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Parties Involved:
Alfred James Smith
Appellant
United States of America
Appellee

Document Text:

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PUBLISH 

ILED 

UniJ'States Coμrt(?f Appealo Tenth Circuit 

t~OV 15 1991 

UNITED STATES COURT OF APPEALS ROBERT L. HOECKER 

Clerk 

UNITED STATES OF AMERICA, 

Plaintiff-Appellee, 

v. 

ALFRED JAMES SMITH, · 

Defendant-Appellant. 

TENTH CIRCUIT 

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No. 91-6096 

Appeal from the United States District Court 

for the Western District of Oklahoma 

(D.C. No. CR-90-236-T) 

ON THE BRIEFS: 

Jerry S. Duncan, Oklahoma City, Oklahoma for Defendant-Appellant. 

Timothy D. Leonard, United States Attorney and Barbara E. Poarch, 

Assistant U.S. Attorney, Oklahoma City, Oklahoma for Plaintiff-Appellee. 

Before McKAY, Chief Judge, SEYMOUR, and EBEL, Circuit Judges. 

SEYMOUR, Circuit Judge. 

Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 1 
Defendant Alfred James Smith appeals his twenty-four month 

sentence for violation of 18 u.s.c. §§ 2 and 1014 (1988) (aiding 

and abetting and false statements to a federally insured lending 

institution). Mr. Smith's sentence was imposed pursuant to the 

United States Sentencing Commission Guidelines Manual (Nov. 1, 

1990) (hereinafter Guidelines). The district court adopted the 

probation officer's offense level calculation under section 2Fl.1 

of the Guidelines, which governs offenses involving fraud and 

deceit. The calculation of nineteen reflects a base offense level 

of six, a nine level enhancement for a loss value of $440,896, and 

a four level enhancement for Mr. Smith's role as an organizer 

pursuant to section 3Bl.l(a) of the Guidelines. 1 Appendix for 

Appellant, vol. II, Presentence Report. His sentence was reduced 

from a guideline range of thirty to thirty-seven months to the 

statutory maximum of two years. Mr. Smith challenges the district 

court's calculation of total loss, and the enhancement of his 

sentence for his role in the offense. We reverse as to both 

matters and remand for immediate release because Mr. Smith has 

served his sentence under the proper guideline range. 

1 Also included, but not at issue on appeal, were a two level 

enhancement for an offense involving more than minimal planning, 

pursuant to§ 2Fl.l(b)(2), and a two level reduction for 

acceptance of responsibility pursuant to§ 3El.1. Appendix for 

Appellant, vol. II, Presentence Report. 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 2 
I. 

Because Mr. Smith's appeal goes only to the propriety of his 

sentence, we need not restate the facts in great detail. Briefly, 

from 1986 to 1989, Mr. Smith operated Handcraft Homes, which 

constructed and marketed single family residences. In the one 

count on which he pled guilty, Mr. Smith represented to a 

federally insured institution that a buyer had made a five hundred 

dollar earnest money payment on a new home, when in fact he had 

not. On six different occasions, Mr. Smith represented to 

federally insured institutions that his customers had made down 

payments of specified amounts when they had either made 

substantially smaller down payments or no down payments at all. 

The cumulative value of the loans advanced on the basis of these 

misrepresentations was $440,896. Not a single loan was in default 

at the time of sentencing. 

II. 

In its application of Guideline§ 2Fl.1, the district court 

adopted the probation officer's position that the appropriate loss 

valuation for computation of the specific offense characteristic 

was $440,896. Under section 2Fl.l(b)(l)(J), this resulted in a 

nine level addition to the base offense level of six. To support 

the increase, the probation officer, and by inference the district 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 3 
court, relied on Guideline Application Note 7 to section 2Fl.1, 

which provides: 

"Valuation of loss is discussed in the Commentary to§ 

2Bl.1 (Larceny, Embezzlement, and Other Forms of Theft). 

In keeping with the Commission's policy on attempts, if 

a probable or intended loss that the defendant was 

attempting to inflict can be determined, that figure 

would be used if it was larger than the actual loss." 

(Emphasis added). 2 The district court apparently found that there 

was no actual loss and that the defendant intended and attempted 

to inflict a loss of $440,896. 

We review factual findings supporting a district court's 

offense level calculation under the "clearly erroneous" standard. 

United States v. Poole, 929 F.2d 1476, 1483 (10th Cir. 1991) 

(calculation of drug quantity). Other circuits have applied this 

standard to a district court's calculation of loss under section 

2Fl.1. United States v. Haddon, 927 F.2d 942, 952 (7th Cir. 

1991); United States v. Davis, 922 F.2d 1385, 1388 (9th Cir. 

1991). Because we find no support in the record for the district 

court's finding that Smith attempted to inflict a loss in the 

amount for which he was sentenced, we must reverse the 

calculation. 

The Guidelines increase a defendant's base offense level 

sentence for either actual or intended loss, whichever is 

2 Application Note 2, Guidelines§ 2Bl.1, defines "loss" to 

mean "the value of the property taken, damaged, or destroyed." 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 4 
greater. 3 United States v. Palinkas, 938 F.2d 456, 465 n.19 (4th 

Cir. 1991) ("if a probable or intended loss was greater than the 

actual loss, the larger figure will be used") ; United States v. 

Schneider, 930 F.2d 555, 556 (7th Cir. 1991). Where the fraud 

results in actual loss within the definition provided by the 

commentary to Guidelines§ 2Bl.1, that value will be considered 

for purposes of enhancement under section 2Fl.1. Where there is 

no such loss, or where actual loss is less than the loss the 

defendant intended to inflict, intended or probable loss may be 

considered. Application Note 7, Guidelines§ 2Fl.l; ~, ~, 

United States v. Lohan, No. 90-1637, 1991 WL 184263, at* 6 (2d 

Cir. Sept. 23, 1991) ("Under the Guidelines 'loss' 'may consist of 

the "probable" loss resulting from the fraud'" (quoting United 

States v. Brach, 942 F.2d 141, 143 (2d Cir. 1991)); Haddon, 927 

F.2d at 951-52; United States v. Wills, 881 F.2d 823, 827 (9th 

Cir. 1989) (affirmed enhancement in credit card fraud case on 

basis of intended loss where intended loss was greater than actual 

loss) • 

A. 

Actual Loss 

There is no evidence of any actual loss in the record. 

3 Because we find no sufficient evidence of any intended loss 

here, we do not need to explore whether there might be some 

limitations on the unrestricted use of intent to establish loss. 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 5 
Neither the probation officer nor the government contended below, 

nor does the government contend here, that the $440,896 figure 

represented the amount of property "taken" by Mr. Smith through 

his misrepresentations. See Application Note 2, Guidelines§ 

2Bl.1. Moreover, the district court made no such finding. 

Nevertheless, because enhancement could properly be based on 

actual loss, we review the record to see if the district court's 

enhancement of Mr. Smith's sentence is justified on the basis of 

actual loss. 

Under the circumstances of this case, we conclude that actual 

loss should be measured by the net value, not the gross value, of 

what was taken. Although Mr. Smith did receive all the proceeds 

from the loans, 4 he delivered to the lenders something in return: 

the security interest in the houses and the promises of the 

individual borrowers to repay the loans. Under the Guidelines, 

net loss must reflect the value of the property securing the 

loans. The government has the burden of proving the amount of 

actual loss. Because the government has failed to prove any 

actual loss in this case, Mr. Smith's sentence may not be enhanced 

4 The loan proceeds apparently were paid to the individual 

borrowers rather than directly to Mr. Smith. The borrowers then 

used the proceeds to purchase homes from Mr. Smith. Because Mr. 

Smith was convicted of aiding and abetting the fraud of the 

borrowers, Smith is properly sentenced as a principal. See Nye & 

Nissen v. United States, 335 U.S. 613, 618-19 (1949); United 

States v. Espinosa, 771 F.2d 1382, 1398 n.18 (10th Cir. 1985) 

(citing Nye & Nissen); Guidelines§ 2X2.1. We may therefore treat 

him as the recipient of the fraudulently obtained loan proceeds. 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 6 
on the basis of actual loss. 5 

This net concept of actual loss comports with common law 

valuation of fraud. Under the common law, if a defendant 

deceitfully persuaded a victim to give up something of value, the 

calculation of loss takes into account any value given to the 

victim by the defrauder. See Dan B. Dobbs, Remedies§ 9.2 at 594-

98 (1973) (various damage fomulae for civil fraud based on net 

rather than gross value); Guidelines§ 2Fl.1, Application Note 

7(a) (Nov. 1, 1991). 

Our approach thus distinguishes between naked fraudulent 

takings, and exchanges of property where the wrongdoer merely 

misrepresents the value of the consideration advanced. If a fraud 

is a naked taking of property, the net and gross loss are the same 

since the victim got nothing of value in return for the property 

given up. However, if the fraud consists of an unequal exchange 

of property, the loss or taking consists only of the difference in 

value between what was given and what was obtained. In any event, 

5 The burden on the government is not onerous, as loss does not 

need to be calculated with exactitude. See Guidelines§ 2Bl.1, 

Application Note 3 ("loss need not be determined with precision, 

and may be inferred from any reasonably reliable information 

available"). Moreover, to the extent that requiring the 

government to prove actual loss makes it a little more difficult 

for the government to obtain sentence enhancements under§ 2Fl.1, 

this does not seem to be cause for great concern. The government 

can obtain the basic sentence in any event, Guidelines§ 2Fl.l(a), 

and if it seeks to enhance the sentence because of the size of the 

victim's loss, it is not asking too much for the government to be 

prepared to prove the actual amount of such loss. 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 7 
it is a net value that must be used to measure loss. Any other 

approach ignores reality. See Schneider, 930 F.2d at 559; cf. 

United States v. Whitehead, 912 F.2d 448, 452 (10th Cir. 1990) 

(economic loss overvalued). A thief who steals $100,000 is more 

culpable than a salesman who obtains $100,000 by selling a victim 

an $80,000 house he fraudulently represents as being worth 

$100,000. In the latter case, it makes no sense to suggest that 

$100,000 is the accurate measure of the victim's loss. 

United States v. Johnson, 941 F.2d 1102 (10th Cir. 1991), is 

not to the contrary. In that case we upheld, on the basis of the 

indictment, a sentence based on the value of several houses that 

were fraudulently acquired by the defendant. Id. at 1113. 

Although Mr. Johnson lied about his intention to repay the loans 

on the houses, the indictment alleged that he fraudulently took 

the houses, rather than the value of the loans. That indictment 

made sense in Johnson, where the loans at issue were assumed, and 

were not the target of the defendant's fraud. Thus, the seller in 

Johnson gave the defendant title to the houses in exchange for a 

fraudulent promise that the defendant would assume the seller's 

obligation. In this sense, Johnson involved a naked taking in 

which the seller received nothing in return because the only 

consideration offered by the defendant was a worthless promise to 

assume the loans. 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 8 
Here there is no actual loss. Mr. Smith's misrepresentations 

resulted in an exchange for value, not a net loss to the lending 

institutions. The government does not contest Mr. Smith's 

assertion that the loans were "fully secured by the property 

involved." Corrected Brief for Appellant at 5. In order to 

justify enhancement on the basis of actual loss, the government 

simply must do more. 

Our approach is consistent with the new commentary to 

Guidelines§ 2Fl.1, promulgated by the Sentencing Commission to 

"provide[] additional guidance with respect to the determination 

of loss." Guidelines, App. C, at 224 (Nov. 1, 1991). The 

commentary provides: 

"In fraudulent loan application cases and contract 

procurement cases where the defendant's capabilities are 

fraudulently represented, 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." 

Guidelines§ 2Fl.1, Application Note 7(b) (Nov. 1, 1991) (emphasis 

added). While our interpretation does not depend on this recent 

amendment to the Guidelines, its focus on net loss further 

buttresses our approach. See United States v. Urbanek, 930 F.2d 

1512, 1514-15 (10th Cir. 1991). 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 9 
B. 

Probable or Intended Loss 

Admittedly, the district court need not find an actual loss 

to increase a defendant's offense level under section 2Fl.1. "The 

fact that good police work diminished the actual loss to the 

employer victim should not affect the determination of the extent 

of defendant's culpability and responsibility for purposes of 

sentencing." United States v. Westmoreland, 911 F.2d 398, 399 

(10th Cir. 1990) (recovery of stolen car does not bar its 

inclusion in loss calculation). As we have noted above, in the 

absence of actual loss, intended loss may be considered. 

Application Note 7, Guidelines§ 2Fl.1. To meet the requirements 

of the Guideline, however, the record must support by a 

preponderance of the evidence the conclusion that Mr. Smith 

realistically intended a $440,896 los·s, or that a loss in that 

amount was probable. 

Neither the Order entered by the district court in this case, 

nor the transcript of the sentencing proceedings indicate that the 

district court had any factual basis for adopting the probation 

officer's calculation. Specifically, investigating agent Kevin 

Markey, of the F.B.I., answered "[n]o," at the sentencing hearing 

to defense counsel's question: "Did you have any indication when 

[Smith] made the false statements that he wanted the government to 

lose money?" Supplemental Appendix to Appellee's Brief at 16. In 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 10 
the same proceeding, on cross-examination, after asserting that 

the $440,896 figure represented the loss within the meaning of 

Application Note 7, Probation Officer McKeever cited no factual 

support for his belief that the total of the six loans constituted 

the probable or intended loss. Id. at 29-31. Indeed, on direct 

examination, support for Officer McKeever's belief was limited to 

his affirmative response to the question: "Are you satisfied that 

this 440,000-some-odd dollar figure is the appropriate amount of 

intended loss?" Id. at 25. 

This affirmative response, standing alone, is insufficient to 

support the increase in Mr. Smith's offense level. Mr. Smith 

specifically stated that "[a]t no time did I intend for a 

federally insured loan company to lose any money or or anybody 

else, for that matter." Id. at 36. As of sentencing, no money 

has been lost on the loans enabled by· Mr. Smith's fraud. 

On appeal, the government never argues that Smith intended to 

cause loss in the full amount of the loans, only that "the 

potential that these six loans may eventually go into default is 

ever present." Brief of Plaintiff-Appellee at 5. However, as Mr. 

Smith points out, each of the six loans was secured by the house 

on which the loan was made, and the home buyers have been paying 

down their loans. Thus, even under a worst case scenario, the 

total potential loss could not be the full amount of the loans. 

We do not believe the possibility that some loss might occur on 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 11 
one or more of the six loans in the future amounts to the 

"probable" loss contemplated by section 2Fl.1. The government has 

simply failed to offer any support for its calculation. 

This is not a case like United States v. Johnson, 908 F.2d 

396 (8th Cir. 1990), where the court declined to reduce the loss 

calculation by the amount recovered by the defrauded bank. "(A] 

defendant's offense level should not turn on whether or not the 

banks recovered some of their potential loan losses. Rather, the 

focus for sentencing purposes should be on the amount of the 

possible loss which Johnson attempted to inflict on the banks." 

Id. at 398 (emphasis added). In Johnson, the defendant was a con 

artist who used falsified identification to obtain loans for 

herself. See also Davis, 922 F.2d at 1391-92 (the defendant 

operated a scheme to steal property). 

The present case is more like the one where "fraud is 

committed in order to obtain a contract that the defendant might 

otherwise not obtain, but he means to perform the contract." 

Schneider, 930 F.2d at 558. In Schneider, the court distinguished 

between two types of fraud: 

"One is where the offender -- a true con artist (as in 

Davis) -- does not intend to perform his undertaking, 

the contract or whatever; he means to pocket the entire 

contract price without rendering any service in return. 

In such a case the contract price is a reasonable 

estimate of what we are calling the expected loss, and 

we repeat that no more than a reasonable estimate is 

required. The other type of fraud is committed in order 

to obtain a contract that the defendant might otherwise 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 12 
not obtain, but he means to perform the contract (and is 

able to do so) and to pocket, as the profit from the 

fraud, only the difference between the contract price 

and his costs. This is such a case." 

Id. at 558 (citations omitted). 

This is not to say that Mr. Smith's crime must go unpunished. 

The base offense level of six provided by the Guidelines applies 

irrespective of loss. Guidelines§ 2Fl.l(a). As the court in 

Schneider noted: "It is simply that the Guidelines award bonus 

punishment points for different levels of proven loss beginning 

with $2,000. The government did not earn a bonus in this case." 

930 F.2d at 559. So here, the court may only properly sentence on 

the basis of the base offense level of six provided by section 

2Fl.l(a). 

III. 

Mr. Smith also appeals the four level enhancement assigned by 

the probation officer for his role in the offense pursuant to 

section 3Bl.l(a). The Guidelines provide for an increase in the 

offense level "[i]f the defendant was an organizer or leader of a 

criminal activity that involved five or more participants or was 

otherwise extensive. 11 Guidelines § 3Bl. l(a). The government does 

not offer support for this enhancement on appeal. Instead, like 

the district court's order, the government assumes the propriety 

of the nine level adjustment for loss valuation and simply notes 

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Appellate Case: 91-6096 Document: 010110097362 Date Filed: 11/15/1991 Page: 13 
that the sentence could have been the same without the organizer 

enhancement, because of the requirement that the sentence could 

not exceed the twenty-four month maximum sentence authorized by 

statute for the offense of conviction. Brief of PlaintiffAppellee at 9. In its written Order, the district court stated: 

"Eliminating the four points assessed as a leader or organizer, 

the defendant's Guideline imprisonment range would be 18 - 24 

months." United States v. Smith, No. CR-90-236-T at 3 (W.D. Okla. 

filed March 5, 1991). Given our holding above, that is no longer 

the case. Consequently, we review the district court's 

application of Guidelines§ 3Bl.l(a). Because the applicability 

of a guideline is an issue of law, our review is de novo. United 

States v. Reid, 911 F.2d 1456, 1461 (10th Cir. 1990), cert. 

denied, 111 S. Ct. 990 (1991); United States v. Petit, 903 F.2d 

1336, 1340 (10th Cir.), cert. denied, 111 s. Ct. 197 (1990). 

Application of the enhancement for a leadership or 

organizational role requires consideration of the following 

factors: 

"the exercise of decision making authority, the nature 

of participation in the commission of the offense, the 

recruitment of accomplices, the claimed right to a 

larger share of the fruits of the crime, the degree of 

participation in planning or organizing the offense, the 

nature and scope of the illegal activity, and the degree 

of control and authority exercised over others." 

Guidelines§ 3Bl.1, Application Note 3. The inapplicability of 

these criteria to the relevant conduct at issue here illustrates 

the inappropriateness of assigning a four level enhancement in 

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, l ,I I• 

this case. While Mr. Smith participated in obtaining each loan, 

there was no connection at all among the various borrowers. This 

was no organization. To support enhancement under this Guideline, 

the government must show that each member of the organization is 

answerable to the defendant and is under his continuing control. 

See Reid, 911 F.2d at 1465. Mr. Smith's clients were not 

continually dependent on him. This was not "a criminal activity 

that involved five or more participants." Guidelines § 3Bl. 1 (a). 

The four level enhancement was thus inappropriate. 

IV. 

As a result of the above analysis, we deduct thirteen levels 

from the district court's calculation of Mr. Smith's offense 

level. His corrected offense level is 6. With no criminal 

history points, the Sentencing Table provides a guideline range of 

zero to six months imprisonment. Mr. Smith has been incarcerated 

since March 26, 1991. Six months expired near the end of 

September, 1991. 

Mr. Smith has served his maximum sentence. Consequently, we 

REVISE his sentence to six months and order him released 

immediately from custody. The mandate shall issue forthwith. 

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