Opinion ID: 808490
Heading Depth: 4
Heading Rank: 1

Heading: The Ninth Circuit

Text: Examining the development of the case law in the Ninth Circuit illuminates this omission. Smith was the first of the cases to consider the appropriate offset in a similar situation—where the victim lent cash based on the defendant’s fraud and eventually foreclosed on the real estate securing the loan. Smith, 944 F.2d at 620-21. In Smith, the defendant asserted “that the district court failed to give him adequate credit against the restitution amount for the value of the collateral property,” arguing that the court should have used the value of the No. 10-3794 21 real estate at the time the victims regained title to the property. Id. at 625. Smith alleged “that because the value of Texas real estate steadily declined throughout the time in question, the measurement of the property’s value at the later dates resulted in an inadequate credit for the collateral property, and that therefore the restitution figure is far too high.” Id. The Ninth Circuit agreed with defendant Smith. And Smith serves as the linchpin for further cases. Because the court went astray in Smith by applying language in the much different property restitution case (Tyler), we quote its reasoning in full: We agree with Smith that the district court used incorrect dates in valuing the property. The Act provides that if a victim has suffered a loss of property, the district court may order restitution in the amount of this loss “less the value (as of the date the property is returned ) of any part of the property that is returned.” 18 U.S.C. § 3663A(b)(1) (emphasis added). We interpreted this portion of the Act in United States v. Tyler, 767 F.2d 1350 (9th Cir. 1985) (Tyler), in which Tyler pled guilty to theft of timber and was ordered to pay restitution under the Act. The district court determined the amount of restitution as the difference between the value of the timber at the time of sentencing and the higher value at the time of theft. Id. at 1351. Because the government recovered the timber on the day of the theft, however, we concluded that “[a]ny reduction in its value stems from the government’s decision to hold the timber during a period of declining prices, not 22 No. 10-3794 from Tyler’s criminal acts.” Id. at 1352. The value of the property “ ‘as of the date the property [was] returned’ ” equaled the amount lost when the timber was stolen, and therefore restitution under the Act was inappropriate. Id. (quoting 18 U.S.C. § 3579, which was subsequently renumbered as 18 U.S.C. § 3663). The same reasoning should apply in determining the value of the collateral property in this case. Smith should receive credit against the restitution amount for the value of the collateral property as of the date title to the property was transferred to either Savings & Loan or Gibraltar. As of that date, the new owner had the power to dispose of the property and receive compensation. Cf. 18 U.S.C. § 3663(e)(1) (restitution may be ordered for any person who has compensated a victim). Value should therefore be measured by what the financial institution would have received in a sale as of that date. Any reduction in value after Smith lost title to the property stems from a decision by the new owners to hold on to the property; to make Smith pay restitution for that business loss is improper. See Tyler, 767 F.2d at 1352. The victims in this case “receive[d] compensation” when they received title to the property and the corresponding ability to sell it for cash; the value of the compensation should therefore be measured and deducted from the total loss figure as of the date title was transferred. 18 U.S.C. § 3663(e)(1). Because the law is clear, to do otherwise would be an abuse of discretion. Id. at 625-26. No. 10-3794 23 There are several flaws in Smith’s reasoning. First, Smith quoted, with emphasis, the “less the value (as of the date the property is returned)” language from the MVRA, but ignored the fact that the property returned was not the property stolen. See Smith, 944 F.2d at 63132 (O’Scannlain, J., dissenting) (explaining that the majority “erroneously treats the five collateral properties as if they are somehow equivalent to the stolen capital,” but “[w]hat Smith stole was capital, and to restore his victims to the status quo ante, he must return the present value of that capital.”). Second, and relatedly, the Ninth Circuit in Smith relied heavily on its decision in Tyler to support its reasoning, but Smith’s reliance on Tyler was misplaced because in Tyler, the defendant was charged with theft of government timber and the exact same property (i.e., the timber) was recovered on the very day of the theft. Thus, Tyler does not support the view that “the property” in the MVRA means any property returned, as opposed to the property stolen. See Smith, 944 F.2d at 632 (O’Scannlain, J., dissenting) (“Nor does our decision in United States v. Tyler, 767 F.2d 1350 (9th Cir. 1985), upon which both the majority and Smith rely, support the court’s holding. See ante at 624-25. A defrauded lender’s assumption of title over collateral property that is itself part of the fraud is in no way analogous to a timber owner’s recovery of stolen timber.”) Third, Smith reasoned that as of the date the victim received title to the collateral, the new owner had the power to dispose of the real estate and receive compensation, and accordingly the value of the real estate should be based on the amount 24 No. 10-3794 the financial institution would have received in a sale as of that date. This reasoning ignores the reality that real property is not liquid and, absent a huge price discount, cannot be sold immediately. Fourth and finally, the court in Smith unreasonably assumed that any reduction “after Smith lost title to the property stems from a decision by the new owners to hold on to the prop- erty.” Smith, 944 F.2d at 625. This rationale also incorrectly assumes that real estate is liquid—which it is not. We say all of this because the Ninth Circuit’s decision in Smith served as the keystone for all of the subsequent decisions holding that the offset value is the fair market value of the collateral real estate on the date the title to the collateral reverted to the victim. For instance, in United States v. Hutchinson, 22 F.3d 846 (9th Cir. 1993), the defendant challenged the district court’s use of the final sales price as the offset value. Based on Smith, the Ninth Circuit agreed that the appropriate offset was the value of the collateral at the time the bank gained control of the real estate. Similarly, in United States v. Catherine, 55 F.3d 1462 (9th Cir. 1995), the defendant argued that the district court should have valued the real estate for offset purposes at the time the victim foreclosed on the collateral real estate, and the Ninth Circuit stated: “We decided this exact issue in Hutchinson, id. at 854-56, which in turn, relied on United States v. Smith.” Id. at 1465. The court in Catherine then followed these precedents and reversed and remanded the case for the district court to value the collateral at the time the bank received title. Id. And in United States v. Davoudi, 172 F.3d 1130 (9th Cir. 1999), No. 10-3794 25 the Ninth Circuit again held that the district court erred in basing its offset valuation on the eventual sales price of the collateral. Davoudi parroted Smith’s reasoning and cited Smith, Catherine, and Hutchinson. Then in United States v. Gossi, 608 F.3d 574 (9th Cir. 2010), the Ninth Circuit relied on Davoudi, to conclude: “Under this Court’s precedent, the district court reasonably found that [the victim] had the power to dispose of the property at the time it took control of the property at foreclosure. ‘Value should therefore be measured by what the financial institution would have received in a sale as of that date.’ ” Id. at 578 (quoting Smith, 944 F.2d at 625). The final and most recent decision from the Ninth Circuit is United States v. Yeung, 672 F.3d 594 (9th Cir. 2012). In Yeung, the court considered the propriety of several restitution orders to financial institutions which suffered losses following a fraudulent real estate scheme and stated: Using the framework set forth in § 3663A(b), we have developed some guidelines for calculating the restitution amount in a case involving a defendant’s fraudulent scheme to obtain secured real estate loans from lenders. Generally, district courts calculating a direct lender’s loss in this context begin by determining the amount of the unpaid principal balance due on the fraudulent loan, less the value of the real property collateral as of the date the direct lender took control of the property. United States v. Hutchison, 22 F.3d 846, 856 (9th Cir. 1993); United States v. Smith, 944 F.2d 618, 625-26 (9th Cir. 1991) 26 No. 10-3794 (construing the VWPA). Because restitution should address a victim’s “actual losses,” see Smith, 944 F.2d at 626, we have approved restitution awards that included other amounts in the calculation of loss, such as prejudgment interest (using the govern- mental loan rate), id., interest still due on the loan, Davoudi, 172 F.3d at 1136, and expenses associated with holding the real estate collateral that were incurred by the lender before it took title to the property, Hutchison, 22 F.3d at 856. To calculate the value of the real property collateral “as of the date the property is returned,” § 3663A(b)(1)(B)(ii), courts use the value of the collateral “as of the date the victim took control of the property,” Davoudi, 172 F.3d at 1134. The lender does not take control of the collateral merely by triggering the foreclosure process. See United States v. Gossi, 608 F.3d 574, 578 (9th Cir. 2010). Rather, the lender generally takes control on the date the lender either (1) receives the net proceeds from the sale of the collateral to a third party at the foreclosure sale, see United States v. James, 564 F.3d 1237, 1246 (10th Cir. 2009), or (2) takes title to the real estate collateral at the foreclosure sale, at which time “the new owner had the power to dispose of the property and receive compensation,” see Smith, 944 F.2d at 625. The direct lender’s losses may also be reduced by amounts recouped from resale of the loan or from other types of “return” of property. See, e.g., Hutchison, 22 F.3d at 856. Id. at 601. No. 10-3794 27 On the basis of this precedent, the Ninth Circuit in Yeung then reversed the district court’s restitution awards, which were based on the subsequent sales price of the real estate, and remanded to the district court.1 0 As the above excerpt from Yeung makes clear, its holding was based on the well-established precedent that flowed from Smith. And as discussed above, none of those cases addressed the fundamental distinction between the property stolen (cash) and the property recovered (real estate). Like its predecessors, Yeung did not recognize that the Smith decision relied on Tyler, which was factually distinguishable from all of the 10 Yeung also held that “when a victim purchased a loan in the secondary market, that is, where the victim is the loan purchaser as opposed to the loan originator . . . the value of that loan is not necessarily its unpaid principal balance, but may vary with the value of the collateral, the credit rating of the borrower, market conditions, or other factors, [and thus] the loan purchaser may have purchased the loan for less than its unpaid principal balance.” Yeung, 672 F.3d at 601-02. The Ninth Circuit in Yeung then remanded the case to the district court to recalculate the restitution award. Robers filed Yeung as supplemental authority and argued that, as in Yeung, remand is required to determine the price at which the loans were purchased in the secondary market. Robers, however, had never previously argued (either before the district court or in briefing or at oral argument) that the restitution award was improperly based on the outstanding principal balance, as opposed to some potentially lower amount paid for the loans in the secondary market. Therefore, he has waived these issues. 28 No. 10-3794 cases at hand because Tyler involved a case where the property the defendant was charged with stealing was the same as the property returned to the victim (timber) and the theft and return happened on the same day.