United States v. Sheinbaum , 216 B.R. 443 ( 1998 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Nos. 97-41055 & 97-41152
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
URI SHEINBAUM,
Defendant-Appellant.
************************************************************
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
MARC A. BIRNBAUM,
Defendant-Appellant.
Appeals from the United States District Court
For the Eastern District of Texas
February 27, 1998
Before GARWOOD, JOLLY, and HIGGINBOTHAM, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Defendants Uri Sheinbaum and Marc Birnbaum each pled guilty to
one count of conspiracy to defraud the government and to commit
bankruptcy fraud. They now appeal both the sentence and the
restitution order that the district court imposed upon them. We
affirm.
I.
Birnbaum and Sheinbaum were principals in various entities
that were partners in a limited partnership known as 5555
Apartments, Ltd. In 1984, the partnership obtained a $10.2 million
loan from Alice Savings & Loan Association to purchase an apartment
complex in Dallas, Texas, called the 5555 Apartments. The terms of
the Promissory Note negotiated between the parties provided for a
deferred downpayment of $1.7 million, with the first installment of
$237,500 due in October 1985 and the remaining principal and
accrued interest due in October 1994. Birnbaum and Sheinbaum were
not personally liable under the Note. Securing the Note instead
were a deed of trust, a security agreement, and an assignment of
rents. The security language in the Note read as follows:
THIS DEED OF TRUST, SECURITY AGREEMENT AND ASSIGNMENT OF RENTS
is made . . . FOR THE PURPOSE of securing payment of the
indebtedness . . . .
TO SECURE the full and timely payment of the indebtedness . .
. Grantor has ASSIGNED . . . (f) all revenues, income, rents,
issues and profits of any of the Land, Improvements, personal
property or Leases (collectively, the “Rents”) . . . .
V. Assignment of Rents: Grantor does hereby absolutely and
unconditionally assign, transfer and convey to
Beneficiary, as well as to Trustee on Beneficiary’s
behalf, all Rents under the following provisions:
1. Grantor reserves the right, unless and until an
Event of Default occurs under this Deed of Trust,
to collect such rents as a trustee for the benefit
of Beneficiary, and Grantor shall apply the Rents
so collected in the order set forth in paragraph 7
of Section III hereof.
2. Upon an Event of Default, Beneficiary, or Trustee
on Beneficiary’s behalf, may at any time and
without notice, either in person, by agent or by
receiver to be appointed by a court, enter and take
possession of the Property or any part thereof and
in its own name sue for or otherwise collect the
Rents.
The partnership made the first $237,500 installment on the deferred
downpayment in November 1985.
2
In October 1987, the parties to the Note renegotiated its
terms and executed a written Modification Agreement. The Agreement
provided that all rents and income from the apartment complex were
to be placed into a separate account to be used to pay off expenses
and indebtedness. It stated:
Grantor shall maintain a special account . . . into which all
income derived from all sources in connection with the
operation of the Property . . . shall be deposited by Grantor,
and against which checks shall be drawn only for the payment
of the sums becoming due and payable under the terms of the
Note or this Deed of Trust and for the payment of the
necessary and reasonable expenses incurred by Grantor in
connection with the operation of the Property, with such
latter payments being made directly to the persons or entities
providing the goods or services for which such expenses are
incurred.
By 1994, the ownership of the Note had passed to Banker’s
Trust Company of California. In September 1994, Birnbaum and
Sheinbaum decided to default on their debt payments while retaining
the income from the apartments for themselves. By withholding the
apartments’ income, they hoped to force Banker’s Trust to
renegotiate the terms of the Note. To aid them in this scheme, the
defendants obtained the assistance of Gail Cooper, a financial
consultant who had also helped the defendants to renegotiate the
Note in 1987.
On January 30, 1995, Banker’s Trust sued Sheinbaum and
Birnbaum in Texas state court, seeking an accounting of all rents
collected since default. On February 27, 1995, before an
accounting could be completed, Birnbaum filed a petition in
Bankruptcy Court for the Northern District of Texas, seeking relief
for 5555 Apartments, Ltd. under Chapter 11.
3
As part of the bankruptcy proceedings, Birnbaum and Sheinbaum
were required to disclose all payments made to “insiders” of 5555
Apartments, Ltd. in the year preceding the bankruptcy filing. On
March 22, 1995, the defendants filed a Statement of Financial
Affairs in the bankruptcy court. The Statement revealed that
$498,995 had been paid to insiders in the year prior to the
bankruptcy petition, $134,000 of which had gone to Birnbaum and
Lawrence Lambert, a business partner. The Statement asserted that
the other $364,995 had been paid to an entity controlled by
Sheinbaum as repayment for a debt owed to him by 5555 Apartments,
Ltd. The Statement claimed that this debt had arisen from
Sheinbaum’s personal contribution towards the November 1985 payment
of the first $237,500 installment on the Note. In fact,
Sheinbaum’s debt had long since been repaid. Sheinbaum and
Birnbaum later repeated this false statement in an Amended
Statement of Financial Affairs, under oath at a creditors’ meeting,
and in a deposition.
On June 21, 1996, the government charged Sheinbaum, Birnbaum,
Cooper, and Lambert in a four-count indictment. In February 1997,
Sheinbaum and Birnbaum pled guilty to count one of the indictment,
charging them with conspiracy to defraud the government and to
commit bankruptcy fraud. The district court sentenced them on
August 25, 1997.
At sentencing, the government contended that Sheinbaum and
Birnbaum’s scheme had caused a loss of $498,995. In support of
this position, it produced an affidavit from Victoria Tutterrow,
4
who had worked on the 5555 Apartments, Ltd. bankruptcy as a
representative for the United States Trustee’s Office for the
United States Bankruptcy Court for the Northern District of Texas.
Tutterrow testified that the defendants deceived her into believing
that the payments made to them out of the apartments’ income within
the year preceding bankruptcy were for legitimate pre-existing
business debts. Tutterrow stated that had she known that those
debts had already been repaid, she would have sought the
appointment of an independent trustee, who would have sued to
recover the apartment’s income appropriated by the defendants.
The defendants, on the other hand, disputed the government’s
loss calculations. Relying on the testimony of John Flowers, a
former United States Bankruptcy judge, Birnbaum and Sheinbaum
argued that they were legally entitled to take the income from the
apartment complex. Furthermore, Phillip Palmer, a bankruptcy
attorney, concluded in an affidavit that the false statements by
the defendants could not have affected Tutterrow’s decision to
appoint an independent trustee and thus did not contribute to any
loss, an opinion shared by Flowers. Finally, the defendants
contended that they should owe little or no restitution, partly
because they caused no loss and partly because they had reached a
civil settlement with the victim prior to sentencing.
The district court sided with the government on all these
issues and fixed the loss from the defendants’ scheme at $498,995.
Under U.S.S.G. § 2F1.1(b)(1)(J), a loss of between $300,000 and
$500,000 mandates a nine-level increase in the offense level for a
5
fraud. After adding these nine levels and then subtracting three
levels for acceptance of responsibility, the district court arrived
at a total offense level of fourteen, yielding a sentence range of
fifteen to twenty-one months of incarceration. However, because
the defendants provided the government with substantial assistance
in prosecuting others, the district court granted the government’s
motion for a downward departure, settling on a sentence of seven
months for each defendant. In addition, it fined Birnbaum $20,000
and ordered both defendants to pay $498,995 in restitution to their
victim, Banker’s Trust.
II.
The defendants’ first argument on appeal is that the district
court erred in determining the amount of loss for sentencing
purposes. They contend that they in fact caused no loss, as they
were legally entitled to keep the income from the apartment complex
for themselves and their actions in no way altered the course of
the bankruptcy proceedings.
The defendants advance a complicated state-law argument, the
premise of which is that the Note and the Modification Agreement
entitled them to control of the income from the apartments. They
entice the government into engaging them on this front. Yet
whether or not the Note and the Modification Agreement created a
“pledge” or an “absolute assignment” of rents is irrelevant in
determining the amount of loss caused by the defendants’ scheme.
See generally Taylor v. Brennan, 621 S.W.2d 592, 593 (Tex. 1981)
(discussing Texas law on assignment-of-rent clauses).
6
Under the Bankruptcy Code, the bankruptcy trustee could avoid
any transfer from the bankrupt estate made to insiders within the
year preceding the filing of the bankruptcy petition. See 11
U.S.C. § 547(b)(4)(B). At sentencing, the defendants admitted that
as insiders they received $498,995 from the apartments in that one-
year period. Under the Code, the only relevant defense available
to Birnbaum and Sheinbaum was that these monies were received “in
the ordinary course of business.” See 11 U.S.C. § 547(c)(2).
The defendants’ fraud operated by deceiving Tutterrow into
believing that they had received the income in the ordinary course
of business. Sheinbaum and Birnbaum lied to the bankruptcy court,
informing it that $364,995 of the monies transferred to them were
in satisfaction of a legitimate business debt. In fact, that debt
had long since been repaid. As Tutterrow testified, had she known
that there was no legitimate business justification for receiving
that sum, she would have sought the appointment of an independent
trustee, who could have sued to recover the entire $498,995 paid to
insiders. Instead, she permitted the defendants to retain trustee
powers as debtors-in-possession, thereby allowing them to abscond
with the money. Thus, the defendants’ fraud on the bankruptcy
court directly led to a loss of $498,995.
The defendants attempt to argue that Texas state law entitled
them to receipt of the income from the apartments, despite the
Modification Agreement. This fact is simply irrelevant, however.
As the defendants freely admitted in their factual resumes
accompanying their guilty pleas, they knowingly withheld the
7
apartments’ income from the noteholder in an attempt to force the
noteholder to renegotiate the terms of the loan. By no stretch of
the imagination, therefore, can the payments to the defendants be
considered to have been made “in the ordinary course of business.”
Thus, whether or not the defendants had the right under state law
to receive the income initially, under the Bankruptcy Code they
could be forced to disgorge those monies unless they were entitled
to the ordinary-course-of-business defense. Their fraud deceived
Tutterrow into believing that they were so entitled. As Tutterrow
stated in her affidavit, had she had any indication that the
defendants were attempting to defraud the noteholder, she
immediately would have sought the appointment of an independent
trustee. Moreover, the defendants further conceded that they knew
that under the Modification Agreement the income from the apartment
complex could not be paid to them directly before the expenses and
indebtedness on the apartments were satisfied. Defendants move too
quickly when they admit as much during their plea, but then argue
to us on appeal that somehow they were entitled to retain the
apartments’ income for themselves.
The defendants attempt to escape from the consequences of
their crime by arguing that their actions caused no loss, as
Tutterrow had sufficient independent authority to avoid the
transfers to them, regardless of their status as ordinary-course-
of-business payments. They suggest that Tutterrow could always
have employed the fraudulent conveyance provisions of 11 U.S.C. §
548(b) to avoid the transfers to the defendants. Thus, they
8
contend, their false statements were of no consequence, because
they did not foreclose all of Tutterrow’s options. Yet Tutterrow
in her affidavit never expressed a willingness to exercise her §
548(b) powers, perhaps because the defendants’ deceptions led her
to believe that they would be entitled to a good faith defense
under 11 U.S.C. § 548(c). Regardless, as Tutterrow stated, an
indication of fraud is what would have led her to seek the
appointment of an independent trustee to avoid any preferential
transfers. Because the defendants masked their fraud through their
false statements, their crime altered Tutterrow’s actions and
directly caused the loss to the noteholder.
Finally, Sheinbaum and Birnbaum contend that even if they lied
when they claimed they took the apartments’ income to satisfy an
unpaid loan, their falsehood caused no loss because 5555
Apartments, Ltd. also owed Sheinbaum $500,000 on a separate debt,
which was never satisfied. Yet as the government points out, this
$500,000 debt arose out of a judgment in favor of an investment
banking firm, F.M. Roberts, which Sheinbaum and Birnbaum had
employed to try to find investors to buy their ownership interests
in 5555 Apartments, Ltd. Tutterrow believed that these syndication
expenses were incurred for the personal financial benefit of the
defendants, and thus did not arise “in the ordinary course of
business.” See 11 U.S.C. § 547(c)(2). According to Tutterrow’s
affidavit, had she been told that the defendants had taken income
from the apartments to pay off this particular $500,000 obligation,
she would have sought the appointment of an independent trustee.
9
We conclude that the district court erred neither in
determining that Birnbaum and Sheinbaum caused a loss to the
noteholder nor in calculating the magnitude of that loss.
Accordingly, in sentencing the defendants, the court used the
proper total offense level as a basis for its downward departure.
III.
The defendants also challenge the $498,995 of restitution
ordered by the district court, repeating the arguments we reject
above that they never caused any losses. In addition, the
defendants contend that they should not owe any restitution to the
victim, Banker’s Trust, because prior to their convictions they
entered into a civil settlement with Banker’s Trust. Pursuant to
the settlement, Banker’s Trust agreed to release Sheinbaum and
Birnbaum from all civil liability. Because Banker’s Trust has
already been recompensed, argue the defendants, they should not
also be required to pay restitution pursuant to the Victim and
Witness Protection Act, 18 U.S.C. §§ 3663-64 (Supp. 1997).
In support of their position, the defendants rely upon United
States v. Coleman, 997 F.2d 1101 (5th Cir. 1993), cert. denied, 510
U.S. 1077 (1994). In Coleman, we held that a district court cannot
order a defendant to pay restitution to a defrauded government
entity when that entity had previously entered into a civil
settlement and release with the defendant. The Coleman court,
however, expressly declined to reach “the question of the effect of
a full release in a civil suit not involving the government on a
subsequent criminal prosecution.” Id. at 1107 n.4. The defendants
10
urge us to extend the Coleman rule to cover all civil settlements
and releases. See also United States v. Bruchey, 810 F.2d 456, 460
(4th Cir. 1987) (implying that a voluntarily executed agreement
between a defendant and his victim would render a restitution order
unnecessary). But see United States v. Cloud, 872 F.2d 846, 853-54
(9th Cir.) (rejecting the Bruchey holding), cert. denied, 493 U.S.
1002 (1989).
The resolution of this question turns on our characterization
of the nature of restitution under the VWPA. If restitution is
purely a penal device, then a civil release from liability should
have no effect on a restitution order, as a court must consider
public, not private, interests in fixing its sentence. If, on the
other hand, restitution is inherently a compensatory measure, then
civil settlements should prohibit restitution awards, as the victim
would already have been compensated to its satisfaction. See
Bonnie Arnett Von Roeder, Note, “The Right to a Jury Trial to
Determine Restitution Under the Victim and Witness Protection Act
of 1982,” 63 Tex. L. Rev.671, 677-79 (1984) (describing scholarly
debate over the nature of restitution).
There are strong arguments to be made that the goal of the
VWPA is compensatory. See id. at 679-84 (analyzing text and
legislative history of VWPA and concluding that it was intended
primarily to be a compensatory, rather than punitive, statute).
Indeed, the very title of the VWPA -- “The Victim and Witness
Protection Act” -- might lead one to believe that the point behind
the VWPA is compensation, not retribution or the like.
11
Nevertheless, the overwhelming trend in the caselaw is to read the
VWPA as a penal provision. The catalyst for this trend was the
Supreme Court’s decision in Kelly v. Robinson, 479 U.S. 55 (1986).
In Kelly, the Court was asked to consider the nature of restitution
ordered under a Connecticut statute. In concluding that the
Connecticut restitution statute was penal in character, the Court
commented broadly about the purpose of restitution in the criminal
law:
The criminal justice system is not operated primarily for the
benefit of victims, but for the benefit of society as a whole.
Thus, it is concerned not only with punishing the offender,
but also with rehabilitating him. Although restitution does
resemble a judgment “for the benefit of” the victim, the
context in which it is imposed undermines that conclusion.
The victim has no control over the amount of restitution
awarded or over the decision to award restitution. Moreover,
the decision to impose restitution generally does not turn on
the victim’s injury, but on the penal goals of the State and
the situation of the defendant. As the Bankruptcy Judge who
decided this case noted in Pellegrino: “Unlike an obligation
which arises out of a contractual, statutory or common law
duty, here the obligation is rooted in the traditional
responsibility of a state to protect its citizens by enforcing
its criminal statutes and to rehabilitate an offender by
imposing a criminal sanction intended for that purpose.”
Id. at 52 (citations omitted).
Technically, the Court’s comments in Kelly were aimed only at
a state restitutionary system, yet in a footnote the Court hinted
that they might apply to the VWPA as well. See id. at 53 n.14; see
also United States v. Caddell, 830 F.2d 36, 39 (5th Cir. 1987)
(concluding Kelly generally applies to both state and federal
restitution orders). Nearly every circuit that has later
confronted the question has taken Kelly to mean that the VWPA is
penal, not compensatory, in nature. See United States v. Savoie,
12
985 F.2d 612, 619 (1st Cir. 1993); United States v. Vetter, 895
F.2d 456, 459 (8th Cir. 1990); United States v. Hairston, 888 F.2d
1349, 1355 (11th Cir. 1989); Cloud, 872 F.2d at 854. But see
Bruchey, 810 F.2d at 460-61 (confusingly concluding that VWPA is
fundamentally penal in nature but that nevertheless a civil
settlement can absolve a defendant of the need to pay restitution).
Our Circuit, without citing Kelly, has held that the effect of a
civil settlement on a criminal restitution order “depends upon what
payment was made in the settlement, whether the claims settled
involved the same acts of the defendants as those that are
predicated on their criminal convictions, and whether the payment
satisfies the penal purposes the district court sought to impose.”
United States v. Rico Indus., 854 F.2d 710, 715 (5th Cir.)
(emphasis added), cert. denied, 489 U.S. 1078 (1989).
Rico Indus. and Kelly lead us to conclude that district courts
possess the discretion to impose restitution orders in spite of
civil settlements. That the victim has agreed in a civil
proceeding that it has been compensated fully does not prevent a
district court from pursuing the rehabilitative and retributive
functions of the criminal law served by restitution. Cf. Coleman,
997 F.2d at 1107 (recognizing that “‘the law will not tolerate
privately negotiated end runs around the criminal justice system’
in the use of the VWPA”) (quoting Savoie, 985 F.2d at 618).
Coleman does not command a different result. In Coleman, a
government agency (working in close connection with the U.S.
Attorney’s Office) negotiated a civil settlement with the
13
defendant. We reasoned that in releasing the defendant from future
civil liability, the government was essentially estopped from
seeking further compensation in criminal litigation from the
defendant. No such estoppel principle exists in this case,
however, as the government here sought a restitutionary order in
favor of a third party, Banker’s Trust. Indeed, the Coleman court
stressed that its holding was not meant to apply to situations like
the one before us. See Coleman, 997 F.2d at 1107 & n.4. The
defendants also argue that because the RTC was a named beneficiary
of their civil settlement with Banker’s Trust, the Coleman rule
should apply. Yet as Coleman stressed, it was the fact that the
government negotiated the settlement with the defendants that
created an estoppel issue. Here, there is no record evidence
indicating that the RTC played a substantial role in settling the
civil matter.
IV.
Of course, to avoid double-counting, a district court must
reduce the size of its restitution order by any amount received by
the victim as part of a civil settlement. See 18 U.S.C. §
3664(j)(2) (Supp. 1997); Rico Indus., 854 F.2d at 715 (“If [the
settlement] is based on the same acts, the object of restitution --
to restore the party harmed -- would indicate that [the defendant]
be credited with the amount of the settlement.”). Here, the victim
and the defendants entered into a settlement, whereby Banker’s
Trust agreed to release Birnbaum and Sheinbaum from civil
liability. Yet the record does not reveal what Banker’s Trust
14
obtained in return for this release; the release itself simply
states that it was given for “good and valuable consideration.” We
doubt that Banker’s Trust struck a bargain in which it was to
receive nothing of value in exchange for its release. Yet the
district court ignored the potential value of the release in
fashioning its restitution order. Instead, the court required the
defendants to pay to Banker’s Trust the full $498,995 of loss
caused by their crime.
The government, however, contends that the district court’s
failure to credit the defendants for the value of their civil
settlement does not invalidate the restitution order, as it was the
defendants’ burden to proffer evidence to the court as to the value
of the consideration they gave to the victim in exchange for the
release. We agree.
The federal restitution statute provides:
Any dispute as to the proper amount or type of restitution
shall be resolved by the court by the preponderance of the
evidence. The burden of demonstrating the amount of the loss
sustained by a victim as a result of the offense shall be on
the attorney for the Government. The burden of demonstrating
the financial resources of the defendant and the financial
needs of the defendant’s dependents, shall be on the
defendant. The burden of demonstrating such other matters as
the court deems appropriate shall be upon the party designated
by the court as justice requires.
18 U.S.C. § 3664(e) (Supp. 1997). It might appear to the casual
observer that § 3664(e) places the burden of proof on the
government on all issues relating to loss to the victim. Yet the
burden section of the statute only requires the government to
establish “the amount of loss sustained by [the] victim,” United
States v. Razo-Leora, 961 F.2d 1140, 1146 (5th Cir. 1992); it does
15
not speak to any compensation later received by the victim for that
loss. Logically, the burden of proving an offset should lie with
the defendant. The statute allocates the various burdens of proof
among the parties who are best able to satisfy those burdens and
who have the strongest incentive to litigate the particular issues
involved. Having investigated the crime and wishing to provide as
strong a deterrent as possible, the government is best suited to
persuade the court as to the amount of loss caused by the offense.
On the other hand, the defendant is better positioned to proffer
evidence about his own financial resources and needs, and his
desire to lower his restitution order gives him the incentive to
litigate such mitigating circumstances. In a similar vein, the
defendant should know the value of any compensation he has already
provided to the victim in civil proceedings, so the burden should
fall on him to argue for a reduction in his restitution order by
that amount. Cf. United States v. Flanagan, 80 F.3d 143, 146 (5th
Cir. 1996) (“[A]s a general rule, the party seeking the adjustment
in the sentence is the party that has the burden of proving the
facts to support the adjustment.”).
Therefore, we conclude that “justice requires” that the burden
of establishing any offset to a restitution order should fall on
the defendant. See 18 U.S.C. § 3664(e) (Supp. 1997) (“The burden
of demonstrating such other matters as the court deems appropriate
shall be upon the party designated by the court as justice
requires.”). Although we doubt that in releasing the defendants
from civil liability Banker’s Trust acted in the spirit of
16
altruism, the defendants failed to present any evidence to the
district court as to the value of the consideration they provided
in exchange for the release. We will not simply assume that the
monetary value of the consideration and the bundle of rights
conferred upon the victim by the settlement equaled the monetary
value of the loss sustained by the victim. If that were the case,
then § 3664 would absolutely bar restitution whenever a civil
settlement was reached between the defendant and the victim, rather
than providing an offset for the value of the settlement.
Accordingly, having failed to present valuation evidence to the
district court, the defendants waived their offset claim. The
district court was entitled to order both of them to pay as
restitution to the victim the entire amount of loss caused by their
scheme. See United States v. Chaney, 964 F.2d 437, 452-54 (5th
Cir. 1992) (upholding district court’s authority to impose joint
and several liability for restitution).
V.
We affirm both the sentence and the restitution order imposed
by the district court.
AFFIRMED.
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