Update: Utah Supreme Court Reverses Court of Appeals’ Decision in Grace Kelson Case

In the fall of 2014, the Utah Supreme Court ruled to reverse a 2012 Utah Court of Appeals decision in the Grace Kelson case.

Grace Kelson Verdict Overturned

In the fall of 2014, the Utah Supreme Court ruled to reverse a 2012 Utah Court of Appeals decision in the Grace Kelson case, which had vacated Ms. Kelson’s conviction for pattern of unlawful activity and reversed and remanded for a new trial on all other charges. The Utah Supreme Court’s decision remanded the case back to the court of appeals for further consideration of any remaining issues in the case, namely to consider an alternative ground for reversal of Ms. Kelson’s convictions that the court of appeals did not consider.

As background, in or around October 2001, Ms. Kelson and the owners of a mortgage company attempted to purchase a $15 million letter of credit to fund the two development projects. In order to secure the letter of credit, Ms. Kelson and the owners had to raise $125,000. As a result, they set about persuading friends, colleagues, and the families of their friends and colleagues, to provide funds for the letter of credit. In exchange for funding the letter of credit, the investors received promissory notes signed by Ms. Kelson for amounts several times larger than the amounts they provided. The promissory notes stated a financial services company that Ms. Kelson was the registered agent of would pay the investors within thirty days. However, Ms. Kelson failed to secure the line of credit and the investors were never paid. Ms. Kelson was subsequently charged and convicted on three counts of securities fraud, one count of offering or selling unregistered securities; one count of sales by an unlicensed broker-dealer, agent, or investment advisor; and one count of engaging in a pattern of unlawful activity. Ms. Kelson appealed her convictions.

On appeal, Ms. Kelson argued that her convictions should be overturned on the basis of ineffective assistance of counsel, and that the trial court erred in denying her motion for directed verdict because the court misapplied the UPUAA. The Utah Court of Appeals agreed, overturning Ms. Kelson’s UPUAA conviction and remanding for a new trial on all other charges. Specifically as it related to the pattern of unlawful activity conviction, Ms. Kelson argued that her activity in this case didn’t constitute a pattern of unlawful activity as a matter of Utah law. The court of appeals agreed. According, to the holding in Hill v. Estate of Allred, “[t]he proper test for determining whether there was a pattern of unlawful activity is whether there was `a series of related predicates extending over a substantial period of time’ or a demonstrated threat of continuing unlawful activity and not whether there were multiple schemes.” In the eyes of the court of appeals, the State had failed to satisfy the Hill test because:

Although Kelson’s actions involved multiple alleged crimes committed for the common purpose of obtaining cash, Kelson’s alleged crimes took place over a matter of days. Kelson first alerted Employee about the opportunity shortly before October 11, 2001, and all checks exchanged for promissory notes were deposited by October 15, 2001. Thus, Kelson’s alleged unlawful activity took place over a “closed period,” and the State was required to show “‘a series of related predicates extending over a substantial period of time.'” The State does not contend that it has done so, nor could it have made such a showing. As the Supreme Court noted in H.J., “[p]redicate acts extending over a few weeks or months,” which do not threaten “future criminal conduct,” do not constitute a substantial period of time sufficient to show continuity. Accordingly, Kelson’s acts over the course of only a few days are insufficient as a matter of law to satisfy Hill’s requirement that a pattern of unlawful activity must occur over a substantial period of time.

 

The State thereafter filed a petition of certiorari to the Utah Supreme Court, but did not challenge the court of appeals ruling on the pattern of unlawful activity conviction. The Utah Supreme Court disagreed with the court of appeals ruling on the securities conviction, and overturned the decision. The Utah Supreme Court reasoned “the jury instruction in question was an accurate statement of the underlying criminal law and not a burden-shifting evidentiary presumption.” As a result, the Utah Supreme Court “reject[ed] Kelson’s claims of ineffective assistance of counsel and plain error, and reverse[d] and remand[ed] to the court of appeals,” for further consideration of any remaining issues in the case.

While Ms. Kelson’s vacated convictions for securities fraud were ultimately overturned by the Utah Supreme Court, the court of appeals decision regarding the UPUAA has stood. The court of appeals decision is important because it further solidifies the Hill test, which recognizes that in order to constitute a pattern of unlawful activity under Utah law, the criminal activity must extend over a “substantial period of time.” If it does not, then a UPUAA charge may not be sustained as a matter of law. It remains to be seen what will happen to the rest of Ms. Kelson’s appeal, but at least her case has produced one favorable result, even if her convictions are ultimately upheld by the court of appeals.

When Trying to Prove “Enterprise” Goes Awry

Merely being an individual engaged in a pattern of unlawful of activity does not necessarily subject a criminal defendant to a racketeering charge under the UPUAA.

Utah Supreme CourtMerely being an individual engaged in a pattern of unlawful of activity does not necessarily subject a criminal defendant to a racketeering charge under the UPUAA. In order to sustain a racketeering conviction under the UPUAA, the state must prove more than just the substantive offense. Rather, the State must prove the existence of an “enterprise” and its relation to the racketeering activity.

In State v. Hutchings, the Utah Court of Appeals answered the questions of whether a person could also be an entity under the UPUAA, and whether the same facts could be used to prove the unlawful activity and the existence of an “enterprise”. Even still, a question lingered regarding the “enterprise” issue. In 2004, the Utah Court of Appeals reiterated the supreme court’s words, and further clarified the required proof to sustain a racketeering charge under the UPUAA.

In State v. Bradshaw, the court of appeals was tasked with answering the question of whether the State had to prove the existence of a relationship between the unlawful activity and the “enterprise”. The State alleged Mr. Bradshaw, over a period of several months defrauded eleven people for a total of approximately $5,400. According to the State, Mr. Bradshaw falsely represented himself as the owner of various mortgage companies, and that he would promise to assist his would-be victims in obtaining refinancing or to avoid foreclosure in exchange for a fee. Two of Mr. Bradshaw’s coworkers allegedly witnessed the fraudulent activity, and Mr. Bradshaw in fact asked one of those employees to falsely represent himself as an appraiser to one of the victims. Mr. Bradshaw was charged with eleven counts of communications fraud and one count of pattern of unlawful activity, all second-degree felonies. In response to the charges against him, Mr. Bradshaw filed a motion to quash the racketeering charge under the UPUAA and to reduce the degree of offense of the communications fraud charges. The trial court denied the motion, finding that the State could prove the “enterprise” element even if Mr. Bradshaw only used the funds for personal expenses, and that the State could in fact charge Mr. Bradshaw with all eleven counts of communications fraud.

After his motion was denied, Mr. Bradshaw entered into a plea agreement with the State. Pursuant to the plea agreement, Mr. Bradshaw pled guilty to four counts of attempted communications fraud, but he reserved his right to appeal the trial court’s denial of his motion.   The trial court subsequently accepted the plea and the remaining charges were dismissed. Mr. Bradshaw thereafter appealed.

On appeal, the Utah Court of Appeals reversed the trial court’s decision and remanded with instructions to grant Mr. Bradshaw’s motion to quash the UPUAA charge and to reduce the degree of offense of the communications fraud charges. As it related to the racketeering charge, Mr. Bradshaw argued that the State had failed to establish probable cause that he was engaged in an “enterprise”. The court of appeals agreed, finding that neither the criminal information nor the stipulated facts properly alleged the existence of an UPUAA “enterprise”. As the court aptly pointed out:

“The State’s information merely parrots the language of UPUAA and offers no insight into the State’s theory of the alleged enterprise. Likewise, the stipulation nowhere mentions the word “enterprise.” On appeal, the State postulates that its theory of an enterprise is an “association in fact” between Bradshaw and his two former coworkers. An “association in fact” enterprise “is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.” The stipulation’s vague references to the fact that two of Bradshaw’s acquaintances witnessed some of the misrepresentations and may have participated on one occasion is not suggestive of an “ongoing organization” or that Bradshaw and his so-called accomplices “function[ed] as a continuing unit.”

Continuing on, the court of appeals noted that the State also misunderstood the UPUAA when it argued that it need only to point to the existence of an “individual” to satisfy the “enterprise” element. The court noted that while it is true that under Hutchings, a criminal defendant may be both an “individual” and an “enterprise” under subsections (1) ands (2) of the UPUAA, the State’s arguments in this case “would essentially collapse the ‘enterprise’ and ‘pattern of unlawful activity’ elements into one and would extend the scope of antiracketeering laws to virtually all substantive criminal offenses.” The court rejected this argument.

The court of appeals concluded its analysis of the racketeering charge by finding that the State had also failed to include any facts suggesting Mr. Bradshaw used the funds from his unlawful activity to invest or gain interest in an enterprise as required by subsection (1) of the UPUAA. According to the court of appeals:

The stipulation submitted in this case suffers from an additional fatal defect in that it fails to include any facts suggesting Bradshaw used the proceeds from his fraudulent activity to invest or gain an interest in an enterprise as required by section 76-10-1603(1). Instead, the stipulation states that Bradshaw used the money to pay his “personal bills.” The trial court nevertheless deemed the stipulation sufficient in this respect, finding that, as a matter of law, using the proceeds from a pattern of unlawful activity to pay one’s personal bills “qualif[ies as] racketeering.” We disagree.

The State appealed the court of appeals decision as it related to the communications fraud charges, but did not challenge the ruling on the UPUAA charge. The Utah Supreme Court overturned the court of appeals decision, and Mr. Bradshaw’s conviction was upheld. Even still, the court of appeals decision in Bradshaw represents an important decision regarding the necessary proof of an “enterprise” under the UPUAA and the connection that must be shown between the “unlawful activity” and that “enterprise”. Going forward, the State must do more than simply parrot the UPUAA in its charging documents and factual stipulations. Rather, it must prove the existence of an “enterprise” beyond the mere existence of the individual and that the enterprise is related to the “unlawful activity” to sustain a conviction under the UPUAA.