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White Collar Defense & Compliance Developments in Criminal Law, Federal Case Law and Statutory Developments

State Court Order Restraining Use of Bank Account Proceeds Admissible In Bank Fraud Prosecution To Establish Knowledge And Intent

Posted in Evidence

Alain Leibman writes:

As discussed here previously, prosecutors always look to introduce evidence of pleadings or orders entered in related civil litigation to achieve a variety of purposes in the present criminal case. Ostensibly, the civil matters are offered to establish an element of the offense, usually going to intent or knowledge, but quite often the evidence is sought simply to show that the defendant has a propensity for behaving badly and that he/she did so on other occasions. As a result, the offer of such evidence usually precipitates a vigorous argument under Federal Rule of Evidence 403, but only after the government first successfully hurdles the admissibility question.

A case in point is the recent decision in United States v. Dupree, 2013 WL 309983 (2d Cir., January 28, 2013), a bank fraud prosecution against the CEO of the borrower. Based on evidence that the borrower entity had inflated its assets in order to obtain a term loan and line of credit worth $21,000,000, the Amalgamated Bank obtained a state court restraining order enjoining the entity and its CEO from removing any assets maintained at the bank; this order was obtained on the same date that the CEO, Dupree, and others were arrested in connection with an alleged scheme to defraud the bank through the same means. According to subsequent indictment, Dupree then also took various steps following the entry of the state court order to gain access to frozen funds, and so was additionally charged specifically for his post-freeze activity.

The government moved in limine in the trial court to allow it to admit the restraining order as evidence that Dupree had knowledge of his and his company’s obligations under the agreements with the bank and that his post-freeze order actions were intended to evade those obligations. The District Court declined to admit the evidence, and the government thought it important enough to seek, and obtain, interlocutory appeal. The Second Circuit reversed the trial court decision. The appeals court rejected the holding below that the state court order was inadmissible hearsay, holding instead that its offer fell under Federal Rule of Evidence 801(c), which defines hearsay as including only those statements offered to prove the truth of the matter asserted. The relevance of the court order, the appeals court held, was not in the legal effect of its directives to the affected parties, but in Dupree’s knowledge of the order and the notice which it gave him of the pertinent loan agreement terms which were referenced in the order and which he allegedly evaded improperly in accessing funds.

As for the Rule 403 considerations, the Second Circuit acknowledged the concerns expressed by the trial court that the jury might place undue emphasis on the freeze order and thus on its violation by the defendant. However, the appeals court noted, as they often do under such circumstances, that the danger of unfair prejudice could be cured by appropriate limiting instructions.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office.  A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)