IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

Nos. 97-41055 & 97-41152

 

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

versus

URI SHEINBAUM,

Defendant-Appellant.

************************************************************

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

versus

MARC A. BIRNBAUM,

Defendant-Appellant.

 

Appeals from the United States District Court

For the Eastern District of Texas

 

February 27, 1998

Before GARWOOD, JOLLY, and HIGGINBOTHAM, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

Defendants Uri Sheinbaum and Marc Birnbaum each pled guilty to

one count of conspiracy to defraud the government and to commit

bankruptcy fraud. They now appeal both the sentence and the

restitution order that the district court imposed upon them. We

affirm.

I.
2

Birnbaum and Sheinbaum were principals in various entities

that were partners in a limited partnership known as 5555

Apartments, Ltd. In 1984, the partnership obtained a $10.2 million

loan from Alice Savings & Loan Association to purchase an apartment

complex in Dallas, Texas, called the 5555 Apartments. The terms of

the Promissory Note negotiated between the parties provided for a

deferred downpayment of $1.7 million, with the first installment of

$237,500 due in October 1985 and the remaining principal and

accrued interest due in October 1994. Birnbaum and Sheinbaum were

not personally liable under the Note. Securing the Note instead

were a deed of trust, a security agreement, and an assignment of

rents. The security language in the Note read as follows:

THIS DEED OF TRUST, SECURITY AGREEMENT AND ASSIGNMENT OF RENTS

is made . . . FOR THE PURPOSE of securing payment of the

indebtedness . . . .

TO SECURE the full and timely payment of the indebtedness . .

. Grantor has ASSIGNED . . . (f) all revenues, income, rents,

issues and profits of any of the Land, Improvements, personal

property or Leases (collectively, the “Rents”) . . . .

V. Assignment of Rents: Grantor does hereby absolutely and

unconditionally assign, transfer and convey to

Beneficiary, as well as to Trustee on Beneficiary’s

behalf, all Rents under the following provisions:

1. Grantor reserves the right, unless and until an

Event of Default occurs under this Deed of Trust,

to collect such rents as a trustee for the benefit

of Beneficiary, and Grantor shall apply the Rents

so collected in the order set forth in paragraph 7

of Section III hereof.

2. Upon an Event of Default, Beneficiary, or Trustee

on Beneficiary’s behalf, may at any time and

without notice, either in person, by agent or by

receiver to be appointed by a court, enter and take

possession of the Property or any part thereof and

in its own name sue for or otherwise collect the

Rents.

The partnership made the first $237,500 installment on the deferred

downpayment in November 1985.
3

In October 1987, the parties to the Note renegotiated its

terms and executed a written Modification Agreement. The Agreement

provided that all rents and income from the apartment complex were

to be placed into a separate account to be used to pay off expenses

and indebtedness. It stated: 

Grantor shall maintain a special account . . . into which all

income derived from all sources in connection with the

operation of the Property . . . shall be deposited by Grantor,

and against which checks shall be drawn only for the payment

of the sums becoming due and payable under the terms of the

Note or this Deed of Trust and for the payment of the

necessary and reasonable expenses incurred by Grantor in

connection with the operation of the Property, with such

latter payments being made directly to the persons or entities

providing the goods or services for which such expenses are

incurred.

By 1994, the ownership of the Note had passed to Banker’s

Trust Company of California. In September 1994, Birnbaum and

Sheinbaum decided to default on their debt payments while retaining

the income from the apartments for themselves. By withholding the

apartments’ income, they hoped to force Banker’s Trust to

renegotiate the terms of the Note. To aid them in this scheme, the

defendants obtained the assistance of Gail Cooper, a financial

consultant who had also helped the defendants to renegotiate the

Note in 1987.

On January 30, 1995, Banker’s Trust sued Sheinbaum and

Birnbaum in Texas state court, seeking an accounting of all rents

collected since default. On February 27, 1995, before an

accounting could be completed, Birnbaum filed a petition in

Bankruptcy Court for the Northern District of Texas, seeking relief

for 5555 Apartments, Ltd. under Chapter 11.
4

As part of the bankruptcy proceedings, Birnbaum and Sheinbaum

were required to disclose all payments made to “insiders” of 5555

Apartments, Ltd. in the year preceding the bankruptcy filing. On

March 22, 1995, the defendants filed a Statement of Financial

Affairs in the bankruptcy court. The Statement revealed that

$498,995 had been paid to insiders in the year prior to the

bankruptcy petition, $134,000 of which had gone to Birnbaum and

Lawrence Lambert, a business partner. The Statement asserted that

the other $364,995 had been paid to an entity controlled by

Sheinbaum as repayment for a debt owed to him by 5555 Apartments,

Ltd. The Statement claimed that this debt had arisen from

Sheinbaum’s personal contribution towards the November 1985 payment

of the first $237,500 installment on the Note. In fact,

Sheinbaum’s debt had long since been repaid. Sheinbaum and

Birnbaum later repeated this false statement in an Amended

Statement of Financial Affairs, under oath at a creditors’ meeting,

and in a deposition.

On June 21, 1996, the government charged Sheinbaum, Birnbaum,

Cooper, and Lambert in a four-count indictment. In February 1997,

Sheinbaum and Birnbaum pled guilty to count one of the indictment,

charging them with conspiracy to defraud the government and to

commit bankruptcy fraud. The district court sentenced them on

August 25, 1997.

At sentencing, the government contended that Sheinbaum and

Birnbaum’s scheme had caused a loss of $498,995. In support of

this position, it produced an affidavit from Victoria Tutterrow,
5

who had worked on the 5555 Apartments, Ltd. bankruptcy as a

representative for the United States Trustee’s Office for the

United States Bankruptcy Court for the Northern District of Texas.

Tutterrow testified that the defendants deceived her into believing

that the payments made to them out of the apartments’ income within

the year preceding bankruptcy were for legitimate pre-existing

business debts. Tutterrow stated that had she known that those

debts had already been repaid, she would have sought the

appointment of an independent trustee, who would have sued to

recover the apartment’s income appropriated by the defendants.

The defendants, on the other hand, disputed the government’s

loss calculations. Relying on the testimony of John Flowers, a

former United States Bankruptcy judge, Birnbaum and Sheinbaum

argued that they were legally entitled to take the income from the

apartment complex. Furthermore, Phillip Palmer, a bankruptcy

attorney, concluded in an affidavit that the false statements by

the defendants could not have affected Tutterrow’s decision to

appoint an independent trustee and thus did not contribute to any

loss, an opinion shared by Flowers. Finally, the defendants

contended that they should owe little or no restitution, partly

because they caused no loss and partly because they had reached a

civil settlement with the victim prior to sentencing.

The district court sided with the government on all these

issues and fixed the loss from the defendants’ scheme at $498,995.

Under U.S.S.G. § 2F1.1(b)(1)(J), a loss of between $300,000 and

$500,000 mandates a nine-level increase in the offense level for a
6

fraud. After adding these nine levels and then subtracting three

levels for acceptance of responsibility, the district court arrived

at a total offense level of fourteen, yielding a sentence range of

fifteen to twenty-one months of incarceration. However, because

the defendants provided the government with substantial assistance

in prosecuting others, the district court granted the government’s

motion for a downward departure, settling on a sentence of seven

months for each defendant. In addition, it fined Birnbaum $20,000

and ordered both defendants to pay $498,995 in restitution to their

victim, Banker’s Trust.

II.

The defendants’ first argument on appeal is that the district

court erred in determining the amount of loss for sentencing

purposes. They contend that they in fact caused no loss, as they

were legally entitled to keep the income from the apartment complex

for themselves and their actions in no way altered the course of

the bankruptcy proceedings.

The defendants advance a complicated state-law argument, the

premise of which is that the Note and the Modification Agreement

entitled them to control of the income from the apartments. They

entice the government into engaging them on this front. Yet

whether or not the Note and the Modification Agreement created a

“pledge” or an “absolute assignment” of rents is irrelevant in

determining the amount of loss caused by the defendants’ scheme. 

See generally Taylor v. Brennan, 621 S.W.2d 592, 593 (Tex. 1981)

(discussing Texas law on assignment-of-rent clauses).
7

Under the Bankruptcy Code, the bankruptcy trustee could avoid

any transfer from the bankrupt estate made to insiders within the

year preceding the filing of the bankruptcy petition. See 11

U.S.C. § 547(b)(4)(B). At sentencing, the defendants admitted that

as insiders they received $498,995 from the apartments in that oneyear period. Under the Code, the only relevant defense available

to Birnbaum and Sheinbaum was that these monies were received “in

the ordinary course of business.” See 11 U.S.C. § 547(c)(2).

The defendants’ fraud operated by deceiving Tutterrow into

believing that they had received the income in the ordinary course

of business. Sheinbaum and Birnbaum lied to the bankruptcy court,

informing it that $364,995 of the monies transferred to them were

in satisfaction of a legitimate business debt. In fact, that debt

had long since been repaid. As Tutterrow testified, had she known

that there was no legitimate business justification for receiving

that sum, she would have sought the appointment of an independent

trustee, who could have sued to recover the entire $498,995 paid to

insiders. Instead, she permitted the defendants to retain trustee

powers as debtors-in-possession, thereby allowing them to abscond

with the money. Thus, the defendants’ fraud on the bankruptcy

court directly led to a loss of $498,995.

The defendants attempt to argue that Texas state law entitled

them to receipt of the income from the apartments, despite the

Modification Agreement. This fact is simply irrelevant, however.

As the defendants freely admitted in their factual resumes

accompanying their guilty pleas, they knowingly withheld the
8

apartments’ income from the noteholder in an attempt to force the

noteholder to renegotiate the terms of the loan. By no stretch of

the imagination, therefore, can the payments to the defendants be

considered to have been made “in the ordinary course of business.”

Thus, whether or not the defendants had the right under state law

to receive the income initially, under the Bankruptcy Code they

could be forced to disgorge those monies unless they were entitled

to the ordinary-course-of-business defense. Their fraud deceived

Tutterrow into believing that they were so entitled. As Tutterrow

stated in her affidavit, had she had any indication that the

defendants were attempting to defraud the noteholder, she

immediately would have sought the appointment of an independent

trustee. Moreover, the defendants further conceded that they knew

that under the Modification Agreement the income from the apartment

complex could not be paid to them directly before the expenses and

indebtedness on the apartments were satisfied. Defendants move too

quickly when they admit as much during their plea, but then argue

to us on appeal that somehow they were entitled to retain the

apartments’ income for themselves.

The defendants attempt to escape from the consequences of

their crime by arguing that their actions caused no loss, as

Tutterrow had sufficient independent authority to avoid the

transfers to them, regardless of their status as ordinary-courseof-business payments. They suggest that Tutterrow could always

have employed the fraudulent conveyance provisions of 11 U.S.C. §

548(b) to avoid the transfers to the defendants. Thus, they
9

contend, their false statements were of no consequence, because

they did not foreclose all of Tutterrow’s options. Yet Tutterrow

in her affidavit never expressed a willingness to exercise her §

548(b) powers, perhaps because the defendants’ deceptions led her

to believe that they would be entitled to a good faith defense

under 11 U.S.C. § 548(c). Regardless, as Tutterrow stated, an

indication of fraud is what would have led her to seek the

appointment of an independent trustee to avoid any preferential

transfers. Because the defendants masked their fraud through their

false statements, their crime altered Tutterrow’s actions and

directly caused the loss to the noteholder.

Finally, Sheinbaum and Birnbaum contend that even if they lied

when they claimed they took the apartments’ income to satisfy an

unpaid loan, their falsehood caused no loss because 5555

Apartments, Ltd. also owed Sheinbaum $500,000 on a separate debt,

which was never satisfied. Yet as the government points out, this

$500,000 debt arose out of a judgment in favor of an investment

banking firm, F.M. Roberts, which Sheinbaum and Birnbaum had

employed to try to find investors to buy their ownership interests

in 5555 Apartments, Ltd. Tutterrow believed that these syndication

expenses were incurred for the personal financial benefit of the

defendants, and thus did not arise “in the ordinary course of

business.” See 11 U.S.C. § 547(c)(2). According to Tutterrow’s

affidavit, had she been told that the defendants had taken income

from the apartments to pay off this particular $500,000 obligation,

she would have sought the appointment of an independent trustee.
10

We conclude that the district court erred neither in

determining that Birnbaum and Sheinbaum caused a loss to the

noteholder nor in calculating the magnitude of that loss.

Accordingly, in sentencing the defendants, the court used the

proper total offense level as a basis for its downward departure.

III.

The defendants also challenge the $498,995 of restitution

ordered by the district court, repeating the arguments we reject

above that they never caused any losses. In addition, the

defendants contend that they should not owe any restitution to the

victim, Banker’s Trust, because prior to their convictions they

entered into a civil settlement with Banker’s Trust. Pursuant to

the settlement, Banker’s Trust agreed to release Sheinbaum and

Birnbaum from all civil liability. Because Banker’s Trust has

already been recompensed, argue the defendants, they should not

also be required to pay restitution pursuant to the Victim and

Witness Protection Act, 18 U.S.C. §§ 3663-64 (Supp. 1997).

In support of their position, the defendants rely upon United

States v. Coleman, 997 F.2d 1101 (5th Cir. 1993), cert. denied, 510

U.S. 1077 (1994). In Coleman, we held that a district court cannot

order a defendant to pay restitution to a defrauded government

entity when that entity had previously entered into a civil

settlement and release with the defendant. The Coleman court,

however, expressly declined to reach “the question of the effect of

a full release in a civil suit not involving the government on a

subsequent criminal prosecution.” Id. at 1107 n.4. The defendants
11

urge us to extend the Coleman rule to cover all civil settlements

and releases. See also United States v. Bruchey, 810 F.2d 456, 460

(4th Cir. 1987) (implying that a voluntarily executed agreement

between a defendant and his victim would render a restitution order

unnecessary). But see United States v. Cloud, 872 F.2d 846, 853-54

(9th Cir.) (rejecting the Bruchey holding), cert. denied, 493 U.S.

1002 (1989).

The resolution of this question turns on our characterization

of the nature of restitution under the VWPA. If restitution is

purely a penal device, then a civil release from liability should

have no effect on a restitution order, as a court must consider

public, not private, interests in fixing its sentence. If, on the

other hand, restitution is inherently a compensatory measure, then

civil settlements should prohibit restitution awards, as the victim

would already have been compensated to its satisfaction. See

Bonnie Arnett Von Roeder, Note, “The Right to a Jury Trial to

Determine Restitution Under the Victim and Witness Protection Act

of 1982,” 63 Tex. L. Rev.671, 677-79 (1984) (describing scholarly

debate over the nature of restitution).

There are strong arguments to be made that the goal of the

VWPA is compensatory. See id. at 679-84 (analyzing text and

legislative history of VWPA and concluding that it was intended

primarily to be a compensatory, rather than punitive, statute).

Indeed, the very title of the VWPA -- “The Victim and Witness

Protection Act” -- might lead one to believe that the point behind

the VWPA is compensation, not retribution or the like.
12

Nevertheless, the overwhelming trend in the caselaw is to read the

VWPA as a penal provision. The catalyst for this trend was the

Supreme Court’s decision in Kelly v. Robinson, 479 U.S. 55 (1986).

In Kelly, the Court was asked to consider the nature of restitution

ordered under a Connecticut statute. In concluding that the

Connecticut restitution statute was penal in character, the Court

commented broadly about the purpose of restitution in the criminal

law:

The criminal justice system is not operated primarily for the

benefit of victims, but for the benefit of society as a whole.

Thus, it is concerned not only with punishing the offender,

but also with rehabilitating him. Although restitution does

resemble a judgment “for the benefit of” the victim, the

context in which it is imposed undermines that conclusion.

The victim has no control over the amount of restitution

awarded or over the decision to award restitution. Moreover,

the decision to impose restitution generally does not turn on

the victim’s injury, but on the penal goals of the State and

the situation of the defendant. As the Bankruptcy Judge who

decided this case noted in Pellegrino: “Unlike an obligation

which arises out of a contractual, statutory or common law

duty, here the obligation is rooted in the traditional

responsibility of a state to protect its citizens by enforcing

its criminal statutes and to rehabilitate an offender by

imposing a criminal sanction intended for that purpose.”

Id. at 52 (citations omitted).

Technically, the Court’s comments in Kelly were aimed only at

a state restitutionary system, yet in a footnote the Court hinted

that they might apply to the VWPA as well. See id. at 53 n.14; see

also United States v. Caddell, 830 F.2d 36, 39 (5th Cir. 1987)

(concluding Kelly generally applies to both state and federal

restitution orders). Nearly every circuit that has later

confronted the question has taken Kelly to mean that the VWPA is

penal, not compensatory, in nature. See United States v. Savoie,
13

985 F.2d 612, 619 (1st Cir. 1993); United States v. Vetter, 895

F.2d 456, 459 (8th Cir. 1990); United States v. Hairston, 888 F.2d

1349, 1355 (11th Cir. 1989); Cloud, 872 F.2d at 854. But see

Bruchey, 810 F.2d at 460-61 (confusingly concluding that VWPA is

fundamentally penal in nature but that nevertheless a civil

settlement can absolve a defendant of the need to pay restitution).

Our Circuit, without citing Kelly, has held that the effect of a

civil settlement on a criminal restitution order “depends upon what

payment was made in the settlement, whether the claims settled

involved the same acts of the defendants as those that are

predicated on their criminal convictions, and whether the payment

satisfies the penal purposes the district court sought to impose.”

United States v. Rico Indus., 854 F.2d 710, 715 (5th Cir.)

(emphasis added), cert. denied, 489 U.S. 1078 (1989).

Rico Indus. and Kelly lead us to conclude that district courts

possess the discretion to impose restitution orders in spite of

civil settlements. That the victim has agreed in a civil

proceeding that it has been compensated fully does not prevent a

district court from pursuing the rehabilitative and retributive

functions of the criminal law served by restitution. Cf. Coleman,

997 F.2d at 1107 (recognizing that “‘the law will not tolerate

privately negotiated end runs around the criminal justice system’

in the use of the VWPA”) (quoting Savoie, 985 F.2d at 618).

Coleman does not command a different result. In Coleman, a

government agency (working in close connection with the U.S.

Attorney’s Office) negotiated a civil settlement with the
14

defendant. We reasoned that in releasing the defendant from future

civil liability, the government was essentially estopped from

seeking further compensation in criminal litigation from the

defendant. No such estoppel principle exists in this case,

however, as the government here sought a restitutionary order in

favor of a third party, Banker’s Trust. Indeed, the Coleman court

stressed that its holding was not meant to apply to situations like

the one before us. See Coleman, 997 F.2d at 1107 & n.4. The

defendants also argue that because the RTC was a named beneficiary

of their civil settlement with Banker’s Trust, the Coleman rule

should apply. Yet as Coleman stressed, it was the fact that the

government negotiated the settlement with the defendants that

created an estoppel issue. Here, there is no record evidence

indicating that the RTC played a substantial role in settling the

civil matter.

IV.

Of course, to avoid double-counting, a district court must

reduce the size of its restitution order by any amount received by

the victim as part of a civil settlement. See 18 U.S.C. §

3664(j)(2) (Supp. 1997); Rico Indus., 854 F.2d at 715 (“If [the

settlement] is based on the same acts, the object of restitution --

to restore the party harmed -- would indicate that [the defendant]

be credited with the amount of the settlement.”). Here, the victim

and the defendants entered into a settlement, whereby Banker’s

Trust agreed to release Birnbaum and Sheinbaum from civil

liability. Yet the record does not reveal what Banker’s Trust
15

obtained in return for this release; the release itself simply

states that it was given for “good and valuable consideration.” We

doubt that Banker’s Trust struck a bargain in which it was to

receive nothing of value in exchange for its release. Yet the

district court ignored the potential value of the release in

fashioning its restitution order. Instead, the court required the

defendants to pay to Banker’s Trust the full $498,995 of loss

caused by their crime.

The government, however, contends that the district court’s

failure to credit the defendants for the value of their civil

settlement does not invalidate the restitution order, as it was the

defendants’ burden to proffer evidence to the court as to the value

of the consideration they gave to the victim in exchange for the

release. We agree.

The federal restitution statute provides:

Any dispute as to the proper amount or type of restitution

shall be resolved by the court by the preponderance of the

evidence. The burden of demonstrating the amount of the loss

sustained by a victim as a result of the offense shall be on

the attorney for the Government. The burden of demonstrating

the financial resources of the defendant and the financial

needs of the defendant’s dependents, shall be on the

defendant. The burden of demonstrating such other matters as

the court deems appropriate shall be upon the party designated

by the court as justice requires.

18 U.S.C. § 3664(e) (Supp. 1997). It might appear to the casual

observer that § 3664(e) places the burden of proof on the

government on all issues relating to loss to the victim. Yet the

burden section of the statute only requires the government to

establish “the amount of loss sustained by [the] victim,” United

States v. Razo-Leora, 961 F.2d 1140, 1146 (5th Cir. 1992); it does
16

not speak to any compensation later received by the victim for that

loss. Logically, the burden of proving an offset should lie with

the defendant. The statute allocates the various burdens of proof

among the parties who are best able to satisfy those burdens and

who have the strongest incentive to litigate the particular issues

involved. Having investigated the crime and wishing to provide as

strong a deterrent as possible, the government is best suited to

persuade the court as to the amount of loss caused by the offense.

On the other hand, the defendant is better positioned to proffer

evidence about his own financial resources and needs, and his

desire to lower his restitution order gives him the incentive to

litigate such mitigating circumstances. In a similar vein, the

defendant should know the value of any compensation he has already

provided to the victim in civil proceedings, so the burden should

fall on him to argue for a reduction in his restitution order by

that amount. Cf. United States v. Flanagan, 80 F.3d 143, 146 (5th

Cir. 1996) (“[A]s a general rule, the party seeking the adjustment

in the sentence is the party that has the burden of proving the

facts to support the adjustment.”).

Therefore, we conclude that “justice requires” that the burden

of establishing any offset to a restitution order should fall on

the defendant. See 18 U.S.C. § 3664(e) (Supp. 1997) (“The burden

of demonstrating such other matters as the court deems appropriate

shall be upon the party designated by the court as justice

requires.”). Although we doubt that in releasing the defendants

from civil liability Banker’s Trust acted in the spirit of
17

altruism, the defendants failed to present any evidence to the

district court as to the value of the consideration they provided

in exchange for the release. We will not simply assume that the

monetary value of the consideration and the bundle of rights

conferred upon the victim by the settlement equaled the monetary

value of the loss sustained by the victim. If that were the case,

then § 3664 would absolutely bar restitution whenever a civil

settlement was reached between the defendant and the victim, rather

than providing an offset for the value of the settlement.

Accordingly, having failed to present valuation evidence to the

district court, the defendants waived their offset claim. The

district court was entitled to order both of them to pay as

restitution to the victim the entire amount of loss caused by their

scheme. See United States v. Chaney, 964 F.2d 437, 452-54 (5th

Cir. 1992) (upholding district court’s authority to impose joint

and several liability for restitution).

V.

We affirm both the sentence and the restitution order imposed

by the district court.

AFFIRMED.