Court Opinion

ID: 2995569
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:21:05.077745+00
Date Added: 2024-06-11T11:45:25.962099
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 00-3937 & 01-2841

United States of America,

Plaintiff-Appellee,

v.

Alan Frost and Anne Bracken (formerly known
as Anne Frost),

Defendants-Appellants.

Appeals from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 2:97 CR 161 JM--James T. Moody, Judge.

Argued January 11, 2002--Decided February 21, 2002

  Before Easterbrook, Kanne, and Diane P. Wood,
Circuit Judges.

  Easterbrook, Circuit Judge. Midland
Career Institute, an accredited trade
school with headquarters in Hammond,
Indiana, opened a branch in Chicago early
in 1992. The branch, and the school
itself, closed about a year later. Almost
95% of the Chicago branch’s students
defaulted on their federally guaranteed
loans. That exceptionally high rate led
to an investigation and criminal
convictions of Alan Frost and Anne
Bracken, who purchased the school in 1987
and managed it until the failure in 1993.
Both defendants were convicted of
conspiracy to defraud the United States,
see 18 U.S.C. sec.371, and four
substantive counts of fraud in connection
with federal educational assistance, see
20 U.S.C. sec.1097(a). Each was sentenced
to 51 months’ imprisonment.

  According to the prosecutor, Frost and
Bracken employed three devices to defraud
the United States. First, they instructed
the school’s employees to lie about
students’ accomplishments in order to
obtain additional Pell Grants (federal
scholarships for needy students). Grant
funds for each year are disbursed in two
parts: half on enrollment, and the second
half on certification by the school that
the student has successfully completed
half of the year’s education hours (or
will do so within three days). The
evidence, taken in the light most
favorable to the jury’s verdict, showed
that the defendants instructed the
school’s staff to make false
certifications in order to obtain Pell
Grant funds on behalf of students who
were nowhere near completion of the hours
required. Second, defendants applied to
Indiana for guarantees (ultimately backed
by the United States) of bank loans made
to students at the Chicago branch. These
applications were made using the name,
address, and identifier of the main
location in Indiana, and the school did
nothing to alert Indiana’s officials that
the education was being provided outside
of Indiana to students who lived outside
Indiana. Third, the school failed to
ensure that all students obtaining
federal aid possessed the necessary
qualifications: a high school degree, a
general education diploma, or a passing
grade on an "ability-to-benefit test."
The result of these three shortcomings,
according to the prosecutor, was that the
school received substantial federal funds
to which it was not legally entitled. The
omission of ability-to-benefit tests for
four particular students is the basis of
the four substantive convictions.

  Frost and Bracken argued at trial that
their conduct was appropriate. With
respect to Pell Grants, for example, they
contended that most of these students
were bound to complete the required
credit hours eventually, and that the
school refunded grant funds received on
behalf of students who did not. Evidence
that refunds actually occurred did not
find its way into the record, a telling
omission. But even if refunds had been
made, defendants’ position is similar to
that of a person who obtains bank loans
by fraudulently overstating his assets
and justifies his conduct with the claim
that he intended to repay (and did pay
back some loans). The conduct is fraud
nonetheless: lies that induce the bank to
part with the money are material, and the
overstatement of assets exposes the bank
to more risk of nonpayment than it
willingly assumed. See United States v.
Dial, 757 F.2d 163, 169-70 (7th Cir.
1985); United States v. Catalfo, 64 F.3d
1070, 1076-78 (7th Cir. 1995). So too
here. The United States took the risk
that someone within three days of
completing the required credits might
fail to do so (and that the school would
go out of business and be unable to
repay). It did not agree to assume the
larger risk that someone a month or two
from completion might drop out of school
or flunk courses, or that a school with a
larger inventory of "unearned grants"
might fold while in debt to the United
States, as Midland Career Institute did.
Other lines of defense relating to Pell
Grants (such as an argument that some of
the students actually had completed the
required hours, but that the school’s
records were defective) presented jury
questions, which were resolved adversely
to the defendants. The record permitted
the jury to find as it did. The frauds
with respect to Pell Grants are enough by
themselves to sustain the conspiracy
conviction, even if the evidence on the
other two kinds of overt acts were deemed
insufficient. See Griffin v. United
States, 502 U.S. 46 (1991).

  Because it turns out to be important for
sentencing, the evidence concerning the
guarantees requires some discussion. When
it opened a branch in Chicago, the school
applied to Illinois for guarantees of
loans to its students. The state agency
responsible for this task in Illinois
told the school that it should apply to
Indiana instead, because its main
location was in that state. Indiana’s
rules make students living in counties
contiguous to that state eligible, see
Ind. Code sec.20-12-21.1-1(f)(4), so the
school filed applications with Indiana.
But it did not tell Indiana’s agency that
the students lived in Illinois and would
attend a branch in Chicago. The
documentation submitted in support of the
guarantees looked just like the
documentation supporting guarantees for
Indiana residents studying in Hammond.
Defendants say that this was not
fraudulent, because residents of Cook
County, Illinois, were substantively eli
gible for guarantees: no harm, no foul.
After all, Illinois had told the school
to turn to Indiana. But Illinois had not
told the school to withhold information
from Indiana. Guarantees were not
automatic. Indiana might well have wanted
to satisfy itself that the Chicago branch
was providing a good education to
responsible students, so that the loans
were likely to be repaid. The Chicago
branch had been provisionally accredited
when it opened, on the strength of the
Hammond school’s history, but did not
undergo a regular accreditation study
until October 1992, months after Indiana
began guaranteeing loans--and after this
study the provisional accreditation was
revoked. Something turned out to be very
different between the Chicago and Hammond
branches--whether on the school’s side or
the students’-- because the repayment
history at the Chicago branch was
dramatically inferior to that in Hammond.
Candid applications for guarantees might
have enabled Indiana’s agency to
investigate and protect itself (and thus
the United States) against the losses
that ensued. Perhaps Indiana would have
insisted that full accreditation precede
guarantees. The information withheld from
Indiana--that the students were attending
a new branch in a different state, and
may have had different willingness or
ability to repay-- was material to the
decisions Indiana had to make. Leaving
Indiana in the dark thus was fraudulent.

  The ability-to-benefit tests played no
material role in sentencing, but they do
support four separate convictions, each
of which carries a $100 special
assessment. These convictions are not
supported by evidence that shows guilt
beyond a reasonable doubt and must be
vacated. An amendment to federal law
effective in 1991 made a passing score on
these tests a condition to federal aid
for students who did not have high school
or general education diplomas. See
sec.3005(a) of Pub. L. 101-508, 104 Stat.
1388, 1388-27, 1388-28 (1990). The school
engaged Wonderlic, Inc., a reputable
firm, to administer these when necessary.
Wonderlic hired Regina Biocic to carry
out this task. Nothing in the record
suggests that Frost or Bracken asked
Biocic to provide false test results. But
when federal investigators scoured the
school’s files after its failure, they
found 19 students’ records that did not
note either a diploma or a passing score
on an ability-to-benefit test. Four of
these 19 were selected as the basis of
criminal charges.

  Although each of the 19 files lacks
proof that the student took and passed an
ability-to-benefit test, there are two
plausible reasons (other than fraud) for
that omission. First, Biocic was not well
organized; this much the United States
concedes. Likely she failed to ensure
that appropriate notations were made in
at least some of the records (although
she may have indicated in some other way
that the applicant passed). Second, the
school’s files were themselves a mess.
After it closed, heaps of miscellaneous
records were scattered about. The agent
who examined the students’ files did not
look through these documents. If the
evidence showed that the school had not
set out to administer proper tests, or
that defendants had tried to subvert
Wonderlic’s process, then a search would
not have been necessary. But because the
United States concedes that defendants
delegated the testing, it was essential
to investigate the possibility that the
lack of notations in the 19 files
reflects a failure at Wonderlic’s end, or
of the school’s filing system, as opposed
to culpable fraud on defendants’ part.
Nineteen students is a small portion of
the enrollment, making record-keeping
errors more plausible as an explanation
(and calling into question whether
defendants had much to gain by skipping
the test for so few students).

  When imposing a sentence, the district
court started with an offense level of 6,
then added 12 because the loss on the
guaranteed loans fell between $1.5
million and $2.5 million. See U.S.S.G.
sec.2F1.1 (2000 ed.). (Section 2F1.1 was
deleted on November 1, 2001, by Amendment
617 and consolidated with sec.2B1.1.
Enhancements also were increased. Under
the revision a loss between $1 million
and $2.5 million would increase the base
offense level by 16. Our references are
to the Guidelines in force when
defendants were sentenced.) The judge
added 2 more levels because the offenses
involved more than minimal planning, see
sec.2F1.1(b)(2)(A), and 4 more because
defendants were the leaders of a large
organization. See sec.3B1.1(a). The final
offense level of 24 combined with
criminal history category I to produce a
sentencing range of 51-63 months. Each
defendant received a sentence at the
bottom of that range. Each contends that
the judge should have omitted the 4-level
enhancement under sec.3B1.1(a) and should
have set the loss at $0. These changes
would decrease the final offense level to
8, with a sentencing range of 0-6 months.
We start with the 4-level enhancement.
  Section 3B1.1(a) provides: "If the
defendant was an organizer or leader of a
criminal activity that involved five or
more participants or was otherwise
extensive, increase by 4 levels." The
word "participants" denotes
criminallyresponsible participants,
sec.3B1.1 Application Note 1, and we
shall assume that no one at the school
other than Frost and Bracken could have
been convicted of conspiring to defraud
the United States--that those who aided
Frost and Bracken were their dupes rather
than knowing participants. Still, "[i]n
assessing whether an organization is
’otherwise extensive,’ all persons
involved during the course of the entire
offense are to be considered. Thus, a
fraud that involved only three
participants but used the unknowing
services of many outsiders could be
considered extensive." Section 3B1.1
Application Note 3. Frost and Bracken
used the services of many participants,
including (for example) the record-
keeping staff who defendants instructed
to submit premature requests for Pell
Grants and guaranty applications omitting
all information that would imply that
operations were being conducted in
Chicago. The Midland Career Institute was
an extensive organization, and defendants
conducted its business in such a way that
a substantial portion of its income
throughout 1992 was obtained by fraud.
The enhancement under sec.3B1.1(a) is
designed for such cases.

  As for the loss calculation: the
district court started with the $2.8
million in unauthorized Pell Grants plus
guarantees on which the United States had
to make good when students did not pay
their lenders, then deducted the costs of
operating the school’s Chicago branch in
order to estimate net loss. The judge’s
idea was that the United States agreed to
buy education for the students, and the
cost of running the school is the best
estimate of the value of the education it
delivered. The two defendants were
sentenced separately. At Frost’s
sentencing, the district judge calculated
this cost at $1.05 million, leaving a
loss of about $1.78 million. At Bracken’s
later sentencing, the judge reckoned the
cost of running the branch at $3.21
million, discarding as inaccurate the
method he had used to determine the cost
when sentencing Frost. But the judge then
reduced this figure by 68% because only
32% of the students at the Chicago branch
had graduated. This produced an adjusted
cost of $1.03 million and a net loss of
$1.8 million, so Frost and Bracken ended
up in the same sentencing range.
Defendants observe that one or the other
of these methods must be wrong--and they
contend that both are mistaken, because
the judge should have used the $3.21
million figure and calculated a net loss
to the United States of zero for each of
them.

  For its part, the United States contends
that the district judge should have
stopped with the $2.8 million gross loss,
making no deduction. (This implies that
the sentence is too low, but a prevailing
party is entitled to defend its judgment
on any properly preserved ground. Compare
Massachusetts Mutual Life Insurance Co.
v. Ludwig, 426 U.S. 479 (1976), with El
Paso Natural Gas Co. v. Neztsosie, 526
U.S. 473, 479-81 (1999).) One argument
offered in support of this position--that
the benefit of higher education does not
count because it was received by the
students rather than the United States--
is unconvincing. The Guidelines call for
the use of net rather than gross loss
(forexample, a defendant receives credit
for the value of goods delivered, if the
fraud entails overcharging). Section
2F1.1 Application Note 8. When one party
sets out to benefit another, then the net
loss is the cost to the payor less the
benefit delivered to the intended
recipient. So in a food stamp case, where
the grocer accepts stamps for both bread
(allowed) and liquor (prohibited), the
net loss to the United States is the
amount of stamps redeemed, less the value
of eligible items delivered to the
beneficiaries. See United States v.
Hassan, 221 F.3d 380 (7th Cir. 2000);
United States v. Barnes, 117 F.3d 328
(7th Cir. 1997). The same principle
allows educators to deduct from the gross
loss the value of any education for which
the United States was willing to pay.

  That qualifier--"willing to pay"--is
vital. Suppose Donald Trump were to hand
a grocery store food stamps to pay for
his purchase of milk and bread. The
cashier knows that Trump’s income is too
high to make him eligible for food stamps
but redeems them anyway. The grocery
could not offset the value of the milk
and bread delivered to Trump against the
amount of its food stamp redemptions when
calculating net loss to the United
States, because Trump is not among the
lawful participants in the program. Right
items, wrong beneficiary. That’s the big
problem defendants face here. Education
is something for which the United States
is willing to pay--but was it delivered
to those persons on whose behalf the
United States is willing to cover the
costs? By concealing the location of the
branch and its students from Indiana’s
agency, Frost and Bracken prevented it
from making an informed decision about
this subject. Perhaps with full knowledge
Indiana would have approved the
guarantees, but we’ll never know. When
imposing sentence a judge may assume that
funds that were furnished only because of
material deceit would not otherwise have
been forthcoming. That’s the normal
approach in a bank-fraud case. The
borrower who overstated his assets,
received a loan, and did not repay could
not argue that the loss really is zero
because the bank would have extended
credit anyway (though perhaps at a higher
interest rate).

  There is a second reason why it is
inappropriate to net out the costs of
running the branch: Costs differ
frombenefit delivered. Suppose the United
States contracted for construction of a
highway, and the winning bidder obtained
the contract by fraud. The loss would be
the contract price less the value of the
highway actually built, not price less
the contractor’s costs. This would be
easy to see if the contractor used shoddy
materials and the road had to be torn up
and rebuilt. Its value would be zero at
best and could be negative (because of
the expense of demolition). Suppose
instead that the highway were well built;
by hypothesis the only problem is that
the Treasury overpaid. If costs are
deducted from price, then a contractor
that worked efficiently, and thus had low
expenses, would receive a higher sentence
than an inefficient builder. What sense
would that make? Similarly with
education. A trade school that owns a
private jet and rents space in fancy
office towers will have higher costs than
a school located in a suburban strip
mall, but these differences would be
poorly correlated with value delivered;
they might instead reflect the
consumption value that the school’s
managers extract (taking trips on
thecorporate jet and enjoying the lofty
views as perks). The relation between
costs and educational value may have been
especially poor for the Chicago branch,
which closed less than 15 months after it
opened and so threw out many students
without providing the full course of
instruction. They may have had to start
from scratch elsewhere. Frost and Bracken
did not attempt to make more direct
estimates of the school’s educational
value. They did not, for example, obtain
before-and-after incomes for their
students. Nothing in this record enabled
the district judge to estimate the value
added provided by the Chicago branch, so
there was no reliable basis for deducting
anything from the gross loss.

  Some deduction might have been justified
on a different ground. The district judge
counted as loss all of the loans that the
United States had to make good as
guarantor. This implicitly assumes that,
if the United States had used its funds
to guarantee loans to the same students,
at other schools, it would not have
suffered any losses. Yet all educational
institutions experience some defaults.
According to the Department of Education,
see , the rate for 1999 ran
from a low of 3.7% (students at private,
four-year colleges) to a high of 10.9%
(students at proprietary trade schools
offering less than two years of
instruction). In 1997 the trade school
rate was 18.5%, and in 1998 14.2%.
Deducting the normal default rate in 1992
and 1993 from the 95% rate experienced at
the Chicago branch would have produced a
figure more closely approximating the
loss caused by the defendants’ fraud.
Such a deduction would have put the loss
in the $1.5 million to $2.5 million
range--exactly the range the district
judge actually used, though he got there
by deducting estimates of the school’s
costs. There is accordingly no reason to
disturb the 51-month sentences.

  The substantive convictions are
reversed. The conspiracy convictions and
prison sentences are affirmed. The resti
tution order is vacated and must be
recalculated on remand in light of this
opinion.