Court Opinion

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Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

9-8-1994

United States of America v. Shaffer
Precedential or Non-Precedential:

Docket 93-7509

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Recommended Citation
"United States of America v. Shaffer" (1994). 1994 Decisions. Paper 126.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/126

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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT

                   __________________________

            Nos. 93-7508, 93-7509, 93-7549 & 93-7550
                   __________________________

                    UNITED STATES OF AMERICA

                            Appellee/Cross-Appellant in Nos. 93-7549
                                                     & 93-7550

                                  v.

                      FRANKLIN R. SHAFFER,

                            Appellant in Nos. 93-7508 & 93-7509
                                                     /Cross-Appellee

                   __________________________

         On Appeal from the United States District Court
             for the Middle District of Pennsylvania
              (D.C. Crim. Nos. 91-00060, 92-00320)
                   __________________________

                       Argued May 24, 1994

            Before: COWEN and ROTH, Circuit Judges,
                  and ACKERMAN, District Judge*

                    (Filed September 8, 1994)

                   __________________________

Matthew R. Gover (argued)
Caldwell & Kearns
3631 North Front Street
Harrisburg, PA 17110

          COUNSEL FOR APPELLANT/CROSS-APPELLEE
          FRANKLIN R. SHAFFER

*
   The Honorable Harold A. Ackerman, United States District Judge
for the District of New Jersey, sitting by designation.
David M. Barasch
United States Attorney
Martin C. Carlson (argued)
Assistant United States Attorney
Sally A. Lied
Assistant United States Attorney
Federal Building
228 Walnut Street
P.O. Box 11754
Harrisburg, PA 17108

          COUNSEL FOR APPELLEE/CROSS-APPELLANT
          UNITED STATES OF AMERICA

                   __________________________

                      OPINION OF THE COURT
                   __________________________

COWEN, Circuit Judge.

          This case presents the issue of whether the bank fraud

sentencing guidelines, which we earlier interpreted as requiring

a sentencing court to calculate the amount of the victim's loss
as it exists at the time of sentencing rather than at the time of

the commission of the offense, permit a defendant convicted of

kiting checks to significantly reduce his sentence by paying back

all or a portion of the amount he absconded with during the

commission of the offense.   In the particular case of a defendant

who has violated the bank fraud statute through the act of kiting

checks, we conclude that, in the absence of overriding facts

dictating other treatment, the sentencing court must ordinarily

calculate the amount of the loss as it exists at the time the
crime was detected, rather than as it exists at the later time of

sentencing.   Because the district court in this case sentenced

the defendant by calculating the amount of the actual loss which

resulted from the crime as it existed at the time of sentencing,

we will vacate the sentence and remand for resentencing.

                                I.

          The facts giving rise to Franklin Shaffer's conviction

and sentence are relatively simple and largely undisputed.

Shaffer formerly led several engineering and construction firms

which were engaged in large construction projects in central

Pennsylvania.   During the summer of 1988, collections of accounts

receivable fell significantly behind, resulting in a sizable cash

shortfall for the companies.   After the companies' line of credit

was canceled, Shaffer attempted to keep his businesses afloat by

kiting checks for large sums of money between his personal bank

accounts and the various business accounts.1   At the time he was

1
 . The check kiter opens an account at Bank A with a nominal
deposit. He then writes a check on that account for a large sum,
such as $50,000. The check kiter then opens an account at Bank B
and deposits the $50,000 check from Bank A in that account. At
the time of deposit, the check is not supported by sufficient
funds in the account at Bank A. However, Bank B, unaware of this
fact, gives the check kiter immediate credit on his account at
Bank B. During the several-day period that the check on Bank A
is being processed for collection from that bank, the check kiter
writes a $50,000 check on his account at Bank B and deposits it
into his account at Bank A. At the time of the deposit of that
check, Bank A gives the check kiter immediate credit on his
account there, and on the basis of that grant of credit pays the
original $50,000 check when it is presented for collection.
     By repeating this scheme, or some variation of it, the check
kiter can use the $50,000 credit originally given by Bank B as an
interest-free loan for an extended period of time. In effect,
writing checks, Shaffer did not have sufficient funds in the

accounts to cover the check amounts.

          In September, 1988, a bank officer reported the matter

to federal authorities.   After an investigation, Shaffer was

charged with executing and attempting to execute a check kiting

scheme from July through September, 1988.    By the time the FBI

investigated the matter, Shaffer had sufficient funds in all the

accounts to cover all the checks.   For this reason, the United

States Attorney for the Middle District of Pennsylvania

recommended Shaffer as a possible candidate for pre-trial

diversion.   By order dated August 21, 1991, the district court

placed Shaffer on pre-trial diversion for twelve months, ordered

him to pay the victim banks the interest each would have earned

on the money Shaffer had borrowed through the check kiting

scheme, and ordered him to perform community service.

          While on pre-trial diversion, Shaffer again began

kiting checks because of cash flow shortfalls in his various

construction firms.   Bank officials notified the government of

suspicious activity in Shaffer's accounts on August 19, 1992.      A

motion was filed with the district court requesting that Shaffer

be removed from pre-trial diversion.    The motion was granted and

the FBI undertook an investigation.    Unlike the first time his

check kiting was discovered, Shaffer was not able to cover all
(..continued)
the check kiter can take advantage of the several-day period
required for the transmittal, processing, and payment of checks
from accounts in different banks . . . ." Williams v. United
States, 458 U.S. 279, 281 n.1.
the checks he had written.   Four of the five victim banks used by

Shaffer in the check kiting scheme reported gross losses at the

time of detection as follows: Fulton Bank--$40,371.46; Commerce

Bank--$18,020.88; Dauphin Deposit Bank--$206,636.60; and CCNB--

$197,280.66.   The total loss was determined to be $462,309.60.

          Shaffer was charged with two counts of bank fraud, in

violation of 18 U.S.C. § 1344, for the two separate check kiting

incidents.   After plea bargain negotiations, Shaffer pleaded

guilty to both counts on January 13, 1993.   As part of the plea

agreement, Shaffer agreed to make restitution to the victim banks

in an amount to be determined by the district court at a pre-

sentencing hearing.   At his arraignment, Shaffer requested a

sentencing delay in order to allow him to get his business

affairs in order and to give him sufficient time to attempt to

make restitution to the victim banks.

          The United States Probation Office prepared a pre-

sentence report pursuant to the United States Sentencing

Guidelines ("U.S.S.G.") which assessed a total offense level of

17 against Shaffer.   The offense level was determined in the

following manner: (1) a base level of 6 was assessed pursuant to

U.S.S.G. § 2F1.1(a); (2) an increase of 9 levels was added under

U.S.S.G. § 2F1.1(b)(1)(J) since the total amount of the loss to

the victim banks exceeded $350,000 but was less than $500,000;

and (3) an additional 2 level increase was made pursuant to

U.S.S.G. § 2F1.1(b)(2)(B) because the crime involved a scheme to

defraud more than one victim.   The pre-sentence report concluded
that the applicable guideline sentence range was from 24 to 30

months.

           A sentencing hearing was held on July 16, 1993.   By

this time, Shaffer had negotiated settlement agreements with

three of the four victim banks.   Pursuant to these agreements,

Fulton Bank had accepted a settlement of $20,000 in "full

satisfaction" of its loss of $40,371.46; Commerce Bank had

accepted $10,500 in "full satisfaction" of its loss of

$18,020.88; and Dauphin Deposit Bank agreed to accept the

conveyance of a parcel of real estate in Shreveport, Louisiana

held by Shaffer in his retirement account, secured by a judgment

against one of Shaffer's business corporations, and a promissory

note in the sum of $84,000 from Shaffer in "full satisfaction"

for its loss of $206,636.60.   No agreement was reached between

Shaffer and the fourth victim bank, CCNB.

           At the sentencing hearing, Shaffer objected to the 9

level increase pursuant to U.S.S.G. § 2F1.1(b)(1)(J).    He argued

that no increase was warranted because he actually intended no

loss to the victim banks at the time of the commission of the

offense.   Based on the evidence presented, the district court

agreed that Shaffer at all times intended to repay the amounts

borrowed during the check kiting scheme through the collection of

accounts receivable, and made a factual finding that Shaffer

actually intended no permanent loss to the victim banks.

Nevertheless, the district court disagreed that the loss was zero

for all victim banks or the three banks which had entered into

settlement agreements with Shaffer.   The district court concluded
that the "actual loss" at the time of sentencing was the total

loss of $462,309.60 less the amounts the three victim banks had

agreed to accept in lieu of their initial losses pursuant to the

settlement agreements.2

          Since this reduced the loss for sentencing purposes to

$347,809.60, the district court enhanced Shaffer's base level

only by 8 levels pursuant to U.S.S.G § 2F1.1(b)(1)(I).   In so

doing, the district court rejected the government's position that

"actual loss" in a check kiting bank fraud case is the initial

loss of the victim banks at the time the fraud is detected, which

should not be reduced by any subsequent settlement payments in

the nature of restitution that the defendant makes.   The district

court further granted Shaffer a 2 level base level reduction

pursuant to U.S.S.G. § 3E1.1(a) for acceptance of responsibility.

Premised on a base level of 14, the district court sentenced

Shaffer to an eighteen month term of imprisonment, three years of

supervised release, and ordered him to make restitution in full

to CCNB and as agreed with the other victim banks.3

2
 . Thus, the district court agreed to reduce the total initial
loss by $114,500, which was composed of the settlement agreement
amounts of $10,500 for Commerce Bank, $20,000 for Fulton Bank,
and $84,000 for Dauphin Deposit Bank.
3
 . Shaffer filed a post-sentencing letter with the district
court seeking a further 1 level base level reduction in his
sentence pursuant to U.S.S.G. § 3E1.1(b). The district court
agreed that a base level reduction of 3 levels was required for
Shaffer's acceptance of responsibility, rather than the 2 base
level reduction which was granted during sentencing. Although
the district court did not enter an order changing the sentence
since it felt that 18 months of incarceration was appropriate and
18 months was still well within the guideline range, the district
court did instruct the probation office to adjust the guideline
                                II.

          Shaffer filed a notice of appeal challenging his

sentence on the theory that the district court overstated the

amount of the victims' loss pursuant to U.S.S.G. § 2F1.1(b)(1).

The government also filed a notice of appeal to challenge

Shaffer's sentence taking the contrary view that the district

court understated the amount of the victims' actual loss.    We

have appellate jurisdiction pursuant to 28 U.S.C. § 1291.    These

appeals involve a legal interpretation of the appropriate

calculation of "loss" under U.S.S.G. § 2F1.1(b)(1), over which we

have plenary review.    United States v. Badaracco, 954 F.2d 928,

936 (3d Cir. 1992).

                                III.

          The question on appeal is whether to calculate the

total amount of the victims' loss for purposes of sentencing a

check kiter as it exists at the time the offense is detected or

at the time of sentencing.    While the language of U.S.S.G. §

2F1.1(b) itself, together with its commentary, does not directly

address whether the loss calculation should be as it exists when

the fraud is detected or at sentencing, the commentary does state

that "the loss need not be determined with precision," U.S.S.G. §

2F1.1 comment. (n.8).    Furthermore, the commentary states that

(..continued)
offense level to 13.    Neither party contests this adjustment on
appeal.
"if an intended loss that the defendant was attempting to inflict

can be determined, this figure will be used if it is greater than

the actual loss."   Id. (n.7).

          We have previously held that in the context of

procuring a secured bank loan through fraudulent

misrepresentation, fraud "loss" pursuant to U.S.S.G. § 2F1.1(b)

"is, in the first instance, the amount of money the victim has

actually lost (estimated at the time of sentencing), not the

potential loss as measured at the time of the crime."   United

States v. Kopp, 951 F.2d 521, 536 (3d Cir. 1991).   The actual

loss calculation, in a case such as Kopp, will reflect the

deduction of the value of the collateral, pledged as security for

the loan, from the loss sustained by the defrauded lender.    We

recognized in Kopp that if actual loss as calculated at the time

of sentencing understates the amount of loss the defendant

intended to inflict, then the "loss" figure should be revised

upward to the intended loss figure.   Id.

          The present case does not involve an intended loss

theory for the calculation of "loss" pursuant to U.S.S.G. §

2F1.1(b) because the district court made a finding of fact that

Shaffer actually intended no permanent loss whatsoever.4   Citing
4
 . At oral argument, the government contended first that it was
unnecessary to address whether the district court was clearly
erroneous as to its factual finding concerning Shaffer's intent,
and alternatively, that the finding was clearly erroneous. Since
we conclude that resolution of this case more appropriately turns
on whether the district court settled on the appropriate actual
loss figure by calculating the loss as it existed at the time of
sentencing, rather than as it existed at the time the crime was
detected, we need not address whether the district court's
finding of fact was clearly erroneous.
Kopp for authority, Shaffer argues that the district court should

have determined that there was no loss to the three victim banks

which entered into settlement agreements with Shaffer, which

would have resulted in an increase of only 7 base levels pursuant

to U.S.S.G. § 2F1.1(b)(1)(H) since the fourth victim bank, CCNB,

had a total loss of just under $200,000.    Alternatively, Shaffer

argues that the district court was correct in its loss

calculation pursuant to U.S.S.G. § 2F1.1(b) in that the loss was

calculated as it existed at the time of sentencing, not as it

existed at the time of the detection of the offense, and

therefore his sentence should be affirmed.    The government argues

that this case is distinguishable from Kopp because the crimes of

kiting checks and the fraudulent procurement of a secured loan,

while both bank frauds, are sufficiently distinct to warrant

differing treatment under the Guidelines.

           In Kopp, a case involving bank fraud where the borrower

submitted false information in order to obtain a commercial real

estate mortgage, we limited the loss calculation pursuant to

U.S.S.G. § 2F1.1(b) to the higher of "actual loss" calculated at

the time of sentencing or the amount of loss the borrower

actually intended. 951 F.2d at 527-36.   In that case, we held

that the actual loss is that which exists at the time of

sentencing, not at the time the fraudulent act was committed,

because the total amount of the loan without a reduction for the

actual or estimated value of the collateral pledged to the bank

would overstate the victim bank's actual loss.    See id. at 528-
30.   Thus, we determined that calculation of the victim's actual
loss at the time of sentencing would more accurately reflect the

defendant's culpability for sentencing purposes.

          Subsequently, we have indicated that the Kopp holding

does not provide a rule that should be followed for all types of

bank fraud convictions.   For instance, where a bank officer was

convicted of bank fraud for using his position for his personal

benefit by conditioning loan approval on the borrower using

contractors in which he owned an interest, we determined that

actual loss was the total amount of the contracts received by the

related contractors, rather than the net gain or profit to these

companies as calculated or estimated at the time of sentencing.

United States v. Badaracco, 954 F.2d 928, 936-38 (3d Cir. 1992).

Thus, we distinguished Kopp because the type of bank fraud at

issue in Badaracco was more similar to an embezzlement crime,

where the loss is calculated as gross gain, rather than a secured

loan crime where the defendant actually pledges something of

value, the collateral, which will reduce the amount of the victim

bank's loss below the face value of the loan.   See 954 F.2d at

937-38.

          We stated in Badaracco that "[a]lthough section 2F1.1
is applicable to a wide variety of fraud schemes, the sentencing

judge is entitled, probably compelled, to evaluate the size of

the loss based on the particular offense."   Id. at 937.   We

believe that check kiting crimes, because of their particular

nature, are crimes where the district court must calculate the

victim's actual loss as it exists at the time the offense is

detected rather than as it exists at the time of sentencing.     Cf.
United States v. Katora, 981 F.2d 1398, 1406-07 (3d Cir. 1992)

(sentencing court not obliged to reduce amount of wire fraud loss

by speculative value of personal guaranties given at time of

commission of offense).     We come to this conclusion for several

reasons.

            First, the commentary to U.S.S.G. § 2F1.1 indicates

that loss valuation should be made in accordance with the

valuation of theft loss pursuant to the commentary to U.S.S.G. §

2B1.1.    U.S.S.G. § 2F1.1 comment. (n.7).   "As in theft cases,

loss is the value of the money, property, or services unlawfully

taken."    Id.   In a check kiting scheme, where the offender writes

bad checks to "temporarily . . . obtain credit," Black's Law

Dictionary 238 (6th ed. 1990), the amount of money owed to the

victim banks at the time the kite is detected is the value of the

money unlawfully taken by the defendant.     In effect, the gross

amount of the kite at the time of detection, less any other

collected funds the defendant has on deposit with the bank at

that time and any other offsets that the bank can immediately

apply against the overdraft (including immediate repayments), is

the loss to the victim bank.

           Second, we do not believe that most check kiting frauds

are sufficiently analogous to secured loan frauds to require, as

we held in Kopp, that the actual loss determination be made as
the loss exists at the time of sentencing rather than at the time

of detection.     Although both of these types of bank fraud involve

fraudulently obtained loans, the similarities end there.     Secured

loan frauds include an aspect that is ordinarily entirely absent
from a check kiting scheme--namely collateral, which while

probably insufficient to protect the victim bank completely

against risk of loss, usually provides some recovery against the

loan amount.   By its very nature, the crime of kiting checks

ordinarily involves the borrowing of funds without authorization

from the bank and without the offender providing any security to

protect the bank against risk of loss.   This distinction warrants

treating perpetrators of check kiting loan frauds in most cases

differently from perpetrators of secured loan frauds for

sentencing purposes.

          Furthermore, we do not believe that calculating check

kiting fraud loss at the time of detection is contrary to the

commentary contained in the Sentencing Guidelines.   The

Sentencing Guidelines have been clarified to make explicit the

rule we announced in Kopp as applicable to secured loan frauds,

but not unsecured loan frauds like check kiting.   The Guidelines

commentary now states in relevant part:
     In fraudulent loan application cases . . ., the loss is the
     actual loss to the victim (or if the loss has not yet come
     about, the expected loss). For example, if a defendant
     fraudulently obtains a loan by misrepresenting the value of
     his assets, the loss is the amount of the loan not repaid at
     the time the offense is discovered, reduced by the amount
     the lending institution has recovered (or can expect to
     recover) from any assets pledged to secure the loan.

U.S.S.G. § 2F1.1 comment. (n.7(b)).   The Sentencing Guidelines

apparently limit this wait-and-see approach to calculating actual

loss to secured loans because with unsecured loans, like those

which sometimes result when check kiting schemes are detected,
any recovery is entirely speculative.5   Nevertheless, to the

extent the Guidelines commentary indicates that in secured loan

frauds the actual loss should be reduced by the amount of money

immediately repaid by the offender at the time of discovery, the

same is true of check kiting frauds.

          Moreover, the weight of authority, while sparse,

supports our conclusion that for purposes of sentencing a

defendant who has perpetrated a bank fraud by kiting checks,

actual loss should be calculated as it exists at the time of

detection rather than at the time of sentencing.   Likening check

kiting frauds more to simple theft than secured loan

transactions, the Court of Appeals for the Fifth Circuit adopted

the position we adhere to today.   United States v. Frydenlund,

990 F.2d 822, 825-26 (5th Cir.), cert. denied, __ U.S. __, 114 S.

Ct. 192 (1993).   Other courts of appeals have held that the

fortuity of the defendant paying full restitution to the victim

banks after the time when the check kiting fraud was detected

does not warrant a downward departure on the sentence for

acceptance of responsibility.   United States v. Carey, 895 F.2d
5
 . We reject the attempt made by Shaffer in this appeal to liken
his crime more to a secured loan fraud than a theft because he
was the principal of several businesses which had a large amount
of accounts receivable outstanding during the period of the kite.
The record reveals that at the time of the second check kite,
which resulted in loss to the four victim banks, Shaffer's
various business interests also had a significant outstanding
loan from an individual named "Cochrane" which was secured with
the business receivables. See App. at 174, 185 (testimony of
Shaffer).
318, 322-23 (7th Cir. 1990); United States v. Bolden, 889 F.2d
1336, 1340-41 (4th Cir. 1989).

          Finally, we, like the district court, are troubled by

the outcome which would result if actual loss is calculated as it

exists at the time of sentencing rather than at the time of

detection.   We agree with the sentiment, stated by the district

court at sentencing, that a reduction of sentence because of a

last minute payment of restitution would unfairly discriminate in

favor of those with greater financial resources.6   We are also

concerned that permitting such a reduction in sentence might

encourage the use of undue pressure by a defendant to induce the

victim bank into settling for payment of only a portion of the

amount it has lost.   In sum, it is a hallmark of our sentencing

scheme that criminal defendants who have committed identical

crimes, and who have the exact same culpability, should be

6
.   The district court stated the following at sentencing:

        As a final note, I should add that the court is troubled
     by the outcome in this case. The [c]ourt recognizes that
     the prospect of a potentially reduced sentence acts as a
     carrot to a defendant sparing that individual to make
     speedier or more adequate restitution than he or she might
     otherwise do benefiting the victims of his or her crime.
     However, the [c]ourt sees a great danger in allowing an
     individual to buy his or her way out of jail time.

        Unfortunately, this is what a reduction of sentence in a
     last minute payment of restitution amounts to. Such a
     policy I think unfairly discriminates in favor of those with
     greater financial resources. I believe in light of the
     cases and in light of the way the Third Circuit has spoken,
     it is the only outcome this [c]ourt can conclude is
     appropriate for this case.

App. at 157-58.
treated equally at sentencing pursuant to U.S.S.G. § 2F1.1(b)

even though one has the means through business or personal

relations to make restitution to the victim banks after he has

been convicted, while the other does not.

                                 IV.

             We conclude that the district court erred in

calculating the victims' loss pursuant to U.S.S.G. § 2F1.1(b)

from this check kiting fraud as it existed at the time of

sentencing rather than as it existed at the time of detection.

Thus, we will vacate Shaffer's sentence and remand for

resentencing consistent with this opinion.

United States v. Shaffer, Nos. 93-7508/7549

ACKERMAN, District Judge, concurring in the judgment:

     I agree with the majority's conclusion that the check-kiting

scheme involved in this case is more akin to theft than to loan

fraud.     I also believe that this distinction makes Kopp

inapplicable.

     I must part company, however, with the majority's treatment

of Kopp.    According to the majority, the rule we announced in

Kopp -- that the amount of the loss is the actual loss estimated

at the time of sentencing (unless the intended loss is higher) --

only applies to fraudulently obtained loans secured by

collateral.     In its view, Kopp is distinguishable from the

instant case in large part because Shaffer did not fraudulently

obtain a loan that was secured by collateral.
     The fact of collateral, however, is peripheral to our

analysis in Kopp.    Rather, Kopp focuses on distinguishing between

the various levels of culpability involved in different types of

fraud.     Specifically, when a fraud consists solely of

misrepresentations designed to secure a contract, but the

defendant has no intention of reneging on the contract, that

fraud must be treated differently from a garden-variety fraud

case.     The latter often is indistinguishable from theft; the

former is not.     As we said in Kopp itself, "some fraud involves

an intent to walk away with the full amount fraudulently

obtained, while other fraud is committed to obtain a contract the

fraud perpetrator intends to perform."    Kopp, 951 F.2d at 529.

In holding as we did, we recognized the irrationality of

"apply[ing] the same sentence against a performing contractor who

lied on its application as against 'a con artist who intended to

winkle $142,400 . . . from a senile old lady.'"     Id. at 532

(citing United States v. Schneider, 930 F.2d 555, 559 (7th Cir.

1991)).    This also is the principle articulated by the cases we

relied on in Kopp.    See Schneider, 930 F.2d 555 (when defendants

fraudulently procured government contracts but fully intended to

perform the contracts, court declined to compute the loss as the

face amount of contracts obtained); United States v. Whitehead,
912 F.2d 448 (10th Cir. 1990) (when defendant presented

fraudulent documents to obtain an option to purchase a home,

court declined to value the loss as the value of the home);

United States v. Hughes, 775 F. Supp. 348 (E.D.Cal. 1991) (when
defendant conspired to present false loan applications to buy
three homes but had no intention of defaulting on the loans, and

in fact paid back two of the loans involved, court declined to

compute loss as value of homes).

     I respectfully suggest that the majority misses this

distinction by focusing on collateral.   Kopp is inapplicable to

this case not because Shaffer's "loan" was unsecured, but because

Shaffer's check-kiting scheme simply is not analogous to the

crime of "a performing contractor who lied on its application."

Check-kiting is more akin to theft.   For that reason, the case
falls outside the scope of Kopp, and I join my colleagues in

vacating Shaffer's sentence and remanding the matter for

resentencing.