United States v. Izydore , 167 F.3d 213 ( 1999 )

Revised March 2, 1999
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 97-50537
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
MARK IZYDORE; HARRY SCHREIBER,
Defendants-Appellants.
Appeals from the United States District Court
for the Western District of Texas
February 8, 1999
Before WIENER, BARKSDALE, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
Appellants Harry Schreiber (“Schreiber”) and Mark Izydore
(Izydore”) were convicted on one count of conspiracy to commit wire
fraud and bankruptcy fraud, and numerous counts of the substantive
offenses of wire fraud and bankruptcy fraud. On appeal they
challenge the propriety of their convictions and sentences. We
vacate two of the appellants’ convictions for wire fraud, affirm
all the appellants’ other convictions, and vacate their sentences
for resentencing on remand.
I. FACTS
Marhil Manufacturing (“Marhil”) was a family-run business in
Smithville, Texas, that manufactured doors, hatches, and other
closures for the marine industry. The company was owned by JoAnn
Copeland, Joe Copeland, and Mrs. Copeland’s son, Craig Wallace
(“Wallace”). In the late 1980s Marhil encountered financial
difficulties and was forced to file for bankruptcy under Chapter 11
of the United States Bankruptcy Code. 11 U.S.C. § 1101, et seq.
In an effort to turn the company around, Marhil began an active
search for outside investors who could provide operating capital
for the business. Wallace, who was Marhil’s president at the time,
subsequently was introduced to the appellants. Negotiations ensued
and the parties eventually agreed that the appellants’ company,
Westminster Financial (“Westminster”), would provide Marhil with
the capital it needed pursuant to a stock subscription agreement.
Under the terms of the agreement Westminster was to purchase
185 shares of Marhil stock for the sum of $185,000. The proceeds
from the sale were to be used to pay Marhil’s creditors and
otherwise fund its plan of reorganization. The sale was scheduled
to occur on September 10, 1990. Thereafter, it was agreed that
Westminister would establish a $250,000 line of credit for Marhil,
2
which would be used to fund business operations.
Shortly after the stock subscription agreement was
incorporated into the bankruptcy court’s order confirming Marhil’s
plan of reorganization, the appellants formed Marhil Acquisition
Corp. (“MAC”), a Colorado corporation, and opened several bank
accounts in Florida for MAC, and a second company, M.C.M.
Acquisitions Corp., Inc. Izydore then arranged to have Marhil’s
receivables factored through Goodman Factors, Inc. by falsely
representing himself as the president of Marhil. The proceeds from
the factoring were subsequently transferred to MAC’s bank account
in Florida. In all, the appellants factored $378,487 worth of
Marhil’s receivables.
In addition to factoring Marhil’s receivables, the appellants
instructed Wallace to apply for a progress payment from National
Steel and Shipbuilding Co. (“NASSCO”), a company for which Marhil
was manufacturing marine closures under a substantial contract.1
NASSCO complied with the request and sent Marhil a progress payment
of $197,490. On the appellants’ instructions Wallace forwarded the
payment to appellants, who deposited it in the MAC bank account in
Florida. It was later determined that no portion of the progress
payment was ever used to complete the NASSCO project. Instead,
some of the money went to the personal expenses of the appellants;
credit card balances; homes in Aspen, Colorado and West Palm Beach,
1
Progress payments allow a company to pay for remaining
materials and labor needed to complete a project under contract.
3
Florida; and Schreiber’s BMW, to name a few. When asked to account
for the funds, the appellants claimed, amongst other things, that
$25,000 had been paid to a company called Michellette Corp., and
that $35,000 had gone to a law firm named Jacobson & Lambert, P.A.
Those statements were later shown to be false.
By December 1990, the appellants had still not purchased
Marhil’s stock as required by the subscription agreement and the
reorganization plan. Consequently, a creditor filed suit seeking
to rescind the bankruptcy court’s order confirming the plan of
reorganization. At a subsequent hearing before the bankruptcy
court, the appellants claimed that $225,000 had been deposited in
Marhil’s account, that checks had been issued to all creditors, and
that the new Marhil stock had been issued in accordance with the
reorganization plan. After taking that testimony, the bankruptcy
court continued its consideration of the matter until January 17,
1991.
On January 15, 1991, Wallace received a fax from Schreiber
stating that Schreiber had stopped payment on a check that had been
issued to one of its creditors. Wallace then learned that
Schreiber had used a blank check that Wallace had given him for
incidental expenses to withdraw the $225,000 deposit. At the
January 17 hearing, the bankruptcy court was presented with
compelling evidence that the appellants’ representations at the
previous hearing were false. Accordingly, the court revoked the
plan of reorganization and appointed a Chapter 11 trustee to
4
oversee Marhil’s operations. On a subsequent audit of Marhil’s
books, the trustee discovered that the appellants had stolen
$108,000 from Marhil. The trustee’s attempts to save the business
were unavailing; she was forced to close Marhil based on its
inability to meet its business obligations.
On September 19, 1995, a grand jury indicted the appellants on
nine counts. Count one charged the appellants with conspiracy to
commit wire fraud and bankruptcy fraud, in violation of 18 U.S.C.
§ 371. Counts two through six charged the appellants with
committing wire fraud in violation of 18 U.S.C. § 1343, and aiding
and abetting wire fraud in violation of 18 U.S.C. § 2. Counts
seven through nine charged the appellants with bankruptcy fraud in
violation of 18 U.S.C. § 152, and aiding and abetting bankruptcy
fraud in violation of 18 U.S.C. § 2. The case went to trial and a
jury convicted the appellants on all counts. The district court
subsequently sentenced Izydore to 60 months imprisonment and
Schreiber to 120 months. The appellants now appeal their
convictions and sentences.
II. CHALLENGES TO EVIDENTIARY RULINGS
The appellants argue that the district court committed
reversible error by allowing Bettina Whyte (“Whyte”), the
bankruptcy trustee, to give opinion testimony regarding the
legality of the appellants’ conduct. At trial, when asked to
characterize the $108,500 that the appellants owed Marhil, Whyte
5
stated “[the money] was taken, and it was not legally taken in my
opinion, which was what I said in my report to the court.” Whyte
was not testifying as an expert witness when she made this
statement. The appellants timely objected to Whyte’s statement,
and asked the court to strike it from the record. The district
court overruled the objection.
We review a district court's decision to admit evidence under
the abuse of discretion standard. United States v. Wallace, 32
F.3d 921, 927 (5th Cir. 1994). However, we will not reverse a
district court's evidentiary rulings unless substantial prejudice
results to the complaining party. Fed. R. Evid. 103(a); Munn v.
Algee, 924 F.2d 568, 573 (5th Cir.), cert. denied, 502 U.S. 900(1991). The burden of proving substantial prejudice lies with the
party asserting error. FDIC v. Mijalis, 15 F.3d 1314, 1318 (5th
Cir. 1994).
In this appeal the appellants assert that Whyte’s statement is
inadmissible because it constitutes a legal conclusion regarding
the ultimate issue of their guilt. They argue that her testimony
was particularly prejudicial given her role as court-appointed
trustee. In the government’s view, Whyte’s statement merely
explains the circumstances surrounding her attempt to recover the
missing funds, and does not reflect a judgment on the criminal
guilt or innocence of the appellants.
Under Rule 704(a), "[t]estimony in the form of an opinion or
6
inference otherwise admissible is not objectionable because it
embraces an ultimate issue to be decided by the trier of fact."
Fed. R. Evid. 704(a); see United States v. Moore, 997 F.2d 55, 57-
58 (5th Cir. 1993) (discussing Rule 704(a)). That rule, however,
does not allow a witness to give legal conclusions. Owen v. Kerr
McGee Corp., 698 F.2d 236, 240 (5th Cir. 1983). For that reason we
have long recognized that determinations of guilt or innocence are
solely within the province of the trier of fact. United States v.
Buchanan, 70 F.3d 818, 833 n.20 (5th Cir. 1995), cert. denied, 517
U.S. 1114 (1996); United States v. Masson, 582 F.2d 961, 964 n.5
(5th Cir. 1978).
Here, there are two visible flaws in the appellants’ argument.
First, we are not at all convinced that the phrase “it was not
legally taken” is a legal conclusion regarding the very specific
issue of whether the appellants are guilty of conspiracy, wire
fraud, and bankruptcy fraud. Whyte made this statement while
testifying at length about her efforts as trustee to account for
monies belonging to Marhil. When viewed in this context Whyte’s
statement is more accurately described as an opinion about whether
the $108,000 properly belonged to Marhil, or the appellants. It is
not a legal conclusion regarding the ultimate issue of whether the
appellants were guilty of the crimes charged in the indictment.
Second, even if it is a legal conclusion that was mistakenly
admitted, we have reviewed the record as a whole and cannot
7
conclude that Whyte’s statement, which consists of that single
remark, affected the substantial rights of the appellants. Any
mistake by the district court in admitting Whyte’s statement was
harmless error.
The appellants also contend that the district court erred in
excluding as hearsay four transcripts from various proceedings in
the bankruptcy court. They assert that the transcripts did not
constitute hearsay because they were offered not to prove the truth
of the matter asserted, but to show that false and misleading
statements were made to the bankruptcy court. The appellants did
not adequately raise this issue below, and we detect no plain error
that would require us to consider it on appeal. United States v.
Calverley, 37 F.3d 160, 162 (5th Cir. 1994) (en banc), cert.
denied, 513 U.S. 1196 (1995).
III. SCHREIBER’S SUFFICIENCY CLAIMS
Schreiber brings sufficiency of the evidence challenges to all
of his convictions. He preserved this claim for appellate review
by moving for judgment of acquittal at close of government’s case,
and at the close of evidence. United States v. Pankhurst, 118 F.3d
345, 351 (5th Cir.), cert. denied, 118 S. Ct. 630 (1997). The
district court denied those motions. We review de novo a district
court’s denial of a motion for judgment of acquittal. United
States v. Myers, 104 F.3d 76, 78 (5th Cir.), cert. denied, 117 S.
8
Ct. 1709 (1997). In evaluating the sufficiency of the evidence we
must affirm the verdict “if a reasonable trier of fact could
conclude from the evidence that the elements of the offense were
established beyond a reasonable doubt, viewing the evidence in the
light most favorable to the verdict and drawing all reasonable
inferences from the evidence to support the verdict.” Id.We have reviewed the record in this case, Schreiber’s
arguments on appeal, and the applicable law, and conclude that
there is sufficient evidence supporting Schreiber’s convictions for
conspiracy under count one; wire fraud under counts two, five, and
six; and bankruptcy fraud under counts seven through nine. We do
not find, however, sufficient evidence to support Schreiber’s
convictions for wire fraud under counts three and four.
A wire fraud conviction requires proof of (1) a scheme to
defraud, and (2) the use of interstate wire communications in
furtherance of the scheme. 18 U.S.C. § 1343; United States v.
Gray, 96 F.3d 769, 773 (5th Cir. 1996), cert. denied, 117 S. Ct.
1275 (1997); United States v. Loney, 959 F.2d 1332, 1337 (5th Cir.
1992). Under the wire fraud statute, 18 U.S.C. § 1343, "once
membership in a scheme to defraud is established, a knowing
participant is liable for any wire communication which subsequently
takes place or which previously took place in connection with the
scheme." United States v. Faulkner, 17 F.3d 745, 771-72 (5th Cir.)
(quotations and citations omitted), cert. denied, 513 U.S. 8709
(1994). But the communication at issue must satisfy the interstate
nexus set forth in § 1343; it is an immutable requirement. See
United States v. Darby, 37 F.3d 1059, 1067 (4th Cir. 1994) (noting
that the interstate nexus requirement of wire fraud is not a
substantive element, but arises from constitutional limitations on
congressional power over intrastate activities), cert. denied, 514
U.S. 1097 (1995).
In this case, there is sufficient evidence supporting
Schreiber’s conviction for conspiracy under count one. Thus, there
is sufficient evidence of a scheme to defraud, the first element of
the wire fraud offense. Gray, 96 F.3d at 773. Schreiber, however,
assails his wire fraud conviction under counts three and four by
attacking the second element of the offense. He alleges that there
is no evidence in the record that the telephone calls at issue in
those counts crossed state lines. We agree.
Count three was based on a telephone conversation that
occurred between Schreiber and JoAnn Copeland on October 10, 1990.
Copeland testified at trial that during that conversation she and
Schreiber discussed payment problems that were occurring with
several of Marhil’s customers. In her testimony, however, Copeland
could not remember where Schreiber was located when this telephone
call took place. Moreover, there is no evidence in the record,
documentary or otherwise, showing that the October 10 telephone
call crossed state lines.
10
Count four was based on a telephone call between Schreiber and
Wallace on January 7, 1991. Wallace testified at trial that on
that day he placed a call to Schreiber in Aspen, Colorado, and left
a message because he was unable to reach him in person. Schreiber
subsequently returned Wallace’s call, and proceeded to allay
Wallace’s concerns about the blank check he had provided Schreiber.
On cross-examination, Wallace conceded that he did not know where
Schreiber was when he returned the call. Again, as with the
telephone call in count three, there is no evidence in the record
which would indicate that Schreiber was outside the State of Texas
when the conversation took place.
Viewing the record in a light most favorable to the
government, we conclude that there is insufficient evidence of an
interstate nexus with respect to the telephone calls that form the
basis of counts three and four. We thus reverse Schreiber’s wire
fraud convictions under those counts. For the same reasons, we
reverse Izydore’s convictions for wire fraud under counts three and
four, which were based upon the same telephone calls.
In a related argument Schreiber argues that, because his wire
fraud convictions in counts three and four are invalid, his
conspiracy conviction in count one is likewise deficient because
one of its two objects was the substantive offense of wire fraud.
He asserts that because the general verdict on the conspiracy
charge does not indicate which object the jury relied on in
reaching that verdict, it is impossible to determine whether the
11
conspiracy conviction rests on the wire fraud object. We reject
this argument.
Schreiber was convicted on five separate counts of wire fraud
and three separate counts of bankruptcy fraud. We have reversed
only two of the wire fraud convictions. Accordingly, Schreiber’s
argument is flawed in two respects. First, there are three
remaining wire fraud convictions that support the wire fraud object
in the conspiracy count. Second, the Supreme Court has held that
the failure of proof on one of several alternative conspiratorial
objects does not void the conspiracy conviction if there is
sufficient proof as to any one of the objects of the conspiracy.
Griffin v. United States, 502 U.S. 46, 56-57 (1991). We thus
affirm Schreiber’s conspiracy conviction in count one.
IV. IZYDORE’S CLAIM OF DENIAL OF COUNSEL
Izydore contends that he was denied his right to counsel of
choice when the district court refused to allow David L. Botsford
(“Botsford”) to represent him at trial. Izydore maintains that the
district court then repeated that mistake by refusing to allow
Botsford to represent him on appeal. We do not find Izydore’s
arguments persuasive.
Under the Sixth Amendment a defendant is guaranteed assistance
of counsel in all criminal prosecutions. United States v.
Morrison, 449 U.S. 361, 364 (1981); United States v. Hughey, 147
F.3d 423, 428 (5th Cir. 1998). Concomitant with that guarantee is
12
a defendant’s right to hire the attorney of his choice. Morris v.
Slappy, 461 U.S. 1 (1983). But the right to counsel of choice is
not an unfettered privilege. See Wheat v. United States, 486 U.S.
153, 159 (1988) (“The Sixth Amendment right to choose one’s own
counsel is circumscribed in several important respects.”). It is
well recognized that there is a presumption in favor of a
defendant's counsel of choice, but that presumption may be overcome
by, inter alia, an actual conflict of interest on the part of the
chosen attorney, or by a showing of a serious potential for such a
conflict. Id. at 164. As observed by the Supreme Court in Wheat,
“while the right to select and be represented by one’s preferred
attorney is comprehended by the Sixth Amendment, the essential aim
of the Amendment is to guarantee an effective advocate for each
criminal defendant rather to ensure that a defendant will
inexorably be represented by the lawyer whom he prefers.” Id. at
159. To that end, a district court is afforded broad latitude in
deciding whether countervailing considerations require the
rejection of a defendant’s preferred counsel. Id. at 163-64 ("The
evaluation of the facts and circumstances of each case . . . must
be left primarily to the informed judgment of the trial court.").
In this case, Schreiber was originally represented by two
attorneys, Botsford and Richard Lubin (“Lubin”). Izydore was
initially represented by only one attorney, Steven Brittain
(“Brittain”). Roughly three weeks before the start of trial
13
Izydore moved the court to allow Botsford to appear as co-counsel
with Brittain. At a hearing on the motion Izydore informed the
court that Botsford was needed to assist in preparing the case for
trial. He also maintained that Botsford would undertake various
responsibilities at trial, including cross-examination. The court
was advised that if Izydore’s motion was granted, Botsford would
withdraw from his representation of Schreiber with Schreiber’s
express permission.
In compliance with the dictates of the Sixth Amendment, the
district court proceeded to explore the nature of Botsford’s
representation of Schreiber. The trial court also questioned
counsel for all parties about whether there was a potential
conflict of interest that might unexpectedly ripen into an actual
conflict at trial. After conducting that inquiry, the district
court concluded that Botsford’s subsequent representation of
Izydore would create a potential conflict of interest. The court
then denied Izydore’s motion, and later denied Izydore’s motion to
have Botsford represent him on appeal.
Izydore now challenges those rulings. He asserts that
Botsford played only a limited role in the representation of
Schreiber. Izydore also emphasizes that he and Schreiber proceeded
to trial under a joint defense agreement, and that Schreiber
explicitly waived any conflict of interest. In Izydore’s opinion,
the district court’s ruling violated Wheat because mere speculation
14
about a conflict of interest is not enough to deny a defendant’s
counsel of choice; there must be a serious potential for conflict
of interest. We are not persuaded by Izydore’s arguments.
Izydore forgets that at the hearing the government
contradicted his claim that Botsford had played a minor role in
Schreiber’s representation. The government, for example, informed
the court that Botsford was involved in lengthy plea negotiations
with the government on Schreiber’s behalf. Additionally, the
government warned the court that, based on statements Izydore made
in those plea negotiations, and in interviews with government
agents, there were two potential conflicts of interest which could
result in antagonistic defenses at trial.
On these facts we cannot conclude that the district court
abused its discretion by refusing to allow Botsford to act as co-
counsel for Izydore. That Izydore may have waived any potential
conflict of interest does not change our view. Under Wheat it is
clear that a defendant’s waiver does not necessarily preclude a
district court from rejecting a defendant’s counsel of choice when
the overall circumstances of a case suggest a conflict of interest
may develop. Id. at 163. In this case, Schreiber’s purported
waiver was significantly outweighed by other facts that strongly
counseled against allowing Botsford to act as co-counsel for
Izydore.
We could not accept Izydore’s argument without turning a blind
15
eye to the original design of the Sixth Amendment. The basic
purpose of the right to counsel “is simply to ensure that criminal
defendants receive a fair trial.” Strickland v. Washington, 466
U.S. 668, 689 (1984). When considering Sixth Amendment claims “the
appropriate inquiry focuses on the adversarial process, not on the
accused’s relationship with his lawyer as such.” United States v.
Cronic, 466 U.S. 648, 657 n.21 (1984). In the present action,
Izydore was represented by Brittain before, during, and after
trial. There is no indication in the record that Brittain’s
representation was inadequate or in any way unsatisfactory to
Izydore. Given the fact that Izydore was represented by one
attorney of his own choosing, we are hard pressed to find a denial
of his right to counsel based solely on the fact that he was denied
a second attorney of his choice. We find no error in the district
court’s decision.
V. SENTENCING CLAIMS
The appellants allege that the district court improperly
calculated their sentences under the United States Sentencing
Guidelines by (1) calculating the amount of loss to be $976,158,
under U.S.S.G. § 2F1.1(b)(1); (2) finding that the appellants were
organizers or leaders of a criminal activity involving five or more
participants, or was otherwise extensive, under U.S.S.G.
§ 3B1.1(a); and (3) finding that the appellants violated a judicial
16
order, under U.S.S.G. § 2F1.1(b)(3). We review each challenge in
turn.2
The appellants first contend that the district court erred in
calculating the amount of loss to be attributed to them under
U.S.S.G. § 2F1.1(b)(1). The district court’s findings in this
regard are reviewed for clear error. United States v. Wimbish, 980
F.2d 312, 313 (5th Cir. 1992). At sentencing the district court
determined that the appellants were responsible for a total loss of
$976,158.3 The district court based its determination on the
findings in the appellants’ presentence reports, although the court
did hear testimony from an expert witness who testified on the
appellants’ behalf. The presentence reports arrived at a total of
$976,158 by adding the following three figures: (1) $656,000,
which was described in the presentence reports as the value of
Marhil at the time of the bankruptcy court’s order of confirmation;
(2) $110,000, which was listed in the presentence reports as the
total loss to post-petition creditors for supplies received but not
paid for; and (3) $210,158, which was characterized in presentence
reports as the expenses associated with the appointment of the
2
Schreiber, but not Izydore, argues that the district
court erred by increasing his offense level by two levels for
obstruction of justice under U.S.S.G. § 3C1.1. We have reviewed
the record and find no merit to this argument.
3
We note, however, that in the subsequent judgment of
conviction the district court assessed a joint and several
obligation against each defendant for restitution in the amount of
$564,412.09. We would ordinarily expect that the restitution
obligation and the amount of loss would be nearly the same.
17
bankruptcy trustee, attorney, and auditor, needed to investigate
Marhil’s reorganization plan (collectively “trustee’s fees”). On
appeal, the appellants challenge the accuracy of these three
determinations.
The applicable Sentencing Guidelines provision for offenses
involving fraud is U.S.S.G. § 2F1.1. Section 2F1.1 assigns a base
offense level of six, and then adds incremental levels according to
the amount of loss resulting from the fraud. U.S.S.G. § 2F1.1. A
"loss" under § 2F1.1 means the actual or intended loss to the
victim, whichever is greater. U.S.S.G. § 2F1.1 commentary n.7.
Further, the amount of loss need not be determined with precision.
The district court need only make a reasonable estimate given the
available information. U.S.S.G. § 2F1.1 commentary n.8.
Here, the appellants first contend that the district court
erred by including in its calculations the $656,000 that
represented the value of Marhil at the time the bankruptcy court
entered its order of confirmation. The appellants maintain that
this figure is flawed because it is based only on Marhil’s assets
at the time of the confirmation order, and does not reflect the
company’s liabilities.
The defendants’ presentence reports state that the value of
Marhil was $656,000 when the plan of reorganization was finally
confirmed. The presentence reports do not calculate that figure
independently, but claim that this amount is “established in the
August 29, 1990, Order Confirming Marhil Manufacturing, Inc.’s Plan
18
of Reorganization.” That statement is incorrect. We have reviewed
the bankruptcy court’s August 29 Order and find no reference at all
to the value of Marhil. Nevertheless, given the record as a whole
we cannot conclude that this single misstatement brings the
district court’s ruling into the realm of clear error.
The evidence at trial established that the defendants were
willing to expend $656,000 in total capital in order to gain
control of Marhil. That figure consisted of $225,000 in cash, a
$250,000 line of credit for Marhil’s use, a $145,000 purchase of
equipment, and $36,000 in leasing costs for commercial real estate.
Although $656,000 may not be a precise valuation of Marhil’s worth
under the appellants’ proposed accounting, we find that it was a
reasonable estimate of its value given the available information.4
See U.S.S.G. § 2F1.1 commentary n.8. (amount of loss need not be
determined with precision, but must only be a reasonable estimate
given the available information). Accordingly, we conclude that
the district court’s decision to include that figure in its loss
calculations was not clear error.
Next, the appellants contend that the district court committed
4
We also note that, although the actual presentence reports
do not contain this breakdown, it is clearly set forth in an
addendum to Izydore’s presentence report that summarizes and
considers Izydore’s sentencing objections. See United States v.
Sanders, 942 F.2d 894, 898 (5th Cir. 1991) ("[A] presentence
report generally bears sufficient indicia of reliability to be
considered as evidence by the trial judge in making the factual
determinations required by the sentencing guidelines").
19
clear error by deciding to include in its loss calculations the
$110,000 debt owed to post-petition creditors. They insist that
this debt cannot be considered a loss because it generated $510,170
in receivables for Marhil. We find no clear error on this point.
Finally, the appellants assail the district court’s decision
to include in its loss calculations the $210,158 in trustee’s fees.
The appellants maintain that those expenses are consequential
losses that cannot be considered in loss calculations under
U.S.S.G. § 2F1.1. We note as a threshold matter that there is no
dispute as to the amount of the trustee’s fees. The only question
is whether those fees are to be considered a “loss” under U.S.S.G.
§ 2F1.1. That is a legal question involving the correct
interpretation of the Sentencing Guidelines that we review de novo.
See United States v. Randall, 157 F.3d 328, 330 (5th Cir. 1998)
(district court's interpretation and application of U.S.S.G. §
2F1.1 is reviewed de novo); see also United States v. Vitek Supply
Corp., 144 F.3d 476, 488 (7th Cir. 1998) (observing that meaning of
“loss” under U.S.S.G. § 2F1.1. is a question of law reviewed de
novo).
The commentary to U.S.S.G. § 2F1.1 describes “loss” as “the
value of the money, property, or services unlawfully taken.”
U.S.S.G. § 2F1.1 (also incorporating by reference the discussion of
loss valuation contained in commentary of U.S.S.G. § 2B1.1); see
also § 2B1.1 (“‘Loss’ means the value of the property taken,
20
damaged, or destroyed”). Thus, on its face the definition of loss
is centered on the value of the thing taken, without reference to
consequential or incidental losses.
Other provisions in the Sentencing Guidelines plainly indicate
that consequential losses are ordinarily not taken into account
under U.S.S.G. § 2F1.1. The Sentencing Guidelines provide, for
instance, that loss “does not include interest the victim could
have earned . . . had the offense not occurred.” U.S.S.G. § 2F1.1
commentary n.7. Similarly, the Sentencing Guidelines explain that
“when property is taken or destroyed, the loss is the fair market
value of the particular property at issue.” U.S.S.G. § 2F1.1
commentary n.2. Thus, it stands to reason that if a defendant
steals an automobile the applicable loss would be the fair market
value of the car. It would not include the victim’s consequential
losses, like paying for public transportation or missing work, even
though such losses were the direct result of the defendant’s
unlawful conduct, and would not have occurred but for the
defendant’s actions.
This is not to say that consequential losses are never
considered under U.S.S.G. § 2F1.1, for there are specific instances
when consequential losses may properly be considered. The
commentary to U.S.S.G. § 2F1.1 provides that “[i]n contrast to
other types of cases, loss in a procurement fraud or product
substitution case includes not only direct damages, but also
consequential damages that were reasonably foreseeable.” U.S.S.G.
21
§ 2F1.1 commentary n.7(c). But the fact that the Sentencing
Commission prescribed consequential losses in only these specific
fraud cases, and not others, is strong evidence that consequential
damages were omitted from the general loss definition by design
rather than mistake. Accordingly, we have found, as other courts
have, that consequential losses typically are not counted when
computing loss under U.S.S.G. § 2F1.1. United States v. Thomas,
973 F.2d 1152, 1159 (5th Cir. 1992); see also United States v.
Daddona, 34 F.3d 163, 171-72 (3d Cir.), cert. denied, 513 U.S. 1002(1994); United States v. Marlatt, 24 F.3d 1005, 1007-08 (7th Cir.
1994); United States v. Newman, 6 F.3d 623, 630 (9th Cir. 1993)
(applying U.S.S.G. § 2B1.1).
Here, the government contends that the trustee’s fees are not
consequential losses because the fees were the direct result of the
appellants’ conduct. The government’s analysis misses the mark.
The touchstone for determining loss under U.S.S.G. § 2F1.1 is the
“value of the thing taken.” That concept is the key measure
because the Sentencing Commission believed that punishment for
fraud should reflect a balance between the loss to the victim and
the gain to the defendant. See U.S.S.G. § 2B1.1 commentary
background (“The value of property stolen plays an important role
in determining sentences for theft and other offenses involving
stolen property because it is an indicator of both the harm to the
victim and the gain to the defendant”). It was a “compromise
22
between the retributive goals of punishment, which might have been
advanced best by basing sentence solely on the injury to the
victim, and its deterrent function, which might have been advanced
best by determining sentence solely from the offender’s gain.”
United States v. Wilson, 993 F.2d 214, 217 (11th Cir. 1993).
In this case, over the course of the appellants’ unlawful
conduct Marhil was robbed of its capital, and post-petition
creditors were defrauded. There can be no doubt that this money
was “taken” by the appellants, as that word is commonly understood.
The trustee’s fees, on the other hand, were incurred after the
appellants’ unlawful conduct had ended. And while it is true that
the trustee’s fees were a consequence of the appellants’ unlawful
conduct, mere “but for” causation is not the litmus test for loss
determinations under U.S.S.G. 2F1.1. See Marlatt, 24 F.3d at 1007(expressly recognizing this point). The appropriate measure is the
value of the thing taken, and under that standard we cannot
reasonably conclude that trustee’s fees were the “thing taken” from
Marhil. Accordingly, we find that the district court erred in
including the trustee’s fees in its loss calculations.
We turn next to the appellants’ challenge to the district
court’s finding that the appellants were organizers or leaders of
a criminal activity involving five or more participants, or that
was otherwise extensive, under U.S.S.G. § 3B1.1(a). Section
3B1.1(a) has two requirements: (1) the defendant must have been a
23
leader or organizer in the criminal activity, and (2) the scheme
must have either included five or more participants or been
otherwise extensive. U.S.S.G. § 3B1.1(a). The commentary defines
"participant" as a person who is criminally responsible for the
commission of the offense, but need not have been convicted.
U.S.S.G. § 3B1.1(a) commentary n.1. “In assessing whether an
organization is ‘otherwise extensive,’ all persons involved during
the course of the entire offense are to be considered.” U.S.S.G.
§ 3B1.1(a) commentary n.3. Moreover, the use of “unknowing
services” of outsiders may make the criminal activity "otherwise
extensive." U.S.S.G. § 3B1.1(a) commentary n.3. We review the
district court's findings in this regard for clear error. United
States v. Narvaez, 38 F.3d 162, 166 (5th Cir. 1994), cert. denied,
514 U.S. 1087 (1995).
On appeal the appellants focus their challenge on the adequacy
of proof supporting the requisite number of participants, and the
alternative requirement that the scheme be otherwise extensive. At
sentencing the district court made an express finding that the
scheme involved five or more participants, and that it was
otherwise extensive. Those findings are not clearly erroneous.
Finally, the appellants contend that the district court erred
by enhancing their offense levels under U.S.S.G. § 2F1.1(b)(3),
which provides for a two-level increase if the underlying offense
involves a “violation of any judicial or administrative order,
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injunction, decree, or process.” U.S.S.G. § 2F1.1(b)(3). We
review de novo the district court’s ruling on this issue. United
States v. Saacks, 131 F.3d 540, 543 (5th Cir. 1997). The
appellants contend that error attended this decision because their
actions did not violate any specific order of the district court.
The appellants’ contention is foreclosed by our decision in Saacks.
In that case we expressly held that bankruptcy fraud is in itself
a violation of a judicial or administrative order or process within
the meaning of U.S.S.G. § 2F1.1(b)(3). Id. at 546. Accordingly,
the district court did not err in this regard.
VI. CONCLUSION
Based on the foregoing, we VACATE the appellants’ convictions
for wire fraud under counts three and four, but AFFIRM the
appellants’ remaining convictions. We also VACATE the appellants’
sentences and REMAND to the district court for resentencing
consistent with this opinion.
g:\opin\97-50537.opn
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