Second Circuit Finds Temporary Restraining Order Admissible To Show State Of Mind

On Monday, the Second Circuit reversed the U.S. District Court for the Eastern District of New York’s denial of a government motion in limine to admit a state court a temporary restraining order as evidence of a defendant’s state of mind in a bank fraud prosecution.  United States v. Dupree, No. 11-5115-CR (2^nd Cir. January 28, 2013).  The court found that because the government had sought to admit the state court order for a non-hearsay purpose and the District Court’s Rule 403 analysis did not account for the order’s probative value if offered to show knowledge, that the decision must be reversed and remanded.

In 2010, Courtney Dupree, the former CEO and President of GDC Acquisitions, along with GDC’s COO and outside counsel, Thomas Foley and GDC’s CFO and CIO, Rodney Watts, was arrested for bank fraud.  The government alleged that Dupree and the others fraudulently secured loans from Amalgamated Bank, with which Dupree had negotiated a $21 million revolving credit line on behalf of three GDC subsidiaries, by intentionally inflating the subsidiaries’ accounts receivable.  The government also alleged fraud in relation to the defendants having GDC purchase another company in violation of the credit agreement.

Following the arrests, Amalgamated filed suit in New York state court, alleging breach of the credit agreement and seeking a temporary restraining order to enjoin GDC, Dupree and the subsidiaries from receiving any assets required to be maintained at the bank other than in the ordinary course of business.  The state court granted the restraining order (TRO).

While the first four counts of the superseding indictment in the underlying case stemmed from material misrepresentations made on the loan application and subsequent actions prior to Dupree’s arrest, the fifth count was directed solely at Dupree and arose from his course of conduct after the issuance of the TRO by the state court.  The government alleged that Dupree knew that the credit agreement provided Amalgamated a security interest in the subsidiary’s deposits and that he knowingly and intentionally executed a scheme to defraud Amalgamated of his interest in violation of 18 U.S.C. §1344.  According to the government, Dupree converted one of the subsidiary company’s revenue for his own personal use, all without giving notice to Amalgamated.  The government asserted that Dupree converted approximately $331,000 to his personal use in the period after his arrest, using the funds to pay for rent, a car lease, various mortgages and other expenses.

Prior to trial, the government filed a motion in limine seeking to admit the temporary restraining order as evidence that Dupree had knowledge of his obligations under the credit agreement, and that he intended to evade those obligations and defraud Amalgamated when he executed his withdraws and transfers.  The District Court denied the motion, holding that the TRO was inadmissible hearsay because the government was seeking to introduce the order for its truth – in the district court’s view, to show that the order created an independent obligation to maintain the accounts at Amalgamated.  The district court further noted that even if the order was admissible, the court would still exclude it under Rule 403 on the grounds that the dangers of unfair prejudice and confusion would substantially outweigh its probative value.  The case eventually went to trial on the remaining four counts, and Dupree was convicted on each of them.  The government, having filed a timely interlocutory appeal of the district court’s limine ruling, then pursued the appeal on the fifth count following trial.

The government’s main argument was that, given the order’s timing, coming on the heels of Dupree’s arrest and Amalgamated’s acceleration of the loan – and the order’s posture – resulting from Amalgamated’s suit to enforce its right under the credit agreement – a jury could infer that its issuance served as a reminder to Dupree of his obligations under the credit agreement.  Dupree maintained that the order was inadmissible.

The Second Circuit indicated that it had repeatedly held that a statement is not hearsay where, as it found in this case, it was offered, not for its truth, but to show that a listener was put on notice, citing George v. Celotex Corp., 914 F.2d 26, 30, (2^nd Cir. 1990) and U.S. v. Ansaldi, 372 F.3d 118, 130 (2^nd Cir. 2004).  The court found that a jury could draw the inference that Dupree knew of his obligations and further knew that he was depriving Amalgamated of its property interest when he allegedly withdrew and transferred money, and that a jury could draw that inference without deciding whether the restraining order itself created any obligations that Dupree subsequently violated.

In reviewing the district court’s Rule 403 analysis, the court found that the district court had failed to consider the probative value of the state court order on the question of whether Dupree was aware of his obligations to Amalgamated under the credit agreement when he improperly withdrew and diverted money.  It found that the district court’s conclusion that the order was proffered by the government to show that the order itself imposed a legal obligation constituted error, requiring that the district court’s order be set aside.  With respect to the potential for the jury placing undue emphasis on the order simply because a judge issued it or that it may cause confusion, the Second Circuit found that such dangers can often be cured by careful limiting instructions, citing United States v. Murcado, 573 F.3d 138, 142 (2^nd Cir. 2009).

The full text of the opinion can be found here: http://www.ca2.uscourts.gov/decisions/isysquery/f7bcf711-0fad-4d88-b86d-94282e327628/1/doc/11-5115_opn.pdf