United States v. Evans , 744 F.3d 1192 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
March 11, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
No. 13-1022
v.
THOMAS B. EVANS,
Defendant - Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 1:11-CR-00481-CMA-1)
Veronica Rossman, Assistant Federal Public Defender, (Warren R. Williamson,
Federal Public Defender, Interim and Virginia L. Grady, Federal Public Defender,
Interim, on the briefs), Denver, Colorado, for Defendant - Appellant.
Ellen Meltzer, (Fred G. Medick of Fraud Section, Criminal Division of the United
States Department of Justice, Mythili Raman, Acting Assistant Attorney General,
and Denis J. McInerney, Acting Deputy Assistant Attorney General, on the brief),
Washington, D.C., for Plaintiff - Appellee.
Before KELLY, GORSUCH, and HOLMES, Circuit Judges.
KELLY, Circuit Judge.
Defendant-Appellant Thomas Evans pled guilty to one count of conspiracy
to commit mail and wire fraud, 18 U.S.C. §§ 1349, 1341, 1343, and was
sentenced to 168 months’ imprisonment and five years’ supervised release. He
now appeals his sentence. Our jurisdiction arises under 28 U.S.C. § 1291 and 18
U.S.C. § 3742(a). Because the district court erred in calculating loss and failing
to award an offense level reduction for acceptance of responsibility, we remand
for the district court to vacate the sentence and resentence.
Background
Mr. Evans was a property manager and organizer of real estate investment
funds, and was owner and president of Evans Real Estate Group, LLC. V R. 212.
Between May 2003 and August 2005, Mr. Evans solicited investors for three
limited partnerships that would acquire, renovate, and operate low-income
apartment complexes in Texas, ultimately selling them at a profit. V R. 213. For
example, Garden Stone Apartments, LP, was capitalized utilizing limited
partnership interests and certificates (debt) bearing interest at 12% with an
expected maturity of seven years. I R. 128, 150. The offering statements
contained lengthy disclosure of the substantial risks of these investments: “there
is no assurance that the Properties will be operated successfully, that the limited
partners will receive a cash return on their investment or that the Certificate
Holders will receive interest or principal payments.” I R. 164; see also I R. 181,
216 (Ventana Apartments, LP); I R. 231, 258 (Aspen Chase Investments, LP). All
told, Mr. Evans raised over $16 million. V R. 215. Mr. Evans, through various
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companies, served as general partner of each limited partnership. I R. 143, 199,
246.
These were legitimate (if highly risky) investment ventures at their outset.
V R. 214. But by April 2005, Mr. Evans experienced cash flow problems and was
unable to make the high interest payments to investors. V R. 452. He contributed
his own funds, but represented that his management company was renting units
from the various entities. Id. Ultimately, Mr. Evans contributed approximately
$4.5 million of his own money to keep the investments solvent. IV R. 90-91; V
R. 452. He also commingled funds of the ventures, using funds from each
offering to pay operational expenses of others. V R. 213-14. He changed some
of the income and decreased some of the expenses reported by the entities. V R.
214, 452. This was accomplished, at least in part, by false journal entries in an
electronic accounting system that generated monthly financial statements; once
the statements were generated, the entries were corrected. The statements would
reflect greater gross potential rent, rental income and occupancy rates, lower
vacancy and delinquency rates, and fewer renewal concessions. The false reports
were provided to investors, lending institutions, and others. V R. 214.
Mr. Evans’ activities continued until April 2007, when he was removed as
property manager and an appointed receiver took control of the projects. V R.
213, 214. In September 2007, the receiver recommended that one of the
remaining properties be abandoned to foreclosure, but believed that two others
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retained value and could be salvaged with additional investment. I R. 470-71. At
the receiver’s behest, Mr. Evans’ investors, although not required to, invested an
additional $3 million. V R. 215.
By April 2009 the receiver had improved the properties, but encountered
unforeseen construction costs and difficulties associated with the nation-wide
financial crisis. I R. 496-97. By September, the value of the properties dropped
significantly, and the receiver allowed the remaining properties to fall into
foreclosure. I R. 523.
Mr. Evans pled guilty by written agreement to an information charging him
with one count of conspiracy to commit mail and wire fraud. I R. 31. In the plea
agreement the government asserted that Mr. Evans’ fraud caused his investors to
lose $9.7 million, but Mr. Evans disputed the government’s loss calculation and
reserved the right to challenge it. I R. 38. The government later increased its
loss estimate to approximately $12 million. I R. 76. The parties agreed that the
applicable Guidelines chapter was § 2B1.1, but made no other agreements related
to sentencing. I R. 38. At Mr. Evans’ change of plea hearing, however, the
government confirmed that it was agreeing to a full three-level decrease in
offense level for acceptance of responsibility. IV R. 14.
Two months before the sentencing hearing, Mr. Evans filed a motion to
continue his sentencing to allow newly appointed counsel to review the
considerable discovery in his case. I R. 67-71. In his motion Mr. Evans argued
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that the government’s loss calculation methodology—subtracting the amount
returned to his investors from the amount initially invested—was incorrect, and
that the court must determine the amount of loss reasonably foreseeable to him. I
R. 68. This calculation, Mr. Evans asserted, must account for the impact of
extrinsic factors such as the actions of the receiver and market conditions on the
investors’ loss. I R. 69-70. Counsel sought more time to investigate those
factors. Id.
The district court denied the motion, finding that “the fruits of such
investigation would be irrelevant to determining the ‘actual loss’ suffered by the
investors.” I R. 88-89. The court relied on United States v. Turk, 626 F.3d 743
(2d Cir. 2010), in stating that even if extrinsic factors were partially responsible
for the eventual bankruptcies of the properties, the only loss that needed to be
foreseeable to Mr. Evans was the loss of the “unpaid principal.” I R. 90. Thus,
the court held that the proper loss calculation was the amount of the initial
investment less any return to the investors, and that the loss was foreseeable to
Mr. Evans. I R. 91.
Mr. Evans filed a sentencing memorandum again challenging the
government’s loss calculation. I R. 105-26. He argued that there was no causal
link between the criminal conduct and the investors’ losses, and thus no “actual
loss.” I R. 121, 124. In response, the government insisted Mr. Evans should
receive no reduction for acceptance of responsibility, I R. 544-47, and did not file
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a request for a one-level reduction under § 3E1.1(b) as it previously represented it
would, IV R. 165.
At the sentencing hearing, the district court adopted the government’s loss
calculation and its prior holding that any extrinsic factors did not need to be
foreseeable to Mr. Evans. IV R. 110-12. The court found irrelevant the fact that
there was no fraud in the inducement of the investments. IV R. 112-13. The
court granted a two-level reduction in offense level for acceptance of
responsibility under § 3E1.1(a), but upheld the government’s refusal to request a
third point under § 3E1.1(b). IV R. 129. The court sentenced Mr. Evans to 168
months’ imprisonment with five years’ supervised release, and ordered restitution
in the amount of actual loss. IV R. 166, 169. This appeal followed.
Discussion
Mr. Evans challenges the district court’s loss calculation methodology and
its failure to award him a third one-level acceptance of responsibility reduction.
Because we find the district court erred on both points and remand for
resentencing, we need not address Mr. Evans’ other arguments regarding the
restitution order and the substantive reasonableness of his sentence.
A. Loss Calculation
Mr. Evans argues that the district court erred in calculating actual loss by
(1) failing to account for the fact that there was no fraud in the inducement of the
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investments, (2) disregarding the foreseeability and effect of the actions of the
receiver and market conditions on actual loss, and (3) refusing to reduce actual
loss by the $4.5 million that he personally infused into the partnerships. We
review the district court’s loss calculation methodology de novo and its factual
finding of loss for clear error. United States v. Gordon, 710 F.3d 1124, 1161
(10th Cir. 2013).
U.S. Sentencing Guidelines Manual § 2B1.1(b)(1) provides sentencing
enhancements for fraud based on the amount of loss caused by the criminal
conduct. Section 2B1.1 cmt. n.3(A) defines actual loss as “the reasonably
foreseeable pecuniary harm that resulted from the offense.” U.S.S.G. § 2B1.1
cmt. n.3(A)(i) (2013). Reasonably foreseeable pecuniary harm is monetary harm
“that the defendant knew or, under the circumstances, reasonably should have
known, was a potential result of the offense.” Id. at cmt. n.3(A)(iv). Thus, §
2B1.1 incorporates and requires both factual or “but for” causation and legal or
foreseeable causation. Id. at App. C Vol. II Amend. 617, at 178.
Mr. Evans argues that the district court erred in calculating loss because
there was no fraud in the inducement of the investments. Aplt. Br. 34-38. He is
correct. In calculating loss, the district court started with the amount initially
invested and subtracted the amount returned to the investors. IV R. 108.
Although it acknowledged that there was no fraud in the inducement, the court
thought it irrelevant because Mr. Evans’ fraud encouraged the investors not to
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raise questions or pull their investments. IV R. 112-13. That may have been the
effect of the fraud, but the court should have accounted for the fact that between
May 2003 and April 2005 there was no criminal conduct. Any decrease in the
value of the properties during that time period cannot constitute “harm that
resulted from the offense.” U.S.S.G. § 2B1.1 cmt. n.3(A)(i).
In United States v. Copus, we examined actual loss in the case of loan fraud
where “the false statement occurred after the loans were issued, in the course of
the lender’s monitoring of the collateral.” 110 F.3d 1529, 1535 (10th Cir. 1997).
We said that “the loss attributable to the false statement is the amount of the
outstanding loan less any amount recouped by the bank from assets pledged
against the loan, less the estimated amount the bank would have lost had the
statement not been false.” Id. (quoting United States v. Wilson, 980 F.2d 259,
262 (4th Cir.1992)) (emphasis added). Thus, the district court should have
inquired into what loss, if any, the investors would have suffered if Mr. Evans
had come clean regarding the status of the securities (and the underlying
properties) in April 2005. This requires a determination of the value of the
securities at the time the fraud began, which is the correct starting point for loss
calculation in this case. In making that calculation, the fact that the securities had
lost value due to a poor or unsustainable business model would not be chargeable
to Mr. Evans.
Next, Mr. Evans argues that the district court should have considered the
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effect and foreseeability of non-fraud factors in determining loss. Aplt. Br. 38-
41. Again, he is correct.
The district court relied on United States v. Turk, 626 F.3d 743 (2d Cir.
2010) in stating that the receiver’s actions and market conditions were irrelevant
to determining actual loss. That reliance was misplaced. In Turk, the defendant
made false promises to obtain loans for real estate projects and promised that the
loans would be collateralized by recorded first mortgages. Id. at 745. Ms. Turk
was arrested, defaulted on the loans, and her company was forced into
bankruptcy. Id. at 745-46. When the buildings were liquidated, the proceeds
were insufficient to repay her investors, who had no collateralized position. See
id. at 746. The Second Circuit rejected Ms. Turk’s argument that actual loss
should be zero because the buildings purportedly securing the loans retained some
value at the time her fraud was discovered, and were only later devalued by
extrinsic forces such as the financial crisis. See id. at 748. In other words, had
the housing market not crashed, her victims’ losses would have been recouped.
The Turk court stated, “[T]he victims’ loss was the unpaid principal, and we hold
that the decline in value in any purported collateral need not have been
foreseeable to Woolf Turk in order for her to be held accountable for that entire
loss.” Id. at 749.
We expressly adopted Turk in United States v. Crowe, 735 F.3d 1229 (10th
Cir. 2013). The defendant in Crowe fraudulently obtained mortgage loans and
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eventually defaulted. Id. at 1232-33. Like Ms. Turk, Ms. Crowe argued that “the
difference between the outstanding loan amount and the foreclosure proceeds”
was not reasonably foreseeable because Ms. Crowe could not have anticipated the
financial crisis. Id. at 1236. We held that “the concept of reasonable
foreseeability applies only to a district court’s calculation of ‘actual loss,’ and not
to its calculation of the ‘credits against loss’ [under U.S.S.G. § 2B1.1 cmt.
n.(3)(E).]” Id. at 1241. Section 2B1.1 cmt. n.(3)(E)(ii) provides that “[i]n a case
involving collateral pledged or otherwise provided by the defendant, the amount
the victim has recovered at the time of sentencing from disposition of the
collateral” should be deducted from loss. Under the plain language of the
Guidelines, and under Crowe, credits against loss do not need to be foreseeable.
Since the loss in Turk and Crowe was simply the outstanding loan balance, and
the underlying buildings were only collateral, the decline in value of the real
estate in these cases did not need to be foreseeable.
But unlike the schemes in Turk and Crowe, Mr. Evans’ is not garden-
variety mortgage fraud. Here, the real estate projects were not mere “insulation
against loss,” Turk, 626 F.3d at 751; they were the underlying assets of the
limited partnerships. The value of the limited partnership interests and
certificates held by Mr. Evans’ investors was tied to the health of the ventures,
the economy, and what might be received on sale or foreclosure of the properties.
In this way, the investors’ interests were akin to equity. The court in Turk
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distinguished simple debt from equity, noting that an equity security “is owned
outright, with the assumption of upside benefit and downside risk, while a loan is
merely the exchange of money for a promise to repay, with no assumption of
upside benefit.” Id. Whereas the investors in Turk and Crowe were simply
promised loan payments, Mr. Evans’ investors purchased securities whose value
necessarily fluctuated. The victims were not guaranteed any return, and were
aware that the success of their investment hinged on unpredictable factors,
including the economy. I R. 139, 164-65. Though the certificate holders were
promised eventual repayment, they were also promised extraordinary returns
predicated on the success of the underlying properties, with disclosure of the
associated and substantial risk factors. Accordingly, the “two-step” loss
calculation described in the mortgage fraud cases, which distinguishes between
“the initial calculation of loss (where foreseeability is a consideration) [and] the
credits against loss available at sentencing (where it is not),” Turk, 626 F.3d at
751, is not appropriate here. Instead, this case calls for a single, more complex
inquiry: the reasonably foreseeable amount of loss to the value of the securities
caused by Mr. Evans’ fraud, disregarding any loss that occurred before the fraud
began, and accounting for the forces that acted on the securities after the fraud
ended.
On remand, the district court must determine whether Mr. Evans’ fraud was
a “but for” cause of the investors’ loss, and whether it was the legal cause. In
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considering the latter, the court must account for the effect and foreseeability of
non-fraud factors including the actions of the receiver to prolong the investments
and the effect of the housing market on the value of the securities and the
underlying properties. The district court should determine in the first instance the
proper assignment of the burden of production regarding these non-fraud factors.
See Gordon, 710 F.3d at 1163 n.40.
Mr. Evans also argues that loss should have been reduced by the $4.5
million he personally infused into the partnerships, asserting they were “services
rendered” to his investors, but we reject that argument. U.S.S.G. § 2B1.1 cmt.
n.3(E)(i) provides that loss shall be reduced by the value of “the services rendered
. . . by the defendant . . . to the victim before the offense was detected.” The
district court refused to credit the $4.5 million because it was not returned to the
investors, but instead used “to cover up the business losses or to cover the
business losses.” IV R. 115. Mr. Evans argues that the $4.5 million was
“services rendered” because it was used to operate the partnerships. The Second
Circuit rejected a similar argument in United States v. Byors, in which a business
owner who lied about assets securing his victims’ loans argued that money used
to capitalize his business and pay for legitimate expenses should be credited
against loss as “services rendered” to the victims. 586 F.3d 222, 226 (2d Cir.
2009). The court held that these were not “services rendered” because they
conferred no benefit or return on investment to the victims. Id. In this case, the
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district court’s finding that the funds Mr. Evans put into the partnerships provided
no ultimate benefit to the investors and prolonged the fraud is not clearly
erroneous. As such, the $4.5 million should not be credited against loss.
B. Acceptance of Responsibility
Mr. Evans argues that the district court erred in refusing to award him a
one-level reduction for acceptance of responsibility under U.S.S.G. § 3E1.1(b).
Under § 3E1.1, a defendant’s offense level may be reduced by up to three levels.
A defendant will receive a two-level reduction under § 3E1.1(a) if he clearly
demonstrates acceptance of responsibility. Id. at § 3E1.1(a). A defendant will
receive an additional one-level reduction under § 3E1.1(b) only “upon motion of
the government” stating that the timeliness of his notification to plead guilty
permitted the government and court to allocate resources efficiently. Id. at §
3E1.1(b). The government has “broad” but “not unfettered” discretion whether to
file a § 3E1.1(b) motion. United States v. Naramor, 726 F.3d 1160, 1166 (10th
Cir. 2013). The district court may reject the government’s refusal if it was “(1)
animated by an unconstitutional motive, or (2) not rationally related to a
legitimate government end.” United States v. Moreno-Trevino, 432 F.3d 1181,
1186 (10th Cir. 2005). We review the district court’s decision to accept or reject
the government’s refusal to file a § 3E1.1(b) motion for clear error. Naramor,
726 F.3d at 1166.
On the record before us, the government’s decision to reverse its stated
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course and refuse to request an acceptance of responsibility reduction is not
rationally related to any legitimate government end. The district court held that
the government’s refusal was related to efficiency and resource allocation, IV R.
129, but we cannot see how, given that the government acknowledged Mr.
Evans’s right to challenge loss, I R. 38, and expressly agreed to request a third
point under § 3E1.1(b) with knowledge of that right, IV R. 14. The government
did not assert in the district court that its refusal was grounded in concerns for
resource allocation; it argued only that Mr. Evans had not truly accepted
responsibility. See I R. 530-31, 544-47; IV R. 117-25. Here, it explains that “the
government declined to move for a reduction under § 3E1.1(b) because of Evans’s
denial that he was responsible for any loss to the investors.” Aplee. Br. 40. The
district court necessarily rejected that argument in finding that a two-level
reduction under § 3E1.1(a) was appropriate, and noted that Mr. Evans saved the
government and the taxpayer significant time and resources by pleading guilty
and waiving indictment. IV R. 125.
Considering the above, we find that the government’s refusal was not
rationally related to resource allocation. Nor do we find Mr. Evans’ arguments
regarding the foreseeability of loss inconsistent with acceptance of responsibility.
We therefore conclude that the district court committed clear error in accepting
the government’s refusal to request a third one-level reduction under § 3E1.1(b),
and that Mr. Evans is entitled to a three-level reduction for acceptance of
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responsibility.
For these reasons, we REMAND with instructions to vacate the sentence
and resentence consistent with this opinion.
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