In the

United States Court of Appeals

For the Seventh Circuit

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No. 02-3166

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

JOSEPH D. CASTELLANO,

Defendant-Appellant.

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Appeal from the United States District Court

for the Southern District of Illinois.

No. 3:01CR30073-001 DRH—David R. Herndon, Judge.

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ARGUED OCTOBER 31, 2003—DECIDED NOVEMBER 17, 2003

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Before POSNER, EASTERBROOK, and EVANS, Circuit

Judges.

EASTERBROOK, Circuit Judge. Joseph Castellano and his

son Monte managed The Joseph Daniel Company, which

built single-family homes. Customers financed this work

with bridge loans from Old Exchange National Bank of

Okawville, Illinois. To attract business, the firm offered low

prices—too low, it turns out, to cover the cost of construction. Losing money on every sale while trying to make it up

on volume is a formula for disaster—and an invitation to

fraud. The Bank agreed to disburse the construction loans

in thirds: the first when the buyer signed the contract, the

second when the buyer certified that the house had been

made weather-tight, and the third when the buyer certified
2 No. 02-3166

that construction had been finished to his satisfaction. The

Castellanos persuaded their customers to allow them to

certify these milestones on their behalf. Joseph and Monte

began to make these certifications prematurely, using new

customers’ funds to finish older projects. Insolvency was

inevitable. By the time even accelerated draws could no

longer pay the bills, the business was about $2 million

under water—leaving buyers with loan obligations but no

houses, the Bank with little security for its advances, and

unpaid subcontractors holding liens against unfinished

houses. The Bank paid the subcontractors to complete

houses already under way and told the buyers of houses

that had not been started that they need not repay the

loans. And federal prosecutors charged Joseph, Monte, and

their company with wire fraud, see 18 U.S.C. §1343. All

three defendants pleaded guilty.

Joseph, alone among the three, has appealed, and his

appeal is limited to calculation of his 97-month sentence.

His initial argument is that, because the Bank made the

borrowers whole, the scheme did not inflict any loss for

purposes of the Sentencing Guidelines. As he sees things,

the buyers were the intended victims, and they emerged

unscathed. There are two problems with this contention.

First, the lender was as much a victim as the borrowers; the

Bank contracted for security (the houses in progress) that

it did not get. Second, a collateral source of recovery does

not eliminate but just shifts the loss. If the buyers had

purchased insurance to protect themselves from fraud, their

receipt of indemnity would not have absolved the wrongdoers.

Next comes an argument that the district court should not

have added two levels under U.S.S.G. §3B1.3 for abusing a

position of trust. Castellano contends that he and the firm

engaged in arms’-length commercial dealings with the Bank

and their customers. That is indeed how the dealings began,

but Joseph and Monte persuaded their customers (and the
No. 02-3166 3

Bank) to let them make accurate certifications when

drawing loan proceeds. Having obtained (by contract) the

right to act on behalf of the customers when certifying

construction milestones, the Castellanos had an obligation

to use that power on behalf of these customers. Application

Note 1 to §3B1.3 says that a position of trust is “a position

of public or private trust characterized by professional or

managerial discretion”. That’s a good description of the

authority that the customers conferred on the Castellanos;

and instead of exercising professional discretion to determine when the milestones had been met, they abused the

trust reposed in them. See United States v. Frykholm, 267

F.3d 604, 612-13 (7th Cir. 2001).

A third contention is that the restitution is excessive. To

the extent this rests on a belief that only the borrowers

were injured, and that the Bank’s losses are consequential

damages that may not be included in restitution awards, it

is wrong for the same reason the challenge to the loss

calculation is incorrect. Joseph also contends that about

$26,000 of the restitution award comes from double counting (requiring restitution to both the customer and the

Bank for the same loss), consequential injury—which is not

appropriate in criminal restitution, see United States v.

Behrman, 235 F.3d 1049 (7th Cir. 2000); United States v.

Marlatt, 24 F.3d 1005 (7th Cir. 1994)—or items unrelated

to the crime. Joseph’s brief goes into detail. It observes, for

example, that the district court ordered him to pay $1,850

in restitution to Kim and Sheila Harper, whose home was

completed as promised but who decided after moving in that

they wanted additional features, such as plumbing for a bar

in the dining room. How the cost of features beyond those

called for by the construction contract could be part of

restitution is hard to understand. The prosecutor’s response, contained in a single paragraph, offers no detail and

essentially invites us to scour the record unaided. That is

not the appropriate relation between advocates and the
4 No. 02-3166

judiciary. Joseph’s argument in this respect stands unanswered, and the amounts contested at pages 42-47 of his

brief concerning individual customers must be removed

from the award.

Last, and most significant, is Joseph’s contention that the

district court erred in adding four levels to his offense score

under U.S.S.G. §2F1.1(b)(7)(B) on the ground that the

offense “affected a financial institution and the defendant

derived more than $1,000,000 in gross receipts from the

offense”. (By the parties’ agreement, sentencing was conducted under the 1998 version of the Guidelines Manual.

Since then, the provision has been moved to U.S.S.G.

§2B1.1(b)(12)(A) and the addition has been reduced to two

levels, but Joseph has not sought to take advantage of the

change, for doing so would require application of the whole

2001 manual, including other alterations unfavorable to

him.) These four levels came on top of the 12 levels added,

per the 1998 version of §2F1.1(b) (1)(M), for causing a loss

between $1.5 million and $2.5 million, and account for the

fact that substantial injuries suffered by financial institutions may have reverberations, such as losses to the federal

deposit-insurance funds. Application Note 18 to the 1998

version of §2F1.1 reads:

“The defendant derived more than $1,000,000

in gross receipts from the offense,” as used in subsection (b)(7)(B), generally means that the gross

receipts to the defendant individually, rather than

to all participants, exceeded $1,000,000. “Gross

receipts from the offense” includes all property, real

or personal, tangible or intangible, which is obtained directly or indirectly as a result of such

offense. See 18 U.S.C. § 982(a)(4).

Everything that Joseph Daniel Company obtained from the

Bank as a result of the premature certifications counts as

“gross receipts”; but did Joseph obtain $1 million of receipts
No. 02-3166 5

“individually”? The money entered the corporation’s coffers,

not Joseph’s pocket, and most was distributed to pay the

expenses of construction. Less than $200,000 reached

Joseph as salary or reimbursement of his expenses. None of

the money redounded to his benefit indirectly through the

corporation’s securities—not only because the stock was

worthless, but also because Monte owned all of it. Cf.

United States v. Bennett, 161 F.3d 181 (3d Cir. 1998). What

the district judge said—and what the United States echoes

in its appellate brief—is that all of the corporation’s receipts

must be attributed to Joseph because he founded the

business and was its principal manager. In the judge’s

language: “Monte answered to him. He made the decisions.

He was the business. . . . The business was him.” In other

words, the judge thought, corporate formalities should be

disregarded for closely held firms, or at least for those

whose operations are dominated by one person.

This approach assumes that federal common law determines when the revenues of a corporation are imputed to

a manager or investor. Nothing in the Sentencing Guidelines specifies what it means to receive proceeds “individually,” and the prosecutor does not rely on any state or

federal statute, so the appeal must be to common law. Yet

why should federal common law determine the relation

among a corporation and its managers, employees, or investors? It is unlikely that the United States would contend

that all of the corporation’s receipts count as taxable income

to Joseph, see 26 U.S.C. §61; even closely held corporations,

unless organized under Subchapter S, are treated as

distinct entities that must pay their own taxes, and their

revenues are treated as personal income only to the extent

distributed via salary or dividends. Unless some federal

statute or regulation addresses the subject, the relation

among corporations, managers, and investors is governed

by state corporate law even when the claim rests on federal
6 No. 02-3166

law. See, e.g., Atherton v. FDIC, 519 U.S. 213 (1997). And

when federal law “applies” in the sense that some term in

a federal statute or rule requires interpretation—as the

term “individually” must be construed here— the norm is to

borrow from state corporate or agency law unless override

is essential to achieve federal objectives. See, e.g.,

Clackamas Gastroenterology Associates, P.C. v. Wells, 123

S. Ct. 1673 (2003); Burlington Industries, Inc. v. Ellerth,

524 U.S. 742 (1998). Thus a closely held corporation may be

an “enterprise” for purposes of RICO, and a manager who

pulls its strings through a pattern of racketeering may be

convicted under that statute. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S 158 (2001). A corporation with

sufficient substance to serve as a RICO “enterprise” also has

sufficient substance to hold receipts for purposes of the

Guidelines. This also means that a top manager’s ability to

control the corporation is not enough to treat the corporation and the manager as a single entity; if that were so,

Cedric Kushner Enterprises would have come out the other

way (for no one doubts that Don King exercises absolute

control over his boxing promotions).

States have developed substantial bodies of law addressing the question whether corporate receipts (or corporate

debts) may be imputed to investors or managers. These

principles, which go under the rubric “piercing the corporate

veil,” are presumptively applicable when a question of

attribution arises under federal law—as it may in tax,

pension, labor, securities, and bankruptcy proceedings,

among other fields. See, e.g., Central States Pension Fund

v. Art Pape Transfer, Inc., 79 F.3d 651 (7th Cir. 1996); In re

Deist Forest Products, Inc., 850 F.2d 340 (7th Cir. 1988);

Mayer v. Chesapeake Insurance Co., 877 F.2d 1154 (2d Cir.

1989). The prosecutor has not argued that state law must

be overridden in order to achieve any policy stated in, or

reasonably imputable to, the Sentencing Guidelines.
No. 02-3166 7

Application Note 18 calls for receipts to be allocated; how

the proceeds are carved up among the three defendants

(Joseph, Monte, and the corporation) does not appear to be

vital to sentencing policy. It is enough that each dollar

count once. That the United States indicted the corporation

implies a belief that it had a separate legal existence; that

the judge accepted its plea of guilty shows that the district

court, too, treated it as an entity distinct from Joseph and

Monte. If federal law allows it to stand as an entity capable

of being indicted and convicted, Joseph Daniel Company

may in principle be treated as the entity that derived the

gross proceeds of the fraud.

The Joseph Daniel Company was incorporated in Illinois

law, so that is the place to turn—not that the choice matters much, as most states follow the same approach. We

canvassed Illinois law in Sea-Land Services, Inc. v. Pepper

Source, 941 F.2d 519 (7th Cir. 1991), and concluded that the

corporate form may be disregarded only if it has been used

to deceive persons dealing with the business. That the

entrepreneur exercises autocratic control (something much

emphasized by the district judge) does not justify disregarding the corporate form and equating the firm with its

manager. (Recall the discussion of Don King above.) The

Bank knew that it was dealing with a corporation, so there

was no deceit on that front. Perhaps, however, Joseph

formed the corporation, and used Monte as nominal owner,

in order to deceive or hide assets from someone else. At oral

argument the prosecutor contended that Joseph was trying

to secrete assets from his creditors in an earlier bankruptcy;

and if some debts passed through that bankruptcy undischarged and Joseph used the corporate form to avoid

payment, then Illinois law might look through the corporate

form to attribute the firm’s receipts and debts to Joseph

personally. Some of the district judge’s statements during

sentencing suggest that he thought that the corporate form

had been used to defraud creditors; but so much else of the
8 No. 02-3166

judge’s discussion suggests that he was relying simply on

the fact that it was a closely held corporation that it would

be imprudent to seize on these statements as a ground of

affirmance. The district judge ought to address this question directly. As with other matters of characterization

accomplished by applying established law to particular

facts, appellate review is deferential; but first we must be

sure that the right body of legal principles has been consulted.

The judgment of the district court is vacated, and the case

is remanded for two purposes: first, to remove from the

restitution obligation the items we have mentioned; second,

to decide whether under Illinois veil-piercing principles

Joseph is personally accountable for the receipts and

obligations of Joseph Daniel Company.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—11-17-03