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United States v. Fairley

United States Court of Appeals, Fifth Circuit

January 22, 2018

UNITED STATES OF AMERICA, Plaintiff - Appellee
v.
KENNETH E. FAIRLEY, Defendant-Appellant

         Appeal from the United States District Court for the Southern District of Mississippi

          Before WIENER, HIGGINSON, and COSTA, Circuit Judges.

          STEPHEN A. HIGGINSON, CIRCUIT JUDGE

         Appellant-Defendant Kenneth Fairley appeals his jury conviction for theft of government property in violation of 18 U.S.C. § 641 (counts two and three) and conspiracy to commit theft of government property in violation of 18 U.S.C. § 371 (count one). Fairley argues that: (1) the indictment, jury instruction, and verdict form all misstated the elements of § 641; (2) the district court erroneously admitted recorded conversations as non-hearsay statements of a coconspirator; and (3) the district court improperly calculated Fairley's loss amount and imposed an inapplicable sentencing enhancement. Because errors in the indictment, jury instruction, and verdict form directly undermined Fairley's defense, we VACATE Fairley's conviction under counts two and three. We AFFIRM Fairley's conviction under count one, and the district court's evidentiary and sentencing rulings. We REMAND to the district court to determine whether Fairley's sentence should change in light of the vacated convictions.[1]

         I.

         After a six-day trial, a jury found Kenneth Fairley guilty of two counts of theft of government funds and one count of conspiracy to commit theft of government funds. The charges arose from a conspiracy between Fairley and another man, Arthur Fletcher, to submit inflated construction bills to a United States government-backed affordable housing program. Fairley was sentenced to 36 months imprisonment, concurrent as to all three counts.[2]

         i. The HUD Grant

         The United States Department of Housing and Urban Development (HUD) operates the HOME investment program, which aims to increase availability of affordable housing. Through the HOME program, HUD partners with "participating jurisdictions, " which in turn certify nonprofit Community Housing Development Organizations (CHDOs). Certified CHDOs are eligible to receive HUD grants for construction and renovation of affordable housing units.

         Fairley served as executive director of Pinebelt Community Services, Inc., a nonprofit organization. In March 2010, the city of Hattiesburg, Mississippi, a HUD participating jurisdiction, designated Pinebelt as an approved CHDO. In August 2010, Hattiesburg and Pinebelt entered into a contract under which Pinebelt agreed to develop three low-income housing units, and Hattiesburg agreed to reimburse Pinebelt with up to $100, 000 of HOME program funds. The agreement also provided for Pinebelt to receive up to $18, 637.60 in operating funds in addition to the HOME funds. The parties later amended the contract, and agreed that Pinebelt would instead renovate two single family homes: 202 South Street and 127 East 5th Street.

         In July and August 2011, Pinebelt submitted two "request[s] for funds" to Hattiesburg totaling $98, 000. The requests were signed by Fairley, and ostensibly sought reimbursement for "services rendered and allowable costs/expenditures" associated with rehabilitating the South Street and 5th Street homes. After receiving the requests, Hattiesburg paid Pinebelt $98, 000.

         ii. The Government's Case

         At trial the government presented evidence that Fairley conspired with his old friend Fletcher to defraud the government.[3] Fletcher owned Interurban Housing and Development LLC. To apply for and receive HOME funds from Hattiesburg, Pinebelt submitted documents suggesting that it had solicited bids for the contract, selected Interurban as a contractor after a competitive bidding process, and Interurban billed Pinebelt for $98, 000 in construction costs at the two properties. According to the government, these documents were false, and Interurban did no work on the properties. Nonetheless, the government investigation showed that Pinebelt sent $72, 000 to Interurban after receiving the $98, 000 from the city.

         An agent with the Office of the Inspector General testified that Fairley admitted to him that Interurban did no work on the South Street and 5th Street properties. The same agent testified that Fletcher admitted that

          Interurban did not work on the Pinebelt projects, but that Fletcher had allowed Fairley to use Interurban's name to qualify for HUD grants.

         An IRS agent testified that a review of Pinebelt's finances showed that Pinebelt spent only approximately $38, 000 renovating the two properties. The agent also documented several transfers, described as "seed money" necessary to secure the contract with Hattiesburg, from a charity controlled by Fletcher to Pinebelt.[4] The government presented evidence that the rehabilitation work on the properties was shoddy, and the properties did not pass inspection until years after Pinebelt was paid. Finally, the government played recorded phone calls between Fairley and Fletcher. In the calls, Fletcher attempted to collect money from Fairley, apparently provided to secure a second HUD contract with Hattiesburg.

         iii. Fairley's Case

         In his defense, Fairley disputed the government's contention that Interurban did no work, and described the transfers from Fletcher's charity as loans and donations. Fairley also challenged the government's interpretation of HOME program regulations and the government's accounting. A HUD consultant called by Fairley testified that CHDOs may properly be reimbursed under HOME for operating expenses, including salaries. Fairley showed that, although HUD did investigate and suspend Pinebelt, the investigation found Pinebelt and Hattiesburg's documentation to be "satisfactory" and HUD eventually lifted Pinebelt's suspension.

         Fairley also called an accountant and former IRS agent who testified that Pinebelt spent-including overhead costs-approximately $135, 000 rehabilitating the South Street and 5th Street properties between August 2010 and August 2011. In addition, a construction contractor called by Fairley estimated that the value of Pinebelt's work on the two properties totaled approximately $149, 000. Finally, Fairley elicited testimony that at least ten different contractors and between 15 and 20 volunteers worked on the two projects, and that Interurban had, in fact, worked on the projects.

         iv. The Verdict

         The jury found Fairley guilty on all three counts. The verdict form read as follows:

1. On Count 1 of the Indictment, conspiracy to commit theft in violation of 18 U.S.C. § 371, we, the jury, find the Defendant Kenneth E. Fairley, Sr.:
___ Guilty ___ Not Guilty
2. On Count 2 of the Indictment, knowingly and willfully receiving, retaining, concealing, or converting any money, property, or thing of value belonging to the United States having an aggregate value of more than $1, 000 in violation of 18 U.S.C. § 641, we, the jury, find the Defendant Kenneth E. Fairley, Sr.:
___ Guilty ___ Not Guilty
3. On Count 3 of the Indictment, knowingly and willfully receiving, retaining, concealing, or converting any money, property, or thing of value belonging to the United States having an aggregate value of more than $1, 000 in violation of 18 U.S.C. § 641, we, the jury, find the Defendant Kenneth E. Fairley, Sr.:
___ Guilty ___ Not Guilty

         The jury placed an "X" next to "Guilty" for all three counts. For counts two and three, the jury crossed out "retaining" and "concealing" on the verdict form, leaving only "receiving" and "converting" as the operative verbs. When the verdict was read aloud by the district court's clerk, the clerk omitted the crossed out words.[5] Fairley did not object.

         II.

         Count one of the indictment charged Fairley with conspiracy to commit theft of government property in violation of 18 U.S.C. § 371. Counts two and three charged Fairley with theft of government property in violation of 18 U.S.C. § 641. Fairley argues that the indictment, jury instruction, and verdict form all misstated the elements of § 641. Fairley asserts that: (1) the indictment was legally insufficient as to counts two and three, (2) the jury instructions permitted the jury to convict Fairley of a nonexistent offense under counts two and three, and (3) the errors in counts two and three invalidate his conspiracy conviction under count one. We begin by discussing the structure of § 641, and then evaluate Fairley's claims of error.

         i. 18 U.S.C. § 641

         Title 18, United States Code, Section 641 criminalizes two distinct acts. The first paragraph of § 641 makes it a crime to:

(1) "embezzle[], steal[], purloin[], or knowingly convert[] to [the defendant's] own use or the use of another";
(2)"a thing of value of the United States."

18 U.S.C. § 641. Under the second paragraph of § 641, it is a crime to:

(1)"receive[], conceal[], or retain[]";
(2)a thing of value of the United States;
(3)"with the intent to convert it to [the defendant's] use or gain";
(4)"knowing it to have been embezzled, stolen, purloined or converted."

Id. In short, paragraph one covers stealing from the United States and paragraph two covers knowingly receiving stolen United States property. See Milanovich v. United States, 365 U.S. 551, 554 (1961) (discussing § 641 and distinguishing between "the provision of the statute which makes receiving an offense" and "the provision relating to robbery"); United States v. Minchew, 417 F.2d 218, 219 (5th Cir. 1969) (per curiam) ("The Court [in Milanovich] apparently concluded that Congress, by adding paragraph two to section 641 intended to reach a new group of wrongdoers, and not to multiply the offense of the thieves themselves.").

         Even though § 641's two paragraphs target separate acts, id., [6] the Fifth Circuit's pattern jury instruction for § 641 applies only to the first paragraph. Fifth Circuit Pattern Jury Instruction (Criminal Cases) § 2.27 (2015) ("Theft of Government Money or Property - 18 U.S.C. § 641 (First Paragraph)"). The Ninth Circuit's pattern instructions have separate entries, with different elements, for paragraphs one and two. Compare Manual of Model Criminal Jury Instructions for the District Courts of the Ninth Circuit § 8.39 (2010) ("Theft of Government Money or Property (18 U.S.C. § 641)") with id. § 8.40 ("Receiving Stolen Government Money or Property (18 U.S.C. § 641)").

         Further, the verbs animating § 641's first two paragraphs are not fungible. The verbs in paragraph one-embezzle, steal, purloin, and convert- describe takings or possessions that are fraudulent or otherwise illegal. Paragraph two's verbs-receive, conceal, and retain-are broader, and cover innocent as well as illicit acts.

         The government disagrees. It argues that § 641 is divided into separate paragraphs merely for historical reasons, and that this distinction has no bearing on this case. The government purports to cite authority in support, but its cases miss the mark. Some state generally that § 641 covers a broad range of conduct. See Morissette v. United States, 342 U.S. 246, 266 n.28, 271 (1952) (discussing § 641's broad reach and stating that there is "considerable overlapping in the embezzlement, stealing, purloining and knowing conversion grouped in this statute" (emphasis added)); United States v. Dowl, 619 F.3d 494, 501 (5th Cir. 2010) (per curiam) (noting § 641's "broad construction"). Others address even more tangential issues. See United States v. Reagan, 596 F.3d 251, 253 (5th Cir. 2010) ("[E]ach distinct taking of funds constitutes a separate violation under the statute."); United States v. Bailey, 734 F.2d 296, 304 (7th Cir. 1984) (describing § 641's "purpose" as "to provide a sanction for intentional conduct by which a person either misappropriates or obtains a wrongful advantage from government property"). And at least one undermines the government's position. See United States v. Bauer, 713 F.2d 71, 74 n.9 (4th Cir. 1983) ("[T]he Government may elect to charge, and obtain a conviction for, either theft or for receiving, concealing or retaining. That is to say that the crimes are not mutually exclusive.").

         In short, nothing cited by the government causes us to doubt what is clear from both the statutory text and prior cases: section 641's first two paragraphs describe two distinct criminal acts, with distinct elements. Fairley's indictment, jury instructions, and verdict form all, in different ways, combined the first and second paragraphs of § 641 into a single purported offense. This erroneous cross-incorporation, and its effect on Fairley's conviction, is discussed below.

         ii. The Indictment

         Fairley challenges counts two and three of the indictment as insufficient.[7] These counts charge that Fairley "did knowingly and willfully retain, conceal, and convert to his own use or the use of another money of the United States in an amount greater than $1, 000.00." In doing so, the indictment borrows the verbs "retain" and "conceal" from paragraph two of § 641. But the indictment omits paragraph two's remaining elements; it does not charge that Fairley acted: (1) "with the intent to convert" the United States' money to "his own use or gain"; or (2) "knowing [the money] to have been embezzled, stolen, purloined, or converted." 18 U.S.C. § 641. Fairley argues that by combining verbs from § 641's theft prong and ...


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