Opinion ID: 2799433
Heading Depth: 2
Heading Rank: 1

Heading: The Guideline Enhancement.

Text: The appellant first contends that the sentencing court used an improper method of calculating intended loss and, thus, erred in enhancing his offense level by 14 levels. This contention is met at the threshold by the government's assertion that we need not reach the merits because any calculation error was harmless. We begin with that assertion and then proceed to the merits.
harmlessness rests on the district court's imposition of a belowthe-range sentence coupled with the court's later remark, made while denying the appellant's motion to stay the sentence pending appeal, that a recalculation of the GSR would be unlikely to result in a lower sentence. This argument flies in the teeth of conventional wisdom, which teaches that the improper calculation of a defendant's guideline range comprises a significant procedural error. See Gall v. United States, 552 U.S. 38, 51 (2007). Such an error ordinarily requires resentencing. See United States v. Ramos-Paulino, 488 F.3d 459, 463-64 (1st Cir. 2007). Indeed, a defendant normally can appeal from an error in calculating his GSR even though the district court imposed a sentence beneath the -7- bottom of the GSR. See United States v. Paneto, 661 F.3d 709, 715 (1st Cir. 2011). To be sure, an appellate court may deem such an error harmless if, after reviewing the entire record, it is sure that the error did not affect the sentence imposed. See Williams v. United States, 503 U.S. 193, 203 (1992). In other words, resentencing is required if the error either affected or arguably affected the sentence. See Ramos-Paulino, 488 F.3d at 463. The case at hand does not fit within these narrow confines. Although the court below imposed a sentence beneath the bottom of the GSR, there is at least a possibility that the court would have imposed an even more lenient sentence had it started with a lower GSR. See United States v. Foley, ___ F.3d ___, ___ n.13 (1st Cir. 2015) [Nos. 13-1048, 13-1118, slip op. at 31 n.13]. While the court stated that a lower GSR was unlikely to result in a different sentence, we have recently reaffirmed that the possibility of a lesser sentence is enough to preclude a finding that an error in calculating the GSR is harmless. See id. Such a possibility exists here: saying that an event is unlikely is not the same as a categorical assurance that the event will not come to pass. It follows that if the court below erred on the high side in fashioning the guideline enhancement for amount of loss (and, thus, the GSR), we cannot regard that error as harmless. -8- 2. Calculating Intended Loss. Our rejection of the government's harmlessness argument brings us to the merits of the appellant's claim that the district court committed a calculation error. We review de novo the court's interpretation and application of the sentencing guidelines, including the propriety of its loss-computation method. See United States v. Prange, 771 F.3d 17, 35 (1st Cir. 2014); United States v. Walker, 234 F.3d 780, 783 (1st Cir. 2000). In fraud cases like this one, the guidelines direct the sentencing court to augment the defendant's offense level based on the amount of loss. See USSG §2B1.1(b)(1). For this purpose, loss is defined as the greater of actual loss or intended loss. Id. §2B1.1, comment. (n.3(A)). Here, the district court based its guideline calculation on intended loss. That term means the pecuniary harm that was intended to result from the offense. Id. at n.3(A)(ii). Intended loss is not synonymous with probable loss. Rather, the term includes intended pecuniary harm that would have been impossible or unlikely to occur. Id. Seen in this light, intended loss is a term of art meaning the loss the defendant reasonably expected to occur at the time he perpetrated the fraud. United States v. Innarelli, 524 F.3d 286, 290 (1st Cir. 2008). This standard focuses primarily on the offender's objectively reasonable expectations, see id., though subjective intent may play -9- some role, see id. at 291 n.6; United States v. McCoy, 508 F.3d 74, 79 (1st Cir. 2007). In this case, the sentencing court concluded that the intended loss was equal to the aggregate face value of the claims submitted by the appellant to his insurers, not the aggregate amount by which the appellant fraudulently inflated those claims.2 The court reasoned that had the insurers known of the fraud when they received the claims, they would have invoked the void-forfraud clauses and paid nothing. The court did not explain what bearing the void-for-fraud clauses may have had on the amount of loss that the appellant intended to cause. It said only that if intended loss were to be viewed solely as the amount of fraudulent inflation, fraudsters would have an incentive to inflate claims because, if caught in the act, they would be punished only for the inflated amount. The government applauds this reasoning, but the appellant decries it. He notes that the sentencing guidelines treat loss as a proxy for relative culpability. In his view, basing an intended loss computation on the entire amount of an insurance claim rather than on the amount fraudulently claimed irrationally conflates the 2 We express no opinion on whether any portion of the appellant's claims was legitimate. This is a matter the district court will need to address on remand. See text infra. For present purposes, we assume — as the appellant contends — that he did suffer some legitimate losses. -10- culpability of fraudsters who commit significantly different offenses. Fraud has many manifestations, and calculating the loss associated with a particular scheme is sometimes more art than science. As a result, we have eschewed rigid rules and instead taken a pragmatic, fact-specific approach to loss calculation. Prange, 771 F.3d at 35 (internal quotation mark omitted). Such a pragmatic view suggests that loss computation should distinguish between an outright swindler who peddles, say, a forged title to a bridge in Brooklyn and a fraudster who contrives to render some value (albeit less than promised) to the victim. See id. at 36; United States v. Blastos, 258 F.3d 25, 30 (1st Cir. 2001). By any practical measure, the former seems more culpable than the latter. Applying the degree-of-culpability approach to the insurance fraud context, it is appropriate for the loss-computation method to distinguish between a fraudster who wholly fabricates a non-existent claim and a fraudster who artificially inflates a legitimate claim. A fraudster who has suffered no loss at all but invents a $100,000 claim out of thin air is not the same as a fraudster who has suffered a legitimate $50,000 loss but artificially inflates his claim to $100,000. See United States v. Smith, 951 F.2d 1164, 1167 (10th Cir. 1991). This gets to the heart of the matter. Under the sentencing guidelines, loss generally does not include sums that a -11- victim would have paid to the defendant absent the fraud. See, e.g., United States v. Evans, 155 F.3d 245, 253 (3d Cir. 1998) (holding that actual loss in insurance fraud case does not include value of legitimate claims); United States v. Parsons, 109 F.3d 1002, 1004 (4th Cir. 1997) (same, in context of government benefits fraud); see also United States v. Miller, 316 F.3d 495, 498-99 (4th Cir. 2003) (applying this principle to intended loss). Given this rule, the question reduces to whether the presence of a void-forfraud clause makes a dispositive difference when calculating loss under the sentencing guidelines. In resolving this question, we find instructive the line of cases involving government benefits fraud. When a person fraudulently obtains government benefits, the United States typically is entitled to recover all sums paid (in a civil forfeiture proceeding) even though some benefits would have been paid anyway (that is, absent the fraud). See, e.g., 5 U.S.C. § 8148(a); 28 U.S.C. § 2514. But when the same fraudulent conduct undergirds a criminal conviction, courts have steadfastly refused to equate the amount of loss under the sentencing guidelines with the amount recoverable by the government through civil forfeiture. That is because [f]orfeiture is a penalty imposed on a criminal independent of any loss to the crime victim. Parsons, 109 F.3d at 1005. Consequently, [t]he loss itself (whether the actual or intended loss) is limited to the tangible economic loss of the -12- victim. Id. at 1004. The forfeitable amount does not count toward the government's loss, which is measured by the amount of benefits that was (and, in the case of intended loss, would have been) paid as a result of the fraud. See United States v. Harms, 442 F.3d 367, 380 (5th Cir. 2006); United States v. Dawkins, 202 F.3d 711, 715 (4th Cir. 2000). To be sure, government benefits fraud is governed by a special application note, which explains that in such cases loss shall be considered to be not less than the value of the benefits obtained by unintended recipients or diverted to unintended uses. USSG §2B1.1, comment. (n.3(F)(ii)). We believe that this note merely represents a specialized application of the guidelines' general focus on a defendant's relative culpability. See, e.g., Dawkins, 202 F.3d at 714; Parsons, 109 F.3d at 1004-05. Since this is so, it makes good sense to transplant the reasoning of the government benefits cases to the analogous context of insurance fraud. We discern no sound basis for treating a void-for-fraud clause (in the insurance fraud context) differently than a civil forfeiture (in the benefits fraud context). Both the void-forfraud clause and the civil forfeiture anodyne afford relief after the fact. So, too, such a clause, like the sword of Damocles inherent in a threat of civil forfeiture, serves the salutary purpose of encouraging transactional honesty. And such a clause, -13- like a civil forfeiture, imposes a penalty on the fraudster for acting corruptly: if the insurer discovers the fraud, the insured forfeits everything. The concept of loss under the sentencing guidelines serves a completely different purpose. See United States v. Hamaker, 455 F.3d 1316, 1337 (11th Cir. 2006); Dawkins, 202 F.3d at 715. The guidelines are designed to ensure that the sentence imposed on a defendant reflect[s] the nature and magnitude of the loss caused or intended by [his] crimes. USSG §2B1.1, comment. (backg'd.). Consonant with this design, the guidelines use amount of loss as the primary metric by which the seriousness of the offense and the defendant's relative culpability are measured. Id. Sums forfeited under a void-for-fraud clause (which is really nothing more than an after-the-fact penalty) do not conform naturally to this metric. Cf. id. §2B1.1, comment. (n.3(D)(i)) (providing that loss does not include [i]nterest of any kind, finance charges, late fees, penalties, amounts based on an agreedupon return or rate of return, [and] other similar costs). It would therefore be anomalous to read the guidelines to distinguish between two fraudsters who fraudulently inflate their claims by exactly the same amount simply because one is covered by an insurance policy that contains a void-for-fraud clause and the -14- other is covered by an insurance policy that does not contain such a clause.3 The government resists this reasoning, asseverating that the appellant intended to deprive his insurers of the entire amount claimed regardless of whether some portion of that amount represented legitimate losses. To achieve this counterintuitive result, the government asks us to consider what an objectively reasonable fraudster standing in the appellant's shoes would have expected to be paid were the fraud discovered. Because such a fraudster would be aware of the void-for-fraud clauses and know that the misrepresentation would relieve his insurers of their payment obligation, the government's thesis runs, the fraudster would expect his insurers to suffer losses in the full amount of the submitted claims. We reject the government's thesis, which approaches intended loss from the wrong angle. Fraudsters do not expect to be found out but, rather, expect to reap the benefits of their contrivance. The relevant inquiry, then, is what the fraudster reasonably expected to euchre out of his victim, cf. id. at 3 We base this conclusion on the language and purpose of the sentencing guidelines, not the language of the particular policies at issue. Whether and to what extent an insurance contract is void or voidable is often a thorny issue and we do not need to resolve that issue here. For the reasons discussed above, an insurer's loss for guideline purposes is distinct from any recovery to which it might be entitled under a void-for-fraud clause in a civil proceeding. -15- n.3(A)(ii) (defining intended loss as the pecuniary harm that was intended to result from the offense (emphasis supplied)), not what would have slipped through his fingers had he been caught in the act. That amount necessarily excludes any sums that the fraudster would have been paid absent the fraud. See Burrage v. United States, 134 S. Ct. 881, 887-88 (2014) (explaining that the phrase results from implies a requirement of actual causality, which typically requires proof that the harm would not have occurred in the absence of — that is, but for — the defendant's conduct (internal quotation marks omitted)). The sentencing court, then, should have determined whether and to what extent legitimate claims were embedded in the fraud. Structuring intended loss in this way makes good sense. After all, loss is meant to serve as a proxy for the seriousness of the crime and the relative culpability of the offender. The best way to gauge the seriousness of a fraud offense is to determine how much the fraudster set out to swindle — and no fraudster sets out to swindle sums that he would have been paid anyway. That is also the best way to gauge a fraudster's culpability. The best case for the government's contrary position is United States v. Torlai, 728 F.3d 932 (9th Cir. 2013) — but Torlai -16- cannot carry the weight that the government loads upon it.4 Torlai involved a defendant who had obtained crop insurance policies from private insurers through a federal program. See id. at 935-36. Those policies and their application documents included void-forfraud clauses. See id. at 940 & n.8. The defendant made a number of misrepresentations both when he procured the policies and when he submitted claims under them. See id. at 936, 941-43. Appealing his sentence, the defendant argued that the district court erred in calculating loss by failing to determine which portions of his indemnity claims were legitimate. The Ninth Circuit disagreed, noting that the case involved a government benefits program and, therefore, loss constituted the value of the benefits obtained by unintended recipients. Id. at 938 (emphasis omitted) (quoting USSG §2B1.1, comment. (n.3(F)(ii))). The court stated that [b]y virtue of his fraud, [the defendant] was not eligible for any government benefit under the crop insurance program, and therefore, he was not an 'intended beneficiary.' Id. at 943. Certain facts underlying the court's unintended beneficiary rationale help to distinguish Torlai from this case. First, the Ninth Circuit found sufficient evidence that the 4 The government's citation to United States v. Ostrom, 80 F. App'x 67 (10th Cir. 2003), need not detain us. That decision lacks precedential force even in the circuit of its origin. See 10th Cir. R. 32.1(A). -17- defendant had suffered no reimbursable losses, see id. at 941-43, so he would not have received anything absent his fraudulent claims. Second, the defendant made material misrepresentations to procure the crop insurance policies, see id., making it unlikely that the insurer would have issued the policies had it been told the truth. This latter fact indicates that, regardless of the legitimacy vel non of the claimed losses, the insurer would not have been obliged to pay. Cases in which an insurer would have paid nothing absent the fraud are materially different from those in which the insurer would have paid something (but less than the full amount claimed) absent the fraud. See United States v. Sharma, 703 F.3d 318, 324-25 (5th Cir. 2012).5 To recapitulate, we conclude that the district court erred in calculating the amount of intended loss attributable to the fraud and, thus, in fashioning the guideline enhancement. We are, therefore, constrained to remand for resentencing. On remand, the district court should compare what the appellant sought to bamboozle his insurers into paying with what they would have paid had the appellant submitted only bona fide claims. We add a coda. It is apodictic that the government bears the burden of proving the applicability of a sentencing enhancement by preponderant evidence. See Paneto, 661 F.3d at 715. But in a 5 To the extent that Torlai can be read to support the position advocated by the government here, we decline to adopt its reasoning. -18- case such as this — where a defendant's claims were demonstrably rife with fraud — a sentencing court may use the face value of the claims as a starting point in computing loss. See United States v. Campbell, 765 F.3d 1291, 1304-05 & n.13 (11th Cir. 2014); United States v. Hebron, 684 F.3d 554, 562-63 (5th Cir. 2012). The burden of production will then shift to the defendant, who must offer evidence to show (if possible) what amounts represent legitimate claims. See Hebron, 684 F.3d at 563; United States v. Jimenez, 513 F.3d 62, 86 (3d Cir. 2008). After the record is fully formed, the sentencing court must determine the amount of loss that the government (which retains the burden of proof) is able to establish. The court, however, need only make a reasonable estimate of the loss. USSG §2B1.1, comment. (n.3(C)); see Blastos, 258 F.3d at 30. Depending on the defendant's offer of proof, the court might well conclude that the amount of loss is equal to the face value of the submitted claims.