Opinion ID: 3010987
Heading Depth: 1
Heading Rank: 4

Heading: jurisdiction

Text: over Lander's appeal on this point, see United States v. McQuilkin, 97 F.3d 723, 729 (3d Cir. 1996), and to that extent it is dismissed. 31 pay such a fine. Our review of the District Court's findings of fact is for clear error. See United States v. Figueroa, 105 F.3d 874, 876 (3d Cir.), cert. denied, 520 U.S. 1248 (1997). A. The Loss Calculation Loss must be established by a preponderance of the evidence. See United States v. Evans, 155 F.3d 245, 253 (3d Cir. 1998). Application Note 9 (formerly Note 8) to section 2F1.1 states, however, that a loss need not be determined with precision, but can be a reasonable estimate. Here, where Electrodyne pled guilty to unlawfully exporting defense-related items and to making false statements, we think that its conduct should be treated as loss from fraud rather than loss from theft. In general, the loss from fraud is the financial loss actually suffered by the victim, or the loss that the criminal intended the victim to suffer if that is greater. See United States v. Maurello, 76 F.3d 1304, 1309 (3d Cir. 1996).7 Because of the nature of the crime, which involved manufacturing fully functional parts, albeit in foreign countries, it is difficult to see what the monetary loss was, though both Electrodyne and the government use the restitution amount as a starting point.8 Because Electrodyne agrees that some version of the restitution amount is the touchstone for the loss calculation, we direct our attention to that figure. The District Court found that Electrodyne stipulated to a $369,105.70 loss by stipulating to that amount in _________________________________________________________________ 7. The offender's gain is an alternative estimate that, according to the Guidelines, ordinarily understates loss. The PSI attempted to calculate Electrodyne's gain from the fraud, but concluded that it was impossible because the foreign components were just part of the overall assemblies that Electrodyne contracted with the government to deliver. 8. Nathan and Lander argue that Electrodyne's stipulation on restitution did not mean that they themselves had stipulated to an amount of loss attributable to their conduct. Because we have concluded that the District Court should not have used the fraud guidelines, and therefore that the amount of loss should not be used to set the individual defendants' threshold offense levels, and because it appears that Electrodyne has assumed responsibility for any fine, we need not reach this issue. 32 restitution. However, because the restitution agreement contained various provisions, including in-kind transfers, it does not have an obvious face value. Electrodyne offers a loss calculation of $189,255.65, calculated by eliminating two items that the District Court and the Probation Office considered part of the restitution, on the ground that those two items did not reflect any actual or intended loss. The government acceded to Electrodyne's calculation in the District Court, though it argues before us that the Court did not clearly err in finding otherwise. We turn to the specific items whose valuation Electrodyne contests. 1. The Air Force Contract The first contested item is the District Court's inclusion of $139,200 in the loss calculation, which represented Electrodyne's claim against the Air Force for a canceled contract. Electrodyne represents that this claim arose from a contract pursuant to which Electrodyne had to provide the Air Force with pin diode switches. During the pendency of the criminal investigation, the Air Force canceled the contract, which was one of Electrodyne's two contracts with the Air Force, on the grounds of delay. Electrodynefiled an administrative appeal, arguing that the contract had been canceled for the convenience of the Air Force. The parties reached a tentative settlement that Electrodyne would fulfill the contract and be paid $139,200 if Electrodyne was not convicted. When Electrodyne pled guilty, that settlement became void and the contract was canceled. The District Court found that the full amount of the $139,200 settlement was part of the loss to the Air Force. Therefore, the District Court calculated a total loss to the Air Force of $309,860, which also included $170,660 relating to investigation and reprocurement costs for two contracts: the pin diode contract that was the subject of the settlement agreement and a separate contract for phase shifters. Electrodyne submits that, as a legal matter, the District Court's finding was in error. Our review of what constitutes loss is plenary and requires us to look for actual or intended harm to the victim. See Evans, 155 F.3d at 252. 33 The government argues that the $139,200 would have been Electrodyne's but for the plea agreement, and that the money would have been fraudulently acquired. However, the issue is not Electrodyne's potential total gain but the Air Force's actual or intended loss, if any, stemming from the criminal conduct. We have repeatedly emphasized that the amount of loss in a fraud case, unlike that in a theft case, often depends on the actual value received by the defrauded victim. See United States v. Dickler, 64 F.3d 818, 825 (3d Cir. 1995). Thus, when a defendant obtains a secured loan by means of fraudulent representations, the amount of loss is the difference between what the victim paid and the value of the security, because only that amount was actually lost. See United States v. Kopp, 951 F.2d 521, 528-31 (3d Cir. 1991). In a fraudulent procurement case, the principles enunciated in Dickler and Kopp require us to offset the contract price by the actual value of the components provided in order to determine the amount of loss. See United States v. Schneider, 930 F.2d 555, 558 (7th Cir. 1991) (following this procedure in a fraudulent procurement case). In short, the face value of the contract does not reflect a reliable loss figure because Electrodyne was prepared to provide the components to the Air Force, and the value of those components must be offset against the amount the Air Force agreed to pay. This is true whether we speak of actual or intended loss. The government's argument ignores the value that the Air Force would have received for its money if the settlement had proceeded. That is, if the parties had carried out the agreement, the Air Force would have received pin diode switches that, for all this record shows, were worth $139,200. Because the loss to the government would not have been the full settlement amount, we cannot charge Electrodyne with the full amount as intended loss. More importantly, the government does not address the argument that the harm suffered by the Air Force was reflected in the $170,660 already attributed to Electrodyne's conduct. The crucial consideration here is that the District Court included the loss attributable to investigation and reprocurement relating to the pin diode 34 switches in its calculation of $170,660 due to the Air Force, independent of the $139,200 in dispute here. See Electrodyne II, 28 F. Supp. 2d at 255 & n.67. Thus, the difference between the value that would have been received by the Air Force and the materials Electrodyne was supposed to have provided has already been taken into account in the $170,660 loss calculation, which included the costs to the Air Force of getting the components from another source. We find that the settlement amount of $139,200 duplicates the $170,660 for reprocurement and investigation, regardless of whether actual or intended loss is considered. The Air Force only suffered one loss relating to the pin diode switches, and the District Court doublecounted that loss when it included both the canceled settlement and the reprocurement. We conclude that the Court erred when it treated this element of the restitution agreement as having value over and above the $170,660 for reprocurement of the items covered by the canceled settlement agreement. 2. The Four Converters for NASA The District Court adopted the PSI's calculation that the four converters (a type of electronic component) contemplated in Electrodyne's restitution agreement had a value of $57,245.70, the cost of buying four new converters. The restitution agreement provided that Electrodyne would provide NASA with either (1) $14,595.65 and three functioning converters, or (2) $42,650.05 and one functioning converter. The Probation Office apparently added the two dollar amounts together to come up with a total value, presumably on the theory that $14,595.65 was the value of one converter and $42,650.05 was the value of three, although $42,650.05 is not three times $14,595.65. Electrodyne does not challenge the inclusion of the converters' value in the loss calculation as such; rather, it disputes the valuation of particular converters. Thus, we need not address how the converters became part of the loss initially. The parties agree that two of the converters were already 35 in NASA's possession.9 They were damaged during the criminal investigation when government investigators opened them to look for foreign-manufactured components. Electrodyne argues that the restitution agreement contemplated that Electrodyne would fulfill part of its obligation by repairing those two converters, which it did at a cost of $2000. Electrodyne also provided NASA with a sample converter already in stock; it represents that the cost of that converter was de minimis. Therefore, Electrodyne argues, the appropriate value of the particular four converters involved in this case is $14,595.65 (one converter) plus $2000 (repairs to two converters) plus zero (the fourth, sample converter), because this reflects the cost of restitution to Electrodyne. The government again responds that Electrodyne obtained the underlying contract through fraud by promising American-made components for the contract price and thus can be charged with the full contract price. This ignores the distinction in our caselaw between fraud and theft; NASA's gains have to be counted against the loss. We are persuaded by Electrodyne's argument about the repairs, but not by its argument about the sample converter. NASA had two converters that were damaged by Electrodyne's criminal conduct.10 As part of its restitution, Electrodyne repaired the harm for $2000. It seems logical that the proper measure of harm is the cost of repairs when that was all that was required, and not the full cost of the converters. See United States v. Sablan, 92 F.3d 865, 869 (9th Cir. 1996) (charging the defendant with the cost of repairs when the result of her activity was damage, not destruction). Indirect support for this proposition is provided by Maurello, supra, in which we held that customers who were satisfied by the services of a defendant _________________________________________________________________ 9. The government points out that the restitution agreement said that Electrodyne would provide converters, but it concedes that two of the converters were in NASA's possession at the time of the agreement. 10. We consider the damage caused by the investigation as included in the harm of Electrodyne's crime, because detection of the fraud required physical inspection of the components. 36 who fraudulently represented that he could practice law did not suffer losses. Though the defendant's actions risked harm to them, if that harm did not materialize he could not be assessed with a loss. Similarly, if the harm that materialized was a need for repairs and not a need to replace the entire machine, then the repairs should serve as the measure of the loss. The government does not dispute that the repairs were worth approximately $2000. When it comes to the sample converter, though, Electrodyne is mistaking its costs (which may well be de minimis) with the harm inflicted on NASA. If NASA was deprived of a converter by Electrodyne's criminal conduct, then it was harmed by the value of one converter, which is apparently worth about $14,000 to a buyer. It was not clear error to value the converter at approximately $14,000, reflecting its market value, even if it was not worth as much to Electrodyne, the manufacturer. Basing our calculation of loss on actual harm, it appears from the record that NASA was harmed by being deprived of two converters and by needing repairs to two others. Therefore, the total amount associated with the NASA converters would be approximately $30,000, the value of two converters plus $2000 in repairs. 3. Summary We conclude that the Air Force contract and the full prices of two converters were improperly included in the loss calculation; hence vacatur and remand is necessary. The full price of a third converter was, however, properly included. Our rough calculation, derived from Electrodyne's plea agreement, is as follows: Stipulated restitution to Air Force $170,660.00 Stipulated restitution to Naval Research Laboratory 2,000.00 Value of one converter 14,595.65 Approximate value of sample converter 14,000.00 Repair of two converters for NASA 2,000.00 Total Approximate Loss $203,255.65 37 (The first three items have values that are not here in dispute.) This recalculation affects the Guideline range for Electrodyne's fine. On remand, the District Court may clarify its finding on the value of one converter to set the exact fine. B. Ability to Pay 1. Background Electrodyne argues that it is unable to pay a $500,000 fine.11 As a result of its plea, Electrodyne was suspended from new government contracts and lost its export privileges, which constituted 80% of its business before the plea. At the time of the plea, Electrodyne had $1.9 million in back orders from the government and anticipated no profit on those contracts. The PSI stated that Electrodyne would cease to exist once it fulfilled its obligation under those remaining contracts. Electrodyne sold its assets to another company, AdComm; contracted out most of the remaining contract work; and fired all but five employees. The District Court calculated Electrodyne's ability to pay as follows: $25,219.48 First Union Account $162,000 Promissory note from AdComm $31,486 Security deposit from AdComm $340,000 Navy contract _________________________________________________________________ 11. Electrodyne also contends that the government is estopped from arguing that Electrodyne can pay more than $140,000, because the plea agreement included an agreement on the appropriatefine to be presented to the District Court. This argument is without merit. Electrodyne had the benefit of its bargain: The government diligently argued the position set forth in the plea agreement to the District Court, which on its own initiative rejected the government's position. The plea agreement allowed the government to take any position on appeal. The appeal provision of the plea agreement contemplated exactly this sort of situation, in which a sentencing court rejects the government's position but the government chooses to support the court on appeal. See United States v. Griswold, 57 F.3d 291, 298-99 & n.10 (3d Cir. 1995). 38 $132,000 Equitable adjustment requested on Defense Supply Center contract12 Total: $690,705.48. Guideline section 5E1.2 requires that a fine be waived when an individual defendant is unable to pay. By contrast, section 8C3.3(b), the corresponding provision in the corporate Sentencing Guidelines, does not require waiver or reduction. At all events, as we recognized in Electrodyne I, the fine must not be unrealistic. The sentencing court must take account of the corporate defendant's financial resources, putting the burden on the defendant to produce relevant materials, before setting a fine that may consume all of the defendant's assets. See Electrodyne I, 147 F.3d at 255. Currently, Electrodyne states, it has only those physical assets that are being used to fulfill the remaining contracts. There is also a $162,000 balance on the promissory note AdComm gave for Electrodyne's inventory. Moreover, AdComm gave Electrodyne a security deposit of $31,486. Finally, Electrodyne submitted a statement showing that it had $1200 in its bank account as of May 31, 1998. It represents that these various sources of income will allow it to pay the $140,000 fine contemplated in its plea agreement, but no more. 2. The Remaining Contracts In Electrodyne I, we remanded for findings on Electrodyne's ability to pay. By the time of resentencing, in August 1998, two of Electrodyne's remaining five contracts had been completed. The PSI had initially stated that the _________________________________________________________________ 12. We admit to some confusion here. The contract amount, according to the facts recited by the District Court, was $173,000. The amount used by the District Court, $132,000, was apparently the upward adjustment in the contract amount requested by Electrodyne but not yet granted at the time of sentencing. We are unsure why the Court used the adjustment number and not $173,000 or the combined total of $305,000. Although the parties do not discuss this issue, it might be useful for the Court to clarify its finding on remand, particularly if the contract amount has been resolved. 39 contracts were break-even projects, and no further evidence on their profitability was presented. On one of the three outstanding contracts, the Defense Supply Center has declared Electrodyne in default. Electrodyne is appealing that declaration, and if it wins it will owe the government nothing, while if it loses it will owe $49,458. Thus, there are two remaining executory contracts, one with the Defense Supply Center and another with the Navy. On the contract with the Defense Supply Center, Electrodyne submitted an affidavit stating that it was negotiating for a $132,000 increase in the contract price (originally $173,000). On the contract with the Navy, the contract amount was $340,000, and Electrodyne had delivered $88,000 worth of product and had received a $100,000 progress payment. The affidavit does not state whether these contracts are break-even; Electrodyne argues that it was entitled to rely on the PSI, which stated that the five contracts remaining at the time of the PSI were breakeven. However, the District Court found that, because Electrodyne failed to specify the expenses incurred in connection with the manufacture of the components under the two remaining contracts, it would deem the full amount of the projected sales--$472,000--available to pay a fine. But see supra note 12 (noting that this might not be the full amount of the projected sales). Electrodyne argues that the Court ignored the obvious fact that manufacturing has costs, and that it made its findings in the face of the information in the PSI. The government suggests that, consistent with our opinion in Electrodyne I, Electrodyne's failure to provide all the financial information requested by the Court upon remand insulates the Court's conclusions from attack. The government submits that the Court did not clearly err in deciding that the entire income stream from the remaining contracts would be available to pay a fine. It suggests that the materials for the contract might already have been manufactured and merely awaiting delivery, and so there might be no remaining manufacturing costs. Electrodyne responds that it did not culpably fail to provide information. It points out that, after remand in Electrodyne I, the District Court ordered Electrodyne to 40 produce a number of documents relating to past expenses and profits, but did not order Electrodyne to set forth expenses projected for the remaining contracts. Moreover, Electrodyne produced a good deal of the requestedfinancial information, and it explained its inability to produce the missing information. It had never been subject to an audit according to generally accepted accounting principles. It submitted an affidavit from an accountant that a retroactive audit would not provide any reliable information because inventory could no longer be verified, that a full audit could cost up to $12,000 per year, and that because of the cost it was not standard for a business Electrodyne's size to undergo audits unless an investor or lender required them. It also submitted an affidavit from Sol Schneiderman, a consultant who was by mid-1998 the only person working full-time for Electrodyne, identifying the years for which Electrodyne did not have complete records and noting the current status of the remaining contracts. The District Court amended its order, relieving Electrodyne of the burden of producing documents that did not, according to Schneiderman, exist. Electrodyne was able to provide tax returns from 1990 to 1997 and unaudited financial statements and balance sheets for 1990-1991, 1994-1997, and through May 31, 1998. The balance sheets showed sales costs between 65% (1995) and 82% (1994) of gross sales and operating expenses between 17% (1994) and 34% (1995 & 1996) of gross sales. In every year but 1990, therefore, Electrodyne's balance sheets show net operating pretax income of under 1% of gross sales. Electrodyne argues that the District Court ignored this record in concluding that Electrodyne would have no expenses for the remaining contracts. It asserts that if Electrodyne's net profit on the executory contracts averaged what it had been between 1990 and 1997, it would make $3304 in profit from the two contracts, a sum consistent with the prediction that the remaining contracts would be break-even propositions. We have been unable to find guidance in the extant caselaw on determination of ability to pay. We find it difficult to believe that Electrodyne had no expenses when fulfilling its remaining contracts, but we are also 41 unconvinced that Electrodyne provided sufficient information. As Electrodyne changed from a going concern to a dying business, it is not obvious that past expenses are an appropriate guide; a one- or five-employee operation that is contracting out most of its work doubtless runs differently than a business that employs nearlyfifty employees. Therefore, Electrodyne's proposed measure of profit from the remaining contracts seems as unlikely to be accurate as the conclusion that the contract amounts represent pure profit. However, Electrodyne may have been legitimately surprised by the District Court's conclusion that the two remaining contracts represented pure profit, given that the PSI stated otherwise and that the government never argued the issue. Because the only record evidence on the remaining contracts comes from the PSI, which labeled them break-even, we conclude that the District Court erred in deeming all contract payments available to pay afine. We emphasize that, were there other evidence in the record to the contrary, the District Court could have accepted it. On remand, we think that Electrodyne should be required to offer proof of its expenses in carrying out the remaining parts of the contracts. See Evans, 155 F.3d at 252 n.8 (sentencing court should inquire about the defendant's financial prospects). The burden of proving expenses is properly on Electrodyne, and the District Court may conclude that money not accounted for is available to pay a fine. See Electrodyne I, 147 F.3d at 254; United States v. Carr, 25 F.3d 1194, 1211-12 (3d Cir. 1994) (court may sua sponte recalculate a defendant's net worth in determining his ability to pay if the PSI recommends a fine; the burden is on the defendant to prove inability to pay a larger fine).13 _________________________________________________________________ 13. Electrodyne also argues that the District Court clearly erred in concluding that Electrodyne's May 1998 checking account balance of $25,219.48 was available in August. Schneiderman's June 26, 1998 affidavit stated that Electrodyne had $1200 in the bank, while a First Union bank statement dated June 30, 1998 listed $419.57 in the account. The government does not contest this point. On remand, the District Court should put together as accurate a picture of Electrodyne's financial position as possible, although we reiterate that it may properly place the burden on Electrodyne to account for funds. 42 3. Payment Schedule Electrodyne further argues that it should not have to pay the total fine immediately. Guideline section 8C3.2(b) requires organizations to pay immediately unless the court finds that they are financially unable to do so or that immediate payment imposes an undue burden. Full payment should be required at the earliest possible date or in installments, within five years. See U.S.S.G. S 8C3.2(b). In Electrodyne I, we remanded for findings on the time within which Electrodyne's fine should be paid; while, on remand, the District Court ordered immediate payment, it did not specifically address the question whether all the assets it had identified were immediately available to pay a fine. The District Court counted $162,000 on AdComm's promissory note as available funds. However, that money is paid monthly in $1566.35 increments, scheduled to end in February 2002. Similarly, the Court considered the amounts due on the executory contracts immediately available. However, the government had, at the time of briefing, made only a $100,000 progress payment on one of the two contracts. An unaudited balance sheet from May 31, 1998, showed that Electrodyne's liabilities exceeded its assets by $32,156 on that date. The government does not address the issue of a payment schedule. In view of the foregoing, we are constrained to conclude that the District Court abused its discretion in finding the total amounts due from AdComm and from the remaining government contracts immediately available, because it is incontrovertible that Electrodyne does not yet have that money. Again, the judgment must be set aside, and on remand the District Court should determine a proper schedule of payments.