Court Opinion

ID: 2762701
Source: CourtListenerOpinion
Date Created: 2014-12-18 23:00:46.391387+00
Date Added: 2024-06-11T10:43:54.621097
License: Public Domain

United States Court of Appeals
                             For the Eighth Circuit
                         ___________________________

                                 No. 14-1029
                         ___________________________

                              United States of America

                         lllllllllllllllllllll Plaintiff - Appellee

                                            v.

                                John Anthony Markert

                       lllllllllllllllllllll Defendant - Appellant
                                       ____________

                     Appeal from United States District Court
                      for the District of Minnesota - St. Paul
                                  ____________

                           Submitted: December 12, 2014
                             Filed: December 18, 2014
                                   ____________

Before LOKEN, BRIGHT, and KELLY, Circuit Judges.
                           ____________

LOKEN, Circuit Judge.

      John Markert, while President of Pinehurst Bank (“the Bank” or “Pinehurst”),
approved five nominee loans by the Bank to friends and family of bank customer
George Wintz. The loan proceeds were used to cover a nearly $1.9 million overdraft
in Wintz’s checking account at the Bank. A jury convicted Markert of willful
misapplication of bank funds by a bank officer in violation of 18 U.S.C. § 656. At
sentencing, applying Application Note 3 to U.S.S.G. § 2B1.1(b)(1), the district court
found that Markert’s offense caused an actual loss to the Bank equal to the total
amount of the nominee loans, resulting in a 16-level enhancement and an advisory
guidelines range of 87 to 108 months in prison. The court granted a substantial
downward variance and sentenced Markert to 42 months in prison. Markert appealed
his conviction and sentence. A divided panel affirmed the conviction, unanimously
concluded that actual loss was erroneously calculated, and remanded for resentencing.
United States v. Markert, 732 F.3d 920 (8th Cir. 2013).

       On remand, the government again asserted that actual loss for purposes of
§ 2B1.1(b)(1) was the face amount of the nominee loans, subject only to a credit for
$60,000 in principal repayments made prior to detection of the fraud, see § 2B1.1,
comment. n.3(E)(i). After considering arguments of counsel, but without an
evidentiary hearing, the district court agreed with the government and reduced its prior
finding of loss only by the amount of those repayments. This small reduction did not
affect the 16-level enhancement, see § 2B1.1(b)(1)(I), and the court “re-impose[d] the
same 42-month term of imprisonment previously ordered.”

       Markert again appeals that sentence. We again review the district court’s fact
findings for clear error and its interpretation of the advisory guidelines de novo. See
United States v. Holthaus, 486 F.3d 451, 454 (8th Cir.), cert. denied, 552 U.S. 939
(2007). As explained below, the government misinterpreted (or refused to follow) the
relevant loss principles discussed in our prior opinion. Markert, 732 F.3d at 931-33.
As a result, the government failed to sustain its burden to prove actual loss, and we
must again remand for resentencing. Though we agree with the district court that “the
loss here cannot be zero,” we decline to give the government a third chance to present
evidence meeting its burden of proof. Thus, on remand, actual loss for sentencing
purposes is zero, reducing the advisory guidelines range to 12-18 months in prison.
As Markert has already served more than 18 months, we reverse the district court’s
Order dated December 26, 2013, remand with instructions to sentence Markert to time

                                          -2-
served, and direct that he be immediately released from prison, subject to the terms
and conditions of supervised release imposed by the district court.

                                   I. Background

       We summarize the evidence at trial relevant to the actual loss issue. Additional
background may be found in our prior opinion. After Markert became Pinehurst’s
President in 2007, Wintz opened business checking accounts for two of his trucking
and warehouse entities, McCallum Transfer and Cue Properties. Markert approved
a series of loans to Wintz, quickly reaching the $250,000 limit of Markert’s unilateral
lending authority. By February 2009, loans to Wintz had reached the Bank’s legal
lending limit of nearly $1.2 million. JoAnn Crowley, Pinehurst’s Chief Financial
Officer, repeatedly warned Markert that Wintz may be “kiting checks.”1 Her warnings
went unheeded.

       In early March, when employees at Northstar Bank discovered Wintz’s check-
kiting activities, Northstar dishonored fifteen checks totaling nearly $1.9 million
drawn on a Wintz account at Northstar and deposited into his McCallum Transfer
account at Pinehurst. With the deposit checks dishonored, Pinehurst faced a nearly
$1.9 million loss on Wintz’s overdrawn account. By Monday, March 9, Wintz had
persuaded five friends and family members to sign documents obligating them to
repay five loans by Pinehurst totaling $1.9 million. Each nominal borrower
understood that Wintz was the real borrower and would be responsible for principal
and interest payments. Markert and others at the Bank prepared and closed the five
nominee loans on Monday, March 9. Disguised as investments in Cue Properties, the
loan proceeds were credited to Wintz’s Cue Properties account, then immediately re-

      1
        Check kiting is a form of fraud designed to utilize the time, or “float,” needed
for one bank to collect on checks drawn on accounts at other banks. By transferring
funds between accounts at different banks using checks not supported by sufficient
funds, the kiter fraudulently inflates the account balances.

                                          -3-
directed and credited to his McCallum Transfer account. The Bank did not post the
checks returned by Northstar until March 10 and did not record the $1.9 million
overdraft because by then the loan proceeds had infused Wintz’s account with
sufficient funds. Markert did not tell the Bank’s Board of Directors that Wintz was
the real borrower on the five nominee loans, nor disclose Wintz’s near-overdraft and
check-kiting activities.

       In January 2010, during a routine audit, an auditor uncovered the true purpose
of the five nominee loans. Markert was immediately terminated. In February 2010,
after reviewing the nominee loans, bank regulators required the Bank to book an
additional $2.2 million in loan reserves. In early April, the Bank as lender, Cue
Properties as borrower, and Wintz as guarantor entered into a fully collateralized Loan
Consolidation and Modification Agreement releasing the nominee borrowers from
their obligations. That agreement made the Bank whole from Markert’s
misapplication offense, but the FDIC’s continuing investigation uncovered additional
loss exposures, and regulators closed the Bank in May 2010.

       Markert was convicted of violating 18 U.S.C. § 656, an offense requiring proof
that he “wil[l]fully misapplied funds for the benefit of himself or another person, for
the purpose of defrauding or injuring” Pinehurst Bank. United States v. Barket, 530
F.2d 181, 186 (8th Cir. 1975), cert. denied, 429 U.S. 917 (1976); see United States v.
Britton, 107 U.S. 655, 666-67 (1883). The nominee loan proceeds were funds of the
Bank. Here, as in other cases where a bank officer used nominee loans to camouflage
fraudulent transactions, the “other person” -- check-kiter Wintz -- was the real
borrower, not the nominee borrowers.2 Wintz gained control of the nominee loan

      2
        The district court instructed the jury that “[n]ominee loans are loans in which
the nominal borrower was actually obtaining the money for a third party’s benefit. . . .
[S]uch a loan may be unlawful when the borrower and the bank officer fail to state the
real borrower and recipient of the funds, thereby obtaining the loans by means of false
pretenses.” See United States v. Willis, 997 F.2d 407, 410 n.2 (8th Cir. 1993), cert.

                                          -4-
proceeds deposited into his account and benefitted by avoiding a large overdraft that
would have severely damaged his business and financial interests. His contractual
relations with the Bank gave the Bank immediate right to use the loan proceeds to
cover the deposit checks that had been dishonored by Northstar Bank.

                                    II. Discussion

       The Guidelines define “loss” for purposes of the enhancement for fraud
offenses as “the greater of actual loss or intended loss.” U.S.S.G. § 2B1.1, comment.
n.3(A). Under this guideline as extensively amended in 2001, “actual loss” is “the
reasonably foreseeable pecuniary harm that resulted from the offense.” Note 3(A)(i);
see United States v. Hartstein, 500 F.3d 790, 798 n.3 (8th Cir. 2007), cert. denied, 552
U.S. 1102 (2008). As the Sentencing Commission explained, this “net loss” approach
“recognizes that the offender who transfers something of value to the victim[]
generally is committing a less serious offense than an offender who does not.”
U.S.S.G. App. C., Vol. II, Amend. 617, at 183; accord § 2B1.1 comment.
(background). Pinehurst Bank was the only victim of Markert’s offense. The
government concedes he did not intend to cause Pinehurst a loss. Thus, the issue is
actual loss, which government has the burden to prove by the preponderance of the
evidence. “The court need only make a reasonable estimate of the loss.” § 2B1.1,
comment. n.3(C).

       Markert’s Revised Presentence Investigation Report recommended, without
explanation, that Markert’s willful misapplication offense caused an actual loss to the
Bank equal to the total amount of the five nominee loans, nearly $1.9 million. The
government’s sentencing memorandum supported this recommendation, arguing (i)
numerous cases have held that loss in check-kiting cases is calculated in this fashion,
and (ii) “the amount of loss in misapplication and fraudulent loan cases is the amount

denied, 510 U.S. 1050 (1994).

                                          -5-
of funds misapplied.” The district court adopted the government’s argument,
explaining: “The amount of funds misapplied is the amount of the loss in a
misapplication case and here those nominee loans totaled $1.8 million.” On appeal,
we concluded that “the government’s actual loss contention as adopted by the district
court . . . fail[ed] to acknowledge that the monetary value of the nominee loans the
Bank received in exchange for the misapplied proceeds, measured at the time the
misapplication offense was detected, must be credited against actual loss.” Therefore,
we remanded to determine “[t]he net value of those loans, measured at the time their
nominal nature was detected.” 732 F.3d at 932-33. Judge Bright in dissent noted his
view that “the true degree of actual loss in this case [is] zero.” Id. at 935.

      On remand, the government succinctly stated its position at the resentencing:
“From our perspective, when Mr. Markert learned of this check-kiting scheme and
determined to secretly deploy the bank’s capital to fund that scheme, that constituted
an actual loss to the bank of $1.9 million at the time the funds were disbursed.” This
was the same position the government took at the initial sentencing. We rejected this
method of determining the actual loss caused by this willful misapplication offense,
noting that the government supported its contention with only one prior case that we
found distinguishable “because the misapplied funds at issue were not the proceeds
of new loans by the victim bank.” Id. at 932 (emphasis in the original). The
government inexplicably ignored this directive to rethink its initial position.

       For purposes of the § 2B1.1(b)(1) enhancement, actual loss is “reasonably
foreseeable pecuniary harm,” that is, “harm that is monetary or that otherwise is
readily measurable in money.” Note 3(A)(i) & (iii). For many, perhaps most fraud
offenses, actual loss is properly and readily measured by the fair market value of
property “taken” from the victim. Note 3(C)(i). That will be true in some willful
misapplication cases, such as United States v. Thomas, 422 F.3d 665, 667 (8th Cir.
2005), where the misapplication offense was causing the bank to disburse loan
proceeds to a borrower who defaulted. But in this case, the money never left the Bank.

                                         -6-
In affirming Markert’s conviction, we reviewed many cases establishing that “it is not
always necessary that money should be actually withdrawn from a bank, to constitute
a criminal misapplication of its funds.” 732 F.3d at 927 (quotation omitted). But that
does not resolve the question of actual loss for sentencing purposes. Cf. United States
v. Sandison, No. 09-CR-0108, 2011 WL 1596205 at *8 (D. Minn. Apr. 22, 2011).
When a willful misapplication offense does not result in money being “taken” from
the bank, as here, actual loss needs to be determined another way, for example, by
estimating “[t]he reduction that resulted from the offense in the value of . . . corporate
assets.” Note 3(C)(v). It may not be estimated simply by declaring, without
supporting evidence, that actual loss was the total amount of the assets that were
willfully misapplied from one segment of the bank’s balance sheet to another (here,
the nominee loans moved dollars from capital available for lending to an overdrawn
customer’s checking account deposits).

       We have little doubt the Bank suffered some actual pecuniary loss as the result
of Markert’s willful misapplication of the nominee loan proceeds. There are many
ways that pecuniary harm could be proved. The most obvious is, as our prior opinion
explained, to determine “[t]he net value of those [nominee] loans, measured at the
time their nominal nature was detected.” 732 F.3d 933. That value is not, as the
government argues, a determination of the amount to credit against an actual initial
loss of $1.8 million. As the loan proceeds were not initially “taken” from the Bank,
actual loss was only the difference between the amount loaned and the value of the
loan (to the extent not repaid) when the fraud was detected. As we observed, that
amount “may be difficult to measure.” Id. at 933. But the bank officers who
succeeded Markert could have estimated the net value of the nominee loans at that
time, perhaps with help from an expert in valuing distressed bank loans.

      Here, the record on appeal contains no such evidence. All the record tells us
is that, three months after the fraud was detected, Wintz agreed to a loan
“modification” agreement that provided the Bank a fully collateralized loan, and

                                           -7-
released the nominee borrowers and their collateral from the Bank’s dubious claims
against them.3 The government urges us to ignore this fact because “a defendant’s
repayment of funds after the discovery of a fraud offense is not relevant to
sentencing.” Id. at 932-33 n.5. That is generally true. But here, the Modification
Agreement was the best evidence of the net value of the nominee loans three months
earlier when the government failed to offer any other evidence.

       The government could also have introduced other evidence showing pecuniary
harm to the Bank. For example, the Bank doubtless incurred attorney’s fees and other
expense in convincing Wintz to enter into the Modification Agreement rather than
face lawsuits by the Bank and by the nominee borrowers, and other harm to his
business interests. In addition, the Bank suffered foreseeable regulatory harm from
the willful misapplication offense; the government could have presented evidence that
adverse regulatory consequences caused pecuniary harm.

       By accepting the government’s contention, the district court assumed that the
nominee loans had zero net value on the date of detection.4 The government suggests
this assumption was appropriate because the FDIC classified the nominee loans as
“loss loans.” We disagree. In the first place, the FDIC reclassification was stated in
the PSR, but it was not proved, and its pecuniary significance was not explained, at
trial. More importantly, that a regulatory agency classifies a bank loan as “loss” or
“uncollectible” when fraud is detected hardly establishes that the loan has no value to
the bank. Banks are accustomed to engaging in collection efforts to recover some
value when they have made loans to financially stressed borrowers, or loans for which

      3
       There was strong evidence at trial that the nominal borrowers were deceived
about the purpose of the loans, did not know the loan terms, and some rather clearly
lacked the ability to repay.
      4
        Markert correctly notes that the amount of principal already repaid bore no
relation to the net value of the nominee loans when the fraud was detected.

                                         -8-
the borrower may have a defense. If a particular bank is unwilling to devote its
resources to such efforts, there are businesses who will purchase doubtful loans at a
discount and attempt to recover from the borrowers more than they paid the bank.

                                         III.

       To summarize, the government on remand ignored its burden to establish the
reasonably foreseeable pecuniary harm resulting from Markert’s offense. It simply
declared that over $1.8 million was the actual loss and argued that the offsets or
credits recognized in Application Note 3(E) did not apply. This put the cart before the
horse. As the principal amount of the nominee loans was not a proper initial estimate
of actual loss, whether to reduce the actual loss by the Credits Against Loss allowed
in Application Note 3(E) became academic. In essence, the government’s flawed
argument to the district court impermissibly placed the burden on Markert to prove
that actual loss was less than $1.8 million.5

       The government has had two opportunities to prove the actual loss resulting
from Markert’s offense. Our prior remand explained what needed to be proved.
While we doubt the actual pecuniary loss to the Bank was zero, the government failed
to present evidence at trial or at sentencing permitting a reasonable estimate of that
loss. We recognize this was a novel sentencing issue, but given the nature of the
offense and the time Markert has served in prison, we conclude we should follow the
“traditional path” and not give the government another “bite at the apple.” United
States v. Thomas, 630 F.3d 1055, 1057 (8th Cir. 2011); see United States v.
Gammage, 580 F.3d 777, 779-780 (8th Cir. 2009). Therefore, no § 2B1.1(b)(1)
enhancement may be imposed in any further sentencing proceeding. That reduces

      5
        For this reason, we need not and do not address whether a defendant bears the
burden of proving offsets or credits once the government has proven the initial actual
loss resulting from an offense governed by § 2B1.1.

                                         -9-
Markert’s total offense level to 13 and his advisory guidelines range to 12-18 months
in prison. He has twice received a substantial downward variance from the district
court, so any sentence above this revised range would raise vindictive sentencing
issues. Markert entered custody on October 31, 2012, and has served more than 18
months in prison. In these circumstances, we conclude the proper disposition is to
remand to the district court with instructions to resentence Markert to time served, and
we direct the appropriate authorities that he be immediately released.

      Let the mandate issue forthwith.
                      ______________________________

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