November 19, 2012 Top Story

Circuits Split on Valuing Offset Against Criminal Restitution

Timing of valuation makes a huge difference under federal act

Sean T. Carnathan

Whether a court values recovered property on the date of return or the date of resale may dramatically affect the amount of restitution the court orders a criminal defendant to pay. The timing of the valuation depends on how the court defines the property to be returned. The federal circuit courts are split on the issue, making it ripe for Supreme Court review.

Under the Mandatory Victims Restitution Act (MVRA), a court must order a criminal defendant convicted of many federal crimes to pay restitution. To the extent the victim recovers any of the lost property, the defendant gets an offset against the restitution to be paid. The statute states that the offset must be based on “the value (as of the date the property is returned) of any part of the property that is returned.”

The Robers Case

In United States v. Robers [PDF],the defendant pleaded guilty to conspiracy to commit wire fraud based on his role as a straw buyer in a mortgage fraud scheme. After the loans went into default, the banks foreclosed and sold the properties, recovering some but not all of the money they had loaned against them. The district court accordingly ordered Robers to pay $218,952 in restitution to the victims.

The disputed issue was how to calculate the “offset value” of the property under the MVRA. Robers argued that the MVRA requires the court to determine the offset value based on the fair market value of the real estate on the date the victim lenders obtained title to the houses through foreclosure, because that is the “date the property is returned.”

The government argued that the offset value must be determined based on the eventual cash proceeds recouped following the sale of the real estate. In the down market, the difference was substantial.

The Circuit Split

In Robers, the U.S. Court of Appeals for the Seventh Circuit joined the Third [PDF], Eighth [PDF], and Tenth Circuits [PDF], holding that in a mortgage fraud case, the property at issue is the money loaned. The property, therefore, is not “returned” until the victim converts the real estate collateral back to cash through a resale. This means that the offset value depends on the resale price that the mortgagee obtains.

In the Second [PDF], Fifth [PDF], and Ninth Circuits [PDF], courts calculate the offset based on the value of the real estate at the time it is returned, when the mortgagee has the opportunity to sell it for cash. If the victim chooses to hold onto the property for a time after taking title, then the reduction in value during that time does not increase the restitution.

Implications of the Decision

The leading cases addressing property valuations for offset against criminal restitution deal with fraud in connection with real estate transactions. The principles at issue, however, may affect other types of crimes as well. “These cases arise in circumstances where there is the most swing in value,” says Maurice M. Suh, Los Angeles, cochair of the ABA Section of Litigation’s Criminal Litigation Committee. “Speculative home values crashed in the recession, but this issue may apply to Wall Street financial crimes as well. Many financial instruments are secured by assets that swing widely in value,” says Suh.

“The decision is focused on the statute’s goal of making victims whole but potentially interferes with the statute’s goal of returning property to victims,” comments Erek L. Barron, Bethesda, MD, cochair of the Section of Litigation’s Criminal Litigation Committee. “If a defendant is going to be on the hook for the offset amount regardless of when the property is sold, then why return the property? Also, the decision may have the unintended consequence of interfering with the marketplace,” says Barron.

This circuit split highlights the potential for complexity to lurk in a seemingly familiar term. When the court defines “property,” the question is whether the statute refers to the property stolen or the property returned. They are not necessarily equivalent, particularly in the context of complex financial instruments, explains Suh. From a practical standpoint, this means that in an MVRA case, lawyers must undertake a sophisticated analysis of what “property” means.

Practical Advice for Defense Counsel

Robers’ argument that the weak real estate market caused the loss, not his fraud, is not a bad argument, says Barron, who points out that this was a “bargained-for transaction by a sophisticated financial institution,” which knew that current and future market conditions could affect its collateral. Barron recommends that when arguing to limit a restitution order, defense counsel should consider evaluating “(1) the victim’s understanding of the collateral at the time of the original agreement, (2) the victim’s sophistication, and (3) whether the victim has, or will, unreasonably delay and not sell the collateral at the appropriate time.”

Sean T. Carnathan is an associate editor for Litigation News.

Keywords: criminal restitution, resale, fraud

Related Resources

  • United States v. Robers, No. 10-3794, 2012 U.S. App. LEXIS 19273 (7th Cir. Sept. 14, 2012).
  • United States v. Yeung, 672 F.3d 594 (9th Cir. 2012).
  • United States v. Statman, 604 F.3d 529 (8th Cir. 2010).
  • United States v. James, 564 F.3d 1237 (10th Cir. 2009).
  • United States v. Boccagna, 450 F.3d 107 (2d Cir. 2006).
  • United States v. Himler, 355 F.3d 735 (3d Cir. 2004).
  • United States v. Holley, 23 F.3d 902 (5th Cir. 1994).

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