1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-17-1994

United States of America v. Daddona

Precedential or Non-Precedential:

Docket 93-7338

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Recommended Citation

"United States of America v. Daddona" (1994). 1994 Decisions. Paper 117.

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 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________ 

 No. 93-7338 

 No. 93-7683 

 No. 93-7725 

 No. 93-7351 

 ___________ 

 UNITED STATES OF AMERICA, 

 Appellee, 

 vs. 

 JOHN L. "JACK" DADDONA, 

 Appellant in Nos. 93-7338, 93-7683, and 93-7725. 

 SIDNEY COHEN, 

 Appellant in No. 93-7351

 ___________ 

 ON APPEAL FROM THE UNITED STATES DISTRICT COURT 

 FOR THE MIDDLE DISTRICT OF PENNSYLVANIA 

 (D.C. Criminal Action Nos. CR-92-179-01 and -02) 

 ___________ 

 ARGUED MAY 19, 1994 

 BEFORE: BECKER, LEWIS, Circuit Judges, 

 and IRENAS, District Judge.

*

 (Filed August 17, 1994) 

 ___________ 

 

 * Honorable Joseph E. Irenas, United States District Judge 

for the District of New Jersey, sitting by designation. 
David Barasch 

United States Attorney 

Kim David Daniel (Argued) 

Assistant United States Attorney 

Federal Building, 228 Walnut Street 

Harrisburg, PA 17108 

 Attorneys for Appellee

James G. Wiles, Esquire (Argued) 

Law Offices of James G. Wiles 

1411 Walnut Street, Suite 200 

Philadelphia, PA 19102 

James L. Heidecker, Jr., Esquire 

Lawyers Professional Building 

27 North Street, 4th Floor 

Allentown, PA 18101 

 Attorneys for Appellant Daddona

Francis Recchuiti, Esquire (Argued) 

Vangrossi & Recchuiti 

319 Swede Street 

Norristown, PA 19401 

 Attorneys for Appellant Cohen

 ___________ 

 OPINION OF THE COURT 

 ___________ 

IRENAS, District Judge. 

 Appellants were convicted of various counts of fraud 

stemming from their attempts to disclaim performance and payment 

bonds issued in connection with a construction project. Pursuant 

to U.S.S.G. § 2F1.1(b), the trial court determined the amount of 

loss for sentencing purposes to be in excess of $1,500,000, most 

of which represented the mortgagee's cost to complete the project 
after taking it over from the mortgagor/developer. Although the 

mortgagee was not an obligee under the bonds, the district court 

nonetheless concluded that its loss was properly attributable to 

the appellants' fraudulent conduct. 

 Appellants raise a number of challenges to their convictions 

and sentences and to the district court's denial of motions for a 

new trial. We will affirm the judgments of conviction and the 

district court's denial of appellants' motions for a new trial. 

However, because we find that the trial court improperly 

calculated the losses resulting from the appellants' fraudulent 

conduct, we will vacate the sentences and remand both cases for 

resentencing. 

I. 

 FACTS AND PROCEDURAL HISTORY

 Appellant Sidney Cohen ("Cohen") was a principal in Green 

Hill Associates ("Green Hill"), a limited partnership and the 

developer of the Green Hill Apartment Building Project ("the 

project") in Susquehanna Township, Pennsylvania. The project was 

financed by an $8.9 million mortgage loan to Green Hill from the 

Summit Tax Exempt Bond Fund, L.P. ("Summit"), which in turn was 

headed by Stuart J. Boesky ("Boesky"). 

 Construction on the project began in July of 1986. By the 

spring of 1987, the project was substantially behind schedule. 

Cohen sought to replace the general contractor, Susquehanna 

Construction Company ("Susquehanna"), with Eastern Consolidated 
Utilities, Inc. ("ECU"), a building contractor owned and operated 

by appellant John L. ("Jack") Daddona ("Daddona"). Summit agreed 

to the substitution, provided ECU obtain performance and payment 

bonds in the amount of $3 million.1 Summit also threatened 

foreclosure unless the bonds were produced by July 29, 1987. 

 Daddona consulted Daniel Culnen ("Culnen") of the Culnen & 

Hamilton Agency ("C & H"), one of the largest independent surety 

bond brokers on the East Coast and Daddona's long-time insurance 

agent. He advised Culnen of Summit's demand, and Culnen agreed 

to issue the bonds through Employers Insurance of Wausau 

("Wausau"), for whom he was a registered independent agent. 

However, as a condition to his agreement, Culnen required that 

Daddona, Cohen, and their families agree in writing to personally 

indemnify Wausau for any claims paid on the bonds.2

 By letter dated June 15, 1987, Culnen advised Summit that in 

the event ECU were to become the project's general contractor, it 

 

 

1 A performance bond guarantees the owner that the general 

contractor will perform his contract. A payment bond, sometimes 

referred to as a labor and materials bond, guarantees the that 

the general contractor's subcontractors and materialmen will be 

paid for their services. The bonds are usually issued in tandem. 

It should be noted that while Green Hill, as owner, had rights 

under both bonds, and the subcontractors and materialmen had 

rights under the payment bond, Summit was not an obligee under 

either bond. See p. 24, infra.

 

2 The requirement that Cohen execute an indemnity agreement 

was unusual in that it essentially vitiated any benefits that 

might have inured to Cohen from the bonds. At trial, Culnen 

explained his concern that Cohen, who had earlier filed what 

Culnen considered to be specious claims against the bonds held by 

Susquehanna, would make similar claims against ECU's bonds. The 

indemnity agreement was expressly designed to prevent Green Hill 

from filing claims under the bonds. 
would be able to obtain the necessary bonding. Thereafter, on 

July 6, 1987, Cohen, Daddona, and their families executed an 

indemnity agreement. On July 20, 1987, ECU and Green Hill 

entered into a $3.4 million contract for the completion of the 

project. 

 On July 27, 1987, Culnen directed his bond manager, Pamela 

Hayes ("Hayes"), to prepare the bonds on Wausau forms. Hayes 

prepared the bonds, affixed the Wausau corporate seal, and 

attached power of attorney forms. Hayes, purportedly at Culnen's 

behest, did not follow the usual procedure and give the bonds a 

new number. Rather, she affixed a number that had been used on a 

previous ECU project and then twice witnessed Culnen's signature 

under the fictitious name of "B. Adams." 

 Culnen signed both bonds and delivered them to Daddona along 

with a cover letter explaining the method of calculating the bond 

premium. Although Culnen did have authority to execute and 

deliver Wausau bonds, he breached his own agreement with Wausau 

by failing to report his execution and delivery of the bonds and 

by failing to obtain Wausau's prior approval. 

 Daddona signed the bonds on July 29, 1987, and forwarded 

them to Cohen. Cohen witnessed Daddona's signatures on the bonds 

and directed his attorney, Mitchell Leiderman ("Leiderman"), to 

forward copies of the bonds to Summit, which Leiderman did on 

July 30, 1994. Summit halted its foreclosure proceedings, and 

ECU commenced work on the project in August of 1987. 

 A. Padding the Invoice
 In August Culnen prepared and mailed to Daddona an invoice 

for the bond premiums in the amount of $42,413. Shortly 

thereafter Cohen called Culnen and instructed him to prepare a 

new invoice in the amount of $52,413, the difference representing 

an unrelated $10,000 consulting fee owed by Cohen to Culnen. 

Daddona indicated that he had no objections to the request. 

 At Daddona's direction, Culnen forwarded the upwardly 

revised invoice to Cohen, who submitted it to Summit on October 

7, 1987, as part of a monthly requisition. When Summit released 

the funds to Cohen on October 21, 1987, Cohen immediately 

forwarded the monies to Culnen and received a check back from 

Culnen for $10,000 on November 27, 1987. 

 Culnen retained the remaining $42,413 for a period of time, 

but was pressured by Cohen and Daddona to divide the money. 

Consequently, Culnen agreed to give Daddona a $32,413 credit 

against his outstanding account balance, which was memorialized 

in a credit memo dated May 11, 1988. On May 16, 1988, Culnen 

forwarded a second check for $10,000 to Cohen. 

 B. Resuming Construction

 Once the new general contractor was in place, Cohen sought 

to entice the subcontractors, many of whom had left the project 

for non-payment, to return to work on the project. At several 

jobsite meetings conducted in August of 1987, Cohen and ECU 

employees displayed copies of the bonds and assured the 

subcontractors that the bonds guaranteed their payment. At least 

two subcontractors, Thomas Strawbridge and Robert Yingling, 
subsequently executed contracts with ECU for work on the project. 

Copies of the bond were also mailed to Les Stewart ("Stewart") of 

York Excavating Company ("York"), thereby inducing him to return 

to work. 

 C. Disclaiming the Bonds

 By the end of 1987, the project was still behind schedule, 

and Summit was again threatening foreclosure. In or around 

December of 1987, Cohen and Daddona returned the original bonds 

to Culnen without informing Summit or the subcontractors.3 By 

January of 1988, most of the subcontractors had left the site for 

non-payment, and on February 5, 1988, Summit commenced 

foreclosure proceedings. 

 In a settlement reached on April 8, 1988, Summit agreed to 

pay Green Hill $216,000 less the amount of any unpaid 

subcontractor bills then due and owing on the project. In 

return, Green Hill agreed to deed the project to Boesky's 

nominee, Green Hill Investors,4 to assign to Summit Green Hill's 

rights (but not its obligations) in the contract with ECU, and to 

 

 

3 While it may be that Cohen or Daddona thought that by 

returning the original bonds to the issuer they were limiting the 

rights of potential claimants, and thereby their indemnity 

obligations to Wausau, there is no legal basis for concluding 

that the rights of parties who entered into contracts or 

performed labor in reliance on the bonds could have their rights 

unilaterally terminated in this manner. Indeed, the indictment 

itself was premised, at least in part, on the validity of the 

bonds. If the bonds were in fact not valid when issued, there 

could be no fraud in disavowing them. 

 

4 For convenience, we will refer to Summit and Green Hill 

Investors collectively as "Summit." 
escrow Cohen's beneficial interest in the bonds to pay off liens 

that might accrue on the property in the four months following 

the settlement.5

 In March, Wausau began to receive claims on the payment 

bond. On March 16, 1988, the attorney for the International 

Brotherhood of Electrical Workers Union ("IBEW") filed a claim 

against the bond with Wausau's home office in Wisconsin and 

forwarded copies to Cohen and Daddona. On March 21, 1988, Jack 

Meyers ("Meyers") of Construction Management Corporation ("CMC") 

also made a claim by sending a copy of the claim letter to 

Wausau's regional bond manager in Totowa, New Jersey, Ken Gelok 

("Gelok"). CMC and York filed formal claims against Wausau on 

April 14, 1988. 

 Gelok was surprised by the claims. Company policy required 

both regional manager and home office approval prior to the 

issuance of any bonds in excess of $750,000. Gelok knew nothing 

of the bonds and called Culnen on or about March 25, 1987, to 

clarify the situation. Culnen advised Gelok that the claims were 

not valid because he had the cancelled bonds in his possession. 

 At a meeting in Culnen's office on March 29, 1988, Culnen 

 

 

5 The four-month escrow period tracked the Pennsylvania 

statute of limitations for the filing of mechanic's liens. 49 

P.S. § 1502. It is clear that Green Hill's assignment was 

strictly limited to the possible liability to existing unpaid 

subcontractors who were either known at the closing or who filed 

claims within four months. The essence of the settlement was that 

Summit's nominees would take the project free and clear of any 

existing claims of ECU's subcontractors. In fact, those debts 

were paid by deductions from the $216,000 owed to Green Hill, and 

Summit's limited rights under the four-month escrow period were 

never exercised. 
delivered the bonds to Gelok and falsely assured him that the 

bonds were not valid, that he had never signed them, and that 

someone else -- perhaps Meyers -- had forged his signature. 

Culnen repeated this tale in a letter dated April 15, 1988, in 

which he advised Gelok that the bonds were forgeries and that 

York's and CMC's claims were "phoney claims filed by crooks who 

probably stole blank forms and forged [Culnen's] signature." 

 On April 20, 1988, Gelok again met with Culnen at the 

latter's office. During the course of the meeting, Gelok advised 

Culnen that he had been unable to contact Cohen to confirm 

Culnen's story about the bonds. Culnen then picked up the 

telephone, dialed some numbers, and handed the phone to Gelok. A 

man who identified himself as Sidney Cohen informed Gelok that 

"there was no bond in force, there never was and there never 

would be." Daddona App. at 325. The man also advised Gelok that 

the bonds on which Meyers' and Stewart's claims were based were 

forgeries, and that Meyers may have been the one who forged 

Culnen's signature. 

 On April 22, 1988, Culnen wrote a second letter to Gelok, in 

which he informed Gelok that he had contacted Daddona, then on a 

hunting trip in Alaska, and "the conclusion we [i.e., Culnen and 

Daddona] came to is . . . that Meyers signed the bond form, which 

was blank, in Jack's office pending finalization of negotiations 

with the owner." Daddona App. at 223-24. Relying on the letters 

from Culnen and Gelok's conversation with Cohen, Wausau advised 

Meyers by letter dated April 20, 1988, that no Wausau bonds 

existed on the Green Hill project. Thereafter, on April 26, 
1988, Wausau issued a second letter, denying Stewart's and 

Meyers' bond claims on the grounds that no valid bonds existed 

for the project. On May 6, 1988, Wausau denied the IBEW claim. 

 On June 16, 1988, Summit, while in the midst of hiring a new 

general contractor, sent a letter to Wausau inquiring about the 

status of the bonds. Culnen advised Wausau by letter dated June 

21, 1988, that he had neither executed nor delivered the bonds. 

Wausau subsequently advised Summit on June 27, 1988, that no 

bonds existed on the project. On September 30, 1988, Summit 

filed a formal claim against the bonds, in which it alleged that 

ECU's failure to perform had cost it $3 million in damages. The 

claim was denied by Wausau in a letter dated October 7, 1988. 

The letter recited that no valid bonds existed on the project, 

and that even if there were valid bonds, Summit was not a proper 

claimant. 

 D. The Unravelling of the Scheme 

 In July of 1988, Meyers contacted the United States Postal 

Inspectors, prompting an investigation into the project. On 

August 5, 1988, grand jury subpoenas were served on Pamela Hayes 

and C & H. On October 13, 1988, Culnen admitted to Wausau that 

he had indeed executed and delivered the bonds in July of 1987 

and that they were not forgeries. Culnen and C & H were indicted 

in June of 1991. In November of 1991, Culnen entered into a plea 

agreement by which he agreed to plead guilty to two counts of 

mail fraud and cooperate with the government in its investigation 

of Cohen and Daddona. 
 Appellants were indicted in July of 1992 and charged with 

conspiracy to commit mail fraud and two counts of mail fraud. In 

addition, Cohen was charged with conspiracy to transport a 

fraudulently obtained security (the $52,413 check issued by 

Summit for the inflated bond premium), interstate transportation 

of a fraudulently obtained security, and interstate 

transportation of a mail fraud victim. The frauds on which the 

indictment was based were threefold: (1) a fraud on Wausau in not 

reporting the issuance of the bonds or the receipt of premiums 

therefor; (2) a fraud on Summit by inflating the invoice for the 

bond premium to cover an unrelated indebtedness to C & H; and (3) 

a fraud on potential bond claimants by first returning the 

original bonds for attempted cancellation and then claiming that 

the signatures were forgeries. 

 A five-day joint trial of the appellants was held from 

September 14-18, 1992. The jury convicted both men of conspiracy 

to commit mail fraud and of the two counts of mail fraud. The 

jury also convicted Cohen of interstate transportation of a 

fraudulently obtained security, but acquitted him of conspiracy 

to transport a fraudulently obtained security.6

 On September 25, 1992, appellant Cohen moved for a new trial 

and, in the alternative, for a judgment of acquittal. That same 

day, appellant Daddona filed motions to set aside the verdict and 

for a new trial. In October, both parties filed motions for a 

 

 

6 The charge of interstate transportation of a fraud victim 

was dismissed by the judge during the trial. 
new trial based on newly-discovered evidence. All of these 

motions were denied by memorandum and order dated January 25, 

1993. 

 Appellant Daddona subsequently filed two additional motions 

for new trial on the grounds of newly-discovered evidence, which 

were denied by the district court initially and on 

reconsideration. Each of the motions was followed by a motion to 

this Court to remand the matter back to the district court, which 

were also denied. 

 E. The Sentencing

 The presentence reports prepared by the U.S. Probation 

Office set each appellant's base offense level at 6, applying 

U.S.S.G. § 2F1.1.7 Then, relying on the findings of fact made by 

the court during the Culnen sentencing, the probation officer 

calculated the approximate amount of losses to the victims to be 

$1,562,500.8 Pursuant to U.S.S.G. § 2F1.1(b)(1)(j), he 

 

 

7 Counts 2 (transportation of a fraudulently obtained 

security), 3 (conspiracy to commit mail fraud), 4 and 5 (mail 

fraud) were counted as a single offense pursuant to U.S.S.G. 

§ 3D1.2(d). 

 

8 See Presentence Report of John L. Daddona at 14; 

Presentence Report of Sidney Cohen at 14: 

 The monetary losses caused by the offenses are 

$1,562,500. This amount is based on the Court's 

finding regarding losses in the case of Daniel J. 

Culnen (Dkt. #1:CR-91-105-001). In the Court's 

sentencing memorandum in the Culnen case, filed on July 

30, 1992, it was determined that for the purposes of 

sentencing, approximate losses to victims were as 

follows: 

 Summit Bond Tax Exempt Fund, L.P. $1,500,000 
recommended a nine-level increase to the base offense level. The 

probation officer also recommended a two-level increase for more 

than minimal planning under U.S.S.G. § 2F1.1(b)(2)(A). 

 All sides objected to the offense level calculation. Cohen 

contended that the losses claimed were either erroneous, not 

covered by the bonds, or settled prior to sentencing. Daddona 

insisted that he was ignorant of any wrongdoing in the issuance 

of the bonds, and could not therefore be held accountable for 

losses incurred. In the alternative, Daddona argued that 

Summit's losses could not be included in the calculation, as 

Summit was not a co-obligee on the bond. The government, on the 

other hand, objected to the lack of a two-point enhancement to 

Cohen's offense level for obstruction of justice. 

 Loss hearings were held on March 30 and April 2, 1993. The 

government proffered the testimony of Norman Tandy, of Norman 

Tandy & Associates, the company hired by Summit to oversee the 

completion of the project.9 Tandy essentially undertook a "cost 

of completion" analysis -- examining the Summit invoices for the 

period after Eastern left the project site to determine how much 

more Summit spent because of the Eastern default, then 

 

 Construction Management Corporation/ 

 Aljohn, Inc. 53,000 

 Yingling Construction Company 9,500

 $1,562,500 

 

9 Tandy did not testify in person at the loss hearings. 

Rather, the government moved to supplement the record by 

incorporating the testimony Tandy had given at the sentencing 

hearing for Daniel Culnen, which motion was granted on March 9, 

1993. 
subtracting the cost of changes to the project specifications and 

the amount of the original Eastern contract. He concluded that 

Summit had suffered losses of $1,524,761 as the result of 

appellants' fraudulent conduct. 

 Appellant Daddona offered rebuttal testimony from S. Leonard 

DiDonato of Hill, International, who was qualified as an expert 

construction analyst. DiDonato independently reviewed Summit's 

records and Tandy's calculations, indicating places where he 

believed Summit had overspent or Tandy had overestimated the 

amount of loss. From these he concluded that Summit could have 

completed the project for $414,719 less than the Eastern contract 

price, and hence had suffered no loss. 

 The trial court resolved the various objections to the 

presentence report in a memorandum dated April 13, 1993. Most of 

the discussion focused on the amount of loss that properly could 

be attributed to the defendants' fraudulent conduct. Recognizing 

that each of the experts were "less than fully objective," the 

court set out to determine who was the more reliable. It noted 

that Tandy's calculations had been adopted at the Culnen 

sentencing and therefore had some indicia of reliability. The 

court also contrasted the "carefully and specifically enumerated" 

deductions of Tandy with the "speculative and repetitive 

deductions" and "artificial numbers" used by DiDonato. 

 The Court found Tandy's testimony to be more dependable, and 

adopted the figure of $1,524,761 as the amount of Summit's loss 
and $1,568,830 as the total loss for sentencing purposes.10 

However, the court declined to impose a two-level increase for 

more than minimal planning and denied the government's request 

for a two-level enhancement to Cohen's offense level for 

obstruction of justice. The decision left each appellant with an 

offense level of 15 and a criminal history category of I, 

resulting in a sentencing range of 18 to 24 months. On 

application of the appellants, the court granted a downward 

departure and sentenced appellants to nine-month terms of 

imprisonment.11 

II 

 LEGAL ANALYSIS

 Both appellants challenge their judgments of conviction and 

sentences, and Daddona also appeals the district court's denial 

of his second and third motions for new trial. We have appellate 

jurisdiction pursuant to 28 U.S.C. § 1291 over final orders of a 

district court and jurisdiction pursuant to 18 U.S.C. § 3742 to 

review sentences imposed under the United States Sentencing 

Guidelines. 

 Appellants' challenges to their convictions and to the 

district court's denial of Daddona's new trial motions are 

 

 

10 The court also found that Wausau had incurred $44,069 in 

legal fees as a result of the fraud. It did not, however, 

address the claims of the other subcontractors, concluding that 

Summit's loss alone was sufficient to place defendants in the $1-

$2 million range. 

 

11 Appellants are out on bail pending appeal. 
without merit.12 However, their claims regarding the calculation 

of their sentences require further analysis. 

 A. The Standard of Review

 "When reviewing the sentencing decisions of the district 

courts, '[w]e exercise plenary review over legal questions about 

the meaning of the sentencing guidelines, but apply the 

deferential clearly erroneous standard to factual determinations 

 

 

12 Daddona's claims included the following: (1) the 

evidence was insufficient to support his convictions; (2) the 

trial court erred in denying appellant's motion for a new trial 

based on an alleged Brady violation without conducting an 

evidentiary hearing; (3) the trial court erred in admitting 

certain government exhibits and testimony; (4) the trial court 

erred in allowing the government to use a summary chart during 

its closing arguments; (5) the trial court erred in submitting 

the indictment to the jury, in drafting the verdict form, and in 

answering a question from the jury; and (6) the trial court 

improperly allowed the government to question Daddona about a 

"check-swapping" arrangement. 

 Cohen's claims included the following: (1) the trial court 

erred in denying appellant's motion for new trial based on an 

alleged Brady violation without conducting an evidentiary 

hearing; (2) the evidence was insufficient to support his 

convictions; (3) the trial court erred in permitting the 

introduction of an "inaccurate and fabricated 'closing 

statement'"; (4) the trial court erred in allowing the government 

to use a summary chart during its closing arguments; (5) the 

trial court erred in submitting the indictment to the jury, in 

drafting the verdict form, and in answering a question from the 

jury; (6) the trial court improperly permitted evidence of a 

"check-swapping" arrangement; and (7) the trial court erred in 

incorporating by reference testimony from the Culnen sentencing 

hearing. 

 Cohen also challenged the failure of the district court to 

depart downward, either based on his acceptance of responsibility 

or on his age and infirmity. However, because on remand the 

district court is free to revisit the issue of departures from 

the properly calculated sentencing range, we need not consider 

these claims here. 
underlying their application.'" United States v. Fuentes, 954 

F.2d 151, 152-53 (3d Cir.), cert. denied, --- U.S. ----, 112 

S.Ct. 2950, 119 L.Ed.2d 573 (1992), quoting United States v. 

Inigo, 925 F.2d 641, 658 (3d Cir.1991). 

 Under the Sentencing Guidelines, the base offense level for 

fraud is six, U.S.S.G. § 2F1.1(a), which must be increased 

according to the size of the loss attributed to the fraud. 

U.S.S.G. § 2F1.1(b). Because appellants challenge the district 

court's interpretation of the "loss" concept in § 2F1.1(b), our 

review is plenary. See Kopp, 951 U.S. at 526; United States v. 

Bierley, 922 F.2d 1061, 1064 (3d Cir. 1990). 

 B. Calculating the Amount of Loss for Sentencing Purposes

 The version of U.S.S.G. § 2F1.1(b) in effect at the time the 

offenses were committed set forth the following method of 

adjusting the offense level : 

 (1) If the loss exceeded $2,000, increase the offense 

level as follows: 

 Loss Increase in Level

 . . . 

 (G) $100,001 - $200,000 add 6 

 (H) $200,001 - $500,000 add 7 

 (I) $500,001 - $1,000,000 add 8 

 (J) $1,000,001 - $2,000,000 add 9 

 . . . . 

U.S.S.G. § 2F1.1(b) (Nov. 1987); see generally U.S.S.G. § 2B1.1, 

commentary at 2 ("'Loss' means the value of the property taken, 

damages, or destroyed.").13 The district court found the total 

 

 

13 Although it is proper to use the Guidelines in effect at 

the time of sentencing, see U.S.S.G. § 1B1.11(a), application of 
loss for sentencing purposes to be $1,568,830. U.S.S.G. 

§ 2F1.1(b). Appellants assert, and we agree, that the losses 

claimed by Summit were not caused by their fraudulent activity 

and should not have been included in the U.S.S.G. § 2F1.1 

calculation. 

 C. Cost to Complete as a Measure of Loss

 It should be noted at the outset that we do not question 

the district court's factual determination that Summit's cost to 

complete the Green Hill project exceeded $1,500,000. The trial 

judge heard extensive testimony on that issue and his factual 

determination finds more than adequate support in the record. 

What the record does not contain is any indication that this loss 

was due to the fraud of the appellants rather than the obvious 

failure of two general contractors, Susquehanna and ECU, to 

fulfill their contractual obligations in a timely fashion. 

 Culnen was a registered independent agent of Wausau with 

actual and apparent authority to execute and deliver surety 

bonds. While there may have been fraud in the failure to advise 

Wausau of the issuance, in the inflated invoice, in their 

redelivery to Culnen, and in the effort to mislead possible 

obligees concerning their validity, the fact remains that the 

 

the version of § 2F1.1 contained in the November 1992 Guidelines

Manual would have resulted in the imposition of more severe 

penalties. The district court and the probation officer 

therefore properly applied the Guidelines in effect at the time 

of the offense. See U.S.S.G. § 1B1.11(b). 
bonds appear to have been validly issued and enforceable by any 

proper obligee who relied on their issuance.14

 Under Pennsylvania law, a principal is liable for the acts 

of its agent committed in the scope of its employment, even 

though the principal did not authorize the act. Aiello v. Ed 

Saxe Real Estate, Inc., 508 Pa. 553, 499 A.2d 282 (1982); see 

also Pennsylvania Nat'l Mut. Casualty Ins. Co. v. Insurance 

Comm'r of the Commonwealth of Pennsylvania, 121 Pa.Cmwlth. 618, 

551 A.2d 368 (Pa. Commw. Ct. 1988). Thus, to the extent that 

Summit (or any other claimant) has any rights under the bonds, 

either initially or pursuant to later agreements, those rights 

would continue to exist. 

 Although Summit was the project lender, it was not a named 

obligee under either the performance or payment bonds as they 

were initially issued. Green Hill was the obligee on the 

performance bond, while the payment bond named as obligees only 

those 

 having a direct contract with [ECU] or with a 

subcontractor of [ECU] for labor, material or both, 

used or reasonably required for use in the performance 

 

 

14 In a recent decision from the Middle District of 

Pennsylvania, York Excavating Co., Inc. v. Employers Insurance of 

Wausau, No. CV-91-1037 (M.D. Pa. Oct. 21, 1993)(Memorandum 

Opinion of Hon. James F. McClure, Jr., U.S.D.J.), the court 

denied claims brought by one of the project subcontractors 

against the Wausau bonds for work done pursuant to written and 

oral agreements entered into in 1987. However, the decision was 

not premised on the validity of the bonds, but rather on the 

validity of York's claims. The court found insufficient evidence 

of an oral agreement with ECU. Furthermore, the court found that 

since ECU was not a party to the written contracts by which York 

agreed to perform work, York could not collect under the Wausau 

bonds. 
of the Contract, labor and material being construed to 

include that part of water, gas, power, light, heat, 

oil gasoline, telephone service or rental of equipment 

directly applicable to the Contract. 

York Excavating, slip. op. at 13. 

 There is also indication in the record that Summit was aware 

that it was not an obligee when it agreed to accept ECU as the 

new general contractor. Daddona App. at 259. Of course, a lender 

benefits indirectly by the existence of a performance or payment 

bond in favor of the owner and subcontractors. However, because 

of the Cohen family indemnity, it is clear that Green Hill, 

controlled by Cohen, would have been reluctant to exercise its 

rights under the bonds. However, the indictment in this case does 

not charge the existence of this indemnity as an act of fraud, 

nor did Summit insist in April of 1988, when negotiating the 

foreclosure settlement, that Green Hill exercise its rights under 

the bonds. The record is clear that Summit feared a protracted 

foreclosure battle and wanted a quick settlement to take control 

of the project. 

 It is equally clear that Green Hill's assignment and escrow 

of the bonds was limited to guaranteeing that existing debts to 

subcontractors were paid by Green Hill.15 There is nothing in the 

 

 

15 The Escrow Agreement specifically provides in the first 

paragraph that the bonds 

shall be held 

 for the benefit of [Summit] until such time as there 

are no mechanics liens filed against the Project 

resulting from events that occurred prior to the date 

hereof . . . provided, however, that in the event no 

Mechanics Liens have been filed against the Project by 

August 10, 1988, then this Escrow Agreement shall 

automatically terminate. 
record to suggest that Summit ever had to pay debts to 

subcontractors that were outstanding at the time it took over the 

property. When Wausau denied Summit's bond claim on October 7, 

1988, there is no indication that Summit thereafter took any 

legal action against Wausau, notwithstanding the significant 

amount at issue. 

 It does not appear from the record before us that Summit was 

harmed in any way by the issuance of the bonds. Nor can we say 

that Summit was harmed by the efforts of Cohen, Daddona, and 

Culnen at various times to deny the existence of the bonds. As 

previously noted Summit has no direct rights under the bonds as a 

named obligee, and its rights as assignee of Green Hill in the 

settlement of April, 1988, were not only sharply limited, but 

also unnecessary since the condition of the escrow was satisfied. 

 A recent decision from the Seventh Circuit offers insight 

into the issue of measuring damages for sentencing purposes in a 

fraud case. The appellant in United States v. Marlatt, 24 F.3d 

1005 (7th Cir. 1994), owned a title company which sold title 

insurance underwritten by Ticor Title Insurance Company 

("Ticor"). Marlatt purchased a resort hotel and converted it 

into time-shared condominium units. With each unit sold, he 

issued a title insurance policy underwritten by Ticor. However, 

while the policies represented clear title to the units, the 

titles were in fact heavily encumbered. When Ticor discovered 

this, it spent $476,000 to clear the titles. Later, in response 

 

Cohen App. at 330a. 
to the threat of lawsuits from the purchasers of the 

condominiums, Ticor spent an additional $565,000 to repurchase 

all of the units sold. 

 Marlatt pled guilty to one count of mail fraud and one count 

of making false statements to the Department of Labor. In 

determining the amount of loss pursuant to U.S.S.G. § 2F1.1(b), 

the district court included both the money spent clearing the 

title and the money spent repurchasing the units, presumably 

concluding that both were elements of the loss caused by the 

fraud. The Seventh Circuit vacated the sentence, even though it 

conceded that the expense of repurchasing the units might be 

considered as having been caused by the appellant's fraud, in the 

sense of "but for" causation: 

 Even if it had been, it was not chargeable to the 

defendant under section 2F1.1 of the guidelines. 

Application Note 7(b) distinguishes between loss on the 

one hand and consequential and incidental damages on 

the other and makes it clear that with irrelevant 

exceptions the latter two items are not to be counted 

in computing the loss for purposes of sentencing under 

this guideline. The reason for that distinction is no 

doubt to prevent the sentencing hearing from turning 

into a tort or contract suit. The distinction is 

nicely illustrated by this case. The defendant 

extracted from Ticor by fraud a bunch of insurance 

policies on which Ticor was required to make good to 

the tune of $476,000. In the wake of the loss Ticor 

incurred other expenses, which were consequences, 

perhaps even foreseeable consequences, of the fraud, 

but were not the thing actually taken from Ticor. . . . 

Id. at 1007-08 (citations omitted). 

 Other circuits have likewise drawn a distinction between 

losses that were directly caused by the fraud and "consequential 
and incidental damages." See, e.g., United States v. Newman, 6 

F.3d 623, 630 (9th Cir. 1993)("[The measure of loss] does not 

include consequential losses. If the Sentencing Commission had 

intended to include consequential losses, it would have included 

them in the definition of loss."); United States v. Wilson, 993 

F.2d 214, 217 (11th Cir. 1993)("The phrase 'property taken, 

damaged or destroyed' does not allow for inclusion of incidental 

or consequential injury, and it is error to rely on evidence of 

such injury in calculating loss when the value of the property 

may be ascertained."), citing United States v. Thomas, 973 F.2d 

1152, 1159 & n.9 (5th Cir. 1992); cf. United States v. Stanley, 

12 F.3d 17, 20-21 (2d Cir. 1993). 

 While it may be that Summit's excess cost to complete the 

project is in some sense a consequence, at least in part, of its 

involvement with Cohen and Daddona, this loss is "not the thing 

actually taken" from Summit as a result of their fraudulent 

activities. 

 We do not mean to suggest that no financial losses were 

incurred by the fraudulent activities of the appellants. Wausau 

has suffered actual harm in the form of legal expenses, and 

potential harm in the form of possible claims against the bond. 

Some of the subcontractors and materialmen who were covered by 

the payment bond may also have suffered losses, although only a 

few claims have surfaced and one of the largest has been recently 

rejected by the Middle District of Pennsylvania. 

 Whatever losses Summit or others may have suffered from 

appellant's fraud, Summit has not demonstrated any losses which 
can fairly be measured by its cost to complete the project, and 

it was therefore error for the district court to incorporate 

Tandy's calculations into the U.S.S.G. § 2F1.1 determination of 

the loss caused by the fraud. The sentences will be vacated, and 

the matter remanded to the district court for resentencing.