United States v. Shaffer

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
9-8-1994
United States of America v. Shaffer
Precedential or Non-Precedential:
Docket 93-7509
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________________________
Nos. 93-7508, 93-7509, 93-7549 & 93-7550
__________________________
UNITED STATES OF AMERICA
Appellee/Cross-Appellant in Nos. 93-7549
& 93-7550
v.
FRANKLIN R. SHAFFER,
Appellant in Nos. 93-7508 & 93-7509
/Cross-Appellee
__________________________
On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Crim. Nos. 91-00060, 92-00320)
__________________________
Argued May 24, 1994
Before: COWEN and ROTH, Circuit Judges,
and ACKERMAN, District Judge*
(Filed September 8, 1994)
__________________________
Matthew R. Gover (argued)
Caldwell & Kearns
3631 North Front Street
Harrisburg, PA 17110
COUNSEL FOR APPELLANT/CROSS-APPELLEE
FRANKLIN R. SHAFFER
*
The Honorable Harold A. Ackerman, United States District Judge
for the District of New Jersey, sitting by designation.
David M. Barasch
United States Attorney
Martin C. Carlson (argued)
Assistant United States Attorney
Sally A. Lied
Assistant United States Attorney
Federal Building
228 Walnut Street
P.O. Box 11754
Harrisburg, PA 17108
COUNSEL FOR APPELLEE/CROSS-APPELLANT
UNITED STATES OF AMERICA
__________________________
OPINION OF THE COURT
__________________________
COWEN, Circuit Judge.
This case presents the issue of whether the bank fraud
sentencing guidelines, which we earlier interpreted as requiring
a sentencing court to calculate the amount of the victim's loss
as it exists at the time of sentencing rather than at the time of
the commission of the offense, permit a defendant convicted of
kiting checks to significantly reduce his sentence by paying back
all or a portion of the amount he absconded with during the
commission of the offense. In the particular case of a defendant
who has violated the bank fraud statute through the act of kiting
checks, we conclude that, in the absence of overriding facts
dictating other treatment, the sentencing court must ordinarily
calculate the amount of the loss as it exists at the time the
crime was detected, rather than as it exists at the later time of
sentencing. Because the district court in this case sentenced
the defendant by calculating the amount of the actual loss which
resulted from the crime as it existed at the time of sentencing,
we will vacate the sentence and remand for resentencing.
I.
The facts giving rise to Franklin Shaffer's conviction
and sentence are relatively simple and largely undisputed.
Shaffer formerly led several engineering and construction firms
which were engaged in large construction projects in central
Pennsylvania. During the summer of 1988, collections of accounts
receivable fell significantly behind, resulting in a sizable cash
shortfall for the companies. After the companies' line of credit
was canceled, Shaffer attempted to keep his businesses afloat by
kiting checks for large sums of money between his personal bank
accounts and the various business accounts.1 At the time he was
1
. The check kiter opens an account at Bank A with a nominal
deposit. He then writes a check on that account for a large sum,
such as $50,000. The check kiter then opens an account at Bank B
and deposits the $50,000 check from Bank A in that account. At
the time of deposit, the check is not supported by sufficient
funds in the account at Bank A. However, Bank B, unaware of this
fact, gives the check kiter immediate credit on his account at
Bank B. During the several-day period that the check on Bank A
is being processed for collection from that bank, the check kiter
writes a $50,000 check on his account at Bank B and deposits it
into his account at Bank A. At the time of the deposit of that
check, Bank A gives the check kiter immediate credit on his
account there, and on the basis of that grant of credit pays the
original $50,000 check when it is presented for collection.
By repeating this scheme, or some variation of it, the check
kiter can use the $50,000 credit originally given by Bank B as an
interest-free loan for an extended period of time. In effect,
writing checks, Shaffer did not have sufficient funds in the
accounts to cover the check amounts.
In September, 1988, a bank officer reported the matter
to federal authorities. After an investigation, Shaffer was
charged with executing and attempting to execute a check kiting
scheme from July through September, 1988. By the time the FBI
investigated the matter, Shaffer had sufficient funds in all the
accounts to cover all the checks. For this reason, the United
States Attorney for the Middle District of Pennsylvania
recommended Shaffer as a possible candidate for pre-trial
diversion. By order dated August 21, 1991, the district court
placed Shaffer on pre-trial diversion for twelve months, ordered
him to pay the victim banks the interest each would have earned
on the money Shaffer had borrowed through the check kiting
scheme, and ordered him to perform community service.
While on pre-trial diversion, Shaffer again began
kiting checks because of cash flow shortfalls in his various
construction firms. Bank officials notified the government of
suspicious activity in Shaffer's accounts on August 19, 1992. A
motion was filed with the district court requesting that Shaffer
be removed from pre-trial diversion. The motion was granted and
the FBI undertook an investigation. Unlike the first time his
check kiting was discovered, Shaffer was not able to cover all
(..continued)
the check kiter can take advantage of the several-day period
required for the transmittal, processing, and payment of checks
from accounts in different banks . . . ." Williams v. United
States, 458 U.S. 279, 281 n.1.
the checks he had written. Four of the five victim banks used by
Shaffer in the check kiting scheme reported gross losses at the
time of detection as follows: Fulton Bank--$40,371.46; Commerce
Bank--$18,020.88; Dauphin Deposit Bank--$206,636.60; and CCNB--
$197,280.66. The total loss was determined to be $462,309.60.
Shaffer was charged with two counts of bank fraud, in
violation of 18 U.S.C. § 1344, for the two separate check kiting
incidents. After plea bargain negotiations, Shaffer pleaded
guilty to both counts on January 13, 1993. As part of the plea
agreement, Shaffer agreed to make restitution to the victim banks
in an amount to be determined by the district court at a pre-
sentencing hearing. At his arraignment, Shaffer requested a
sentencing delay in order to allow him to get his business
affairs in order and to give him sufficient time to attempt to
make restitution to the victim banks.
The United States Probation Office prepared a pre-
sentence report pursuant to the United States Sentencing
Guidelines ("U.S.S.G.") which assessed a total offense level of
17 against Shaffer. The offense level was determined in the
following manner: (1) a base level of 6 was assessed pursuant to
U.S.S.G. § 2F1.1(a); (2) an increase of 9 levels was added under
U.S.S.G. § 2F1.1(b)(1)(J) since the total amount of the loss to
the victim banks exceeded $350,000 but was less than $500,000;
and (3) an additional 2 level increase was made pursuant to
U.S.S.G. § 2F1.1(b)(2)(B) because the crime involved a scheme to
defraud more than one victim. The pre-sentence report concluded
that the applicable guideline sentence range was from 24 to 30
months.
A sentencing hearing was held on July 16, 1993. By
this time, Shaffer had negotiated settlement agreements with
three of the four victim banks. Pursuant to these agreements,
Fulton Bank had accepted a settlement of $20,000 in "full
satisfaction" of its loss of $40,371.46; Commerce Bank had
accepted $10,500 in "full satisfaction" of its loss of
$18,020.88; and Dauphin Deposit Bank agreed to accept the
conveyance of a parcel of real estate in Shreveport, Louisiana
held by Shaffer in his retirement account, secured by a judgment
against one of Shaffer's business corporations, and a promissory
note in the sum of $84,000 from Shaffer in "full satisfaction"
for its loss of $206,636.60. No agreement was reached between
Shaffer and the fourth victim bank, CCNB.
At the sentencing hearing, Shaffer objected to the 9
level increase pursuant to U.S.S.G. § 2F1.1(b)(1)(J). He argued
that no increase was warranted because he actually intended no
loss to the victim banks at the time of the commission of the
offense. Based on the evidence presented, the district court
agreed that Shaffer at all times intended to repay the amounts
borrowed during the check kiting scheme through the collection of
accounts receivable, and made a factual finding that Shaffer
actually intended no permanent loss to the victim banks.
Nevertheless, the district court disagreed that the loss was zero
for all victim banks or the three banks which had entered into
settlement agreements with Shaffer. The district court concluded
that the "actual loss" at the time of sentencing was the total
loss of $462,309.60 less the amounts the three victim banks had
agreed to accept in lieu of their initial losses pursuant to the
settlement agreements.2
Since this reduced the loss for sentencing purposes to
$347,809.60, the district court enhanced Shaffer's base level
only by 8 levels pursuant to U.S.S.G § 2F1.1(b)(1)(I). In so
doing, the district court rejected the government's position that
"actual loss" in a check kiting bank fraud case is the initial
loss of the victim banks at the time the fraud is detected, which
should not be reduced by any subsequent settlement payments in
the nature of restitution that the defendant makes. The district
court further granted Shaffer a 2 level base level reduction
pursuant to U.S.S.G. § 3E1.1(a) for acceptance of responsibility.
Premised on a base level of 14, the district court sentenced
Shaffer to an eighteen month term of imprisonment, three years of
supervised release, and ordered him to make restitution in full
to CCNB and as agreed with the other victim banks.3
2
. Thus, the district court agreed to reduce the total initial
loss by $114,500, which was composed of the settlement agreement
amounts of $10,500 for Commerce Bank, $20,000 for Fulton Bank,
and $84,000 for Dauphin Deposit Bank.
3
. Shaffer filed a post-sentencing letter with the district
court seeking a further 1 level base level reduction in his
sentence pursuant to U.S.S.G. § 3E1.1(b). The district court
agreed that a base level reduction of 3 levels was required for
Shaffer's acceptance of responsibility, rather than the 2 base
level reduction which was granted during sentencing. Although
the district court did not enter an order changing the sentence
since it felt that 18 months of incarceration was appropriate and
18 months was still well within the guideline range, the district
court did instruct the probation office to adjust the guideline
II.
Shaffer filed a notice of appeal challenging his
sentence on the theory that the district court overstated the
amount of the victims' loss pursuant to U.S.S.G. § 2F1.1(b)(1).
The government also filed a notice of appeal to challenge
Shaffer's sentence taking the contrary view that the district
court understated the amount of the victims' actual loss. We
have appellate jurisdiction pursuant to 28 U.S.C. § 1291. These
appeals involve a legal interpretation of the appropriate
calculation of "loss" under U.S.S.G. § 2F1.1(b)(1), over which we
have plenary review. United States v. Badaracco, 954 F.2d 928,
936 (3d Cir. 1992).
III.
The question on appeal is whether to calculate the
total amount of the victims' loss for purposes of sentencing a
check kiter as it exists at the time the offense is detected or
at the time of sentencing. While the language of U.S.S.G. §
2F1.1(b) itself, together with its commentary, does not directly
address whether the loss calculation should be as it exists when
the fraud is detected or at sentencing, the commentary does state
that "the loss need not be determined with precision," U.S.S.G. §
2F1.1 comment. (n.8). Furthermore, the commentary states that
(..continued)
offense level to 13. Neither party contests this adjustment on
appeal.
"if an intended loss that the defendant was attempting to inflict
can be determined, this figure will be used if it is greater than
the actual loss." Id. (n.7).
We have previously held that in the context of
procuring a secured bank loan through fraudulent
misrepresentation, fraud "loss" pursuant to U.S.S.G. § 2F1.1(b)
"is, in the first instance, the amount of money the victim has
actually lost (estimated at the time of sentencing), not the
potential loss as measured at the time of the crime." United
States v. Kopp, 951 F.2d 521, 536 (3d Cir. 1991). The actual
loss calculation, in a case such as Kopp, will reflect the
deduction of the value of the collateral, pledged as security for
the loan, from the loss sustained by the defrauded lender. We
recognized in Kopp that if actual loss as calculated at the time
of sentencing understates the amount of loss the defendant
intended to inflict, then the "loss" figure should be revised
upward to the intended loss figure. Id.
The present case does not involve an intended loss
theory for the calculation of "loss" pursuant to U.S.S.G. §
2F1.1(b) because the district court made a finding of fact that
Shaffer actually intended no permanent loss whatsoever.4 Citing
4
. At oral argument, the government contended first that it was
unnecessary to address whether the district court was clearly
erroneous as to its factual finding concerning Shaffer's intent,
and alternatively, that the finding was clearly erroneous. Since
we conclude that resolution of this case more appropriately turns
on whether the district court settled on the appropriate actual
loss figure by calculating the loss as it existed at the time of
sentencing, rather than as it existed at the time the crime was
detected, we need not address whether the district court's
finding of fact was clearly erroneous.
Kopp for authority, Shaffer argues that the district court should
have determined that there was no loss to the three victim banks
which entered into settlement agreements with Shaffer, which
would have resulted in an increase of only 7 base levels pursuant
to U.S.S.G. § 2F1.1(b)(1)(H) since the fourth victim bank, CCNB,
had a total loss of just under $200,000. Alternatively, Shaffer
argues that the district court was correct in its loss
calculation pursuant to U.S.S.G. § 2F1.1(b) in that the loss was
calculated as it existed at the time of sentencing, not as it
existed at the time of the detection of the offense, and
therefore his sentence should be affirmed. The government argues
that this case is distinguishable from Kopp because the crimes of
kiting checks and the fraudulent procurement of a secured loan,
while both bank frauds, are sufficiently distinct to warrant
differing treatment under the Guidelines.
In Kopp, a case involving bank fraud where the borrower
submitted false information in order to obtain a commercial real
estate mortgage, we limited the loss calculation pursuant to
U.S.S.G. § 2F1.1(b) to the higher of "actual loss" calculated at
the time of sentencing or the amount of loss the borrower
actually intended. 951 F.2d at 527-36. In that case, we held
that the actual loss is that which exists at the time of
sentencing, not at the time the fraudulent act was committed,
because the total amount of the loan without a reduction for the
actual or estimated value of the collateral pledged to the bank
would overstate the victim bank's actual loss. See id. at 528-
30. Thus, we determined that calculation of the victim's actual
loss at the time of sentencing would more accurately reflect the
defendant's culpability for sentencing purposes.
Subsequently, we have indicated that the Kopp holding
does not provide a rule that should be followed for all types of
bank fraud convictions. For instance, where a bank officer was
convicted of bank fraud for using his position for his personal
benefit by conditioning loan approval on the borrower using
contractors in which he owned an interest, we determined that
actual loss was the total amount of the contracts received by the
related contractors, rather than the net gain or profit to these
companies as calculated or estimated at the time of sentencing.
United States v. Badaracco, 954 F.2d 928, 936-38 (3d Cir. 1992).
Thus, we distinguished Kopp because the type of bank fraud at
issue in Badaracco was more similar to an embezzlement crime,
where the loss is calculated as gross gain, rather than a secured
loan crime where the defendant actually pledges something of
value, the collateral, which will reduce the amount of the victim
bank's loss below the face value of the loan. See 954 F.2d at
937-38.
We stated in Badaracco that "[a]lthough section 2F1.1
is applicable to a wide variety of fraud schemes, the sentencing
judge is entitled, probably compelled, to evaluate the size of
the loss based on the particular offense." Id. at 937. We
believe that check kiting crimes, because of their particular
nature, are crimes where the district court must calculate the
victim's actual loss as it exists at the time the offense is
detected rather than as it exists at the time of sentencing. Cf.
United States v. Katora, 981 F.2d 1398, 1406-07 (3d Cir. 1992)
(sentencing court not obliged to reduce amount of wire fraud loss
by speculative value of personal guaranties given at time of
commission of offense). We come to this conclusion for several
reasons.
First, the commentary to U.S.S.G. § 2F1.1 indicates
that loss valuation should be made in accordance with the
valuation of theft loss pursuant to the commentary to U.S.S.G. §
2B1.1. U.S.S.G. § 2F1.1 comment. (n.7). "As in theft cases,
loss is the value of the money, property, or services unlawfully
taken." Id. In a check kiting scheme, where the offender writes
bad checks to "temporarily . . . obtain credit," Black's Law
Dictionary 238 (6th ed. 1990), the amount of money owed to the
victim banks at the time the kite is detected is the value of the
money unlawfully taken by the defendant. In effect, the gross
amount of the kite at the time of detection, less any other
collected funds the defendant has on deposit with the bank at
that time and any other offsets that the bank can immediately
apply against the overdraft (including immediate repayments), is
the loss to the victim bank.
Second, we do not believe that most check kiting frauds
are sufficiently analogous to secured loan frauds to require, as
we held in Kopp, that the actual loss determination be made as
the loss exists at the time of sentencing rather than at the time
of detection. Although both of these types of bank fraud involve
fraudulently obtained loans, the similarities end there. Secured
loan frauds include an aspect that is ordinarily entirely absent
from a check kiting scheme--namely collateral, which while
probably insufficient to protect the victim bank completely
against risk of loss, usually provides some recovery against the
loan amount. By its very nature, the crime of kiting checks
ordinarily involves the borrowing of funds without authorization
from the bank and without the offender providing any security to
protect the bank against risk of loss. This distinction warrants
treating perpetrators of check kiting loan frauds in most cases
differently from perpetrators of secured loan frauds for
sentencing purposes.
Furthermore, we do not believe that calculating check
kiting fraud loss at the time of detection is contrary to the
commentary contained in the Sentencing Guidelines. The
Sentencing Guidelines have been clarified to make explicit the
rule we announced in Kopp as applicable to secured loan frauds,
but not unsecured loan frauds like check kiting. The Guidelines
commentary now states in relevant part:
In fraudulent loan application cases . . ., the loss is the
actual loss to the victim (or if the loss has not yet come
about, the expected loss). For example, if a defendant
fraudulently obtains a loan by misrepresenting the value of
his assets, the loss is the amount of the loan not repaid at
the time the offense is discovered, reduced by the amount
the lending institution has recovered (or can expect to
recover) from any assets pledged to secure the loan.
U.S.S.G. § 2F1.1 comment. (n.7(b)). The Sentencing Guidelines
apparently limit this wait-and-see approach to calculating actual
loss to secured loans because with unsecured loans, like those
which sometimes result when check kiting schemes are detected,
any recovery is entirely speculative.5 Nevertheless, to the
extent the Guidelines commentary indicates that in secured loan
frauds the actual loss should be reduced by the amount of money
immediately repaid by the offender at the time of discovery, the
same is true of check kiting frauds.
Moreover, the weight of authority, while sparse,
supports our conclusion that for purposes of sentencing a
defendant who has perpetrated a bank fraud by kiting checks,
actual loss should be calculated as it exists at the time of
detection rather than at the time of sentencing. Likening check
kiting frauds more to simple theft than secured loan
transactions, the Court of Appeals for the Fifth Circuit adopted
the position we adhere to today. United States v. Frydenlund,
990 F.2d 822, 825-26 (5th Cir.), cert. denied, __ U.S. __, 114 S.
Ct. 192 (1993). Other courts of appeals have held that the
fortuity of the defendant paying full restitution to the victim
banks after the time when the check kiting fraud was detected
does not warrant a downward departure on the sentence for
acceptance of responsibility. United States v. Carey, 895 F.2d
5
. We reject the attempt made by Shaffer in this appeal to liken
his crime more to a secured loan fraud than a theft because he
was the principal of several businesses which had a large amount
of accounts receivable outstanding during the period of the kite.
The record reveals that at the time of the second check kite,
which resulted in loss to the four victim banks, Shaffer's
various business interests also had a significant outstanding
loan from an individual named "Cochrane" which was secured with
the business receivables. See App. at 174, 185 (testimony of
Shaffer).
318, 322-23 (7th Cir. 1990); United States v. Bolden, 889 F.2d
1336, 1340-41 (4th Cir. 1989).
Finally, we, like the district court, are troubled by
the outcome which would result if actual loss is calculated as it
exists at the time of sentencing rather than at the time of
detection. We agree with the sentiment, stated by the district
court at sentencing, that a reduction of sentence because of a
last minute payment of restitution would unfairly discriminate in
favor of those with greater financial resources.6 We are also
concerned that permitting such a reduction in sentence might
encourage the use of undue pressure by a defendant to induce the
victim bank into settling for payment of only a portion of the
amount it has lost. In sum, it is a hallmark of our sentencing
scheme that criminal defendants who have committed identical
crimes, and who have the exact same culpability, should be
6
. The district court stated the following at sentencing:
As a final note, I should add that the court is troubled
by the outcome in this case. The [c]ourt recognizes that
the prospect of a potentially reduced sentence acts as a
carrot to a defendant sparing that individual to make
speedier or more adequate restitution than he or she might
otherwise do benefiting the victims of his or her crime.
However, the [c]ourt sees a great danger in allowing an
individual to buy his or her way out of jail time.
Unfortunately, this is what a reduction of sentence in a
last minute payment of restitution amounts to. Such a
policy I think unfairly discriminates in favor of those with
greater financial resources. I believe in light of the
cases and in light of the way the Third Circuit has spoken,
it is the only outcome this [c]ourt can conclude is
appropriate for this case.
App. at 157-58.
treated equally at sentencing pursuant to U.S.S.G. § 2F1.1(b)
even though one has the means through business or personal
relations to make restitution to the victim banks after he has
been convicted, while the other does not.
IV.
We conclude that the district court erred in
calculating the victims' loss pursuant to U.S.S.G. § 2F1.1(b)
from this check kiting fraud as it existed at the time of
sentencing rather than as it existed at the time of detection.
Thus, we will vacate Shaffer's sentence and remand for
resentencing consistent with this opinion.
United States v. Shaffer, Nos. 93-7508/7549
ACKERMAN, District Judge, concurring in the judgment:
I agree with the majority's conclusion that the check-kiting
scheme involved in this case is more akin to theft than to loan
fraud. I also believe that this distinction makes Kopp
inapplicable.
I must part company, however, with the majority's treatment
of Kopp. According to the majority, the rule we announced in
Kopp -- that the amount of the loss is the actual loss estimated
at the time of sentencing (unless the intended loss is higher) --
only applies to fraudulently obtained loans secured by
collateral. In its view, Kopp is distinguishable from the
instant case in large part because Shaffer did not fraudulently
obtain a loan that was secured by collateral.
The fact of collateral, however, is peripheral to our
analysis in Kopp. Rather, Kopp focuses on distinguishing between
the various levels of culpability involved in different types of
fraud. Specifically, when a fraud consists solely of
misrepresentations designed to secure a contract, but the
defendant has no intention of reneging on the contract, that
fraud must be treated differently from a garden-variety fraud
case. The latter often is indistinguishable from theft; the
former is not. As we said in Kopp itself, "some fraud involves
an intent to walk away with the full amount fraudulently
obtained, while other fraud is committed to obtain a contract the
fraud perpetrator intends to perform." Kopp, 951 F.2d at 529.
In holding as we did, we recognized the irrationality of
"apply[ing] the same sentence against a performing contractor who
lied on its application as against 'a con artist who intended to
winkle $142,400 . . . from a senile old lady.'" Id. at 532
(citing United States v. Schneider, 930 F.2d 555, 559 (7th Cir.
1991)). This also is the principle articulated by the cases we
relied on in Kopp. See Schneider, 930 F.2d 555 (when defendants
fraudulently procured government contracts but fully intended to
perform the contracts, court declined to compute the loss as the
face amount of contracts obtained); United States v. Whitehead,
912 F.2d 448 (10th Cir. 1990) (when defendant presented
fraudulent documents to obtain an option to purchase a home,
court declined to value the loss as the value of the home);
United States v. Hughes, 775 F. Supp. 348 (E.D.Cal. 1991) (when
defendant conspired to present false loan applications to buy
three homes but had no intention of defaulting on the loans, and
in fact paid back two of the loans involved, court declined to
compute loss as value of homes).
I respectfully suggest that the majority misses this
distinction by focusing on collateral. Kopp is inapplicable to
this case not because Shaffer's "loan" was unsecured, but because
Shaffer's check-kiting scheme simply is not analogous to the
crime of "a performing contractor who lied on its application."
Check-kiting is more akin to theft. For that reason, the case
falls outside the scope of Kopp, and I join my colleagues in
vacating Shaffer's sentence and remanding the matter for
resentencing.