockford Auto Auction, Fallon met
Borgetti who owned a number of small businesses in
Rockford, Illinois including Morgan Auto. Morgan Auto sold
inexpensive ($1800 and less) used cars. Around 1990, Fallon
left the Greater Rockford Auto Auction and went to work as
an independent wholesaler for Morgan Auto.
In May 1992, Fallon and Borgetti opened a used car
dealership known as AutoSmart. AutoSmart sold used cars
in the $6,000 to $12,000 range. Borgetti was the president
of AutoSmart, Fallon was the secretary, and each man
owned 50% of AutoSmart’s stock.
Borgetti did his banking with Alpine Bank in Rockford.
To control the inventory purchases by the independent car
wholesalers that he financed, Borgetti entered into a draft-
ing agreement with Alpine Bank. Under this agreement,
Borgetti and other representatives of his business could
issue Alpine Bank drafts. Unlike checks, which are drawn
against funds maintained in a particular account, these
drafts were drawn directly on Alpine Bank. When drafts
were presented to Alpine Bank for payment, a bank em-
ployee would call Borgetti and ask if he intended to pay the
draft. With Borgetti’s approval, the bank would cash the
draft and Borgetti would then be required to reimburse the
bank. The drafts were used to purchase inventory for both
Morgan Auto and AutoSmart. Though there was no formal
agreement, the parties’ intent was that the drafts would be
used to purchase cars. The drafts included fields for “Make,”
“Year,” and “Serial Number.”
Around 1994, Fallon and Borgetti began using drafts to
artificially inflate the balances of the AutoSmart and
Morgan Auto checking accounts at Alpine Bank. The fraud
No. 03-1330 3
began when Borgetti discovered that the AutoSmart ac-
count was overdrawn. Fallon and Borgetti discussed the
situation and decided to resolve it by kiting checks from
Morgan Auto’s account to AutoSmart’s. As this situation
continued on a regular basis, oftentimes there was not
enough money in the Morgan Auto account to cover the
checks payable to the bank. In those events, Borgetti issued
drafts from AutoSmart to Morgan Auto and deposited those
drafts into the Morgan Auto account. In early stages of
the scheme, the kiting occurred for brief periods and was
then corrected by increased cash flow. By early 1997, the
fraud reached a point where it could not be stopped. After
a while, Borgetti became concerned that the appearance of
his signature on all of the fictitious drafts would cause
Alpine Bank to discover the fraud, so Fallon began signing
the drafts from AutoSmart to Morgan Auto.
Understandably, the numerous fraudulent drafts made
it difficult for Jerri Anderson, AutoSmart’s secretary/book-
keeper, to perform her responsibilities. Ordinarily, when
Anderson received copies of the bank drafts she would
match the drafts to purchased vehicles. Once Anderson dis-
covered that cars listed on many of the drafts were “miss-
ing,” she alerted Fallon to the problem. Fallon told her to
record the drafts as loans from AutoSmart to Morgan Auto.
During August and September 1998, Fallon signed a
total of 134 drafts on behalf of AutoSmart that were pay-
able to Morgan Auto. Those drafts listed a total of 324
vehicles, but according to AutoSmart’s police book (an of-
ficial inventory Illinois requires car dealers to maintain)
AutoSmart purchased no vehicles whatsoever from Morgan
Auto during that time period.
In October 2001, a federal grand jury returned an in-
dictment charging Fallon with twenty-six counts of bank
fraud. Borgetti was also indicted, pled guilty, and agreed
to cooperate in the case against Fallon. A jury convicted
Fallon on eleven counts.
4 No. 03-1330
II. DISCUSSION
A. Brady violation
On direct examination at Fallon’s trial, Borgetti testified
about cash-flow problems that AutoSmart experienced dur-
ing the time period of the fraud. On cross-examination,
defense counsel challenged this testimony by confronting
Borgetti with AutoSmart’s monthly “Statements of Profit
and Loss” for 1997 and 1998. The exhibit showed that as of
August 1998 AutoSmart had a total profit of $156,000.
Borgetti explained, however, that he and Fallon had in-
flated these numbers for the purpose of hiding AutoSmart’s
true financial condition. Borgetti then told the defense
counsel that he had told the government that the state-
ments were inflated. Since the government had not dis-
closed Borgetti’s statements on the “inflated inventory” to
the defendant, the defense believed Borgetti was lying and
challenged his testimony in front of the jury.
The next day, after reviewing the FBI’s notes as well as
his own, the government’s attorney confirmed that Borgetti
had, in fact, informed the government of this information.
Despite this admitted oversight, the district court denied
defense counsel’s motion to dismiss the indictment based
upon an alleged Brady violation, finding that the defendant
had not been prejudiced by the late disclosure. We review
the district court’s decision for abuse of discretion. United
States v. Wilson, 237 F.3d 827, 831-32 (7th Cir. 2001) (citing
United States v. Asher, 178 F.3d 486, 496 (7th Cir. 1999)).
Fallon argues that the government’s failure to disclose
this additional material regarding Borgetti prior to trial
constituted a violation of the government’s obligation to
disclose impeaching evidence under Brady v. Maryland, 373
U.S. 83, 83 S.Ct. 1194, 10 L. Ed. 2d 215 (1963), and Giglio
v. United States, 405 U.S. 150, 92 S.Ct. 763, 31 L. Ed. 2d
104 (1972). Under Brady and its progeny, the government
No. 03-1330 5
has the affirmative duty to disclose evidence favorable to
a defendant and material either to guilt or punishment.
United States v. Gonzalez, 93 F.3d 311, 315 (7th Cir. 1996).
Although the term “Brady violation” is often used to refer
to any breach of the government’s broad obligation to dis-
close any exculpatory information, the Supreme Court had
made it clear that there is no true “Brady violation” unless
the non-disclosure was so serious that there is a reasonable
probability that the suppressed evidence would have
produced a different verdict. Strickler v. Greene, 527 U.S.
263, 281, 119 S.Ct. 1936, 144 L. Ed. 2d 286 (1999). To pre-
vail on his Brady claim, Fallon must show three compo-
nents: (1) that the evidence at issue, Borgetti’s admission
concerning the Profit and Loss statements, was favorable to
him because it is exculpatory or impeaching; (2) that the
government willfully or inadvertently suppressed the evi-
dence; and (3) that Fallon suffered prejudice as a result.
United States v. O’Hara, 301 F.3d 563, 569 (7th Cir. 2002)
(citing Strickler, 527 U.S. at 281-82).
While Borgetti’s statements regarding the “inflated in-
ventory” may have been favorable to Fallon, we cannot con-
clude that the delayed disclosure caused him prejudice. To
establish prejudice under Brady, a defendant must estab-
lish a reasonable probability that, had the evidence been
disclosed to the defense, the result of the proceeding would
have been different. Strickler, 527 U.S. at 280. The value of
the “inflated inventory” evidence was for the impeachment
of Borgetti—it demonstrated a false statement and unlaw-
ful act. However, this evidence was merely cumulative of an
extensive amount of other evidence that showed Borgetti to
be a liar and a fraud (e.g., his admissions that he defrauded
Alpine Bank for four years) and therefore was not material.
See United States v. Wilson, 237 F.3d 827, 832-33 (7th Cir.
2001) (finding that undisclosed evidence that a cooperat-
ing witness had tested positive for marijuana use while in
the witness protection program was not material because it
6 No. 03-1330
would have been cumulative of extensive evidence of
the witness’s drug use); United States v. Dweck, 913 F.2d
365, 370-72 (7th Cir. 1990) (concluding that government did
not violate duty to disclose material about a witness under
Brady where material was merely cumulative of witness’s
extensive involvement in the drug trade).
Fallon argues that his trial strategy was affected by the
late disclosure of Borgetti’s statements. Materiality focuses
not on trial preparation, but instead on whether earlier dis-
closure would have created a reasonable doubt of guilt. See
United States v. Agurs, 427 U.S. 97, 112, n.20, 96 S.Ct.
2392, 49 L. Ed. 2d 342 (1976) (rejecting argument that the
materiality test should be defined in terms of the defen-
dant’s ability to prepare for trial rather than in terms of
fact finders’ assessments of guilt); Matthew v. Johnson, 201
F.3d 353, 360 (5th Cir. 2000) (finding that a definition of
the materiality requirement in terms of defense strategies
is at odds with the Brady rule’s purpose of ensuring that
the accused receives an impartial party’s assessment of
guilt based on all available evidence); United States v.
Rogers, 960 F.2d 1501, 1511 (10th Cir. 1992) (materiality
does not focus on trial strategy). Accordingly, despite
Fallon’s insistence that the delayed disclosure caused the
defense’s theory to shift midstream and undermined the
defense counsel’s credibility with the jury, the salient issue
remains whether the late disclosure of Borgetti’s statements
undermines confidence in the outcome of the trial. See
United States v. Bagley, 473 U.S. 667, 682, 105 S.Ct. 3375,
87 L. Ed. 2d 481 (1985).
The government presented overwhelming evidence of
Fallon’s guilt, including evidence that he signed a total of
134 drafts for nonexistent vehicles during the last two
months of the scheme and mislead Jerri Anderson as to the
purpose of the fraudulent drafts. In light of the weight of
countervailing evidence, we are unconvinced that there is
No. 03-1330 7
a reasonable probability that timely disclosure of the evi-
dence would have changed the result of the proceeding.
In any event, we have serious reservations as to whether
Fallon’s claim satisfies the suppression prong of the Brady
test. Evidence is “suppressed” for Brady purposes if (1) the
prosecution failed to disclose the evidence before it was too
late for the defendant to make use of the evidence; and (2)
the evidence was not otherwise available through the exer-
cise of reasonable diligence. O’Hara, 301 F.3d at 569;
United States v. Reyes, 270 F.3d 1158, 1167 (7th Cir. 2001).
Again, the value of the “inflated inventory” evidence in this
case was for the impeachment of Borgetti—it demonstrated
an additional false statement and unlawful act. Borgetti
expressly admitted falsifying the documents on cross-
examination, thus the delayed disclosure did not prevent
the defense counsel from effectively using the information.
Furthermore, the “inflated inventory” evidence was clearly
otherwise available through the exercise of reasonable
diligence. Although Fallon claims to have relied upon the
inflated “Statement of Profit and Loss,” other financial
documents and tax returns disclosed to the defense showed
that AutoSmart had indeed sustained a large loss in 1998.
Accordingly, we find that the district court did not abuse
its discretion in denying Fallon a new trial.
B. Ostrich Instruction
Fallon claims that the district court abused its discretion
by including the “conscious avoidance” or “ostrich” language
in the jury instruction that defined the word “knowingly.”
We review the district court’s decision to give the “ostrich”
instruction for abuse of discretion, viewing the evidence in
the light most favorable to the government. United States
v. Craig, 178 F.3d 891, 896 (7th Cir. 1999).
8 No. 03-1330
The “conscious avoidance” or “ostrich” instruction “ex-
plain[s]to the jury that the legal definition of ‘knowledge’
includes the deliberate avoidance of knowledge.” United
States v. Carrillo, 269 F.3d 761, 769 (7th Cir. 2001). The
instruction is appropriate when: (1) the defendant claims a
lack of guilty knowledge; and (2) the facts and evidence sup-
port an inference of deliberate ignorance. Id.Fallon clearly claimed a lack of guilty knowledge, thus,
the second factor becomes the critical determination. Fallon
argues that the government presented no evidence that he
took any action to avoid knowing the truth. However, an
inference of willfulness need not be shown by overt physical
acts—“ ‘a cutting off of one’s normal curiosity by an effort
of will’ is enough.” United States v. Neville, 82 F.3d 750,
760 (7th Cir. 1996) (quoting United States v. Stone, 987
F.2d 469, 472 (7th Cir. 1993)). Again, evidence demon-
strated that during August and September 1998 Fallon
signed drafts listing a total of 324 vehicles on behalf of
AutoSmart that were payable to Morgan Auto. According to
AutoSmart’s police book, AutoSmart purchased no vehicles
from Morgan Auto during this period. Moreover, when Jerri
Anderson pointed out to Fallon that there was a problem
with the drafts, he made no effort to investigate the prob-
lem. To a normally curious and innocently ignorant person,
especially one who co-owns a company, over 300 paid for
but unaccounted for vehicles would presumably raise a red
flag. However, Fallon did not investigate the problem and
told Anderson to record these drafts as loans to Morgan
Auto. On these facts, the district court did not abuse its
discretion in giving the “ostrich” instruction as a jury could
reasonably conclude that Fallon consciously avoided dis-
covering the ongoing fraud.
C. Motion in Limine
Prior to trial, Fallon filed a motion in limine to preclude
impeachment with his two prior state theft convictions, his
No. 03-1330 9
federal conviction for conspiracy to alter odometers and
mail fraud, and his federal false statement conviction. The
court denied the motion with respect to Fallon’s 1986 fed-
eral conviction to alter odometers and his 1989 federal false
statements conviction. Although the two federal convictions
were outside the normal ten-year period, the court found
that the probative value of the convictions substantially
outweighed their prejudicial effect.
The district court’s decision to admit these convictions
falling outside the ten-year time limitation set forth in
Fed. R. Evid. 609(b) causes us concern. As we noted in
United States v. Shapiro, the legislative history leading to
the enactment of Rule 609 indicates that “it is intended that
convictions over 10 years old will be admitted very rarely
and only in exceptional circumstances.” 565 F.2d 479, 481
(7th Cir. 1977) (citing Notes of the Committee on the
Judiciary, Senate Report No. 93-1277).
Nevertheless, we are unable to substantively address the
appropriateness of the district court’s decision that this case
falls within the limited “exceptional circumstances” cate-
gory. Fallon chose not to testify at trial and therefore
waived his right to challenge the district court’s decision on
this issue. Under Luce v. United States, “to raise and pre-
serve for review the claim of improper impeachment with a
prior conviction, a defendant must testify.” 469 U.S. 38, 43,
105 S.Ct. 460, 83 L. Ed. 2d 443 (1984). See also United
States v. Burrell, 963 F.2d 976, 991-92 (7th Cir. 1992). The
Luce court noted that when a reviewing court does not
“know the precise nature of the defendant’s testimony,” it
is impossible for the court to weigh the probative value of a
prior conviction against the prejudicial effect to the de-
fendant. 469 U.S. at 41. Although Luce dealt with prior con-
victions admitted under Rule 609(a)(1), we find that it
applies with equal force to convictions admitted under Rule
609(b).
10 No. 03-1330
Fallon attempts to distinguish his case by arguing that he
explicitly informed the district court that his decision not to
testify was based on the denial of the motion in limine,
whereas in Luce it was unclear to the reviewing court what
motivated the defendant’s decision not to testify. Neither
Luce nor its rationale makes exception for a defendant who
informs the trial judge that the denial of his motion in
limine is the basis for his decision not to take the stand.
Accordingly, we find that Fallon waived this argument and
the district court’s ruling on his motion in limine is un-
reviewable.
III. Conclusion
The defendant did not show that the district court abused
its discretion by (1) failing to grant a new trial based on the
alleged Brady violation or (2) giving the “ostrich” instruc-
tion to the jury. The defendant waived his right to challenge
the district court’s ruling on his motion in limine to exclude
impeachment with his prior convictions. We therefore
AFFIRM his conviction.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-24-03