UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

v. No. 96-4843

JAMES RAY STUBBS, JR.,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of North Carolina, at Greenville.

Malcolm J. Howard, District Judge.

(CR-95-63-H)

Argued: May 9, 1997

Decided: June 23, 1997

Before RUSSELL and WILLIAMS, Circuit Judges, and

MICHAEL, Senior United States District Judge for the

Western District of Virginia, sitting by designation.

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Vacated and remanded for sentencing by unpublished per curiam

opinion.

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COUNSEL

ARGUED: David J. Cortes, Assistant United States Attorney,

Raleigh, North Carolina, for Appellant. Bobby Grey Deaver, Fayetteville, North Carolina, for Appellee. ON BRIEF: Janice McKenzie

Cole, United States Attorney, Raleigh, North Carolina, for Appellant.

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Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

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OPINION

PER CURIAM:

James Ray Stubbs, Jr., pleaded guilty to one count of mail fraud,

see 18 U.S.C.A. § 1341 (West Supp. 1997), in connection with his

fraudulent marketing of automobile warranty policies. The Government appeals Stubbs's sentence, arguing that the district court

improperly granted a significant downward departure. We agree that

the district court abused its discretion in concluding that the circumstances of this case took it out of the heartland of the applicable

guideline. Accordingly, we vacate Stubbs's sentence and remand for

resentencing.

I.

In March 1985, Stubbs founded Automotive Guaranty Corporation

(AGC), a North Carolina corporation that marketed and serviced used

car warranties through various used car dealerships throughout the

country. Stubbs was president and chief executive officer of AGC

until November 1991, when he sold the corporation to Royal Underwriters, Inc., a shell corporation whose only shareholder was Richard

West, AGC's former Vice-President of Sales. AGC marketed service

warranties, in which AGC promised to reimburse a warranty holder

for contractually defined breakdowns, and marketed product warranties, in which AGC sold products with the promise that if the product

failed, AGC would reimburse the claimant for any necessary repairs.

Stubbs managed and controlled the marketing of these warranties and

the payment of claims.

During the late 1980s, AGC began experiencing financial difficulties. By March 1990, AGC was deeply in debt with liabilities exceeding assets by approximately $1.8 million. AGC was unable to pay all

its legitimate claims and a multitude of acknowledged claims went

unpaid. Stubbs nevertheless continued to market warranties. During

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these financially difficult times, Stubbs diverted at least $160,000 in

corporate funds to his own use. He also maintained at least ten bank

accounts so that he could manipulate and inflate the funds in the

accounts to conceal AGC's true financial status. The parties agree that

when Stubbs sold AGC in November 1991, AGC warranty holders

had suffered losses between $500,000 to $800,000 on unpaid claims.1

In addition, many other victims were subjected to"slow pays," while

others bought the warranties under the false pretense that the policy

would pay if they made a claim.

The North Carolina Attorney General, after receiving numerous

complaints from AGC customers, filed suit to close the business and

referred the case to the Federal Bureau of Investigation. The federal

investigation resulted in Stubbs's indictment on October 18, 1995, for

conspiracy to commit wire fraud (count 1), mail fraud (counts 2-13),

and wire fraud (counts 14-23). A superseding indictment was filed on

December 19, 1995, which added charges of making false statements

upon a loan application (counts 24-26). On July 31, 1996, pursuant

to a plea agreement, Stubbs pleaded guilty to one count of mail fraud.

All remaining charges were dismissed.

The district court sentenced Stubbs pursuant to§ 2F1.1 of the Sentencing Guidelines, which applies to violations of 18 U.S.C.A. § 1341

(West Supp. 1997). See U.S. Sentencing Guidelines Manual § 2F1.1

(Nov. 1995). Section 2F1.1 prescribes a base offense level of 6. The

district court increased the offense level by ten because the loss

exceeded $500,000, but did not exceed $800,000, see U.S.S.G.

§ 2F1.1(b)(1)(K), and increased the offense level by two for more

than minimal planning, see U.S.S.G. § 2F1.1(b)(2)(A). Stubbs

received a three-level downward adjustment, however, for acceptance

of responsibility, see U.S.S.G. § 3E1.1, for a total offense level of 15.

With the exception of a 1983 driving-under-the-influence conviction,

Stubbs had no prior criminal record, resulting in a criminal history

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1 AGC, though arguably an "insurance company" under North Carolina

law, see N.C. Gen. Stat. § 58-1-10 (1994), was subject to a special

exemption for automobile service contracts that allowed it to operate

without maintaining "reserves" sufficient to pay claims, see N.C. Gen.

Stat. § 58-1-15(b) (1994).

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category of I. These calculations produced a sentencing range of 18-

24 months imprisonment.

The district court, however, determined that the circumstances of

this case took it out of the applicable guideline's heartland and warranted a downward departure pursuant to U.S.S.G.§ 5K2.0. As a

result, the district court granted Stubbs a six-level downward departure and sentenced him to three years probation, with conditions that

included confinement for 4 consecutive weekends and payment of a

$10,000 fine. The Government appeals the district court's significant

downward departure from the sentencing range imposed by the

Guidelines.

II.

Current law governing departure from the sentencing guidelines

was established by the Supreme Court in Koon v. United States, 116

S. Ct. 2035 (1996), and applied by this Court in United States v.

Brock, 108 F.3d 31 (4th Cir. 1997). In Brock , we delineated a framework for determining when a factor identified by the district court

may support a departure. Having identified the factors that may

potentially support a departure, the district court must determine

whether the factor is a forbidden, encouraged, discouraged, or unmentioned basis for departure. See Brock, 108 F.3d at 34. If the factor is

encouraged, and is not taken into account by the applicable guideline,

the district court may exercise its discretion and depart. However, if

the factor is encouraged, but the applicable guideline has already adequately taken the factor into account, or if the factor is discouraged,

"then departure is permissible `only if the factor is present to an

exceptional degree or in some other way makes the case different

from the ordinary case where the factor is present.'" Id. at 34-35

(quoting Koon, 116 S. Ct. at 2045). If a factor is neither encouraged

nor discouraged, but is listed by the Commission as one appropriately

considered for departure, departure is permissible"only if the factor

is present to such an exceptional or extraordinary degree that it

removes the case from the heartland of situations to which the guidelines was fashioned to apply." Id. at 35. If a factor is unmentioned,

the district court may depart only if it determines that the structure

and theory of both the relevant individual guideline and the Guidelines as a whole take the case from the heartland of the applicable

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guideline. See id. We review the district court's decision to depart for

abuse of discretion. See Koon, 116 S. Ct. at 2048.

The district court based its downward departure on the following

grounds: (1) that more than five years had passed between the date

of the offense and the scheduled date of the trial; (2) that approximately five years prior to the date of sentencing, an attorney told

Stubbs that he could anticipate being indicted, thereby causing Stubbs

extraordinary emotional distress that affected his family and business

life during the ensuing years; (3) that in May 1987 Stubbs employed

private counsel to lobby the North Carolina legislature to require

automobile warranty companies such as AGC to maintain reserves;

and (4) that Stubbs had no prior criminal record. We must determine

whether the factors relied upon by the district court take this case out

of the heartland of U.S.S.G. § 2F1.1, thereby justifying a downward

departure. We conclude that none of the cited factors are permissible

bases for departure. As a result, we vacate the sentence and remand

for resentencing.

The first factor identified by the district court, that five years

passed between the date of the offense and the date of trial, is an

unmentioned factor. We conclude that this factor does not warrant a

downward departure because, considering the structure and theory of

§ 2F1.1 and the Guidelines as a whole, this circumstance is not sufficient to remove the case from of the heartland of the guideline.

Rather, as the Government pointed out at sentencing, complex interstate fraud conspiracies often take years to investigate before coming

to fruition. Furthermore, Stubbs presented no evidence that the Government intentionally delayed pursuit of his conviction. Accordingly,

we conclude that the district court erred when it considered the fiveyear time lapse a factor that justified a downward departure.

The Commission expressly considered the second and third factors

cited by the district court, Stubbs's emotional distress and prior good

works, and instructed that they are ordinarily not relevant in determining whether a sentence should be outside the applicable guideline

range. Therefore, these factors are discouraged. See U.S.S.G. § 5H1.3,

p.s. ("Mental and emotional conditions are not ordinarily relevant in

determining whether a sentence should be outside the applicable

guideline range."); U.S.S.G. § 5H1.11, p.s. (civic activities,

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employment-related contributions, and similar prior good works are

not ordinarily relevant in determining whether a sentence should be

outside the applicable guideline range). Nothing in the record indicates that either of these factors was present to such an exceptional

degree that a downward departure is warranted.

And finally, the district court's fourth factor, that Stubbs had no

prior convictions, is a forbidden factor that cannot provide a basis for

departure. See U.S.S.G. § 4A1.3, p.s. ("The lower limit of the range

for Criminal History Category I is set for a first offender with the

lowest risk of recidivism. Therefore, a departure below the lower limit

of the guideline range for Criminal History Category I on the basis

of the adequacy of criminal history cannot be appropriate."); see also

Koon, 116 S. Ct. at 2052-53. Therefore, none of the factors underlying the district court's decision warranted a downward departure from

the applicable guideline range.

On appeal, Stubbs raises four additional factors that he argues justify the district court's downward departure: North Carolina's failure

to adequately regulate the automobile warranty business while Stubbs

was president of AGC, outside economic pressures on the business,

Stubbs's excellent employment history and family ties, and the

speculativeness of the amount of losses.2 Stubbs raised the first three

factors to the district court at sentencing, and the district court properly rejected these arguments as bases for a downward departure. See

U.S.S.G. § 5K2.12, p.s. ("economic pressures upon a trade or business do not warrant a decrease in sentence"); U.S.S.G. § 5H1.5, p.s.

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2 Stubbs cites United States v. Marcum, 16 F.3d 599 (4th Cir. 1994),

in support of his argument that North Carolina's laxity in failing to pass

legislation requiring companies to maintain reserves encouraged his

crime. Stubbs's reliance on Marcum is misplaced, however. In Marcum,

we did not affirm the district court's six-level downward departure based

upon its finding "that the guidelines had not taken into consideration that

West Virginia had failed to diligently regulate bingo." Rather, we simply

noted that the district court had granted Marcum a downward departure

on that basis and that the Government had failed to challenge it on

appeal. Marcum, 16 F.3d 599, 604 n.5. Stubbs's argument, therefore, is

not a recognized basis for departure. At best, an"unmentioned" factor

that, under the circumstances of this case, does not warrant a departure.

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(employment record is not ordinarily relevant in determining sentence); U.S.S.G. § 5H1.6, p.s. (family and community ties are not

ordinarily relevant in determining sentence). As to the alleged uncertainty of the amount of losses, the Commission acknowledges that a

downward departure may be warranted if the determined losses "overstate the seriousness of the offense." U.S.S.G.§ 2F1.1, comment.

(n.10). In this case, however, Stubbs agreed to the loss range of

$500,000 to $800,000. Moreover, these amounts fail to take into

account indirect losses incurred by AGC customers who were subjected to "slow pays" and who invested in worthless warranties. In

other words, the loss range accepted by the district court likely underestimated, not overestimated, the seriousness of Stubbs's offense.

III.

Because none of the bases for departure set forth by Stubbs take

this case out of the heartland of the applicable guideline, we vacate

Stubbs's sentence and remand for resentencing within the applicable

guideline range of 18-24 months.

VACATED AND REMANDED FOR RESENTENCING

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