United States v. Quigley

• Court: Court of Appeals for the Sixth Circuit
• Decided: August 30, 2004
• Docket: 04-1160
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 United States v. Quigley Nos. 03-2495; 04-1160 ELECTRONIC CITATION: 2004 FED App. 0285P (6th Cir.) File Name: 04a0285p.06 _________________ OPINION UNITED STATES COURT OF APPEALS _________________ FOR THE SIXTH CIRCUIT KENNEDY, Circuit Judge. Defendant appeals his sentence _________________ pursuant to a plea agreement in a wire fraud case. Defendant argues that the district court erred in its determination of the UNITED STATES OF AMERICA , X loss amount for the purposes of identifying the sentencing Plaintiff-Appellee, - guidelines range. While we agree that the district court erred - in its determination, we affirm the sentence imposed because - Nos. 03-2495; the corrected loss amount would still keep Defendant in the v. - 04-1160 same range. > , BACKGROUND KENNETH QUIGLEY, - Defendant-Appellant. - This case arises out of a scheme to defraud which occurred N from approximately May 1997 through May 1998. The Appeal from the United States District Court government described the scheme as follows: for the Eastern District of Michigan at Detroit. No. 01-80992—John Corbett O’Meara, District Judge. The fraud occurred when defendants, through their mortgage company, First Finance, Inc., used funds Submitted: August 5, 2004 borrowed from their warehouse lender, Pinnacle Mortgage Warehouse (“Pinnacle”) for purposes other Decided and Filed: August 30, 2004 than closing mortgage loans. Sterling Bank & Trust (“Sterling”) was the ultimate source of the warehouse Before: KENNEDY, SUTTON, and COOK, Circuit funds, and therefore the victim for purposes of Judges. restitution.

_________________ First Finance, Inc. (“First Finance) was a Michigan corporation with its principal place of business located in COUNSEL Bloomfield Hills, Michigan. It was founded in 1993 by Randall Sage, who was charged separately for his conduct. ON BRIEF: Michael J. Rex, Walter J. Piszczatowski, From about 1993 until May 1998, First Finance engaged in HERTZ, SCHRAM & SARETZKY, Bloomfield Hills, the business of originating and selling residential mortgage Michigan, for Appellant. Jennifer M. Gorland, ASSISTANT loans. In 1994, Defendant became an investor in First UNITED STATES ATTORNEY, Detroit, Michigan, for Finance. In the fall of 1996, he became a working partner and Appellee. shareholder. At that point, the three principal shareholders of

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First Finance were Randall Sage, Robert Geissbuhler,1 and close. Over the course of its relationship with Pinnacle, First Defendant. A Voting Agreement executed between the three Finance, instead of closing mortgage loans with the money reflected that each became a one-third owner of the that had been specifically deposited into the settlement trust corporation with Randall Sage holding 51 percent of the account, frequently transferred that money from the voting stock. All three were signatories on the Surety settlement trust account into its general operating account in Agreement that accompanied the Mortgage Warehouse and order to cover, on a temporary basis, general operating Security Agreement between Pinnacle and First Finance expenses, including the payment of salaries, benefits, and (“MWS Agreement”). other expenses. First Finance dealt directly with the consumer by As part of the MWS Agreement, First Finance assigned to processing loan applications and arranging for financing. Pinnacle as security each and every mortgage or evidence of Sterling provided the loan money through Pinnacle, which indebtedness, right, title, or interest in any insurance; all acted as an administrator for the mortgage funding. Upon property of First Finance in possession of Pinnacle; and all notification by First Finance that a loan note had been signed causes of actions, claims, or demands that First Finance had by an individual borrower, Pinnacle wired funds for the loan or might acquire in connection with the mortgages. Pinnacle, from an account in New York to a settlement trust account in turn, assigned to Sterling all its rights, title, and interest in that First Finance maintained. First Finance would then the Participation Agreements (which included mortgage loans disburse the funds when the mortgage closed. Money was originated by First Finance as security) as part of a advanced to First Finance pursuant to the terms of the MWS Participation Purchase Agreement between the two parties. Agreement. That agreement specified that First Finance was Accordingly, Sterling had a security interest (through to use the funds for the purpose of closing loans it originated. Pinnacle) in each of the loans closed by First Finance. It also The agreement also required First Finance to return the funds retained a security interest in each and every instance of to Pinnacle if the closing did not occur as scheduled. Sterling indebtedness, loan, and asset belonging to First Finance. funded about 98 percent of each loan that First Finance originated. First Finance advanced the other 2 percent (the First Finance ceased its business operations in May of “haircut), expecting to recoup not only the haircut, but also an 1998. At that time, Sterling immediately executed its rights additional premium of 4 to 8 percent of the loan value when under its Participation Purchase Agreement, which was cross- it ultimately sold the loan to another company, typically collateralized through the MWS Agreement between Pinnacle Advanta Mortgage. and First Finance, and obtained all First Finance originated loans. It later sold these loans at a profit. Due to a high volume of mortgages that First Finance was closing, Pinnacle funded them in groups (or clusters). Some On December 4, 2001, the government filed an Information mortgages would close on time, some would be delayed, and charging Defendant Kenneth Quigley with one count of wire some would not close at all. Often, First Finance did not fraud in violation of 18 U.S.C. § 1343. On February 4, 2002, immediately return the money for the mortgages that did not Defendant appeared before the magistrate judge, signed a formal waiver of indictment, and was arraigned on the Information. On June 13, 2002, Defendant appeared before 1 the district court and entered a plea of guilty to the charge. Robert Geissbuhler was not named as a co-defendant to the wire After extensive negotiations, the plea was entered pursuant to fraud charge. Nos. 03-2495; 04-1160 United States v. Quigley 5 6 United States v. Quigley Nos. 03-2495; 04-1160

a Rule 11 plea agreement (“Agreement) in which the parties exercised its rights under the two cross-collateralized agreed on all sentencing guideline factors, except for U.S.S.G. agreements, it obtained receivables in excess of $20 million. § 2F1.1(b)(8)(B) (relating to offenses from which the This amount represented not only the principal amount of the defendant derived more than $1,000,000 in gross receipts) loans that Sterling funded, but also a premium in the 6 percent and U.S.S.G. § 2F.1.1(b)(1)(N) (relating to the amount of to 8 percent range, plus recovery of the 2 percent “haircut,” loss). Prior to sentencing, the government concluded that the amount initially funded by First Finance. Sterling also § 2F1.1(b)(8)(B) did not apply in this case and, accordingly, seized another $5,806,510 worth of loans originated by First it was not factored into the guideline calculation. The Finance and funded them directly, thereby eliminating Agreement contained a sentencing agreement of no more than Pinnacle’s involvement and guaranteeing recovery of the 41 months’ imprisonment with an understanding that the entire premium on those loans. In addition, the Memorandum government would file a motion for downward departure identified a number of wire transfers from Advanta Mortgage based on substantial assistance and recommend a sentence directly to Sterling, which reflected the payment of the range of 18 to 24 months, “or a similar percentage reduction principal amount loaned by Sterling on a number of if the court determines a lower guideline range is applicable.” mortgages, in addition to the premium that would have gone The Agreement also provided that the district court would to First Finance had it not ceased operations. enter an Order of Restitution in an amount “up to $2,353,151.00, less those amounts recovered by Pinnacle The government did not respond to Defendant’s Sentencing Warehouse Mortgage or Sterling Bank & Trust.” Memorandum but did file a Combined Motion and Brief for a Downward Departure pursuant to U.S.S.G. § 5K1.1. Citing Following Defendant’s plea, the Probation Department the Probation Department’s calculated guideline range of 24 prepared the Presentence Investigation Report (“PSI”) in to 30 months for Defendant, the government recommended which it determined that Defendant’s total offense level was that the court depart downward and sentence Defendant to a 21 (including a twelve-level adjustment under term of imprisonment between 12 to 15 months due to the § 2F1.1(b)(1)(N) for loss exceeding $1,500,000.) The PSI substantial assistance that Defendant rendered. listed the total loss to Sterling as $2,353,151 for sentencing purposes. Defendant filed numerous objections to the PSI, On October 24, 2003, Defendant appeared for sentencing. including an objection to the amount of loss, arguing that the The defense counsel attempted to address Defendant’s figure did not reflect the profits Sterling made on the sale of objection to the loss, an objection that was specifically the collateralized mortgages it acquired when First Finance preserved in the Rule 11 Plea Agreement. The court did not ceased operations. The Probation Department responded by permit the defense counsel to make that argument, ruling that saying that “the amount was provided by the government and the issue had been already raised and resolved the previous the case agent,” that the issue “will be decided by the Court,” day during the sentencing of Randall Sage. The defense and that the report will remain unchanged. Prior to counsel informed the court that there was a significant sentencing, Defendant filed his Sentencing Memorandum, difference between the two defendants because Defendant addressing a number of issues, including the loss figure. The Quigley had specifically preserved the issue whereas his co- Memorandum explained the manner in which Sterling was defendant Sage had not. The trial court acknowledged that protected through its Participation Purchase Agreement with the restitution figure, to be determined at a later hearing, Pinnacle and the MWS Agreement between Pinnacle and would be substantially smaller than the loss figure, but First Finance. The Memorandum showed that when Sterling indicated that it was not going to do anything different from Nos. 03-2495; 04-1160 United States v. Quigley 7 8 United States v. Quigley Nos. 03-2495; 04-1160

what it had previously indicated it would do, namely grant the collateralization agreements ($803,409.90). Defendant also Motion for Downward Departure. insisted that the restitution figure should be offset by 6 percent of an additional $5,806,510 in loans that had been When the trial court asked the government if it wanted to listed on the “Sterling Advantage Line,” or $384,390. On add anything, the government argued that the $2.3 million January 20, 2004, the parties appeared at the restitution loss figure represented the loss intended by the defendants. hearing where they stipulated to credit Defendant with offsets The government also argued that the false loan application reducing the restitution figure from $2,413,788.50 to cases2 Defendant cited in support of his position that the loss $907,251.84 (or an offset of $1,506,536.66).4 The court then figure should be offset by that which was recouped by considered the allocation of restitution among the parties and security or pledge had no bearing on the present case. The ordered that Defendant be held responsible for 50 percent of trial court reiterated that it was not going to do anything the total restitution, or $453,625.92. differently since it had granted the downward departure motion. The court imposed a sentence of incarceration of ANALYSIS twelve months and one day in the custody of the Bureau of Prisons. Additionally, the court ordered restitution in the We review a district court’s findings under the Guidelines amount to be determined at a later hearing. under the clearly erroneous standard. United States v. Clay, 346 F.3d 173, 178 (6th Cir. 2003). The application of the For the purposes of determining the restitution figure, the Guidelines to factual findings is a question of law subject to government started with a loss figure of $2,413,788.50.3 This de novo review. United States v. Finkley, 324 F.3d 401, 403 amount represented 46 separate mortgages for which money (6th Cir. 2003). had been wired into the settlement trust account, but had never closed. The government, however, acknowledged that Defendant argues on this appeal that the district court erred this figure should be offset by (1) the payments Sterling when it failed to make the requisite findings of fact received for loans that were originated by First Finance and concerning the amount of loss used in arriving at the subsequently sold to Advanta Mortgage and for which a 4 sentencing guideline range. The government presents two percent premium and a 2 percent “haircut” were realized and distinct arguments for affirming Defendant’s sentence. For paid directly to Sterling instead of First Finance the reasons stated below, we reject those arguments. ($373,768.28); and (2) the amount realized through the seizure of First Finance Loans pursuant to the cross- First, the government argues that the district court was not required to resolve the factual dispute concerning the amount of loss from Defendant’s fraud because the ultimate sentence 2 would not be affected. According to the government, False, or fraudulent, application cases involve situations where the Defendant was sentenced to twelve months and one day, creditor lies about the value of the collateral to obtain a more favorable loan.

3 4 It is unclear why the restitution c alculatio n started with a It is unclear how the parties arrive d at that figure since it represents $2,413,788.50 loss rather than a $ 2,35 3,15 1 loss id entified in PSI. We do an offset gre ater tha n wha t the government acknowledged not resolve this ambiguity because it does not affect the o utcom e of this ($1,177,178.18) but less than what the government acknowledged case. W e proceed on the assumption that $2,413,788.5 is the proper coupled with what Defendant additionally insisted upon ($1,561,568 .18). starting point for the loss amount calculation. Nos. 03-2495; 04-1160 United States v. Quigley 9 10 United States v. Quigley Nos. 03-2495; 04-1160

making him eligible for “good conduct time” credits awarded where the bank was able to satisfy at least one part of the debt by the Bureau of Prisons to prisoners who receive a sentence by foreclosing on the underlying collateral. See, e.g., United of more than 12 months. 28 C.F.R. § 523.20 (an inmate earns States v. Wright, 60 F.3d 240, 241 (6th Cir. 1995) (loss 54 days of “good conduct time” credits for each year served). amount should be offset by assets pledged to secure the loan). The government, therefore, argues that Defendant would The government insists that those cases have no relevance actually only serve 312 days under his current sentence. On here because Defendant’s “fraud in this case was the use of the other hand, if the trial court had accepted Defendant’s the funds for purposes other than the purchase of an asset or argument on the loss amount, the government would have other collateral.” Appellee Br. at 13 (citing U.S.S.G. § 2F1.1, been obligated to recommend a sentence in the range of 10 ½ Application Note 8(b) (reducing the amount of loss by “any to 13 ½ months. Relying on the fact that the district court assets pledged to secure the loan” that was obtained through sentenced Defendant to 12 months and 1 day when the a fraudulent application). We agree that the fraudulent loan government recommended a sentence between 12 and 15 application cases are technically different from the case at months, the government argues that the district court, if it hand. However, we find them (and the Application Notes accepted Defendant’s argument, would have sentenced related to them) extremely relevant to the question of the Defendant to at least 10 ½ months, or 315 days, or 3 days valuation of an intended loss. In both types of cases, a longer than his current sentence. We reject this argument Defendant obtains a loan under false pretenses while because, as Defendant points out, the district court may have providing the lender with some collateral. The lender is thus a number of sentencing options available to it that would able to offset some of his loss through the use of the affect either the term or the conditions of the sentence. We collateral. The Guidelines provide that in the case of a false cannot categorically reject such a possibility. loan application, the district court should reduce the amount of loss by the amount recovered. We see no reason, nor have Second, the government argues that the district court we been provided with one by either the district court or the properly used the “intended loss” amount of $2,413,788.50 government, as to why the district court in this case should for the sentencing purposes. The absence of a district court not have reduced the $2,413,788.50 loss by the amount opinion and a very perfunctory brief from the government recovered by reason of the cross-collateralization agreement. complicate our review in this case. However, as explained below, we find that the district court clearly erred in Having concluded that the district court erred by not determining the loss amount. reducing the $2,413,778.50 loss amount, we now undertake a de novo analysis of what that offset should have been. We “In challenging the court’s loss calculation, [the appellant] do so because Defendant has admitted to all facts relevant to must carry the heavy burden of persuading this Court that the the legal question presented. Sterling obtained three evaluation of the loss was not only inaccurate, but was categories of assets when it exercised its rights under the outside the realm of permissible computations.” United cross-collateralization agreements: (1) cash that represented States v. Jackson, 25 F.3d 327, 330 (6th Cir. 1994). the profit from loans originated by First Finance, fully Defendant argued before the district court and before this funded, and subsequently sold to Advanta ($373,768.28); (2) Court that the loss amount should have been reduced to the loans that were originated by First Finance and were fully restitution amount because the victim bank was able to use funded, but were not yet sold to Advanta; (3) loans that were other collateral to offset its losses. As support for his originated by First Finance but were not yet funded, and, argument, Defendant cites fraudulent loan application cases therefore, not yet sold to Advanta. Of the three categories, we Nos. 03-2495; 04-1160 United States v. Quigley 11 12 United States v. Quigley Nos. 03-2495; 04-1160

find that only the first one is relevant to the offset Defendant’s sentence under the Guidelines. Accordingly, determination. there is no need to remand for resentencing. We agree with Defendant that the $373,768.28 of cash CONCLUSION should be used to offset the gross loss amount because it cannot be said that First Finance intended to deprive Sterling For the reasons stated above, we affirm Defendant’s of the entire $2.4 million when it knew, with absolute sentence in this case. certainty, that Sterling had a fully-enforceable security interest in that amount as the proceeds from the sale of the underlying loans. The situation, however, is different with respect to categories (2) and (3). With respect to category (2), Sterling obtained loans in the amount of $13 million that First Finance originated, fully funded, and was about to sell to Advanta. Defendant argues that he is entitled to an offset equal to the profit that First Finance would have made had it been allowed to sell the loans to Advanta ($803,409.90). We disagree. Unlike cash in category (1), the profit on the sale of loans was a mere expectancy. First Finance was virtually assured of the profit because of its contractual relationship with Advanta, but it was not guaranteed that the sale would take place or that the amount realized would be as expected. It is possible that some event may have intervened to prevent First Finance from making the profit, thereby depriving Sterling of the funds. With respect to category (3), Sterling obtained loans in the amount of approximately $5.8 million that were originated by First Finance. Sterling then funded those loans and sold them to Advanta resulting in a “lost profit” to First Finance of $384,390. As with category (2), we find that Defendant is not entitled to an offset that represents a profit that First Finance may have earned if it funded the loans and sold them. Since we find that the only appropriate offset is for $373,768.28, the proper loss amount for the sentencing purposes is approximately $2 million. This amount is within the same range ($1.5 million to $2.5 million) as the loss amount ($2.4 million) that the district court used to establish