United States v. Jean Hosking ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1826
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
JEAN M. H OSKING,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 3:08-cr-0001-bbc-1—Barbara B. Crabb, Chief Judge.
A RGUED S EPTEMBER 16, 2008—D ECIDED JUNE 4, 2009
Before C UDAHY, FLAUM and R OVNER, Circuit Judges.
C UDAHY, Circuit Judge. Jean M. Hosking pleaded guilty to
one count of embezzlement and was sentenced to 34
months in prison and ordered to pay restitution. Hosking
appeals, arguing that her victim’s costs to investigate her
fraud should not have been included in the restitution
award. She also challenges the district court’s failure to
provide a complete accounting of the loss caused by her
2 No. 08-1826
fraud, and the order to make a lump-sum payment of
$100,000 from her retirement account.
We affirm the principle of including a private victim’s
investigative costs in the restitution award but vacate and
remand for the district court to make findings regarding
the amount of those costs. Without such findings it is
impossible to review the award’s propriety. We also affirm
the aspect of the order requiring Hosking to make a lump-
sum restitutionary payment from her retirement account.
I.
Hosking worked for the Cross Plains Bank in Cross
Plains, Wisconsin, for almost twenty years. When her fraud
was discovered in 2007, she was an assistant vice president,
responsible for among other things loans granted under the
Wisconsin Petroleum Environmental Cleanup Fund Award
(PECFA) program. The bank provides intermediary
financing for the PECFA program, which pays for environ-
mental cleanup costs incurred by owners of property
contaminated by petroleum storage tanks. After a cleanup
site is deemed eligible for a PECFA grant, the property
owner takes out a line of credit with the bank, and then
submits invoices for cleanup costs to the bank. The bank
pays the invoices by allowing advances on the line of
credit, and then submits claims for reimbursement to
PECFA.
In 1994, Hosking began embezzling money from the
bank’s PECFA loan program. Her scheme involved taking
unauthorized cash advances funded by PECFA loan
No. 08-1826 3
accounts and covering her tracks by reimbursing those loan
accounts with money taken from other PECFA loan
accounts, thereby “lapping” the loan accounts. Hosking’s
lapping scheme went on for twelve years, and she embez-
zled funds from twenty-three PECFA accounts. Ultimately,
bank officials started asking questions about discrepancies
in PECFA loan files, and Hosking confessed. She thought
she had taken about $135,000. The bank’s internal investi-
gation revealed that she had actually embezzled more than
$500,000.
At sentencing, the bank requested restitution of
$1,144,889.92. The probation office recommended a reduced
restitution award of $712,776.52, which included the
$502,246.52 in embezzled funds, $206,280 for the bank’s in-
house staff costs and $4,250 for miscellaneous paper and
copying expenses. Hosking objected, arguing that there was
insufficient documentation to support the bank’s claim for
in-house costs. In response, the government submitted
minutes from the bank’s meetings relating to the investiga-
tion; a declaration of losses from the bank; a description of
the PECFA loan process and Hosking’s lapping scheme;
and a description of each expense the bank incurred in the
investigation, with attached invoices and a listing of in-
house staff members and the hours they spent on the
project.
The district court ordered restitution of $627,895.52. This
figure included the $502,246.52 Hosking embezzled from
the bank, plus $125,649 for the bank’s investigation costs.
To reach this new amount for investigation costs, the court
added $6,733.90 in legal fees; $11,655.00 in accounting
4 No. 08-1826
consultant fees; $4,250.00 in miscellaneous paper and
copying expenses; and $103,140.00 for in-house staff costs,
or half the amount recommended by the probation office to
reimburse the bank for the time its employees spent on the
investigation. The district court failed to explain why it cut
the in-house staff costs in half, stating only that the re-
duced amount was “clearly legitimate.” 1 The district court
also ordered Hosking to make an immediate lump-sum
payment of $100,000.00 from her retirement account.
II.
The district court’s authority to order restitution is
reviewed de novo, United States v. Wells, 177 F.3d 603, 608
(7th Cir. 1999), while the amount of restitution is reviewed
for an abuse of discretion, United States v. Sensmeier, 361
F.3d 982, 988 (7th Cir. 2004) (citing United States v. Newman,
144 F.3d 531, 542 (7th Cir. 1998)). Hosking argues that the
district court abused its discretion by including the bank’s
investigation costs in the restitution award because the
only “actual loss” caused by her embezzlement was the
$502,246.52 that she took. She labels the additional amount
the bank spent on the investigation and professional fees as
“consequential damages” not caused by her fraud and
therefore not properly included in the award. We disagree
in principle but question the amounts claimed.
The Mandatory Victims Restitution Act (MVRA) requires
a defendant convicted of certain crimes, “including any
1
The government concedes that the district court made a de
minimis error of $129.90 in calculating the restitution amount.
No. 08-1826 5
offense committed by fraud or deceit,” to make restitution
to the victims of the offense in an amount equal to the
value of the property damaged or lost. 18 U.S.C.
§§ 3663A(a)(1), (b)(1), (c)(1)(A)(ii).2 The MVRA also ex-
pressly contemplates inclusion of the cost of “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.” 18 U.S.C. § 3663A(b)(4) (emphasis added). The
bank’s investigation was clearly an important part of “the
investigation . . . of the offense” in this case. It led to the
determination of the actual amount embezzled, and
therefore the costs of that investigation may be included in
the restitution award under § 3663A(b)(4). See United States
v. Adcock, 534 F.3d 635, 643 (7th Cir. 2008) (applying
§ 3663A(b)(4) to include the cost of an external audit in a
restitution award because it qualified as “other expenses
incurred during participation in the investigation or
prosecution of the offense. . . .”); United States v. Amato, 540
F.3d 153, 161 (2d Cir. 2008) (including attorney fees and
accounting costs in a restitution award “because these
2
The parties debate whether Hosking’s appeal is properly
considered under the MVRA or the Victim Witness Protection
Act (VWPA). The MVRA is the proper statute, and it requires
restitution for crimes such as Hosking’s, but for purposes of
determining the amount of a restitution order, the two statutes
are functionally identical. See United States v. Randle, 324 F.3d
550, 555 n.2 (7th Cir. 2003). In particular, both statutes provide
that an order of restitution is to be issued and enforced in
accordance with 18 U.S.C. § 3664. See 18 U.S.C. § 3663(d)
(VWPA); id. § 3663A(d) (MVRA).
6 No. 08-1826
expenses are so obviously associated with investigation
and prosecution, particularly in the case of fraud of-
fenses”).
In response to Hosking’s argument that allowing the
bank to recover these costs improperly reimburses the bank
for “consequential damages,” we have repeatedly ex-
plained that it does no such thing. In fact,
“[t]his measure of relief is less generous than common
law damages, since it does not extend to consequences
beyond the diminution of the value of the property
stolen or damaged.” This is because criminal restitu-
tion refers only “to the restoration of something that
the defendant had taken from the plaintiff, including a
profit.”
Adcock, 534 F.3d at 642 (quoting United States v. Havens, 424
F.3d 535, 537 (7th Cir. 2005), further quoting United States
v. Scott, 405 F.3d 615, 618, 619 (7th Cir. 2005)) (other
citations omitted). See also Scott, 405 F.3d at 619 (allowing
restitution under § 3663A(b)(1) for a victim’s external audit
costs because such costs represented a diminution in value
of the victim’s property).
The time and effort spent by the bank’s employees and
outside professionals in unraveling the twelve-year
embezzlement scheme was a direct and foreseeable result
of the defendant’s conduct that contributed to the diminu-
tion of the value of the bank’s property. See § 3663A(b)(1);
Scott, 405 F.3d at 619. See also United States v. Donaby, 349
F.3d 1046, 1054–55 (7th Cir. 2003). The bank’s activities
were also an important part of “the investigation . . . of the
offense.” § 3663A(b)(4); Adcock, 534 F.3d at 643. The
No. 08-1826 7
sentencing judge was selective. She included only those
costs related to uncovering Hosking’s fraud. This was not
an abuse of discretion.
Hosking argues that even if it was proper to include this
category of costs in the restitution award, the sentencing
judge nevertheless erred by failing to provide a complete
accounting of those costs. Instead, she cut the amount
recommended by the probation office for in-house investi-
gation costs in half, and announced without elaboration
that the reduced amount was “clearly legitimate.” We
agree with Hosking that more is needed, both from the
government and the district court.
As stated above, supra n.2, restitution under the VWPA
and the MVRA is awarded and enforced according to 18
U.S.C. § 3664. The district court is required to base its
restitution order, to the extent practicable, on “a complete
accounting” of the loss. Id. § 3664(a). If the presentence
report or other report of the loss is insufficient for this
purpose, the court may require additional documentation
or hear testimony. Id. § 3664(d)(4). The court may refer any
issue, including the amount of loss, “to a magistrate judge
or special master for proposed findings of fact.” Id.
§ 3664(d)(6). The court is required to resolve any dispute
over the amount of loss by a preponderance of the evi-
dence, and the government has the burden of proving the
loss. Id. § 3664(e). The court is required to order restitution
in the full amount of the victim’s losses, “without consider-
ation of the economic circumstances of the defendant.” Id.
§ 3664(f)(1)(A).
Based on the foregoing statutory provisions, we have
held that “the VWPA recognizes that specific findings of
8 No. 08-1826
fact reflected in the record still are necessary at times and
contemplates that district courts provide an explanation of
their reasoning, supported by articulated findings of fact.”
United States v. Menza, 137 F.3d 533, 538 (7th Cir. 1998).
Again, these provisions apply equally to the MVRA. 18
U.S.C. § 3663A(d). “Unless we know why a district court
included specific costs in an order granting restitution, we
have no adequate basis upon which to review the deci-
sion.” Menza, 137 F.3d at 538. The sentencing court is only
required to supply findings of fact within the bounds of
reasonableness in justifying the amount of restitution, but
“we have urged district courts to provide articulated
findings in order to facilitate appellate review.” United
States v. Minneman, 143 F.3d 274, 285 (7th Cir. 1998). In
other words, the sentencing court should give enough
detail for us to determine whether the award has factual
support. Should the district court fail to provide a satisfac-
tory accounting of the items included in a restitution
award, it “runs the risk that we may remand a restitution
award based on ‘inadequate explanation and insufficient
reasoning.’ ” Id. (quoting Menza, 137 F.3d at 538).
The district court ran that risk here. At sentencing, the
government presented a single document supporting the
inclusion of the bank’s in-house costs in the restitution
award. This document listed the name and title of each
employee who worked on the investigation, the number of
hours that the employee worked on the project, and the
employee’s hourly wage rate. The resulting total was a
simple tabulation of the amount paid to the employees for
their collective hours worked.
No. 08-1826 9
This document also briefly and generally described the
scope of the investigation. The description included the
activities of a few employees, but made no attempt to
describe the work done by each one. For example, it
explained that many of the employees were not familiar
with the PECFA process and had to educate themselves
before trying to unravel the defendant’s scheme. One
senior employee spent an entire year, with substantial
assistance from two other employees, focusing on recreat-
ing each fraudulent PECFA transaction. A bookkeeping
employee spent his time transferring older data from film,
while another primarily ran the copying machine. These
details are of some help, but they pertain to the work of
only a few of the many employees listed in the govern-
ment’s explanatory document. The two-paragraph descrip-
tion of these few employees’ roles fails to demonstrate that
all of the in-house staff costs—or even half of those
costs—were proximately caused by Hosking’s conduct,
produced a diminution in the value of the bank’s property
or were convincingly claimed as part of the investigation
of the offense. 18 U.S.C. §§ 3663A(a)(2), (b)(1), (b)(4).
As in Menza, there is inadequate explanation and insuffi-
cient reasoning why the district court relied on the face of
the government’s document without requiring evidence
that the costs reported were directly and reasonably
demanded by the bank’s investigation of Hosking’s fraud.
Without such evidence and related findings, we cannot
determine whether the court’s award was appropriate and
reasonable. Indeed, simply cutting the reported costs in
half, while it may not be far off the mark, cannot suffice.
On remand, the government must, to the extent feasible,
10 No. 08-1826
provide an explanation, supported by evidence, of how
each employee’s time was spent in pursuing the investiga-
tion. Not only must the work be firmly connected to the
investigation but there must be an adequate indication that
the hours claimed are reasonable. The court must ensure
that all reported costs were in fact incurred in the investi-
gation of Hosking’s fraud. It is the government’s responsi-
bility to make the connection between the work and
Hosking’s misconduct. The district court should not have
to delve through pages of exhibits “in order to dissect
legitimate expenditures from illegitimate.” United States v.
Swanson, 394 F.3d 520, 527 (7th Cir. 2005).
Next, Hosking argues that the district court erred in
ordering her to make a lump-sum payment of $100,000
from her retirement account. She asserts that her Individ-
ual Retirement Account (IRA), as a qualified trust under
the tax code, “may not be assigned or alienated,” 26 U.S.C.
§ 401(a)(13)(A), and therefore that it was not proper to
include it in the restitution order. We disagree.
Under the MVRA, “[a] restitution order may direct the
defendant to make a single, lump-sum payment, partial
payments at specified intervals, in-kind payments, or
a combination of payments at specified intervals and in-
kind payments.” 18 U.S.C. § 3664(f)(3)(A). An order of
restitution may be enforced “by all . . . available and
reasonable means.” Id. § 3664(m)(1)(A)(ii). In addition,
[t]he United States may enforce a judgment imposing
a fine in accordance with the practices and procedures
for the enforcement of a civil judgment under Federal
law or State law. Notwithstanding any other Federal law
No. 08-1826 11
(including section 207 of the Social Security Act), a
judgment imposing a fine may be enforced against all
property or rights to property of the person fined. . . .
Id. § 3613(a) (emphasis added).
We have never considered whether § 3613(a) supersedes
an anti-alienation provision like the one governing
Hosking’s IRA, a qualified trust under the tax code, 26
U.S.C. § 401(a)(13)(A). However, several other circuits have
addressed this question in the context of ERISA’s similarly
worded anti-alienation provision, 29 U.S.C. § 1056(d). Our
sister circuits have concluded that the MVRA allows a
district court to consider a defendant’s retirement plan as
a source of funds to pay restitution. See United States v.
Novak, 476 F.3d 1041, 1053 (9th Cir. 2007); United States v.
Irving, 452 F.3d 110, 126 (2d Cir. 2006); see also United States
v. Hyde, 497 F.3d 103, 107–08 (1st Cir. 2007) (holding that
the MVRA allows the government to enforce a restitution
order against proceeds from the sale of a home notwith-
standing the Bankruptcy Code’s homestead exemption).
We therefore hold that it was within the district court’s
discretion to charge Hosking’s retirement account as a
source of funds to provide restitution.
The MVRA authorizes the government to enforce a
restitution order through a series of specific means includ-
ing “all other available and reasonable means.” 18 U.S.C.
§ 3664(m)(1)(A)(ii). And again, § 3613(a) provides that
the United States may enforce a judgment against “all
property or rights to property of the person fined,”
“[n]otwithstanding any other Federal law.” Although there
are several enumerated exceptions to this provision, none
12 No. 08-1826
of them exempts an IRA from enforcement. See 18 U.S.C.
§ 3613(a)(1) (exempting from enforcement four types of
federally authorized pension plans under 26 U.S.C.
6334(a)(6), including Railroad Retirement Act pensions,
Railroad Unemployment Insurance Act pensions, pensions
received by those on the Armed Forces Medal of Honor
rolls, and certain pensions paid to military service-mem-
bers); see also Novak, 476 F.3d at 1047–48 (concluding that
Congress intended the list of exemptions in § 3613(a)(1) to
be exhaustive).
Moreover, § 3613 treats a restitution order under the
MVRA like a tax liability. This means that any property the
IRS can reach to satisfy a tax lien, a sentencing court can
also reach in a restitution order. See 18 U.S.C. § 3613(c);
United States v. Irving, 452 F.3d 110, 126 (2d. Cir. 2006).
Thus, the IRS can levy on a tax debtor’s IRA or pension
plan to satisfy tax liability, so long as the defendant has a
right to withdraw money from or liquidate the account. See
Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1223 (10th
Cir. 1998) (“[The defendant’s] right to liquidate his IRA and
withdraw the funds therefrom (even if subject to some
interest penalty) undoubtedly constituted a ‘right to prop-
erty’ subject to the IRS’ administrative levy.”); United States
v. Sawaf, 74 F.3d 119, 123 (6th Cir. 1996) (The anti-alienation
provision protecting the defendant’s pension fund does not
prevent the IRS from garnishing the fund to collect unpaid
income taxes.); In re McIntyre, 222 F.3d 655, 660 (9th Cir.
2000) (The anti-alienation provision of ERISA does not
prevent the IRS from levying on benefits of the defendant’s
pension plan.); United States v. Metropolitan Life Ins., 874
F.2d 1497, 1501 (11th Cir. 1989) (affirming the district
No. 08-1826 13
court’s judgment in favor of the IRS, awarding the cash
withdrawal value of the delinquent taxpayer’s annuity
contract); see also 26 C.F.R. 1.401(a)-(13)(b)(2)(i)–(ii) (Trea-
sury regulation implementing the tax code’s anti-alienation
provision, stating that a qualified plan does not preclude
“[t]he enforcement of a Federal tax levy made pursuant
to section 6331,” or “[t]he collection by the United States
on a judgment resulting from an unpaid tax assessment”).
Since the IRS may levy on a retirement account, it follows
that a sentencing court, within its discretion, may order a
lump-sum payment from such an account to satisfy a
restitution order. See also United States v. Wahlen, 459
F. Supp. 2d 800, 822 (E.D. Wis. 2006) (The MVRA creates an
exception to the anti-alienation provision protecting a
defendant’s IRA.); United States v. Tyson, 242 F. Supp. 2d
469, 473 (E.D. Mich. 2003) (Section 3613 is an express
statutory exception to the anti-alienation provisions of
ERISA as well as § 401(a)(13)(A).). We hasten to add,
however, that the availability of retirement funds to satisfy
a restitution order does not limit the district court’s
discretion in determining the manner in which restitution
should be paid. See 18 U.S.C. § 3664(f).
In this connection, Hosking argues that the district court
erred by failing to consider her financial situation before
ordering the liquidation of her retirement account.
Although the MVRA requires the district court to
determine the amount of restitution without regard to the
economic circumstances of the defendant, 18 U.S.C.
§ 3664(f)(1)(A), in determining the manner in which the
restitution is to be paid, the court must consider the financial
14 No. 08-1826
resources and other assets of the defendant, projected
earnings of the defendant and any financial obligations of
the defendant. Id. § 3664(f)(2)(A)–(C). The court may order
the defendant to make a single lump-sum payment,
reasonable periodic payments, or, if the defendant is
indigent, nominal periodic payments. See 18 U.S.C.
§ 3664(f)(3)(A), (B). The court is also required to craft its
restitution order “pursuant to [18 U.S.C. §] 3572,” id.
§ 3664(f)(2), which provides that “[a] person sentenced to
pay a fine or other monetary penalty, including restitution,
shall make such payment immediately, unless, in the interest
of justice, the court provides for payment on a date certain
or in installments.” 18 U.S.C. § 3572(d)(i) (emphasis
added).
Section 3572 “creates a preference” for immediate
payment, United States v. Coates, 178 F.3d 681, 684 (3d Cir.
1999), but it does not limit the district court’s discretion to
determine a payment schedule according to the other
factors the court must consider under § 3572 and
§ 3664(f)(2). See id. Cf. United States v. Sawyer, 521 F.3d 792,
795 (7th Cir. 2008).
At sentencing, the judge acknowledged Hosking’s
limited financial means and that her IRA, which had a
corpus of roughly $115,000, represented her only source of
savings for retirement other than Social Security payments.
Nevertheless, the court ordered a lump-sum payment of
$100,000 within thirty days of the judgment, to be followed
by nominal payments once the defendant is released from
prison. The judge noted that she “realized that [the retire-
ment account] does represent the greater amount of money
that’s set aside for you to live on, but you made that
No. 08-1826 15
decision a long time ago to take money that didn’t belong
to you and that money has to be paid back.”
The district judge clearly recognized Hosking’s limited
means and ordered a schedule of payments that reflected
those means. She ordered an immediate payment of
$100,000, leaving $15,000 in Hosking’s retirement account.
Further, the restitution schedule requires Hosking to make
only nominal payments after she is released from prison,
taking into account her nonexistent projected future
earnings. We cannot say that the district judge abused her
discretion in this respect. The restitution order is therefore
A FFIRMED in part but vacated and remanded in part for
further proceedings consistent with this opinion.
6-4-09