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United States v. Klein

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


decided: April 30, 1975.

THE UNITED STATES OF AMERICA, APPELLEE,
v.
MERRILL H. KLEIN A/K/A "MORRIE", ELDON G. STUDEBAKER, FRANK GRAZIER A/K/A "BUNNY", AND CARL LUICK CARL LUICK, APPELLANT

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA Criminal No. 73-277.

Van Dusen, Gibbons and Hunter, Circuit Judges.

Author: Hunter

Opinion OF THE COURT

HUNTER, Circuit Judge:

Appellant, Carl Luick, and three others were indicted for mail fraud, 18 U.S.C. § 1341,*fn1 and for conspiracy to commit mail fraud, 18 U.S.C. § 371.*fn2 Luick was convicted on all counts.*fn3 On this appeal we must decide whether there was sufficient evidence to show that Luick knew he was dealing with a conspiracy to defraud several insurance companies of the proceeds owing on fire insurance policies. Because we believe there was insufficient evidence of that knowledge, we reverse.

I.

The alleged conspiracy revolved around a scheme to destroy by fire a debt-ridden hotel for the proceeds of several fire insurance policies. During the summer of 1968, two of the hotel owners contacted one Karsnak about their continuing financial difficulties in managing the hotel. Karsnak, an unindicted co-conspirator who testified as the government's chief witness, introduced the owners to codefendant, Merrill Klein. The evidence shows that it was Klein who suggested arson as a solution to the hotel owners' financial difficulties. After negotiations in which Karsnak acted as intermediary between the owners and Klein, Klein was hired to destroy the hotel for $60,000.

On March 1, 1969 the hotel was partially destroyed by fire. The representative of the insurance companies, Mr. Roy Cook, suspected that arson had been the cause of the fire because large plastic bags of gasoline were found in the remains. There was no indication that the owners had been involved, however, so the insurance representative entered negotiations to settle on the policies.

The evidence shows that appellant Luick's role in the proceedings began only after the fire had taken place. Luick, a public fire insurance adjuster, was hired by Karsnak at a percentage-of-settlement fee to prepare proof of loss claims for the owners. Luick submitted proof of loss forms to Cook, the insurance representative, and after several adjustments, a $310,000 settlement for the hotel owners was reached.

Two of the hotel owners, with Luick and Klein, were indicted for conspiracy to defraud the insurance companies by mail and for twenty substantive counts of mail fraud. After a joint trial by jury, Klein and Luick were found guilty on all counts and the two hotel owners were acquitted.

II.

To support a conspiracy conviction, the government must show both an agreement and a specific intent to achieve some unlawful goal. United States v. DeCavalcante, 440 F.2d 1264, 1275 (3d Cir., 1971); United States v. Borelli, 336 F.2d 376, 384 (2nd Cir., 1964). We do not dispute that a party who associates himself with an ongoing conspiracy may become a party to that agreement, either expressly by agreement or implicitly by acts done in furtherance of that conspiracy. Direct Sales v. United States, 319 U.S. 703, 709, 87 L. Ed. 1674, 63 S. Ct. 1265 (1943); United States v. Lester, 282 F.2d 750, 753 (3d Cir., 1960). At a minimum, however, it must be shown that such a person has knowledge of the conspiracy's illicit purpose when he performs acts which further that illicit purpose. Direct Sales, supra, United States v. Salerno, 485 F.2d 260, 263 (3d Cir., 1973); United States v. American Radiator & Standard Sanitary Corporation, 433 F.2d 174 (3d Cir., 1970).*fn3a By acting in furtherance of the co-conspirators' goals with knowledge of the improper purpose, the jury can reasonably infer that the new member has achieved a tacit agreement with members of the ongoing conspiracy. Without knowledge of some improper purpose, the agreement, which is the heart of any conspiracy indictment, cannot be inferred from acts, even acts which further the purpose of the conspiracy. United States v. Kates, 508 F.2d 308 (3d Cir., 1975).

Knowledge of the illicit purpose will also serve as the foundation for the required proof of specific intent. According to the Supreme Court in Direct Sales, supra, the intent requirement in conspiracy,

In judging whether knowledge or specific intent have been shown in this case, we must, after a jury verdict of guilty, "view the evidence in the light most favorable to the prosecution." United States v. DeCavalcante, 440 F.2d at 1273. Glasser v. United States, 315 U.S. 60, 80, 86 L. Ed. 680, 62 S. Ct. 457 (1942). Circumstantial evidence is clearly proper to show these elements especially in a conspiracy case where direct evidence is likely to be scant.*fn4

With respect to the substantive counts of mail fraud the government was required to prove a specific intent to defraud. United States v. Payne, 474 F.2d 603, 604 (9th Cir., 1973). Mere use of the mails by Luick, without a showing that by that use he intended to further the fraudulent scheme, would be insufficient to support the jury's guilty verdicts on the substantive counts.

The indictment in this case charged conspiracy to defraud several insurance companies by mail. Clearly, the purpose of this illegal agreement was the fraudulent procurement of fire insurance proceeds. In order to link Luick to this ongoing conspiracy, it was, therefore, essential for the government to prove his knowledge of a plot to defraud the insurors. Mere knowledge of arson would be insufficient to support a guilty verdict in this case.*fn5 Despite the government's argument to the contrary, the evidence simply gave rise to no inferences from which the jury could find that Luick had knowledge of the conspiracy to defraud the insurance companies.

The evidence showed that Luick paid Klein, the arsonist, a $5,000 referral fee,*fn6 N.T. 2876, and that Klein had referred fire adjustments to Luick in the past with a similar fee arrangement, N.T. 2899. In a pretrial interview with the FBI, Luick denied involvement in any pre-arranged fire scheme but indicated that some of his acquaintances could possibly have been arsonists, N.T. 2872, 2877. Evidence also showed that Luick admitted that he adjusted fires with his "eyes closed," N.T. 2872, 2878, 2918. At the conclusion of a pretrial interview with the FBI, Luick remarked that even if the FBI charged Luick with mail fraud and put him out of business there would always be other fire adjusters to handle questionable cases. N.T. 2878.

As additional evidence against Luick, the government offered the testimony of a court clerk concerning Luick's prior conviction for conspiracy to commit mail fraud. The clerk read to the jury the following portions of the indictment with testimony that Luick had been found guilty of the offense charged.

That beginning on or about December 1, 1969 and continuing thereafter to on or about November 18, 1970, in the Western District of Pennsylvania, Carl Luick and others did knowingly and unlawfully conspire, continue, confederate and agree together and with each other to commit certain offenses against the United States, to wit: violations of Title 18 . . . Section 1341; that is to say, they conspired and agreed to use the United States mails in furtherance of a scheme and artifice to defraud and by means of fraud to obtain money from [an] . . Insurance company . . . . (N.T. 2572).

From these proofs, the government contends that the jury could infer the requisite knowledge. We cannot agree.

Clearly, the ongoing relationship between Luick and Klein could give rise to no inference of the requisite knowledge. It was not shown that Klein had a reputation for being an arsonist or that Luick should have been put on notice of suspicious facts in this case because of his past dealings with Klein.*fn7 In fact the nature of Klein's and Luick's past dealings was left wholly unexplained. Clearly, the referral fee would give rise to no inference that Klein should have been known as an arsonist to Luick. Nowhere in the record is there any evidence to show why a referral fee was paid but the referral fee would seem to negative any inference that excessive financial gain should have put Luick on notice of suspicious dealings.*fn8 Presumably from their ongoing relationship the government would have us infer that Luick knew of some past reputation of Klein. The past relationship was presented to the jury as perfectly neutral. To infer from such evidence that Luick might know of any past bad reputation Klein might have had, is more than the evidence warrants.

But the government would have us go even further. In its view, the jury could infer from this past relationship not only knowledge of Klein's reputation but knowledge that because of Klein's involvement in this case, a plot to defraud the insurance companies must have been afoot. There is no logical connection between the evidence presented and such a conclusion.

Similarly, Luick's remark that he adjusted first with his "eyes closed" may have supported an inference that Luick knew arson had occurred in this case. Where even the insurance companies suspected arson and where the indictment did not charge conspiracy to commit arson, this evidence was simply insufficient.

The government characterizes as an admission Luick's hypothetical remark that even if the FBI were to charge him with mail fraud there would always be other insurance adjusters. Viewed in the light most favorable to the prosecution, this remark shows only Luick's awareness that the FBI considered him a possible defendant. It is one thing to know one might be charged with mail fraud and quite another to admit guilt for the actual offense.

The government would also have us believe the jury could infer the requisite knowledge from Luick's prior conviction for mail fraud. In admitting this prior conviction we believe the trial court abused its discretion. Moreover, the limited information read to the jury about the prior conviction renders meaningless any contention that it showed knowledge.

Generally, evidence of other offenses is inadmissible in a criminal prosecution. "The rule is qualified by a number of exceptions stated in terms of the capacity of the evidence to prove some specific fact or issue. . . . Of course, the trial judge may, in the exercise of his sound discretion exclude evidence which is logically relevant to an issue other than propensity, if he finds the probative value of such evidence is substantially outweighed by the risk that its admission will create a substantial danger of undue prejudice." (Emphasis added.) United States v. Stirone, 262 F.2d 571, 576-577 (3d Cir., 1959), rev'd on other grounds 361 U.S. 212, 4 L. Ed. 2d 252, 80 S. Ct. 270 (1960); United States v. Chrzanowski, 502 F.2d 573, 575 (3d Cir., 1974); United States v. Hines, 470 F.2d 225, 228 (3d Cir., 1972); United States v. Todaro, 448 F.2d 64, 66 (3d Cir., 1971), cert. denied 404 U.S. 1040, 30 L. Ed. 2d 732, 92 S. Ct. 724 (1972); United States v. Carter, 401 F.2d 748, 749 (3d Cir., 1968), cert. denied 393 U.S. 1103, 21 L. Ed. 2d 797, 89 S. Ct. 905 (1960).

In this Circuit prior crimes are admissible, if in the trial court's view, their tendency to prove some issue outweighs any prejudice.*fn9

In the instant case, the trial judge charged the jury that on the issue of intent it could consider the prior mail fraud conspiracy but only "to the extent that . . . a similar method of operation was employed in the prior crime." N.T. 2573.*fn10 Although this was a correct statement of the law, the way in which the prior crime was introduced gave the jury no basis for determining whether a similar method of operation had been employed. Merely reading the prior indictment to the jury, in our view, had no probative value on the issue for which it was admitted. As such we conclude that admission of the prior crime in this manner was an abuse of discretion.*fn11

But even assuming that it had been properly admitted, the prior conviction did not show knowledge in this case.*fn12 The jury was told only that Luick had conspired with unnamed persons to defraud an insurance company. The jury was not told whether Luick had acted as a fire adjuster in the prior conspiracy or whether arson had been committed or whether any of the same persons*fn13 or a similar scheme had been involved in the prior crime.*fn14 Where none of the facts are presented and only the former indictment is read to the jury, there is no basis for the jury to infer what defendant might have known in the first case, let alone to infer from that knowledge what he was likely to know in the second case.*fn15 Absent any showing of factual similarity the government argues that the prior conviction had probative value to show the requisite knowledge in this case. In effect, the government argues that if Luick was convicted of conspiracy to commit mail fraud in the past, he must have known that he was dealing with an ongoing conspiracy to commit mail fraud in this case.

Even if the jury had been told the facts in the prior case, however, no inference of knowledge in this case could have been drawn. With the exception of Luick's participation in both transactions, the record quite clearly shows that there was no factual similarity between the two offenses.*fn16

Simply stated, the prior crime had no probative value in showing Luick's knowledge of the instant plot to defraud the insurors.

It is noteworthy that Karsnak, the chief government witness, gave no testimony implicating Luick in the conspiracy to defraud the insurors.*fn17 The evidence, characterized by the government as sufficient, was presented through FBI reports of Luick's pretrial interviews, through a report of Luick's grand jury testimony and through the prior conviction. Considered cumulatively, this evidence is insufficient to support a finding that Luick had knowledge of the purpose of the conspiracy.*fn18

On the substantive counts of mail fraud, the government has also failed to sustain its burden of proof in that it did not show Luick's specific intent to defraud the insurance companies. Clearly, if Luick was unaware of the scheme to defraud, his innocent act of mailing proof of loss claims to the defrauded insurance companies cannot support the jury's guilty verdicts.

III.

Because the government failed to sustain its burden of proof, Luick's conviction on all counts will be reversed, the sentence will be vacated and the matter will be remanded to the district court for entry of judgment of acquittal.


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