United States v. Dickler

• Court: Court of Appeals for the Third Circuit
• Decided: August 21, 1995
• Docket: 94-3517
• Status: Unknown

Opinion

Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit

8-21-1995

United States v Dickler Precedential or Non-Precedential:

Docket 94-3517

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995

Recommended Citation "United States v Dickler" (1995). 1995 Decisions. Paper 229. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/229

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. 1 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

N0S. 94-3517 and 94-3518

UNITED STATES OF AMERICA

v.

SIDNEY J. DICKLER RICHARD R. PETRUCCI

Sidney J. Dickler Appellant in No. 94-3517

Richard R. Petrucci Appellant in No. 94-3518

On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Crim. Action Nos. 94-cr-00030-1 and 94-cr-00030-2)

Argued April 18, 1995

BEFORE: STAPLETON, HUTCHINSON and SEITZ, Circuit Judges

(Opinion Filed August 21, 1995)

Frederick W. Thieman United States Attorney Bonnie R. Schlueter (Argued) Assistant U.S. Attorney 633 U.S. Post Office & Courthouse Pittsburgh, PA 15219 Attorneys for Appellee

William F. Manifesto (Argued) 1550 Koppers Building

2 436 Seventh Avenue Pittsburgh, PA 15219 Attorney for Appellant Sidney J. Dickler

Ellen M. Viakley (Argued) 1550 Koppers Building 436 Seventh Avenue Pittsburgh, PA 15219 Attorney for Appellant Richard R. Petrucci

OPINION OF THE COURT

STAPLETON, Circuit Judge:

These are appeals from the judgments of sentence

imposed on Sidney Dickler and Richard Petrucci after each entered

a plea of guilty to impeding the functions of the Resolution

Trust Corporation ("RTC") in violation of 18 U.S.C. § 1032(2).

The defendants attack their sentences on two grounds: that the

court prohibited them from submitting evidence at their

sentencing hearings relevant to the calculation of the "loss"

caused by their criminal conduct for purposes of U.S.S.G. § 2F1.1

and that the district court erred in calculating that loss. We

will reverse the judgments and remand for resentencing.

I.

Sidney Dickler and Richard Petrucci were charged in a

three-count indictment with offenses relating to their operation

2 of two companies: Action Repossession Services, Inc. ("Action

Repossession") and Action Motors, Inc. ("Action Motors"). Action

Repossession was in the business of repossessing cars on behalf

of financial institutions. Action Motors was a used car dealer.

Dickler and Petrucci were principals in both companies. Counts

One and Two of the indictment charged Dickler and Petrucci with

participating in a scheme to defraud two federally insured

financial institutions, Horizon Financial Savings ("Horizon") and

Atlantic Financial ("Atlantic"), in violation of 18 U.S.C.

§ 1344. According to the indictment, the criminal activity began

in 1985. The RTC became the conservator of Horizon on June 8,

1989, and of Atlantic on January 11, 1990. Count Three charged

defendants with participating in a scheme to impede the functions

of the RTC in violation of 18 U.S.C. § 1032(2).

Action Repossession was under contract with the victim

banks to repossess cars when a car owner defaulted on his or her

car loan, or when a lease terminated and the car was not

voluntarily returned. Under its agreement with the banks, Action

Repossession was to repossess and store the vehicle, prepare a

condition report on the repossessed vehicle, and solicit three

bona fide bids for the vehicle from prospective buyers.0 The

0 As was apparently the custom in this business, Action Repossession operated pursuant to informal, oral contracts and the parties dispute the exact terms of the agreements. For example, counsel for Action Repossession indicated at oral argument before this court that the company did not solicit bids for the banks pursuant to the repossession contract, but simply provided this as an enhancement to the contract. This distinction is immaterial for purposes of this appeal, however, since it is clear that in soliciting bids for the banks and the RTC, pursuant to the terms of the agreement or otherwise, the

3 condition report and bids were then to be sent to the banks, who

would either accept one of the bids or reject them all. If the

bids were rejected, the banks might sell the car at auction. If

one of the bids was accepted, the bank would send the vehicle

title and bill of sale to Action Repossession, who was then

expected to transfer title to the vehicle to the successful

bidder on the bank's behalf.

The defendants' fraudulent scheme involved submitting

false bids to the banks. Instead of soliciting bona fide bids

from used car dealers or individuals, Dickler and Petrucci

submitted bids with the names of fictitious bidders with the

intent that Action Motors would purchase the car for resale

whenever a false bid was accepted. Thus, under the scheme, when

the bank accepted one of the bids and sent the title and bill of

sale to Action Repossession, Action Motors would acquire the

vehicle instead of the fictitious bidder and, after repairing and

"detailing" it,0 would then resell the vehicle for a profit.

Prior to trial, Dickler and Petrucci each entered a

plea of guilty to Count Three of the indictment pursuant to a

plea agreement. The respective plea agreements, which were the

same in all aspects relevant to this appeal, provided that: (1)

banks and the RTC expected Action Repossession to solicit bona fide bids. 0 Petrucci defined detailing a car as thoroughly cleaning the interior and exterior (buffing, waxing, degreasing the engine, painting the engine compartment, cleaning the trunk, shampooing the interior, trunk, and carpeting), performing cosmetic repairs such as repairing holes in the upholstery, and in some cases adding or removing exterior details such as pin striping and window tinting.

4 that conduct charged in Counts One and Two could be considered

"relevant conduct" for purposes of the presentence investigative

report ("PSR"), (2) the relevant loss for purposes of applying

U.S.S.G. § 2F1.1 was more than $120,000 and less than $500,000,

(3) each defendant would assist the government in the

investigation of other bank fraud violations, (4) a special

assessment of $50 would be paid, (5) the defendants' offense

levels under the Sentencing Guidelines should be reduced for

acceptance of responsibility, (6) the offense levels should be

increased two levels for aggravating roles, and (7) at

sentencing, the government would move to dismiss the remaining

counts and recommend that the defendants be given sentences in

the middle range of the applicable guideline range.

In compliance with Federal Rule Criminal Procedure

11(f), the court, before accepting the pleas of Dickler and

Petrucci, asked the government to summarize its evidence as to

Count Three.0 The government summarized the defendants' false

bid scheme. It submitted documentation to explain how the scheme

worked, including a bid sheet, a condition report, a bill of

sale, odometer disclosure statement, and an internal record of

Action Possession indicating the purchase, repair, and retail

sale of the vehicle. In the course of explaining the

illustrative documentation to the court, the government indicated

that the scheme included not only the preparation and submission

0 Rule 11(f) requires that a court inquire into the facts of the case to satisfy itself that there is a factual basis for the plea before accepting even a freely given plea.

5 of bids from fictitious bidders but also the preparation and

submission of false condition reports. Specifically, the

government represented that it had spoken with the former lessee

of the vehicle described in the sample condition report, who had

explained that the vehicle had been in better condition when it

was repossessed than represented on the condition report (e.g.,

he refuted that the tires were poor, that the car had no hubcaps,

and that the tail light was broken), and that the signature

purporting to be his on the condition report was not. Each

defendant, upon questioning by the court, agreed with the

government's factual summary and entered his plea.

A PSR was subsequently prepared for each defendant. In

relevant part, the PSRs contained the following factual

allegations and legal conclusions: the defendants would order

employees to falsify the condition reports being sent to the

financial institutions, the defendants' fraud caused the banks to

lose monies on the vehicles because the submitted bids were "low

balled," the defendants had obtained approximately $386,223 from

the banks and the RTC through the submission of false bids

(calculated by deducting the bid price and cost for detailing and

repairing the vehicles from the price at which Action Motors sold

the repossessed vehicles), and the amount they obtained

represented the amount of loss for purposes of calculating the

offense level under U.S.S.G.

§ 2F1.1(b).

Sentencing hearings were held on September 2, 1994. A

separate hearing was held for each defendant although the court

6 held that any relevant information in the first hearing

(Dickler's) could be incorporated into the second. The focus of

the hearings was the calculation of loss under U.S.S.G.

§ 2F1.1(b). Although they had stipulated to a loss of at least

$120,000 in their respective plea agreements, the defendants

objected to the PSR's loss calculation because it focused on the

gain they realized from reselling the repossessed vehicles rather

than the actual loss to the victims. They maintained that the

figure did not accurately represent the victims' loss because it

did not account for the effect market forces and other external

factors had on their resale price. Although the defendants

conceded that the court was entitled to set the loss at $120,000

based on their stipulation, they contended that no higher loss

figure was permissible because the fraudulent bids they had

submitted, although falsified as to identity of the purchaser,

represented the fair market value of the vehicles and,

accordingly, there was no loss to the victims.

According to Petrucci's testimony, the defendants

submitted bids in the name of fictitious purchasers because it

was difficult to obtain bona fide bids from outside bidders, a

contention supported by the testimony of another used car dealer

who testified that most dealers were reluctant to become involved

in the repossession bid market. The defendants were concerned,

according to Petrucci, that the failure to submit three bids in

accordance with the standard practice of the banks would

jeopardize their repossession business, which generated

7 approximately three times the income produced by their used car

dealership.

Testimony as to the banks' method for evaluating bids

on repossessed vehicles was presented by James Sweeney, a former

collection manager for Atlantic Financial. Sweeney explained

that at the time an automobile was repossessed, the bank would

determine a high and low bid for the vehicle. The high bid would

be eighty-five percent of the National Automobile Dealers

Association ("NADA") book's average value for that car. To

obtain the low bid figure, the bank would reduce that figure

based on the vehicle's condition and mileage, as represented in

the vehicle condition reports and accompanying photographs.

Sweeney testified that it was generally known in the repossession

bid industry that banks valued their repossessed vehicles in this

manner and thus that banks did not generally receive bids for

more than eighty-five percent of "book" value. Sweeney further

explained that once the statutory no-bid period passed, it was

important to obtain and accept a reasonable bid as quickly as

possible in order to avoid mounting storage charges and further

erosion of the bid price.0

The parties stipulated to testimony that Atlantic's bid

evaluation methods were standard industry practice. Sweeney also

testified that, at Dickler's suggestion, defendants would

0 According to Sweeney, an institution may not seek bids on repossessed vehicles under Pennsylvania law until 15 days after repossession. He also indicated that bids were generally valid for only a short time because the NADA book was reissued every two weeks with continually depreciating values.

8 occasionally fix up the repossessed vehicle before selling it on

the bank's behalf but, although this generated a higher return

value for the bank, they elected not to sell most of the vehicles

in this manner because they were more interested in simply

disposing of the vehicles quickly. According to Petrucci,

Horizon had likewise declined defendants' suggestion to improve

the condition of their vehicles before soliciting buyers.

The defendant also presented evidence to explain why

their resale price was generally significantly higher than their

purchase bid price. Petrucci testified that all of the

repossessed vehicles purchased from the banks and the RTC were

detailed, and that many were also repaired before they were

resold. Various witnesses testified that cosmetic and repair

work increases the price of a used vehicle disproportionately to

the cost of the work. Moreover, cars sold by used car dealers

sell at higher prices than repossessed vehicles because

repossessed vehicles are purchased on an "as is" basis and cannot

be test-driven.0

The defendants also attempted to present evidence that

the vehicle condition reports had not been falsified, but the

court would not permit this testimony, stating that defendants

could not now present evidence that contradicted the facts to

which they had agreed during the change of plea hearings.

0 When Action Motors resold the repossessed vehicles they were covered by Action Motors' insurance and could be test driven with Action Motors' dealer plates.

9 The district court did not find the defendants'

arguments and evidence persuasive. The court rejected all of the

defendants' substantive objections to the PSR's loss calculation

and adopted the PSR's focus on the defendants' resale prices less

the amount they paid for the vehicles and their costs for

detailing work and repairs. The court allowed only a deduction

for computational errors of $34,765.50, resulting in a final loss

calculation of $351,457.50. Thus, under U.S.S.G. § 2F1.1, the

court added nine levels to the base offense level of six because

the loss involved in the offense was greater than $350,000 and

less than $500,000. That figure was increased another two levels

for more than minimal planning, and increased an additional two

levels for aggravating role, resulting in a total offense level

of nineteen. That figure was then reduced three levels for

acceptance of responsibility, for a total adjusted offense level

of sixteen. This offense level, with a criminal history category

of I, corresponded to a sentencing range for each defendant of

twenty-one to twenty-seven months. Within that range, the court

sentenced Dickler to twenty-four months of imprisonment and

Petrucci to twenty-one months. These timely appeals followed.0

0 The district court had jurisdiction pursuant to 18 U.S.C. § 3231 as the defendants were charged with violations of federal law. We exercise appellate jurisdiction pursuant to 18 U.S.C. § 3742 and 28 U.S.C. § 1291.

10 II.

The threshold issue is whether the district court erred

in refusing to admit evidence at the sentencing hearing tending

to show that the condition reports submitted to the banks were

not falsified. The district court so ruled based on its view

that when a defendant under oath expressly admits facts at a plea

hearing in the course of persuading the court to accept his plea,

he may not thereafter deny those facts any more than he may

thereafter deny the facts alleged in the indictment and admitted

by his plea.

The defendants do not challenge this legal conclusion

as a general proposition.0 Rather, they insist that there were

special circumstances here that should relieve them of the

consequences that would ordinarily flow from an admission at a

plea hearing. First, according to the defendants, they did not

0 We have held that facts relevant to sentencing contained in the indictment and plea agreement are conclusively established by the entry of a guilty plea even if they are not elements of the offense charged. United States v. Parker, 874 F.2d 174, 178 (3d Cir. 1989) (holding that where indictment and plea agreement specified value of packages taken, entry of guilty plea conclusively established value for purposes of sentencing even though value was not an element of the offense charged); see also Crawford v. United States, 519 F.2d 347, 350 (4th Cir. 1975) ("[T]he accuracy and truth of an accused's statements at a Rule 11 proceeding in which his guilty plea is established are 'conclusively' established by that proceeding unless and until he makes a reasonable allegation why this should not be so."), cert. denied, 423 U.S. 1057 (1976), and overruled on other grounds by United States v. Whitley, 759 F.2d 327 (4th Cir.), cert. denied, 474 U.S. 873 (1985); Nesbitt v. United States, 773 F. Supp. 795, 799 (E.D. Va. 1991) ("Sworn statements in a plea proceeding are conclusive unless the movant can demonstrate compelling reasons for questioning their truth, such as ineffective assistance of counsel.").

11 unambiguously admit that their scheme involved falsified

condition reports. Second, they claim surprise, pointing out

that the indictment alleged only the submission of bids from

fictitious bidders and insisting that they were "blindsided" by

the government at the plea hearings. We cannot accept either

contention.

The transcript of the change of plea hearings simply

does not support the defendants' first contention. The

government represented that it had evidence tending to show that

false condition reports were a part of the defendants' scheme.

Each defendant, in response to questioning from the court while

under oath, then acknowledged that he agreed with what the

government said he had done. There was no ambiguity; there were

clear admissions in each instance.

While we agree that the indictment did not put the

defendants on notice of the government's false condition report

contention, that fact provides no adequate explanation for the

defendants' failure to take exception to that contention at the

plea hearings. Both defendants were sophisticated businessmen

who were represented by counsel. They and their counsel sat in

court and listened to the government's representation regarding

what it would prove if the case went to trial. The government's

description of its case was neither lengthy nor complex, and each

defendant was asked point blank by the court whether he agreed or

did not agree with the government's version of the facts.

12 The defendants were thus in no position to contend at

the sentencing hearing that falsified condition reports were not

a part of their scheme.

III.

A.

The defendants pleaded guilty to a violation of 18

U.S.C. § 1032(2).0 Because their conduct involved a fraudulent

bidding scheme, the court sentenced defendants under U.S.S.G.

§ 2F1.1, the guideline provision applicable to crimes of fraud

and deceit. This guideline section provides for a base offense

level of six with graduated enhancements of the offense level

according to the size of "the loss" to the victim attributable to

the fraudulent conduct. The court determined their loss to be

$351,457.50 which added nine levels.

While the general definition section of the Sentencing

Guidelines does not define "the loss," the commentary to § 2F1.1

discusses this concept.0 Application note 7 states in relevant

part:

Valuation of loss is discussed in the Commentary to § 2B1.1 (Larceny, Embezzlement,

0 This statute provides: "Whoever . . . corruptly impeded or endeavors to impede the functions of [the Resolution Trust] Corporation . . . shall be fined under this title or imprisoned not more than 5 years, or both." 18 U.S.C. § 1032(2). 0 All references to the Sentencing Guidelines, unless otherwise noted, are to the 1994 edition of the Guidelines Manual which was in effect at the time of the defendants' sentencing and incorporates amendments through November 1, 1993.

13 and Other Forms of Theft).0 As in theft cases, loss is the value of the money, property, or services unlawfully taken; it does not, for example, include interest the victim could have earned on such funds had the offense not occurred. Consistent with the provisions of 2X1.1 (Attempt, Solicitation or Conspiracy), 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. Frequently, loss in a fraud case will be the same as in a theft case. For example, if the fraud consisted of selling or attempting to sell $40,000 in worthless securities, or representing that a forged check for $40,000 was genuine, the loss would be $40,000.

There are, however, instances where additional factors are to be considered in determining the loss or intended loss, [for example]:

. . . .

In a case involving a misrepresentation concerning the quality of a consumer product, the loss is the difference between the amount paid by the victim for the product and the

0 The commentary to section 2B1.1, which has a similar table for enhancement of the base offense level based on loss, defines "loss" as:

the value of the property taken, damaged, or destroyed. Ordinarily, when property is taken or destroyed the loss is the fair market value of the particular property at issue. Where the market value is difficult to ascertain or inadequate to measure the harm to the victim, the court may measure loss in some other way, such as reasonable replacement cost to the victim.

U.S.S.G. § 2B1.1 cmt. (n.2); see also id. § 2B1.1 cmt. (background) ("The value of property stolen plays an important role in determining sentences for theft and other offenses involving stolen property because it is an indicator of both the harm to the victim and the gain to the defendant.").

14 amount for which the victim could resell the product received.

In fraudulent loan application cases and contract procurement cases, the loss is the actual loss to the victim (or if the loss has not yet come about, the expected loss). . . . However, where the intended loss is greater than the actual loss, the intended loss is to be used.

In a case involving diversion of government program benefits, loss is the value of the benefits diverted from intended recipients or uses.

U.S.S.G. § 2F1.1 cmt. (n.7).

We have previously interpreted § 2F1.1 and this

commentary as requiring that the method for calculating the

victim's loss correspond to the nature of the defendant's

conduct. Thus, where the defendant's fraud is similar to theft

in that the defendant has "taken" something from the victim

without giving the victim something of value in return, the value

of the thing or service taken will reflect the victim's loss. However, where the defendant intended to and did give the victim

something of value in exchange for what was fraudulently taken,

the value of the object or service taken will not reflect the

victim's actual loss and another method of calculating actual

loss must be used. United States v. Kopp, 951 F.2d 521, 528-31

(3d Cir. 1991).

Our decision in United States v. Kopp provides a good

illustration of this rule. The defendant in Kopp had submitted

15 falsified loan documents to a bank and had thereby obtained a

loan of $13.75 million. Although the amount fraudulently taken

was $13.75 million, the court rejected this figure as the loss

under § 2F1.1 because the defendant had secured the loan with a

mortgage on other property which enabled the bank to recover the

loan proceeds when the defendant defaulted. Thus, we explained:

[The defendant] did not "take" $13.75 million for nothing, as a thief would. Furthermore, all thefts involve an intent to deprive the victim of the value of the property taken. . . .[T]he same is not always true for fraud: 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.

Mechanical application of the theft guideline in fraud cases would frustrate the legislative purpose of the guidelines and contravene the specific language of the Commission.

951 F.2d at 529 (citing United States v. Schneider, 930 F.2d 555,

558 (7th Cir. 1991)).

In applying this flexible, fact-driven concept of loss,

we have thus held that in situations where value passes in only

one direction -- from the victim to the perpetrator -- the

perpetrator's gain will normally reflect the victim's loss. On

the other hand, where value passes in both directions, we have

held that the victim's loss will normally be the difference

between the value he or she gave up and the value he or she

received (or, if greater, the difference between what the

perpetrator intended the victim to give up and to receive).

16 Even where value flows in both directions, if it is not

feasible to estimate with reasonable accuracy the victim's loss

or intended loss, we have indicated that a sentencing court may

look to the perpetrator's gain as a surrogate for the victim's

loss. United States v. Badaracco, 954 F.2d 928, 937-38 and n.10

(3d Cir. 1992) (citing Kopp, 951 F.2d at 531). Where property is

received by the perpetrator of a fraud and promptly resold

without alteration, for example, the proceeds from the resale

will normally approximate the market value of the property when

the victim parted with it; in such a situation, the defendant's

gain can rationally serve as a surrogate for the victim's loss.

The guideline provision governing fraud offenses refers to the

victim's loss, however, and the defendant's gain may be used only

when it is not feasible to estimate the victim's loss and where

there is some logical relationship between the victim's loss and

the defendant's gain so that the latter can reasonably serve as a

surrogate for the former. Without this logical connection, the

defendant's gain cannot be said to be an "estimation" of actual

loss, and as our precedent and the Sentencing Guidelines make

clear, it is a reasonable estimation of loss, not an alternative,

unrelated value, that the sentencing court must ascertain.

U.S.S.G. § 2F1.1 cmt. (n.8) ("For the purposes of subsection

(b)(1), the loss need not be estimated with precision. The court

need only make a reasonable estimate of the loss, given the

available information. . . . The offender's gain from committing

the fraud is an alternative estimate that ordinarily will underestimate the loss.") (emphasis added); cf. United States v.

17 Holloman, 981 F.2d 690 (3d Cir. 1992) (upholding use of

defendant's gain as surrogate for victim's loss where value to

defendant of stolen cancelled checks in counterfeiting scheme

reflected bank's potential loss), cert. denied, 113 S. Ct. 3002

(1993).

In Kopp, we specifically rejected the use of the

defendant's gain as "an alternative estimate, when . . . the true

loss is measurable." 951 F.2d at 530 (emphasis removed).

Although we have subsequently refined the circumstances in which

Kopp's specific actual loss calculation is applicable, we have

not strayed from the concept that the loss calculation should

represent the fraud victim's actual loss. E.g., United States v.

Shaffer, 35 F.3d 110, 114 (3d Cir. 1994) (distinguishing Kopp's

focus on calculating victim's actual loss at the time of

sentencing and holding that in check kiting scheme, loss should

be calculated at time crime is detected because this more

accurately reflects the bank's actual loss from the unsecured

fraudulent "loans"); United States v. Mummert, 34 F.3d 201 (3d

Cir. 1994) (upholding face value of loan as reasonable

calculation of bank's actual loss where no assets had been

pledged against the loan and no payments had been made thereon);

see also United States v. Dadonna, 34 F.3d 163, 170-71 (3d Cir.) (holding that actual loss may not include developer's costs to

complete construction project absent evidence linking those costs

directly to defendant's conduct in fraudulently securing

construction bonds), cert. denied, 115 S. Ct. 515 (1994).

18 In this case, the district court found that the

defendants' conduct had deprived it of the ability to make a

reasonable estimate of the loss. It reasoned that in each

instance the bank expected to receive value equal to the best of

three independently submitted bids and that because of the

defendants' conduct, no one could ever know what that value would

have been. Accordingly, the district court looked to the

defendants' gain from their scheme as a surrogate for the

victims' loss. It took the gross amount received by the

defendants from their sale of the cars and deducted the expense

of repairing and detailing, as well as the amount paid to the

banks for the vehicles. We find the district court's analysis

troublesome in a number of respects.

B.

We start with the proposition, based on the

uncontradicted evidence, that there are two distinct markets

involved here. First, there is an "as is" market in which a

buyer purchases a repossessed vehicle in the condition it was in

at the time of repossession and without an opportunity to test

drive it. The second is a "reconditioned market" in which a

buyer purchases a vehicle that has been repaired and detailed,

and with an opportunity to test drive it. A vehicle normally has

a substantially lower value in the "as is" market than in the

"reconditioned" market. In addition to the fact that the risk of

paying more than a vehicle is worth is materially greater in the

"as is" market, resulting in lower purchase prices in that

19 market, the undisputed evidence indicated that when a vehicle is

repaired and detailed, its value materially increases, often many

times the amount invested in these activities.

The banks knew that both markets existed and they chose

to participate, with immaterial exceptions, only in the "as is"

market. They did so primarily because they wanted to dispose of

the vehicles and get paid quickly. Moreover, when the banks

asked the defendants to secure three bids on an "as is" basis,

they did so in an effort to secure the fair market value of the

vehicles in the "as is" market, not because they expected the

defendants to find a particular type of bidder who would bid on

average above the fair value in that market. It follows, we

believe, that the actual loss of the banks was the fair market

value of the vehicles in the "as is" market, less what the

defendants paid the banks for the vehicles.

The record contains substantial evidence relevant to a

determination of the fair market value of the vehicles in the "as

is" market. According to the undisputed evidence, sellers in

this market value vehicles by discounting the value of the

vehicle reported in industry publications like the NADA "blue

book" by fifteen percent and by further discounting the resulting

value when there is above average mileage or below average

condition. Based on this evidence, the defendants urge that the

district court's conclusion regarding the feasibility of

estimating the loss cannot stand. We agree.

It is true, as the district court found, that the

defendants' conduct with respect to the submission of false

20 condition reports makes it difficult to now determine one factor

in the evaluation formula -- the condition of each particular

vehicle at the time of repossession. Because the condition

reports cannot be relied upon as evidence of the vehicles' actual

condition, we acknowledge that the defendants' conduct has

impaired the district court's ability to estimate the banks'

losses in particular transactions.

As the defendants stress, however, the relevant value

here is not the value of a particular vehicle, but rather the

value of a stream of many vehicles over a seven year period.

Moreover, the uncontradicted evidence indicates that, because of

the financial circumstances of their owners, repossessed

vehicles, on average, have been less well maintained and are in

poorer condition than vehicles of the same age generally.

Finally, we know that, as a result, those selling in the "as is"

market regard 85% of the "blue book" value as the high side of

the value range and generally consider condition only for the

purpose of determining whether the fair value is less than 85% of

book value. One can argue persuasively on the basis of this

record evidence that the fair market value of the stream in the

"as is" market would be no more than 85% of the aggregate "blue

book" value of all of the vehicles and that a comparison of this

figure with the aggregate amount the banks received from the

defendants for the vehicles would provide an estimate of the

banks' loss that should serve as a ceiling for purposes of loss

calculation under § 2F1.1.

21 We do not say that the evidence cited by the defendants

compels a conclusion that it is feasible to arrive at a

satisfactory estimate of the banks' losses here. We hold,

however, that it was sufficiently probative on that issue that

the district court was not at liberty to accept the government's

evidence of the defendants' gain as a surrogate without some

explanation of why an estimate of loss based on this data was not

feasible. Accordingly, we will remand to provide the district

court with an opportunity to reevaluate the feasibility of making

a satisfactory determination of the victim's aggregate losses.

C.

The second arrow to the defendants' bow is based on

data gathered from Horizon's records for the period from November

of 1989 to November of 1990. According to the defendants, these

were the only records of the victims available to them. During

this period Horizon sold a total of 1,103 repossessed vehicles.

Action Motors bought 103 or 9% of these vehicles. The rest were

sold to others. The largest single purchaser was a dealer in

eastern Pennsylvania, Yelland. Horizon received an average

return on all 1,103 vehicles equal to 96.51% of a value

designated on defendants' exhibits as the "appraised value." On

vehicles sold to Yelland the average return was 95.26% of

"appraised value." By comparison, Horizon received a 97.01%

return on the vehicles sold to Action Motors.

The district court was unpersuaded by this data for the

following reasons:

22 Defendant was the agent of the institutions and had an obligation to solicit bids to obtain the highest possible price for the cars. Defendant did not fulfill this obligation and solicited no independent bids. (Defendant's position at ¶9). Rather, defendant's company purchased the cars, hiding its true identity. Thus, the fair market value of the cars is unascertainable because of defendant's own conduct. The fact that the institutions may have received a higher percentage of the cars' appraisal value from defendant than they received, on average, from other purchasers is of little relevance. The cars that defendant purchased may have been in better condition than other cars that the financial institutions sold.

App. at 161-62.

To the extent this conclusion rests on the district

court's view that the market value of the cars in the "as is"

market "is of little relevance" because the banks bargained for

three bids solicited by Atlantic, we have already noted our

disagreement. To the extent it rests on the district court's

speculation that the 103 repossessed vehicles purchased by Action

Motors may have been in better condition on average than the

1,103 repossessed vehicles purchased by others, we find that

speculation inadequate to support the district court's rejection

of this approach to loss estimation. Given the volume of

vehicles and the duration of the period involved, we do not

believe the district court was entitled to conclude without some

supporting record explanation that the 103 vehicles assigned to

Action for repossession were in materially better condition than

those assigned to others for repossession.

23 We confess that our study has left us without

confidence that we understand exactly what the "appraised value"

refers to and how it was derived. At the same time, the record

appears to indicate that the "appraised value" on Horizon's books

came from a source not dependent on Action's condition reports,

was regularly recorded on Horizon's books, and was presumably

relied upon by it for some business purpose.0 While it is not a

necessary inference, we believe a trier of fact could infer from

this information that the "appraised value" of the various

vehicles was determined in some reasonably consistent manner. If

one draws this inference, this data concerning a substantial

sample of the relevant universe of transactions appears to

indicate that Horizon received more from the vehicles it sold to

Action Motors than it received from its other sales in the "as

is" market. Unless one is willing to assume that the sales to

others were also tainted with fraud, this would suggest that the

sales to defendants, on average, were not at prices below market

value in the "as is" market.

It is not for us to decide in the first instance

whether any or all of these inferences should be drawn. On

remand, the district court should take a fresh look at the data

0 Horizon used an independent damage appraiser, J. M. Taylor, to assess the condition of its repossessed vehicles, but there was conflicting evidence regarding the use that Horizon made of these damage reports. The defendants point to evidence indicating that Horizon used the damage reports, along with the defendants' vehicle condition reports, to determine an appropriate target bid, while a government witness testified that Horizon used them only to determine the residual value of the vehicle to the lessee.

24 from Horizon's books and determine whether or not, based on that

data, it is possible to estimate the banks' losses with

reasonable accuracy.

D.

The third arrow to the defendants' bow is an

alternative argument that grants, arguendo, the validity of the

proposition that a reasonable estimate of victim loss is not

feasible. If the district court was entitled to look to the

defendants' gain as a surrogate for the victim's loss, the

defendants insist that it erred in deducting only the defendants'

repair and detailing expenses and the purchase price paid the

banks. Specifically, the defendants argue that the district

court, if it looked to gain, was required to deduct the

commissions paid to salespersons at Action Motors for reselling

the cars (allegedly $40,820.79) and auction and transportation

expenses related to the resales (allegedly $7,180.00). In

addition, the defendants argue for a further $16,017.96 reduction

in their gain, a figure that reflects the difference between the

vehicles they resold at auction and the vehicles they resold to

individuals in the retail market. Since the district court set

the gain at $351,457.50, one or more of these adjustments could

make a difference in the guideline range.

The district court found the argument regarding the

defendants' additional expenses "without merit" because the

"focus of the Court should be on the loss to the victim, not the

costs of committing the crime to the defendant." App. at 165.

25 "Even if the defendant[s] incurred these costs," the court

reasoned, "they are not clearly connected to the actual losses

sustained in this case, which is the lost value on the cars that

the financial institutions sold to the defendant[s]." Id.

Having determined to look to the defendants' gain as a

surrogate for the victim's loss, we believe the district court

was not entitled to give credit for certain expenses that reduced

the defendants' gain and ignore others that would have the same

effect on the ground that the latter were not clearly connected

to the bank's loss.0 In short, we find it impossible to

logically distinguish between the defendants' repair costs and

the commissions and auction costs they paid in order to realize

their gain.0

0 While the district court was, of course, entitled to pass upon the probative value of the evidence regarding the other expenses, it made no finding that this evidence was not worthy of belief. To the contrary, based on the district court's findings and conclusions and the fact that this evidence of other expenses was uncontradicted and unchallenged by the government, it appears that the district court regarded it as credible, but not legally relevant. 0 In United States v. Badaracco, 954 F.2d 928 (3d Cir. 1992) we approved the use of the defendant's gain as a surrogate for the victim's loss and declined to deduct the defendant's expenses from the amount of his gain. Our refusal there to give the defendant credit for his expenses is not contrary to the position we take here. Badaracco involved a bank officer whose fraud involved conditioning construction loans on developers' subcontracting out the electrical work to companies in which the defendant had an interest. We found this type of fraud to be like embezzlement and concluded that an analogy to the theft guidelines was therefore proper. On this basis, we upheld the district court's use of the defendant's gain, measured in terms of the full amount of the contracts awarded to the defendant's electrical companies, as a reasonable estimate of the loss under § 2F1.1. We refused to deduct the expenses of the defendant's companies because a three-party transaction was involved and those expenses neither conferred a benefit on the bank nor were

26 The other adjustment requested by the defendants is

also appropriate. The argument is that if the sentencing court

follows a gain approach because it cannot estimate the victim's

loss with reasonable precision, and the defendant demonstrates

that a component of the total gain is attributable solely to its

own efforts after the victim's loss was complete, that component

must be deducted. More specifically, the record shows the price

received by Action Motors on the resale of each vehicle,

including the price on those sold at auction and those sold at

retail. The value received on retail resales over and above what

would have been received at auction is attributable, according to

the defendants, solely to their own efforts and must be deducted

before their gain can serve as a reasonable surrogate for the

victim's loss. The district court rejected this argument because

"the fact that the defendants' profit percentage . . . on his

retail car sales was greater than his wholesale profit margin

does not inform [the] Court about the actual losses on the cars."

App. at 166.

logically related to anything received by the bank in the transaction. As we have pointed out, the banks' loss in this case was the difference between what they gave up (the value of the cars at the time they were sold to defendants) and what they received (the amount paid by the defendants for the cars). Gain can logically serve as a surrogate for loss here only to the extent it reflects the value of what the banks gave up. Based on the uncontradicted evidence in this case, it appears that the expenses incurred by the defendants between the time they purchased the cars and resold them contributed to their resale value. Accordingly, the resale value cannot be used as a surrogate for the value of the vehicles at the time of their purchase by the defendants without deducting their expenses.

27 Again, we believe the district court misunderstood the

import of the argument being made. We do not suggest that the

district court needs to view this argument with an uncritical

eye. We do say, however, that the underlying legal premise is a

sound one. When a gain approach is used as a surrogate for loss

fraud and the defendant demonstrates that a component of the gain

as calculated by the government could not be a component of the

victim's loss, an appropriate adjustment is required.

E.

The fourth and final arrow to the defendants' bow in

their attack on the district court's calculation of loss is

premised on the fact that it included the defendants' gain on all

purchases that occurred between 1985 and December of 1992.

According to the defendants, the victim's loss under § 2F1.1 can

include only loss attributable to "relevant conduct" under

§ 1B1.3(a)(2) and "relevant conduct" can include only conduct

proscribed by a criminal statute. Because the bids they

submitted to the RTC prior to November 29, 1990, the effective

date of 18 U.S.C. § 1032(2), were not in violation of that

statute, the defendants maintain that it was reversible error to

include any loss attributable to those bids.

The conduct underlying the indictment involved two

periods: the period during which defendants submitted false bids

to Horizon (1985 to June 1989) and Atlantic (1985 to January

1990), and the period during which they submitted false bids to

the RTC who had been appointed custodians of the failed banks

28 (June 1989 or January 1990 to December 1992). Counts One and Two

of the indictment, which were dismissed at sentencing, were based

on the conduct during the earlier period and Count Three, to

which the defendants pleaded guilty, was based on the conduct

during the latter period. There is no question that the

defendants' actions in defrauding the banks during the early

period is "relevant conduct" within the meaning of the Sentencing

Guidelines and thus that any loss attributable to that conduct

may be used to calculate the defendants' offense level under

U.S.S.G. § 2F1.1.0 The defendants argue, however, that because

the statute underlying their guilty pleas, 18 U.S.C. 1032(2), was

not enacted until November 29, 1990, their acts vis-a-vis the RTC

prior to that date cannot be considered relevant conduct for

purposes of determining loss. The district court regarded all

sales as relevant conduct without finding that the bids during

the challenged period were criminal conduct. If the defendants

are right, this would require a $101,562.23 reduction in the

district court's loss calculation.

0 "Relevant conduct" includes acts that were part of the same course of conduct or common scheme or plan as the offense conduct if those acts would be grouped as multiple counts under U.S.S.G. § 3D1.2(d) had the defendant been convicted of those counts. See U.S.S.G. § 1B1.3(a)(2) & cmt.(n.3). The bank fraud and RTC fraud counts would be grouped as related counts under § 3D1.2(d) because the offense level for both offenses is determined on the basis of total loss. Moreover, as part of the plea agreement, the defendants acknowledged their responsibility for the conduct charged in Counts One and Two and stipulated that that conduct could be considered "relevant conduct" for purposes of sentencing. See also U.S.S.G. § 6B1.2(a) (conduct underlying charges dismissed pursuant to a plea agreement can not be excluded from consideration in sentencing by the terms of the plea agreement).

29 Although this court has not yet addressed the question,

other courts of appeals have concluded that "relevant conduct"

within the meaning of § 1B1.3 must be criminal conduct. See

United States v. Sheahan, 31 F.3d 595, 600 (8th Cir. 1994) ("We

agree that the relevant conduct the sentencing court should

consider in the section 2F1.1 loss calculation is that which is

attributable to the defendant's 'criminal conduct.'"); United

States v. Wilson, 980 F.2d 259, 261 (4th Cir. 1992) (same).0 The

government does not contend otherwise, and we agree.0

The relevant criminal conduct need not be conduct with

which the defendant was charged, United States v. Santiago, 906

F.2d 867 (2d Cir. 1990), nor conduct over which the federal court

has jurisdiction, United States v. Pollard, 986 F.2d 44 (3d

Cir.), cert. denied, 113 S. Ct. 2457 (1993). Thus, the district

court's use of the loss attributable to the challenged period

could be upheld if the defendants' conduct during that period was

shown to constitute any state or federal crime, since it is clear

0 Without directly addressing this issue, other courts have presumed that relevant conduct is criminal. See, e.g., United States v. Palomba, 31 F.3d 1456, 1464 n.8 (9th Cir. 1994) (For purposes of provision permitting grouping of closely related counts, relevant conduct is defined inter alia with reference to similarity between charges of conviction and "other criminal conduct."); United States v. Shonubi, 998 F.2d 84 (2d Cir. 1993) (The guideline provision defining relevant conduct with respect to a "course of conduct" refers to identifiable pattern of criminal conduct.); United States v. Bethley, 973 F.2d 396, 401 (5th Cir. 1992) (Relevant conduct involves "repeated instances of criminal behavior [that] constitute a pattern of criminal conduct."), cert. denied, 113 S. Ct. 1323 (1993). 0 While § 1B1.3 does not expressly so state, it defines relevant conduct in terms that are more consistent with the hypothesis that relevant conduct is limited to criminal behavior.

30 that the conduct was part of the same on-going scheme as the

offense conduct. See U.S.S.G. § 1B1.3(a)(2). For some

inexplicable reason, however, the government did not present

evidence at the sentencing hearing or argue in its brief on

appeal that the conduct during that period was otherwise

criminal. Nevertheless, at oral argument before this court the

government suggested a number of criminal offenses which the

defendants were said to have committed by submitting fictitious

bids to the RTC0 and asked that we affirm the district court's

inclusion of the loss that occurred during the challenged period

on this basis.

While we think it highly likely that the defendants'

conduct during the challenged period did violate some criminal

statute, we decline to accept the government's invitation. Due

process requires that the defendants have fair notice of exactly

why the government believes their conduct during this period was

criminal and a fair opportunity to counter the government's case

on that score. In order to be fair, such an opportunity may have to include an opportunity to offer additional evidence.

Accordingly, on remand, the district court should require the 0 The government cited the federal mail fraud statute, 18 U.S.C. § 1341, and the Pennsylvania criminal fraud statutes, e.g., 18 Pa. Cons. Stat. Ann. § 4107 (deceptive business practices); id. § 4101 (criminal forgery). As we understand a conservatorship under the RTC's statute, the bank does not cease to exist when the RTC is appointed conservator. Accordingly, it may be that the submission of fictitious bids to the RTC violated Pennsylvania's bank fraud statute (e.g., 18 Pa. Cons. Stat. Ann. § 4133) or even the then current version of 18 U.S.C. § 1344, the statute underlying Counts One and Two and making it a crime to defraud a bank insured by the Federal Deposit Insurance Corporation.

31 government to identify the statute or statutes it relies upon and

to identify the record evidence that satisfies each element of

the offense proscribed. The defendants should then be afforded

the opportunity to develop an appropriate record and argue to the

contrary.0

IV.

For the foregoing reasons, we will vacate the

defendants' sentences and remand for resentencing. On remand,

the question may arise whether the district court is restricted

to resentencing the defendants based on the current record, plus

whatever the defendants may have to offer in response to the

government's designation of a criminal offense applicable to the

defendants' pre-November 29, 1990, conduct vis-a-vis the RTC.

Stated conversely, the issue may arise whether the district court

may reopen the record to permit further development of the

relevant facts in light of this opinion. We do not preclude the

district court from permitting further development of the record

and leave that for resolution by an exercise of the district

court's informed discretion.

We agree with the Fourth and the D.C. Circuit Courts of

Appeal that, where the government has the burden of production

0 United States v. Pollard, 986 F.2d 44 (3d Cir. 1993), cert. denied, 113 S. Ct. 2457 (1993), does not provide support for the proposition that we must search the record ourselves and determine whether the defendants' conduct was otherwise criminal. In Pollard, the defendant did not argue that the relevant conduct was non-criminal, but only that the federal court was without jurisdiction to charge him based on that conduct.

32 and persuasion as it does on issues like enhancement of the

offense level under § 2F1.1 based on the victim's loss, its case

should ordinarily have to stand or fall on the record it makes

the first time around. It should not normally be afforded "a

second bite at the apple." United States v. Leonzo, 50 F.3d

1086, 1088 (D.C. Cir. 1995) (remanding for resentencing on the

existing record where government failed to sustain its burden of

proving loss under § 2F1.1); United States v. Parker, 30 F.3d

542, 553-54 (4th Cir.) (no new evidence permitted on resentencing

where prosecution had failed to introduce sufficient evidence

that offense took place within 1000 feet of a "playground" within

meaning of statute), cert. denied, 115 S. Ct. 605 (1994). At the

same time, we perceive no constitutional or statutory impediment

to the district court's providing the government with an

additional opportunity to present evidence on remand if it has

tendered a persuasive reason why fairness so requires. See

United States v. Ortiz, 25 F.3d 934, 935 (10th Cir. 1994)

(holding that an order vacating sentence and remanding for

resentencing contemplates a de novo hearing at which court can

receive any evidence it could have considered during first

sentencing hearing); United States v. Cornelius, 968 F.2d 703, 705 (8th Cir. 1992) (holding that district court erred in

refusing to consider defendants' evidence upon resentencing);

United States v. Jacobs, 955 F.2d 7, 10 (2d Cir. 1992) (per

curiam) (where original sentence had been vacated because there

was insufficient evidence connecting conspiracy's income to drug

sales, district court could on remand consider "reliable new

33 evidence" on this issue; United States v. Stern, 13 F.3d 489, 498

(1st Cir. 1994) ("where a sentence is vacated and remanded for

redetermination under correct principles, the government is not

automatically foreclosed from offering evidence pertinent to the

newly established rule.")

Where, as here, the government believes that it is not

feasible to estimate the victim's loss and its evidence, in the

absence of the defendant's evidence, would support a finding to

that effect, it will frequently not be fair to expect the

government to be prepared with evidence concerning any theory of

loss calculation the defendant may advance at the sentencing

hearing. If the government, for want of notice or any other

reason beyond its control, does not have a fair opportunity to

fully counter the defendant's evidence and the government's

theory does not carry the day, the district court is entitled to

permit further record development on remand.

By making these observations, we do not suggest that

the government should or should not be permitted to offer further

evidence in this case on remand. The district court is in a far

better position than we to assess the situation in the light of

the circumstances surrounding the original sentencing hearing.

We hold that the district court did not err when it

refused to entertain evidence tending to show that the condition

reports were not falsified. We further hold, however, that the

district court's findings and conclusions do not support the

34 sentences imposed. Accordingly, we will reverse the judgments of

the district court and remand for resentencing.

On remand, the district court will revisit its

conclusion that it is not feasible to estimate the banks' and

RTC's loss with a reasonable degree of accuracy. At a minimum,

this will involve a reevaluation of the defendants' evidence

concerning the trade practice regarding the valuation of vehicles

to be sold in the "as is" market and Horizon's sales proceeds

between November 1989 and November 1990. If the district court

concludes that it is feasible to estimate the victims' losses, it

will resentence the defendants based on the stipulated loss of

$120,000 unless the government demonstrates that a greater loss

was incurred.

If the district court once again determines it

appropriate to look to the defendants' gain as a surrogate for

the banks' loss, it will deduct from the gross gain all expenses

necessarily incurred in realizing that gain and any component of

the gain necessarily attributable solely to the defendants'

investment of their own resources after their purchase of the

vehicles from the banks. Finally, the district court shall not

include any gain attributable to bids received by the RTC prior

to November 29, 1990, unless it determines that those bids were

made in violation of a specific state or federal criminal

statute.