United States v. Jerry D. Smith

944 F.2d 618, 91 Daily Journal DAR 11407, 91 Cal. Daily Op. Serv. 7445, 1991 U.S. App. LEXIS 21678, 1991 WL 179617

• Court: Court of Appeals for the Ninth Circuit
• Decided: September 17, 1991
• Docket: 90-30060
• Status: Published

Opinions

WALLACE, Chief Judge:

Smith was convicted on numerous counts of conspiracy and bank fraud as a result of his criminal dealings with the Queen City Savings & Loan (Savings & Loan). The district court sentenced Smith to ten years in prison and ordered him to make restitution to the Federal Savings and Loan Insurance Corporation (FSLIC) in the amount of $12,792,160. Smith challenges only the restitution order in this appeal. The district court had jurisdiction pursuant to 18 U.S.C. §§ 3663 and 3664. We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291. We affirm in part, reverse in part, vacate the order, and remand.

I

Savings & Loan was a state-chartered institution located in Seattle, Washington, the accounts of which were insured by the FSLIC, predecessor in interest to amicus FDIC. By March 1982, Savings & Loan was in serious financial trouble as a result of a number of bad loans. Smith presented himself as a potential purchaser of the institution.

At the height of his career in the late 1970’s, Smith had accumulated a net worth of between $50 million and $90 million, and held substantial ownership interests in financial institutions throughout the Pacific Northwest. In 1980, however, Smith’s fortunes worsened as his mortgage company in Eastern Washington collapsed. This loss left him in substantial debt, and his plans for a recovery included gaining control of Savings & Loan. Smith did not have the financial resources to purchase the institution himself. Instead, he convinced Block, a wealthy Canadian client, to make a tender offer for the stock of Savings & Loan. A majority of the shareholders accepted the offer, and Block purchased about 93 percent of the institution’s stock. Federal regulators approved the purchase in the fall of 1982.

Although he did not own any of Savings & Loan’s stock himself, Smith fostered the impression that he was the true purchaser of a controlling percentage of the stock. For example, between the time of Block’s tender offer and the point at which Block took control, Smith attended numerous board meetings of Savings & Loan and gave direction on how to solve the institution’s financial problems. In addition, on many occasions Smith led various Savings & Loan officials and patrons to believe that he was the actual purchaser of the institution’s stock. Thus, although he held no official position at Savings & Loan and did not own a single share of stock, Smith was able to cultivate an image as a Savings & Loan insider that allowed him to influence the institution’s financial decisions.

Thus, between 1982 and 1983, Smith persuaded Savings & Loan to extend five separate high risk loans to shell corporations controlled by him. Three of these transactions were land acquisition and development loans, while the remaining two were joint ventures in land purchase and development. Each of the five loans was secured by speculative real estate in the Midland-Odessa area of west Texas, the appraisal value of which was largely inflated by Smith for loan application purposes. The balance sheets and cash-flow projections for the borrowing corporations were most often fraudulent. Moreover, most of the loan proceeds, which were in each case designated for the development of the collateral property, were diverted to the personal control of Smith. Smith used these funds to pay his previous creditors and to finance other outside projects.

Predictably, all five loans fell into default, and the resulting losses pushed Savings & Loan into failure. In July 1984, Gibraltar Saving of California (Gibraltar) acquired Savings & Loan. Almost all of Savings & Loan’s assets and liabilities were transferred to Gibraltar, and Gibraltar received a large payment of assistance from FSLIC. After this transfer, the sole remaining asset of Savings & Loan was the institution’s claims against its former directors, officers, Smith and others. This asset was assigned to FSLIC during the transition period.

In 1987, the government indicted Smith and three others on sixteen counts of conspiracy, fraud, and bank fraud. A jury convicted Smith on 15 of the counts, and we affirmed the conviction and prison sentence. United States v. Smith, 891 F.2d 703 (9th Cir.1989), amended, 906 F.2d 385 (9th Cir.), cert. denied, — U.S. -, 111 S.Ct. 47, 112 L.Ed.2d 23 (1990). After numerous delays and two hearings, the district court arrived at the restitution figure and ordered Smith to pay it to FSLIC within five years of his release from prison.

II

Smith first challenges the restitution order on the ground that it constitutes an impermissible application of the Victim and Witness Protection Act (Act), 18 U.S.C. §§ 3663-3664.¹ We review the legality of a sentence de novo. United States v. Angelica, 859 F.2d 1390, 1392 (9th Cir.1988) (Angelica).

A.

Smith alleges that many of the criminal acts and resultant losses occurred prior to January 1, 1983, the effective date of the Act. See id. at 1393. Because the restitution order is based on an amount of damages that includes losses incurred prior to the effective date, Smith contends that it is invalid.

We confronted this argument in Angelica, and concluded that the Act did apply to all losses resulting from a mail and wire fraud scheme that had begun before, and continued beyond, January 1, 1983. Because the scheme involved in Angelica was “similar to the ongoing offense of conspiracy,” we refused to narrow the restitution order to encompass only losses incurred after the effective date. Id. Instead, “we look[ed] to the duration of the entire fraudulent scheme,” and concluded that all of the victims’ losses were subject to the restitution order. Id. Angelica controls this case. Smith was convicted of an ongoing criminal conspiracy, embracing all five loan transactions, that continued well beyond January 1, 1983. Thus, as in Angelica, the district court was correct in applying the Act to all losses resulting from the scheme.

Alternatively, Smith argues that we should reconsider Angelica in light of the Supreme Court’s recent holding in Hughey v. United States, 495 U.S. 411, 110 S.Ct. 1979, 109 L.Ed.2d 408 (1990). Hughey is not on point. It merely holds that the Act authorizes restitution only for those losses caused by the offense of conviction, and not for losses resulting from other alleged conduct. Id. 110 S.Ct. at 1981. The entire restitution order in this case relates to losses arising from acts for which Smith was convicted, and thus satisfies Hughey. Hu-ghey does not deal with the question of whether the restitution order may encompass losses incurred before January 1, 1983, and therefore does not impact on our holding in Angelica.

B.

Smith next contends that the district court erred in concluding that FSLIC was a “victim” which can receive restitution under the Act. 18 U.S.C. § 3663(a)(1). Because Savings & Loan, not FSLIC, was the entity that suffered the losses, Smith argues that FSLIC is unauthorized to receive payment. We have previously held, however, that a governmental entity is eligible to receive restitution as a “victim” under the Act. United States v. Ruffen, 780 F.2d 1493, 1496 (9th Cir.) (Ruffen), cert. denied, 479 U.S. 963, 107 S.Ct. 462, 93 L.Ed.2d 407 (1986). Although it was not directly harmed, FSLIC did suffer as a result of Smith’s conduct, and the Act’s legislative history makes it clear that the statute is intended to encompass both direct and indirect victims of criminal acts. See S.Rep. No. 532, 97th Cong., 2d Sess. 13, reprinted in 1982 U.S.Code Cong. & Admin.News 2515, 2519; see also United States v. Hairston, 888 F.2d 1349, 1354-55 (11th Cir.1989) (describing legislative history). The Fifth Circuit has twice held that FSLIC may receive restitution under the Act when, as in this case, it has acquired the claims of a defunct savings and loan. See United States v. Rochester, 898 F.2d 971, 980 n. 7 (5th Cir.1990) (Rochester); United States v. Ryan, 874 F.2d 1052, 1053 (5th Cir.1989) (Ryan). These rulings are persuasive, and we conclude that FSLIC qualifies as a “victim” under the Act.

Ill

We deal next with Smith’s argument that the restitution order violates his right to due process under the fifth amendment to the Constitution. We review de novo his claim that the sentence is constitutionally invalid. See United States v. Ahumada-Avalos, 875 F.2d 681, 684 (9th Cir.), cert. denied, 493 U.S. 837, 110 S.Ct. 118, 107 L.Ed.2d 79 (1989).

In analyzing the due process claim, “we consider the private and governmental interests at stake, the risk of an erroneous deprivation of the private interests through existing procedures, and the probable value of additional or substitute procedures.” United States v. Keith, 754 F.2d 1388, 1392 (9th Cir.) (Keith), cert. denied, 474 U.S. 829, 106 S.Ct. 93, 88 L.Ed.2d 76 (1985). In essence, Smith argues that due process was violated because the criminal restitution process denied him some of the procedures that the alternative civil litigation process would have provided him. For example, Smith alleges that the availability of civil discovery procedures would have allowed the court to explore more fully the causes and extent of the economic losses in this case.

We confronted an identical due process argument in Keith, and concluded that “due process is satisfied by affording the defendant an adequate opportunity to present his objections.” Id. at 1392. We thus upheld a restitution order under the Act, even though the district court had declined to hold a special restitution hearing. Id. Smith correctly observes that the claims involved in Keith were not as complex as the claims involved in this case. The district judge recognized this, however, and in response held two lengthy restitution hearings to gather the relevant data, despite the fact that the Act “does not require an oral hearing in order for the court to determine whether restitution should be awarded and the amount thereof.” Rochester, 898 F.2d at 981. At these restitution hearings, the district court analyzed both whether Smith should be subject to a restitution order and whether it should encompass the losses as asserted by the government. Smith presented a great deal of evidence on both issues. Moreover, Smith actually benefited because the restitution hearings were part of the criminal process. Court-appointed counsel represented him, and public funds enabled him to hire appraisal experts for both hearings. We therefore conclude that, although this was a complicated case, the procedures used in entering the restitution order were constitutionally sufficient.

In a related argument, Smith contends that the district court violated the Act in issuing the restitution order because of the extreme complexity of the case. The relevant portion of the Act provides that “[t]o the extent that the court determines that the complication and prolongation of the sentencing process resulting from the fashioning of an order of restitution under this section outweighs the need to provide restitution to any victims, the court may decline to make such an order.” 18 U.S.C. § 3663(d). Despite Smith’s pleas to the contrary, this provision contains no mandatory command. It merely gives the district court discretion to forego entering a restitution order if it would entail undue delay and complexity. The district court in this case obviously concluded that the need to provide restitution to FSLIC outweighed the resultant prolongation of the sentencing process, and we conclude that the court did not abuse its discretion.

IV

Smith next argues that the district court erred in finding, as part of its restitution order, that he will have the ability to pay nearly $12.8 million to FSLIC within five years of his release from prison. We review a sentence that is within the statutory limits of the Act for abuse of discretion. Angelica, 859 F.2d at 1392. Findings of fact upon which a sentence is based are reviewed under the clearly erroneous standard. United States v. Burns, 894 F.2d 334, 336 (9th Cir.1990).

Although Smith had a net worth of between $50 million and $90 million in the late 1970’s, at the time of sentencing Smith had few assets, numerous liabilities, and a monthly income of $5,000. Smith argues that it will be impossible for him to accumulate enough wealth to pay the nearly $12.8 million due FSLIC within five years of release from prison, especially because he will be a convicted felon. He therefore contends that the district court abused its discretion in setting such a high award.

We have expressly held that “[t]he Act does not prohibit a sentencing court from imposing a restitutionary sentence upon a defendant who is indigent at the time of sentencing.” Keith, 754 F.2d at 1393; see also Ryan, 874 F.2d at 1054 (allowing restitution order against insolvent defendant under the Act because “a defendant’s financial situation may well change in the future, making him able to pay some if not all the restitution ordered”). Although the restitution order against Smith is not prohibited on the grounds that he is insolvent, the Act does impose important substantive and procedural limitations on the trial judge’s discretion to issue such an order. Most relevant to this case, the Act provides that in determining whether to order restitution the district court “shall consider the amount of the loss sustained by any victim as a result of the offense, the financial resources of the defendant, the financial needs and earning ability of the defendant and the defendant’s dependents, and such other factors as the court deems appropriate.” 18 U.S.C. § 3664(a).

Thus, if a district court fails to consider a defendant’s ability to pay, the court abuses the discretion afforded it by the Act. See United States v. Mahoney, 859 F.2d 47, 51 (7th Cir.1988) (the district judge “simply forgot or disregarded the defendant’s ability to pay,” requiring the order of restitution to be vacated). In ordering that Smith make restitution, the district court expressly “eonsider[ed] the financial resources of [Smith], and the financial needs and earning ability of [Smith] and his dependents,” and found that although Smith “may not currently possess significant assets, he has demonstrated the ability to accumulate assets in the amount of this restitution order within five years from his release from custody.” The court therefore satisfied the requirements of the Act.

Smith argues that the district judge improperly neglected to make necessary findings of fact on the amount of the award. In so arguing, he misconstrues circuit precedent interpreting the Act. Although some circuit courts “have invoked their supervisory power to require district courts to make specific fact findings on those matters relevant to application of the [Act],” e.g., United States v. Bruchey, 810 F.2d 456, 458 (4th Cir.1987), we have refused to do so. We have stated that “[t]here is no textual support for [the] contention that the district court must make findings of fact concerning [defendant’s] financial condition before imposing restitution.” United States v. Cannizzaro, 871 F.2d 809, 810 (9th Cir.), cert. denied, 493 U.S. 895, 110 S.Ct. 245, 107 L.Ed.2d 195 (1989). Because the Act only requires that the district court “consider” the listed factors, the record need only “reflect that the district judge had at his disposal information bearing on the considerations enumerated in section 3664.” Id. at 811. As in Cannizzaro, Smith’s presentence report set forth information concerning his financial condition and earning capacity. The district court had evidence of Smith’s unconventional financial abilities, as well as the numerous wealthy contacts that he has maintained. In addition, Smith himself stated to the court that he has “good earning power right now,” and could get a job immediately for as much as $10,000 a month. Because the district court had at its disposal all the relevant information, it did not abuse its discretion under the Act.

Smith contends that the district court clearly erred in finding that he will be able to pay the amount ordered within five years of his release from prison. One can reasonably argue that it will be very difficult for Smith to pay the entire amount within five years of his release, even assuming a persistent and good faith effort to do so. This is not determinative, however. Bearden v. Georgia, 461 U.S. 660, 672, 103 S.Ct. 2064, 2072, 76 L.Ed.2d 221 (1983), “requires that incarceration of an offender for noncompliance with a restitution order be preceded by a determination that the offender has not made sufficient bona fide efforts to pay, or, if the offender has made such efforts, that alternative punishments will not satisfy the penological interests of the government.” Keith, 754 F.2d at 1391. We have held that this protection applies to restitution orders issued under the Act. Id. Thus, if Smith has not paid the full amount at the end of the five-year period but can demonstrate that he has made a diligent, good faith effort to do so, he may petition the district court at that time for either an extension of time period for payment or a remittitur. See Ruffen, 780 F.2d at 1495.²

V

Smith finally argues that the amount of the restitution order was improperly calculated, and challenges both the amount of credit given him for the value of the collateral property securing the five loans and the prejudgment interest included in the restitution award. The first challenge is tested for an abuse of discretion while the latter is governed by an interpretation of the Act, and we therefore review it de novo. See Angelica, 859 F.2d at 1392.

In calculating the restitution to be paid by Smith, the district court first determined that the unpaid balance due on the five fraudulent loans provided a measure of the total loss suffered by FSLIC as a victim. Because the Act forbids restitution “with respect to a loss for which the victim has received or is to receive compensation,” 18 U.S.C. § 3663(e)(1), the court reduced this initial loss figure in two respects. First, it recognized that FSLIC had recovered substantial amounts against its loss as a result of civil litigation, and therefore deducted those amounts from the total loss figure. Next, the court acknowledged that the victims of Smith’s illegal conduct had received partial compensation for their losses through the seizure of the collateral property that had secured his five fraudulent loans. At the time of sentencing, some of the property that had served as collateral had been sold, but Gibraltar retained ownership over a substantial portion. Therefore, the court deducted (1) the amount realized from the disposition of collateral properties, or the fair market value of those properties at the time of the disposition, if higher; and (2) the fair market value of the unsold collateral on the date of the restitution order.

Smith contends that the district court failed to give him adequate credit against the restitution amount for the value of the collateral property. He argues that the district court should have measured the value of the property at an earlier date than it did: the date Savings & Loan or Gibraltar “took control” of it, rather than at the time of sale or sentencing. He alleges that because the value of Texas real estate steadily declined throughout the time in question, the measurement of the property’s value at the later dates resulted in an inadequate credit for the collateral property, and that therefore the restitution figure is far too high.

We agree with Smith that the district court used incorrect dates in valuing the property. The Act provides that if a victim has suffered a loss of property, the district court may order restitution in the amount of this loss “less the value (as of the date the property is returned) of any part of the property that is returned.” 18 U.S.C. § 3663(b)(1)(B) (emphasis added). We interpreted this portion of the Act in United States v. Tyler, 767 F.2d 1350 (9th Cir.1985) (Tyler), in which Tyler pled guilty to theft of timber and was ordered to pay restitution under the Act. The district court determined the amount of restitution as the difference between the value of the timber at the time of sentencing and the higher value at the time of theft. Id. at 1351. Because the government recovered the timber on the day of the theft, however, we concluded that “[a]ny reduction in its value stems from the government’s decision to hold the timber during a period of declining prices, not from Tyler’s criminal acts.” Id. at 1352. The value of the property “ ‘as of the date the property [was] returned’ ” equaled the amount lost when the timber was stolen, and therefore restitution under the Act was inappropriate. Id. (quoting 18 U.S.C. § 3579, which was subsequently renumbered as 18 U.S.C. § 3663).

The same reasoning should apply in determining the value of the collateral property in this case. Smith should receive credit against the restitution amount for the value of the collateral property as of the date title to the property was transferred to either Savings & Loan or Gibraltar. As of that date, the new owner had the power to dispose of the property and receive compensation. Cf. 18 U.S.C. § 3663(e)(1) (restitution may be ordered for any person who has compensated a victim). Value should therefore be measured by what the financial institution would have received in a sale as of that date. Any reduction in value after Smith lost title to the property stems from a decision by the new owners to hold on to the property; to make Smith pay restitution for that business loss is improper. See Tyler, 767 F.2d at 1352. The victims in this case “receive[d] compensation” when they received title to the property and the corresponding ability to sell it for cash; the value of the compensation should therefore be measured and deducted from the total loss figure as of the date title was transferred. 18 U.S.C. § 3663(e)(1). Because the law is clear, to do otherwise would be an abuse of discretion.

It may be that the court corrected this error by increasing the collateral property valuation figure from $2,895 million to $5 million before setting the restitution figure. Unless the value of the various properties when title was transferred totals more than $5 million, any recalculation on remand will not result in a lower restitution figure. Thus, the district court’s valuation timing error may be harmless. From the record before us, however, we cannot tell whether a correct valuation of the collateral property will result in a credit to Smith of more or less than $5 million. We therefore vacate and remand to the district court for a new determination of the value of collateral property.

Smith also contends that the district court erred by including prejudgment interest in the restitution award. There is no language in the Act that specifically allows or forbids prejudgment interest. The Supreme Court has held that such silence need not be interpreted “as manifesting an unequivocal congressional purpose that the obligation shall not bear interest.” Rodgers v. United States, 332 U.S. 371, 373, 68 S.Ct. 5, 7, 92 L.Ed. 3 (1947). Instead, the question of whether interest should be imposed on particular statutory obligations should be governed “by an appraisal of the congressional purpose in imposing them and in the light of general principles deemed relevant by the Court.” Id.

When confronted recently with an identical argument, the Fifth Circuit ruled that it was proper to include prejudgment interest in a restitution award under the Act in order to fully compensate victims for their losses. Rochester, 898 F.2d at 982-83. We agree with this analysis. We have repeatedly held that the Act authorizes restitution for a victim’s “actual losses.” E.g., United States v. Cloud, 872 F.2d 846, 855 (9th Cir.), cert. denied, 493 U.S. 1002, 110 S.Ct. 561, 107 L.Ed.2d 556 (1989). Foregone interest is one aspect of the victim’s actual loss, and thus may be part of the victim’s compensation. See Rochester, 898 F.2d at 983.

The amount of prejudgment interest awarded may change on remand, as a result of the revaluation of the collateral property and possible reduction of the figure on which the interest is based. If not, the restitution order may stand. The court did not use the interest rates specified in the fraudulent loans to calculate the prejudgment interest, a procedure that would have allowed FSLIC to recover lost profits. Instead, the court used a much lower governmental loan rate, in order simply to compensate the victim for the loss of funds that were illegally taken. No objection to the rate of interest used by the district court is before us, and the adequacy of that interest rate is therefore not subject to review.

VI

We therefore affirm the district court in all respects except for its valuation of the property used as collateral in the fraudulent transactions. We vacate the restitution award and remand to the district court for the calculation of a restitution award that incorporates a credit for the proper value of collateral received in partial payment on the defaulted loans, plus prejudgment interest.

AFFIRMED IN PART, REVERSED IN PART, AND VACATED AND REMANDED.

1 . Congress has recently amended the relevant provisions of the Act. See Crime Control Act of 1990, Pub.L. No. 101-647, § 2509, 104 Stat. 4789, 4863 (1990). We express no opinion on how these amendments will affect future sentencing decisions.

2 . We disagree with the dissent’s argument that our approval of the restitution award ignores the fact that restitution "is a criminal, not a civil penalty.” We have previously pointed out that criminal restitution is “a means of achieving penal objectives such as deterrence, rehabilitation, or retribution.” United States v. Cloud, 872 F.2d 846, 854 (9th Cir.), cert, denied, 493 U.S. 1002, 110 S.Ct. 561, 107 L.Ed.2d 556 (1989). The award in this case is consistent with all of these goals. Requiring Smith to attempt diligently to pay back the fraudulently acquired funds could have a rehabilitative effect. Cf. United States v. Terrigno, 838 F.2d 371, 374 (9th Cir.1988) (pointing out “our uncertainty about how rehabilitation is accomplished” and stating that probation order that prevents individual from profiting from the crime may serve as an important reminder that "crime does not pay” (internal quotations omitted)). Similarly, a large restitution award "adds to the deterrent effect of imprisonment” and "vindicat[es] society's interest in peaceful retribution.” United States v. Brown, 744 F.2d 905, 909 (2d Cir.), cert. denied, 469 U.S. 1089, 105 S.Ct. 599, 83 L.Ed.2d 708 (1984). Therefore, the restitution award is compatible with the goals of the criminal justice system.

It was also legitimate for the district court to consider the goal of compensation when ordering restitution. At least two other circuits have emphasized the compensatory nature of a restitution award under the Act. The Fifth Circuit has stated that “[t]he restitution imposed pursuant to the [Act] ... is not in the nature of a fine. Rather the purpose of the [Act] is to ensure that wrongdoers, to the degree possible, make their victims whole.” Rochester, 898 F.2d at 983 (internal quotations omitted). Similarly, the Second Circuit has expressly held that a district court may order full restitution, despite the defendant's indigency at the time of sentencing. United States v. Atkinson, 788 F.2d 900, 904 (2d Cir.1986). In so holding, the court stated that:

Since many defendants who are sentenced to terms of incarceration do not have the funds to make restitution immediately, restitution orders would be severely limited if district judges did not have discretion to discount the importance of present indigency in performing the statutory balance. Although there may be little chance that it will ever be made, if full restitution is not ordered at the time of sentencing, an indigent defendant would evade the statutory purpose of making the victim whole in the event that he should come into sufficient funds.

Id. By this reasoning, the district judge in this case should not be reversed for imposing a restitution award that would fully compensate the victim.