United States v. Shepard, Everett V. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-1569
United States of America,
Plaintiff-Appellee,
v.
Everett V. Shepard,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 3:00-30154-01-GPM--G. Patrick Murphy, Chief Judge.
Argued September 17, 2001--Decided October 23, 2001
Before Coffey, Easterbrook, and Williams,
Circuit Judges.
Easterbrook, Circuit Judge. St. Mary’s
Hospital in East St. Louis hired Eileen
Shepard as a social worker, a position in
which she met Beatrice Neely, then 87
years old and one of the Hospital’s
patients. Eileen gained the confidence of
Neely and her guardian Clara Person
(Neely’s daughter), who invited Eileen
and her husband Everett to move into
Neely’s home. The Shepards began to drain
Neely’s bank account on the pretext of
using the money for home maintenance and
improvements. Neely’s savings dwindled
from $92,000 to nothing by the time she
died. Everett has been convicted of mail
fraud and money laundering, and he has
been sentenced to 33 months’ imprisonment
plus restitution of $165,000. His appeal
concerns only the amount of restitution.
(Eileen, indicted and convicted
separately, has not appealed.)
Restitution usually means the return of
ill-got gains or other sums to which the
holder is not legally entitled, which
makes it hard to see how Everett could be
required to pay more than $92,000 plus
interest as restitution. The Mandatory
Victims Restitution Act, 18 U.S.C.
sec.3663A, follows the common law in this
respect. Section 3663A(b), which
specifies the amount of restitution,
provides in part:
The order of restitution shall require
that such defendant--
(1) in the case of an offense resulting
in damage to or loss or destruction of
property of avictim of the offense--
(A) return the property to the owner of
the property or someone designated by the
owner; or
(B) if return of the property under
subparagraph (A) is impossible,
impracticable, or inadequate, pay an
amount equal to--
(i) the greater of--
(I) the value of the property on the date
of the damage, loss, or destruction; or
(II) the value of the property on the
date of sentencing, less
(ii) the value (as of the date the
property is returned) of any part of the
property that is returned; . . . and
(4) in any case, reimburse the victim for
lost income and necessary child care,
transportation, and other expenses
incurred during participation in the
investigation or prosecution of the
offense or attendance at proceedings
related to the offense.
Eileen and Everett took Neely’s money,
and return of the same number of dollars
would be "inadequate" for purposes of
sec.3663A(b)(1)(A) because the money came
from an interest-bearing account.
Restitution should include interest to
make up for the loss of the funds’
capacity to grow. See, e.g., Milwaukee
v. Cement Division of National Gypsum
Co., 515 U.S. 189, 195 (1995) ("The
essential rationale for awarding
prejudgment interest is to ensure that an
injured party is fully compensated for
its loss"); In re Oil Spill by the Amoco
Cadiz, 954 F.2d 1279, 1311-35 (7th Cir.
1992) (interest should be computed at the
rate the defendant would have had to pay
for unsecured credit). This sends us to
sec.3663A(b)(1)(B)(i)(II) which calls for
restitution of value on the date of
sentencing, a value that includes
prejudgment interest. Neely’s estate did
not incur any child care, transportation,
or other expenses while assisting
prosecution, so the presumptive
restitution award remains $92,000 (plus
interest, a detail that to simplify
exposition we disregard from now on).
We’ll take up later the possibility that
this amount should be reduced under
sec.3663A(b)(1) (B)(ii).
Our calculation assumes that Neely (and
thus her estate) is the victim of the
offense. The prosecutor argues, and the
district court apparently concluded, that
the Hospital rather than Neely is the
victim of this crime. Neely’s estate sued
the Hospital, contending that it was both
directly and vicariously liable for the
loss--vicariously because it was Eileen’s
employer, and directly because it failed
to screen its employees properly. The
Hospital took Eileen’s credentials at
face value, failing to learn that she was
not qualified to be a social worker, was
using a false Social Security number and
other bogus details, and had a recent
felony conviction; she was on probation
when the Hospital hired her. Neely’s
estate sought both compensatory and
punitive damages. The $165,000 represents
the amount that the Hospital paid in
settlement.
The district judge did not explain why
he viewed the Hospital as the victim of
Everett’s crimes. Section 3663A(a)(2)
defines "victim" as "a person directly
and proximately harmed as a result of the
commission of an offense". The Hospital
was not "directly" harmed by mail fraud
or money laundering. The Shepards did not
steal the Hospital’s money; its loss was
derivative of Neely’s. Although
Eileendefrauded the Hospital when
obtaining employment, and the $165,000
might be deemed a loss from that fraud,
it is not a crime in which Everett
participated. (At least, this indictment
did not charge him with that offense.)
Apparently the prosecutor believes that
any losses causally related to a crime
make the person bearing those losses a
"victim" of that crime. Yet
sec.3663A(a)(2) says otherwise. Far from
being "directly and proximately harmed as
a result of the commission of an
offense", the Hospital was liable for a
harm inflicted by its employee (and by
the Hospital’s own negligence) on one of
its patients. Although, by settling the
litigation, the Hospital became
subrogated to Neely’s rights against the
Shepards, it obtained no entitlements
other than those Neely had to convey, and
that entitlement is limited to what Neely
lost.
Both sec.3663A and its predecessor
sec.3663 have been understood to require
restitution only for direct losses and
not for consequential damages and the
other effects that may ripple through the
economy. See, e.g., United States v.
Arvanitis, 902 F.2d 489, 497 (7th Cir.
1990) (restitution is limited to the
property subject to the offense and
therefore excludes consequential losses
such as attorneys’ fees). (Arvanitis
interprets sec.3663(b) rather than
sec.3663A, but in this respect the two
statutes are identical). If by failing to
check Eileen’s credentials the Hospital
magnified the harm that the Shepards were
able to inflict on others, in that
respect the Hospital was a tortfeasor,
not a victim. And to the extent the
Hospital was vicariously liable for the
Shepards’ fraud, it was not a victim
under sec.3663A(a)(2)’s definition. To
see this, consider the treatment of an
insurer. Suppose Neely had purchased
insurance against theft, with a double-
indemnity clause, so that the insurer
paid her estate $184,000. At oral
argument the prosecutor conceded that the
insurer would not be deemed a victim
under the statute, and that restitution
would be limited to $92,000. Why, then,
should the Hospital be treated
differently when it indemnifies Neely for
her loss?
The indictment alleges that the Shepards
induced Person to buy an insurance
policy, which they then cashed. This
would not be a good reason to add to the
$92,000: because the policy was purchased
from Neely’s bank account, adding the
surrender value of the policy to the
original balance of the account would be
double counting. The charges of which
Everett was convicted add to less than
the whole $92,000, but at oral argument
his lawyer expressly disclaimed any
reliance on the principle that
restitution under sec.3663A is limited to
losses on the counts of conviction. See
United States v. Behrman, 235 F.3d 1049
(7th Cir. 2000); United States v. Martin,
195 F.3d 961, 968 (7th Cir. 1999). Thus
$92,000 must be the starting point. The
indictment implies that the Shepards may
have taken some of Neely’s physical
assets as well as her financial assets.
If so, then these losses must be added to
the $92,000; the district judge should
evaluate this possibility on remand.
What remains is application of
sec.3663A(b)(1)(B)(ii), which requires a
deduction from the award of "the value
(as of the date the property is returned)
of any part of the property that is
returned". Everett contends that he and
his wife "returned" about $12,000 of the
$92,000 by using it to make improvements
in Neely’s home. Some of this $12,000
doubtless represented the consumption
value that the Shepards, who were living
in Neely’s home, enjoyed from these
expenditures, but to the extent
improvements increased the market value
of Neely’s house, and thus were (or could
have been) realized by Neely’s estate in
selling the property, the funds were
"returned" for statutory purposes. It is
no different in principle from taking the
money from one of Neely’s bank accounts
and depositing it in another a week
later. So long as Neely regained
beneficial use of the property, it has
been "returned" as sec.3663A(b)(1)(B)(ii)
uses that term. The United States does
not contend that the change of the
property’s form--from cash to, say,
central air conditioning-- precludes a
conclusion that the property has been
"returned." Instead the prosecutor’s only
response is that the Shepards did not
return any property to the Hospital; that
position depends on treating the Hospital
as the victim, which we have already held
is not sound. On remand, then, the
district judge must determine the amount
by which improvements enhanced the market
value of the house and deduct this sum
from the sum otherwise appropriate as
restitution.
The sentence of imprisonment, which has
not been challenged, is left undisturbed.
The award of restitution is vacated, and
the case is remanded for proceedings
consistent with this opinion.