May 31, 2016 Articles

Is Proximate Cause Being Eroded in Determining Restitution?

The first legal challenge to U.S. Coast Guard's complex restitution calculation.

By Dennis S. Medica

In the Ninth Circuit decision of United States v. Kennedy, 643 F.3d 1251 (9th Cir. 2011), the court indicated that restitution under 18 U.S.C. § 3663 may be awarded only for losses for which the defendant’s conduct was an actual and proximate cause. In 2011, the D.C. Circuit Court in United States v. Monzel, 641 F.3d 528, 535, 538 (D.C. Cir. 2011), said, “It is a bedrock rule of both tort and criminal law that a defendant is only liable for harms he proximately caused.” Proximate cause is a critical linkage to any calculation or determination of restitution. Even when the government is the victim, it has to prove that its harm was proximately caused by the defendant. This critical linkage between proximate cause and restitution has been abandoned in the Sixth Circuit’s decision in United States v. Kumar, 750 F.3d 563 (6th Cir 2014).

In Kumar, the Sixth Circuit affirmed the decision of the U.S. District Court for the Northern District of Ohio related to the calculation of restitution in a hoax distress call, among other claims. The circuit court cautioned, though, that its decision does not entitle the U.S. Coast Guard (USCG) to recover all claimed indirect costs in every case. This cautionary statement suggests that complex calculations in restitution claims associated with false distress calls have not been fully settled. Kumar was the first case that legally challenged the USCG’s calculation of restitution under 14 U.S.C. § 88(c).

Background
The defendant, Mr. Kumar, was a 19-year-old college student in March 2012 at Bowling Green University and a licensed pilot. On March 14, 2012, Mr. Kumar was flying roundtrip, alone at night from Wood County Airport near Bowling Green to Burke Lakefront Airport in Cleveland. The trip required him to fly over a portion of Lake Erie. On his return flight, Mr. Kumar observed what he believed to be a flare in the sky, typically deployed by boats in distress. He radioed Cleveland Hopkins International Airport of this sighting and was asked to fly lower to get a closer look. Upon doing so, he did not see a boat. Nonetheless, Mr. Kumar reported seeing additional flares going up and four people aboard a boat wearing life jackets with strobe lights activated. Upon receiving the information, the USCG deployed search and rescue (SAR) efforts with assistance from the Canadian Armed Forces (CAF). The SAR efforts continued for 21 hours with no findings.

About one month after the SAR efforts, Mr. Kumar admitted to a USCG investigator that his report of a boat in distress had been false. He was subsequently indicted on making a false distress call under 14 U.S.C. § 88(c)(1) and pled guilty on January 17, 2013. Mr. Kumar was sentenced to prison for three months and ordered to pay restitution of $277,257.70 to the USCG and $211,750 to the CAF. On appeal, Mr. Kumar claimed the district court was without authority to order restitution to the CAF and erred in its calculation of costs incurred by the USCG associated with the SAR efforts.

Calculation of Restitution
According to 14 U.S.C. § 88(c)(3), an individual who makes a false distress message to the USCG or causes the USCG to attempt to save lives when help is not needed is “liable for all costs the Coast Guard incurs as a result of the individual’s actions.” 136 Cong. Rec. 7269–70 (daily ed. Sept. 10, 1990). To determine restitution in such matters, the USCG uses its published user fee hourly rates. These rates are published in the Commandant Instruction, which provides for standard rates to be used in computing reimbursable charges. The Commandant Instruction identifies hourly standard rates for USCG personnel, cutters, boats, aircraft, and other equipment. These rates are divided into two categories: inside government and outside government. “The ‘Inside Government’ rate is for use when charging other Federal agencies within the government.” Commandant Instruction 7310.1M (Feb. 28, 2011). All others are charged the inside government rate for the costs identified below, in addition to the outside government rate for pension benefit adjustments, operating asset depreciation, and operating cost of capital. The inside government rate includes the following:

1. direct costs, such as labor, employee benefits, fuel, and maintenance;
2. support costs, which are allocated costs for assistance received from Coast Guard support activities from area commands, districts, Personnel Services and Support Units, and others;
3. general and administrative costs, which are allocated costs for administrative activities such as legal services and payroll processing.

The outside government rate includes the following:

1. pension benefit adjustments, which are costs incurred for retirement pay and medical expenses;
2. operating asset depreciation for cutters, aircraft, boats, buildings, structures, electronics, and other assets;
3. operating asset cost of capital, which is an annual rate of return applied to the net book value of cutters, aircraft, boats, buildings, structures, and other assets.

These direct and indirect expenses are summed and divided by the annual budgeted hours per asset to arrive at an hourly reimbursement rate per asset for false distress calls. Similarly, personnel expenses include direct and indirect costs, including salaries and fringe benefits such as medical insurance and retirement costs. Reimbursement rates for personnel are based on annual standard personnel costs and also include incurred, but unfunded, retirement and medical costs. Commandant Instruction 7310.1M (Feb. 28, 2011). The USCG’s calculation of restitution in Kumar included the following components:

Direct                                      $118,216
Support                                    30,723
General & Administrative       66,229
Pension adjustment                35,377
Asset depreciation                  10,611
Asset cost of capital                16,101
Total                                        $277,257

Commander Kevin Mohr, chief of financial analysis for the USCG, testified on behalf of the government as its financial expert at the district court hearing. Commander Mohr indicated that the USCG’s reimbursable standard rates are adopted pursuant to Office of Management and Budget Circular No. A-25 (OMB A-25), which establishes federal policy regarding fees assessed for government resources. OMB A-25 provides that “user charges will be sufficient to recover the full cost to the Federal Government . . . of providing the service, resource or good.” “Full cost includes all direct and indirect costs to any part of the Federal Government of providing a good, resource, or service.” Commander Mohr indicated that “full cost”—as defined in OMB A-25 and implemented by Commandant Instruction 7310.1M—represents “all costs” Mr. Kumar is liable for under 14 U.S.C. § 88(c). He concluded by further indicating that “‘full cost’ methodology is the required approach for the USCG to calculate its hourly standard asset rates used to assess restitution. Restitution from Kumar to the USCG for all costs incurred by the USCG due to Kumar’s false distress call are, therefore, appropriately assessed at $277,259.25.” Preliminary Expert Report of CDR Kevin W. Mohr, USCG, MBA, CGFM, CDFM, PMP (July 22, 2013).

Mr. Kumar argued that this approach places excessive emphasis on “all costs” while ignoring the “as a result” limitation. He contends that section 88(c) creates a restitution remedy and that the “as a result” language limits recovery to actual losses proximately caused by his false report. Mr. Kumar further indicated he is liable under section 88(c) only for those costs directly attributable to his actions, not for the “indirect costs” included in Commander Mohr’s calculation. In its opinion, the circuit court indicated, “There appears to be little published case law directly on point.” Kumar, 750 F.3d at 567. Mr. Kumar’s challenge of the USCG’s restitution calculation presents the first such legal challenge of its kind.

At the district court trial, Mr. Kumar’s financial expert testified that using a full-cost methodology overstates the USCG’s claim for restitution because it includes indirect costs that would have been incurred by the USCG irrespective of the SAR efforts in this case. Indirect costs such as legal services, payroll processing, retirement pay, and medical expenses would have been incurred by the USCG whether or not a boat left the dock or a helicopter left the hangar to assist in this SAR effort. “Awarding these costs to the USCG generates an economic benefit that it did not possess ‘but for’ its SAR efforts.” Preliminary Expert Report of Dennis S. Medica, CPA, CFF, CGMA, CVA, CFE (May 21, 2013). According to Mr. Kumar’s expert, the USCG’s restitution calculation is overstated by more than $159,047, or 135 percent, due to an erroneous calculation methodology.

U.S. Court of Appeals Decision
In its decision, the court of appeals noted that

[s]ection 88(c) does not mention “restitution.” Yes, it functions in a manner akin to restitution, and Kumar’s judgment of sentence refers to restitution, but the statutory language we interpret does not. . . . It makes one who gives a false report liable for all costs incurred by the Coast Guard as a result of his actions.

Id. at 568.

The court went on to note that section 88(c) “renders Kumar liable for all costs associated with resources mobilized as a result of his false report. We therefore find no error in the district court’s ruling that Kumar is liable under § 88(c) for full cost of the service rendered by the Coast Guard, $277,257.10.” The circuit court provided an explanatory statement indicating that, “Kumar . . . has not challenged on appeal any particular items of indirect costs claimed by the Coast Guard, and our opinion should not be construed as meaning that ‘all costs’ necessarily entitles the Coast Guard to recovery of all claimed indirect costs in every case.” Id. at 568 n.1.

Circuit court Judge Helene N. White provided a dissenting opinion regarding the obligation imposed under 14 U.S.C. § 88(c), in which she stated,

The question is whether 14 U.S.C. § 88(c), which imposes liability for “all costs the Coast Guard incurs as a result of” a false distress message, contemplates the use of the standard reimbursable rates (“user charges”) adopted pursuant to 31 U.S.C. § 9701 and Office of Management and Budget Circular No. A-25. I do not believe it does.

. . . .

Section 88(c) speaks of all costs incurred as a result of the false report; in contrast, § 9701 and OMB A-25 speak of including all costs, direct and indirect, in an effort to price a good or service as it would be priced on the open market and account for all overhead costs that are necessary to run the overall operation but do not result from the fact that the particular good or service was produced or rendered. User charges calculated pursuant to the latter provisions include elements that are not related to a false distress signal and produce an inflated cost figure. I would remand for an adjustment of the penalty imposed under § 88 (c).

Kumar, 750 F.3d 571–71 (White, J., concurring in part, dissenting in part).

Conclusion
Upon analysis, the Sixth circuit court’s decision in Kumar abandoned proximate cause in determining restitution. The government has not explained why or how this bedrock principle of proximate cause should be abandoned in this case. In its claim for restitution, the USCG has included costs that would have been incurred regardless of whether helicopters took off or boats left the dock. This calculation is fundamentally incompatible with basic principles of proximate cause and restitution. Furthermore, the USCG’s calculation of restitution in false distress calls had not been challenged until United States v. Kumar. Although it affirmed the district court’s decision supporting the current calculation, the appeals court stated that its opinion should not be construed as meaning that “all costs” necessarily entitles the Coast Guard to recovery of all claimed indirect costs in every case. This statement coupled with Judge White’s dissenting opinion provides for a somewhat unsettled future for the USCG’s current calculation of restitution in false distress calls.

Keywords: criminal litigation, restitution, proximate cause, CPA, litigation, expert witness, USCG, false distress call, appeals court, calculation

Dennis S. Medica, CPA, CFF, CGMA, CVA, CFE, testified as a financial expert witness on behalf of Kumar. He is a forensic accountant, USCG master captain, and managing director of Medica, LLC, based in Cleveland, Ohio.


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