Opinion ID: 765751
Heading Depth: 3
Heading Rank: 2

Heading: The Remaining Contracts

Text: 116 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 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. 117 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 break-even. 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. 118 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. 119 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 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 requested financial 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. 120 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. 121 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 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 nearly fifty 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. 122 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 a fine. 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