United States v. Alphas ( 2015 )

United States Court of Appeals
For the First Circuit
No. 14-2228
UNITED STATES OF AMERICA,
Appellee,
v.
JOHN S. ALPHAS,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Barron, Selya and Stahl,
Circuit Judges.
Tracy A. Miner, with whom Megan A. Siddall and Demeo LLP were
on brief, for appellant.
Brian A. Pérez-Daple, Assistant United States Attorney, with
whom Carmen M. Ortiz, United States Attorney, was on brief, for
appellee.
May 7, 2015
SELYA, Circuit Judge. When a criminal defendant is
convicted of a fraud offense, the Sentencing Commission has
established amount of loss — generally the higher of actual or
intended loss — as a rough proxy for determining the seriousness of
the offense and the relative culpability of the offender. Although
this concept is easily stated, its application often has vexed
sentencing courts. As in so many other instances, the devil is in
the details.
This appeal requires us to decide two issues of first
impression in this circuit. The first involves the method for
calculating the guideline enhancement for amount of loss in an
insurance fraud context. The second involves the method for
calculating the amount of statutory restitution in that context.
Concluding, as we do, that the court below erred in adopting its
calculation methods, we vacate the appellant's sentence and remand
for resentencing.
I. BACKGROUND
Because this sentencing appeal follows a guilty plea, we
distill the pertinent facts from the plea agreement, the change-of-
plea colloquy, the undisputed portions of the presentence
investigation report (PSI Report), and the transcript of the
disposition hearing. See United States v. Almonte-Nuñez, 771 F.3d
84, 86 (1st Cir. 2014).
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Defendant-appellant John S. Alphas owns and operates The
Alphas Company, a wholesale produce distributor located in Chelsea,
Massachusetts. During the relevant time frame, the appellant
purchased large quantities of produce, often from distant
purveyors. To protect his investment, the appellant routinely
obtained insurance on these produce shipments.
In or around March of 2007, the appellant devised a
scheme to defraud. Over the next four and one-half years, he
submitted at least ten fraudulent claims to his insurers for lost,
stolen, or damaged produce.1 The appellant sought reimbursement
for the value of allegedly lost, stolen, or damaged produce,
together with disposal expenses, shipping fees, and the cost of
procuring replacement stock. These claims were largely bogus: in
each instance, the appellant either invented fictitious losses or
artificially inflated legitimate losses. To make matters worse, he
supported his submissions with documents that had been fraudulently
altered or, in some cases, constructed out of whole cloth. He
compounded his mendacity by making false and misleading statements
to insurance adjusters.
The insurance policies at issue contained void-for-fraud
clauses. A representative clause stated:
1
Nine of these claims were submitted to Zurich North American
and the final claim to Selective Insurance Company. Though all of
the claims were submitted in the name of The Alphas Company, the
sentencing context requires us to attribute those claims and the
underlying losses to the appellant.
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This Coverage Part is void in any case of
fraud by you as it relates to this Coverage
Part at any time. It is also void if you or
any other insured, at any time, intentionally
conceal or misrepresent a material fact
concerning:
1. This Coverage Part;
2. The Covered Property;
3. Your interest in the Covered Property; or
4. A claim under this Coverage Part.
Four of the appellant's claims were never paid: three
were withdrawn after suspicions surfaced and the lone claim
submitted to Selective Insurance Company was thwarted by early
detection of the fraud. The other six claims were paid, but mostly
in amounts less than their face value. In sum, the ten claims
totaled over $490,000, yet the appellant received payments totaling
only $178,568.41.
The appellant's persistent pattern of chicanery sparked
a federal criminal investigation. In May of 2014, the government
filed an information charging the appellant with a single count of
wire fraud. See 18 U.S.C. § 1343. Waiving prosecution by
indictment, the appellant pleaded guilty to the charge. In an
accompanying plea agreement, the parties stipulated to a base
offense level of 7. See USSG §2B1.1(a)(1).
The parties could not agree, however, as to the amount of
loss — a necessary step in determining the guideline sentencing
range (GSR). To fill this void, the PSI Report recommended
boosting the appellant's offense level by 14 levels based on an
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intended loss of approximately $480,000. See id. §2B1.1(b)(1)(H)-
(I) (increasing offense level by 14 for losses exceeding $400,000
but not greater than $1,000,000). This calculation derived from
the probation officer's conclusion that intended loss should be
measured by the face amount of the appellant's claims, less a $1000
per claim deductible.
The appellant objected to the recommendation. He argued
that the loss figure should exclude legitimate losses embedded in
the fraudulent claims. In conjunction with this argument, he
submitted a competing set of calculations that purported to show
which component amounts were legitimate. This set of calculations
yielded an intended loss amount of roughly $178,000 which
corresponded to an increase of 10 (rather than 14) in his adjusted
offense level. See id. §2B1.1(b)(1)(F).
The PSI Report also dealt with restitution. It
recommended an award of $178,568.41 (the aggregate amount actually
paid out on the claims). The appellant objected to this
recommendation, envisioning a finding of actual loss (and,
therefore, a restitution amount) of $58,931.36. Once again, the
appellant attributed the reduced figure to the fact that a portion
of the claims paid corresponded to legitimate losses.
The probation officer stood by her calculations regarding
both the guideline enhancement and restitution. Although she
conceded that the appellant may have incurred legitimate losses,
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she maintained that the appellant's fraud rendered the claims
altogether illegitimate.
The disposition hearing was held on November 6, 2014.
The district court concluded as a matter of law that where, as
here, insurance policies contain void-for-fraud clauses, intended
loss is equal to the aggregate face value of the claims submitted.
Starting with this premise, the court overruled the appellant's
objections; enhanced his offense level by 14 levels; deducted 3
levels for acceptance of responsibility, see id. §3E1.1; placed the
appellant in Criminal History Category I; and set the GSR at 27 to
33 months, see id. Ch.5, Pt.A, sentencing table. The court then
varied sharply downward, sentencing the appellant to an
incarcerative term of 12 months and 1 day. In addition, the court
fined the appellant $60,000; attached a 36-month term of supervised
release; and ordered payment of restitution to Zurich North
American in the amount of $178,568.41.
This timely appeal ensued. The district court refused to
stay the appellant's sentence pending appeal. This court, however,
granted a stay. See United States v. Alphas, No. 14-2228 (1st Cir.
Dec. 31, 2014) (finding that appeal presented "'substantial
question' within the meaning of 18 U.S.C. § 3143(b)(1)(B)").
II. ANALYSIS
The appellant assigns error to the district court's
determination of the amount of loss with respect to both the
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guideline enhancement and the award of restitution. Because these
determinations are controlled by different authorities, we
bifurcate our analysis.
A. The Guideline Enhancement.
The appellant first contends that the sentencing court
used an improper method of calculating intended loss and, thus,
erred in enhancing his offense level by 14 levels. This contention
is met at the threshold by the government's assertion that we need
not reach the merits because any calculation error was harmless.
We begin with that assertion and then proceed to the merits.
1. Harmlessness. The government's argument for
harmlessness rests on the district court's imposition of a below-
the-range sentence coupled with the court's later remark, made
while denying the appellant's motion to stay the sentence pending
appeal, that a recalculation of the GSR would be unlikely to result
in a lower sentence. This argument flies in the teeth of
conventional wisdom, which teaches that the improper calculation of
a defendant's guideline range comprises a significant procedural
error. See Gall v. United States, 552 U.S. 38, 51 (2007). Such an
error ordinarily requires resentencing. See United States v.
Ramos-Paulino, 488 F.3d 459, 463-64 (1st Cir. 2007). Indeed, a
defendant normally can appeal from an error in calculating his GSR
even though the district court imposed a sentence beneath the
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bottom of the GSR. See United States v. Paneto, 661 F.3d 709, 715
(1st Cir. 2011).
To be sure, an appellate court may deem such an error
harmless if, after reviewing the entire record, it is sure that the
error did not affect the sentence imposed. See Williams v. United
States, 503 U.S. 193, 203 (1992). In other words, resentencing is
required if the error either affected or arguably affected the
sentence. See Ramos-Paulino, 488 F.3d at 463.
The case at hand does not fit within these narrow
confines. Although the court below imposed a sentence beneath the
bottom of the GSR, there is at least a possibility that the court
would have imposed an even more lenient sentence had it started
with a lower GSR. See United States v. Foley, ___ F.3d ___, ___
n.13 (1st Cir. 2015) [Nos. 13-1048, 13-1118, slip op. at 31 n.13].
While the court stated that a lower GSR was "unlikely" to result in
a different sentence, we have recently reaffirmed that the
possibility of a lesser sentence is enough to preclude a finding
that an error in calculating the GSR is harmless. See id. Such a
possibility exists here: saying that an event is unlikely is not
the same as a categorical assurance that the event will not come to
pass. It follows that if the court below erred on the high side in
fashioning the guideline enhancement for amount of loss (and, thus,
the GSR), we cannot regard that error as harmless.
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2. Calculating Intended Loss. Our rejection of the
government's harmlessness argument brings us to the merits of the
appellant's claim that the district court committed a calculation
error. We review de novo the court's interpretation and
application of the sentencing guidelines, including the propriety
of its loss-computation method. See United States v. Prange, 771
F.3d 17, 35 (1st Cir. 2014); United States v. Walker, 234 F.3d 780,
783 (1st Cir. 2000).
In fraud cases like this one, the guidelines direct the
sentencing court to augment the defendant's offense level based on
the amount of loss. See USSG §2B1.1(b)(1). For this purpose, loss
is defined as "the greater of actual loss or intended loss." Id.
§2B1.1, comment. (n.3(A)). Here, the district court based its
guideline calculation on intended loss. That term means "the
pecuniary harm that was intended to result from the offense." Id.
at n.3(A)(ii). Intended loss is not synonymous with probable loss.
Rather, the term "includes intended pecuniary harm that would have
been impossible or unlikely to occur." Id. Seen in this light,
intended loss "is a term of art meaning the loss the defendant
reasonably expected to occur at the time he perpetrated the fraud."
United States v. Innarelli, 524 F.3d 286, 290 (1st Cir. 2008).
This standard focuses primarily on the offender's objectively
reasonable expectations, see id., though subjective intent may play
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some role, see id. at 291 n.6; United States v. McCoy, 508 F.3d 74,
79 (1st Cir. 2007).
In this case, the sentencing court concluded that the
intended loss was equal to the aggregate face value of the claims
submitted by the appellant to his insurers, not the aggregate
amount by which the appellant fraudulently inflated those claims.2
The court reasoned that had the insurers known of the fraud when
they received the claims, they would have invoked the void-for-
fraud clauses and paid nothing. The court did not explain what
bearing the void-for-fraud clauses may have had on the amount of
loss that the appellant intended to cause. It said only that if
intended loss were to be viewed solely as the amount of fraudulent
inflation, fraudsters would have an incentive to inflate claims
because, if caught in the act, they would be punished only for the
inflated amount.
The government applauds this reasoning, but the appellant
decries it. He notes that the sentencing guidelines treat loss as
a proxy for relative culpability. In his view, basing an intended
loss computation on the entire amount of an insurance claim rather
than on the amount fraudulently claimed irrationally conflates the
2
We express no opinion on whether any portion of the
appellant's claims was legitimate. This is a matter the district
court will need to address on remand. See text infra. For present
purposes, we assume — as the appellant contends — that he did
suffer some legitimate losses.
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culpability of fraudsters who commit significantly different
offenses.
Fraud has many manifestations, and calculating the loss
associated with a particular scheme is sometimes more art than
science. As a result, we have eschewed rigid rules and instead
taken "a pragmatic, fact-specific approach" to loss calculation.
Prange, 771 F.3d at 35 (internal quotation mark omitted). Such a
pragmatic view suggests that loss computation should distinguish
between an outright swindler who peddles, say, a forged title to a
bridge in Brooklyn and a fraudster who contrives to render some
value (albeit less than promised) to the victim. See id. at 36;
United States v. Blastos, 258 F.3d 25, 30 (1st Cir. 2001). By any
practical measure, the former seems more culpable than the latter.
Applying the degree-of-culpability approach to the
insurance fraud context, it is appropriate for the loss-computation
method to distinguish between a fraudster who wholly fabricates a
non-existent claim and a fraudster who artificially inflates a
legitimate claim. A fraudster who has suffered no loss at all but
invents a $100,000 claim out of thin air is not the same as a
fraudster who has suffered a legitimate $50,000 loss but
artificially inflates his claim to $100,000. See United States v.
Smith, 951 F.2d 1164, 1167 (10th Cir. 1991).
This gets to the heart of the matter. Under the
sentencing guidelines, loss generally does not include sums that a
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victim would have paid to the defendant absent the fraud. See,
e.g., United States v. Evans, 155 F.3d 245, 253 (3d Cir. 1998)
(holding that actual loss in insurance fraud case does not include
value of legitimate claims); United States v. Parsons, 109 F.3d
1002, 1004 (4th Cir. 1997) (same, in context of government benefits
fraud); see also United States v. Miller, 316 F.3d 495, 498-99 (4th
Cir. 2003) (applying this principle to intended loss). Given this
rule, the question reduces to whether the presence of a void-for-
fraud clause makes a dispositive difference when calculating loss
under the sentencing guidelines.
In resolving this question, we find instructive the line
of cases involving government benefits fraud. When a person
fraudulently obtains government benefits, the United States
typically is entitled to recover all sums paid (in a civil
forfeiture proceeding) even though some benefits would have been
paid anyway (that is, absent the fraud). See, e.g., 5 U.S.C.
§ 8148(a); 28 U.S.C. § 2514. But when the same fraudulent conduct
undergirds a criminal conviction, courts have steadfastly refused
to equate the amount of loss under the sentencing guidelines with
the amount recoverable by the government through civil forfeiture.
That is because "[f]orfeiture is a penalty imposed on a criminal
independent of any loss to the crime victim." Parsons, 109 F.3d at
1005. Consequently, "[t]he loss itself (whether the actual or
intended loss) is limited to the tangible economic loss of the
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victim." Id. at 1004. The forfeitable amount does not count
toward the government's loss, which is measured by the amount of
benefits that was (and, in the case of intended loss, would have
been) paid as a result of the fraud. See United States v. Harms,
442 F.3d 367, 380 (5th Cir. 2006); United States v. Dawkins, 202
F.3d 711, 715 (4th Cir. 2000).
To be sure, government benefits fraud is governed by a
special application note, which explains that in such cases loss
"shall be considered to be not less than the value of the benefits
obtained by unintended recipients or diverted to unintended uses."
USSG §2B1.1, comment. (n.3(F)(ii)). We believe that this note
merely represents a specialized application of the guidelines'
general focus on a defendant's relative culpability. See, e.g.,
Dawkins, 202 F.3d at 714; Parsons, 109 F.3d at 1004-05. Since this
is so, it makes good sense to transplant the reasoning of the
government benefits cases to the analogous context of insurance
fraud.
We discern no sound basis for treating a void-for-fraud
clause (in the insurance fraud context) differently than a civil
forfeiture (in the benefits fraud context). Both the void-for-
fraud clause and the civil forfeiture anodyne afford relief after
the fact. So, too, such a clause, like the sword of Damocles
inherent in a threat of civil forfeiture, serves the salutary
purpose of encouraging transactional honesty. And such a clause,
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like a civil forfeiture, imposes a penalty on the fraudster for
acting corruptly: if the insurer discovers the fraud, the insured
forfeits everything.
The concept of loss under the sentencing guidelines
serves a completely different purpose. See United States v.
Hamaker, 455 F.3d 1316, 1337 (11th Cir. 2006); Dawkins, 202 F.3d at
715. The guidelines are designed to ensure that the sentence
imposed on a defendant "reflect[s] the nature and magnitude of the
loss caused or intended by [his] crimes." USSG §2B1.1, comment.
(backg'd.). Consonant with this design, the guidelines use amount
of loss as the primary metric by which "the seriousness of the
offense and the defendant's relative culpability" are measured.
Id. Sums forfeited under a void-for-fraud clause (which is really
nothing more than an after-the-fact penalty) do not conform
naturally to this metric. Cf. id. §2B1.1, comment. (n.3(D)(i))
(providing that "loss" does not include "[i]nterest of any kind,
finance charges, late fees, penalties, amounts based on an agreed-
upon return or rate of return, [and] other similar costs"). It
would therefore be anomalous to read the guidelines to distinguish
between two fraudsters who fraudulently inflate their claims by
exactly the same amount simply because one is covered by an
insurance policy that contains a void-for-fraud clause and the
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other is covered by an insurance policy that does not contain such
a clause.3
The government resists this reasoning, asseverating that
the appellant intended to deprive his insurers of the entire amount
claimed regardless of whether some portion of that amount
represented legitimate losses. To achieve this counterintuitive
result, the government asks us to consider what an objectively
reasonable fraudster standing in the appellant's shoes would have
expected to be paid were the fraud discovered. Because such a
fraudster would be aware of the void-for-fraud clauses and know
that the misrepresentation would relieve his insurers of their
payment obligation, the government's thesis runs, the fraudster
would expect his insurers to suffer losses in the full amount of
the submitted claims.
We reject the government's thesis, which approaches
intended loss from the wrong angle. Fraudsters do not expect to be
found out but, rather, expect to reap the benefits of their
contrivance. The relevant inquiry, then, is what the fraudster
reasonably expected to euchre out of his victim, cf. id. at
3
We base this conclusion on the language and purpose of the
sentencing guidelines, not the language of the particular policies
at issue. Whether and to what extent an insurance contract is void
or voidable is often a thorny issue and we do not need to resolve
that issue here. For the reasons discussed above, an insurer's
loss for guideline purposes is distinct from any recovery to which
it might be entitled under a void-for-fraud clause in a civil
proceeding.
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n.3(A)(ii) (defining "intended loss" as "the pecuniary harm that
was intended to result from the offense" (emphasis supplied)), not
what would have slipped through his fingers had he been caught in
the act.
That amount necessarily excludes any sums that the
fraudster would have been paid absent the fraud. See Burrage v.
United States, 134 S. Ct. 881, 887-88 (2014) (explaining that the
phrase "results from" implies "a requirement of actual causality,"
which typically "requires proof that the harm would not have
occurred in the absence of — that is, but for — the defendant's
conduct" (internal quotation marks omitted)). The sentencing
court, then, should have determined whether and to what extent
legitimate claims were embedded in the fraud.
Structuring "intended loss" in this way makes good sense.
After all, loss is meant to serve as a proxy for the seriousness of
the crime and the relative culpability of the offender. The best
way to gauge the seriousness of a fraud offense is to determine how
much the fraudster set out to swindle — and no fraudster sets out
to swindle sums that he would have been paid anyway. That is also
the best way to gauge a fraudster's culpability.
The best case for the government's contrary position is
United States v. Torlai, 728 F.3d 932 (9th Cir. 2013) — but Torlai
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cannot carry the weight that the government loads upon it.4 Torlai
involved a defendant who had obtained crop insurance policies from
private insurers through a federal program. See id. at 935-36.
Those policies and their application documents included void-for-
fraud clauses. See id. at 940 & n.8. The defendant made a number
of misrepresentations both when he procured the policies and when
he submitted claims under them. See id. at 936, 941-43.
Appealing his sentence, the defendant argued that the
district court erred in calculating loss by failing to determine
which portions of his indemnity claims were legitimate. The Ninth
Circuit disagreed, noting that the case involved a government
benefits program and, therefore, loss constituted "the value of the
benefits obtained by unintended recipients." Id. at 938 (emphasis
omitted) (quoting USSG §2B1.1, comment. (n.3(F)(ii))). The court
stated that "[b]y virtue of his fraud, [the defendant] was not
eligible for any government benefit under the crop insurance
program, and therefore, he was not an 'intended beneficiary.'" Id.
at 943.
Certain facts underlying the court's "unintended
beneficiary" rationale help to distinguish Torlai from this case.
First, the Ninth Circuit found sufficient evidence that the
4
The government's citation to United States v. Ostrom, 80 F.
App'x 67 (10th Cir. 2003), need not detain us. That decision lacks
precedential force even in the circuit of its origin. See 10th
Cir. R. 32.1(A).
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defendant had suffered no reimbursable losses, see id. at 941-43,
so he would not have received anything absent his fraudulent
claims. Second, the defendant made material misrepresentations to
procure the crop insurance policies, see id., making it unlikely
that the insurer would have issued the policies had it been told
the truth. This latter fact indicates that, regardless of the
legitimacy vel non of the claimed losses, the insurer would not
have been obliged to pay. Cases in which an insurer would have
paid nothing absent the fraud are materially different from those
in which the insurer would have paid something (but less than the
full amount claimed) absent the fraud. See United States v.
Sharma, 703 F.3d 318, 324-25 (5th Cir. 2012).5
To recapitulate, we conclude that the district court
erred in calculating the amount of intended loss attributable to
the fraud and, thus, in fashioning the guideline enhancement. We
are, therefore, constrained to remand for resentencing. On remand,
the district court should compare what the appellant sought to
bamboozle his insurers into paying with what they would have paid
had the appellant submitted only bona fide claims.
We add a coda. It is apodictic that the government bears
the burden of proving the applicability of a sentencing enhancement
by preponderant evidence. See Paneto, 661 F.3d at 715. But in a
5
To the extent that Torlai can be read to support the
position advocated by the government here, we decline to adopt its
reasoning.
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case such as this — where a defendant's claims were demonstrably
rife with fraud — a sentencing court may use the face value of the
claims as a starting point in computing loss. See United States v.
Campbell, 765 F.3d 1291, 1304-05 & n.13 (11th Cir. 2014); United
States v. Hebron, 684 F.3d 554, 562-63 (5th Cir. 2012). The burden
of production will then shift to the defendant, who must offer
evidence to show (if possible) what amounts represent legitimate
claims. See Hebron, 684 F.3d at 563; United States v. Jimenez, 513
F.3d 62, 86 (3d Cir. 2008). After the record is fully formed, the
sentencing court must determine the amount of loss that the
government (which retains the burden of proof) is able to
establish. The court, however, "need only make a reasonable
estimate of the loss." USSG §2B1.1, comment. (n.3(C)); see
Blastos, 258 F.3d at 30. Depending on the defendant's offer of
proof, the court might well conclude that the amount of loss is
equal to the face value of the submitted claims.
B. The Restitution Order.
The appellant further contends that the district court
erred in calculating restitution. The government counters both
that this claim is waived and that it is impuissant.
1. Purported Waiver. Waiver typically occurs when a
party intentionally relinquishes a known right. See United States
v. Rodriguez, 311 F.3d 435, 437 (1st Cir. 2002). In the sentencing
context, an appellant may waive an issue when he initially raises
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it as an objection to the PSI Report but later explicitly withdraws
the objection. See United States v. Eisom, 585 F.3d 552, 556 (1st
Cir. 2009); Rodriguez, 311 F.3d at 437. Once an issue is waived,
there is nothing for an appellate court to review. See Rodriguez,
311 F.3d at 437.
Here, the appellant challenged the loss computation both
in objections to the PSI Report and in his sentencing memorandum.
His objection was directed to the calculation of both the guideline
enhancement and the restitution award. A common thread ran through
both halves of his argument: loss simply does not include amounts
that the victim would have paid absent the fraud. At the
disposition hearing, the appellant's trial counsel forcefully
presented this argument in connection with the calculation of the
guideline enhancement. The court rejected it. Later on, the
appellant's counsel was asked whether he wanted the court to
consider any other modifications to the PSI Report. Counsel
responded in the negative.
The sentencing proceeding continued. At one point, the
court remarked that it did not understand the amount of restitution
to be disputed and asked defense counsel whether he was looking at
the same set of numbers. Counsel responded that he was.
The government urges us to find that these (and similar)
statements amounted to an intentional relinquishment of the right
to contest the amount of restitution. This exhortation has some
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superficial appeal: taken in a vacuum, the sentencing colloquy can
be read as an acknowledgment that the appellant was not pressing
any arguments about the amount of restitution. It surely would
have been better practice for counsel to have clarified that he had
no objections to the restitution amount save for the method of
calculation (that is, the court's announced unwillingness to deduct
any legitimate portions of the claims from the loss calculation).
But reading the sentencing transcript as a whole, we do not think
that defense counsel's statements clear the high bar needed for a
finding of waiver.
Waivers are strong medicine, see Pike v. Guarino, 492
F.3d 61, 72 (1st Cir. 2007), and that medicine should not be
dispensed in criminal cases where ambiguity lurks, see United
States v. Bradstreet, 207 F.3d 76, 79-80 (1st Cir. 2000). On this
scumbled record, defense counsel's statements, taken in the context
of the sentencing hearing as a whole, were ambiguous. The main
event at sentencing was the battle over the method of calculating
loss.6 Having lost that battle after a full airing, counsel's
statements can fairly be read as an acknowledgment that the court's
arithmetic (though not its method of calculation) was correct with
respect to restitution. Any other reading would be illogical: it
6
Although the district court specifically addressed the
method of calculation only in connection with the guideline
enhancement, its reasoning plainly encompassed restitution as well.
Indeed, the government, both before us and in the court below, has
made identical arguments concerning the two issues.
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would have been odd for the appellant to press his computational
argument to the bitter end with respect to the guideline
enhancement and then impliedly abandon the very same argument with
respect to restitution.
The short of it is that there was no waiver. Defense
counsel's statements are most sensibly read as a recognition that
the critical issue already had been decided against his client, not
as a concession of that issue.
As a fallback, the government suggests that the appellant
forfeited the restitution issue by not raising it at the
disposition hearing, thus engendering review for plain error. See
Rodriguez, 311 F.3d at 437. This argument is fruitless: the
appellant raised the issue in written objections to the PSI Report
and in his sentencing memorandum, and his attorney presented a
legal basis for the argument to the sentencing court. No more was
exigible to avoid a finding of forfeiture. See United States v.
Theodore, 468 F.3d 52, 58 (1st Cir. 2006).
2. Amount. The district court ordered restitution
pursuant to the Mandatory Victims Restitution Act (MVRA), 18 U.S.C.
§ 3663A. Since the appellant's challenge to the restitution order
is based on an alleged error of law, our review is plenary. See
United States v. Cutter, 313 F.3d 1, 6 (1st Cir. 2002); see also
Walker, 234 F.3d at 783 (explaining that proper method of loss
computation is "a prototypical question of legal interpretation").
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The MVRA authorizes a court to award restitution only in
the amount of a victim's actual loss. See Innarelli, 524 F.3d at
294-95. Thus, the question boils down to whether the presence of
the void-for-fraud clauses in the insurance policies converts the
entire amount paid in response to the appellant's claims into an
actual "loss."
The answer depends, in relevant part, on the MVRA's
definition of a victim as a "person directly and proximately harmed
as a result of the commission of an offense for which restitution
may be ordered."7 18 U.S.C. § 3663A(a)(2). Mindful of this
definition, we have held that, under the MVRA, a court may only
order restitution for losses that have an adequate causal link to
the defendant's criminal conduct. See Cutter, 313 F.3d at 7.
Importantly, we have made it pellucid that "restitution
should not be ordered if the loss would have occurred regardless of
the defendant's misconduct." Id. This means that the government
must establish a but-for connection between the defendant's fraud
and the victim's loss. See United States v. Vaknin, 112 F.3d 579,
590 (1st Cir. 1997) (interpreting parallel provision in Victim and
Witness Protection Act, 18 U.S.C. § 3663). Our case law on this
7
Because the appellant's offense of conviction involves, as
an element, a "scheme or artifice to defraud," 18 U.S.C. § 1343,
victims include those "directly harmed by the defendant's criminal
conduct in the course of the scheme," id. § 3663A(a)(2). This
language does not alter the direct causation requirement. See
United States v. Hensley, 91 F.3d 274, 277 (1st Cir. 1996).
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point is consistent with the weight of authority under the MVRA.
Actual loss is widely (and correctly) thought to be limited to
pecuniary harm that would not have occurred but for the defendant's
criminal activity. See, e.g., Sharma, 703 F.3d at 324; United
States v. Petruk, 484 F.3d 1035, 1038 (8th Cir. 2007); United
States v. Feldman, 338 F.3d 212, 220-21 (3d Cir. 2003); Dawkins,
202 F.3d at 715.
Applying the MVRA and the case law interpreting it, we
think it evident that the district court erred in ordering
restitution in the full amount paid to the appellant simply because
the insurance policies included void-for-fraud clauses. While such
clauses may suffice to ground claims for disgorgement in civil
proceedings, an insurer's recoverable loss for MVRA purposes is
confined to the amount the insurer would not have paid but for the
fraud. See United States v. Chalupnik, 514 F.3d 748, 754 (8th Cir.
2008); Petruk, 484 F.3d at 1038-39.
This gets the grease from the goose. The appellant has
contended all along that some portion of his claims represented
legitimate losses. This remains to be proven. But if it is true,
Zurich North American presumably would have reimbursed him for
those losses had he presented them without embellishment. The
district court must, therefore, reconsider its restitution order,
taking into account the extent (if at all) to which the appellant's
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claims encompassed legitimate losses.8 The district court need
only make "a reasonable determination of appropriate restitution by
resolving uncertainties with a view towards achieving fairness to
the victim." United States v. Burdi, 414 F.3d 216, 221 (1st Cir.
2005) (internal quotation marks omitted).
III. CONCLUSION
We need go no further. For the reasons elucidated above,
we vacate the appellant's sentence (including the restitution
order) and remand for resentencing consistent with this opinion.
On remand, the only issues open to consideration shall be the
appropriate amount of intended loss for purposes of the guideline
enhancement, the appropriate amount of actual loss for purposes of
restitution, and, of course, the dimensions of the sentence to be
imposed.
Vacated and Remanded.
8
The appellant alternatively suggests for the first time on
appeal that if the void-for-fraud clauses dictate the amount of
loss, the restitution award should be offset by the amount of
premiums paid. Given our holding, we do not have any occasion to
consider this alternative suggestion.
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