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United States v. Pollak

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


filed: April 21, 1988.

UNITED STATES OF AMERICA, APPELLEES
v.
FRED R. POLLAK, APPELLANT

On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Criminal No. 85-00252-01.

Sloviter, Becker, and Cowen,*fn* Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

Fred B. Pollak has appealed from a conviction for wire fraud, 18 U.S.C. §§ 2, 1343, mail fraud, 18 U.S.C. §§ 2, 1341, conspiracy to commit mail fraud, wire fraud and interstate transportation of stolen property, 18 U.S.C. § 371, and the interstate transportation of stolen property, 18 U.S.C. §§ 2, 2314. We have considered all the issues raised by appellant with regard to his conviction for these offenses, and conclude that none have merit and the conviction must be affirmed.*fn1 We do, however, have difficulty with three interesting questions regarding the district court's imposition of restitution pursuant to the Probation Act, 18 U.S.C. § 3651 (1982 & Supp. III 1985),*fn2 as part of the sentence in this case. First, we must decide whether the district court erred in imposing restitution for transactions enumerated in counts upon which appellant was acquitted. We conclude that it did err.

Second, we must determine whether the district court improperly ordered restitution under § 3651 for legal fees and transportation and storage costs incurred by some of the victims in an effort to recover their property. We conclude that the district court erred on this point as well.

Finally, we must determine whether the district court improperly ordered appellant to pay $250,000 in restitution in the face of appellant's contention that he cannot reasonably be expected to pay this amount, and whether the district court made adequate findings as to appellant's ability to pay. We conclude that the district court did not make adequate findings justifying the conclusion that appellant was able to pay restitution in the amount of $250,000.

Although we reject other attacks on the district court's restitution order, we will, for the reasons indicated, vacate the judgment of sentence and remand this matter to the district court for further proceedings consistent with this opinion.

I. FACTS AND PROCEDURAL HISTORY

William Loch was the sole proprietor of Loch Industries, a small tool and dye shop in Tullytown, Pennsylvania. In October, 1982, Loch sold Loch Industries to Richard Estrada, appellant's co-defendant in the district court. At the time of the sale, and on behalf of Loch Industries, Estrada executed a note in favor of a company controlled by appellant, Certified Machinery Co., to repay $343,000 plus interest by December 1982 for a line of equipment, production rights to the equipment, and consulting and marketing services that Certified Machinery ostensibly had sold to Loch Industries. Estrada gave Certified Machinery a security interest in all of Loch Industries's assets, including after-acquired property, as security for the note. Certified Machinery recorded the security agreement in accordance with the Uniform Commercial Code.

Loch Industries thereupon began to order, for immediate delivery, new machinery from other vendors on credit, ostensibly to expand the company's operations to meet production requirements under newly acquired contracts. During November and December, 1982, Estrada ordered on credit approximately $2,000,000 worth of equipment on behalf of Loch Industries. In support of the credit purchases, Estrada provided as credit references appellant's company as well as various companies, operated by some of appellant's friends, which had never extended credit to Loch Industries. Several vendors requested security interests for the machinery they sold to Loch Industries, and Estrada, when placing the orders, promised to convey such an interest to each vendor. However, when the machinery was actually delivered, Estrada somehow managed in each instance to take possession of the equipment without ever signing away any security interests. All subsequent pleas from the defrauded vendors fell on deaf ears.

By December 1982, it was apparent that Loch Industries' newly acquired contracts, which had justified the rapid expansion of the company, were actually worthless. On December 16, 1982, appellant wrote to Estrada demanding payment in full on Loch Industries' note to Certified Machinery no later than December 21, 1982. According to appellant, the balance due on the note had risen to $557,884. The evidence at trial in this case showed, however, that the dollar value of the Loch Industries note to Certified Machinery, which was the basis for appellant's eventual claim to the machinery, had been artificially inflated, as explained in the margin.*fn3

In response to appellant's demand for payment on the note, Estrada informed appellant that Loch Industries had to default on its obligation to Certified Machinery. Meanwhile, employees of Loch Industries began shipping some of the newly purchased machinery from the company's Pennsylvania facilities to Illinois and Texas.

Appellant, acting as a secured creditor of Loch Industries, announced a U.C.C. sale of the company's assets, including its valuable new machinery, and then sent one of his employees to display and then to auction the items. At the public sale on December 29, 1982, his own employee declared appellant the high bidder for the machinery and equipment. After the sale, appellant personally oversaw the removal of more machinery from the Loch Industries warehouse in Huntingdon Valley, Pennsylvania, and one fully loaded trailer left for Chicago. Before other trucks could depart, however, the defrauded vendors (now angry creditors of Loch Industries), fearful of losing the machinery that they sold to Estrada but had not yet been paid for, arrived on the scene and blocked the exits. During the ensuing commotion, appellant identified himself to the creditors as "John Williamson." Ultimately the creditors obtained a restraining order to prohibit the removal of additional machinery.

After the sale, despite promises to return to Huntingdon Valley to make recompense, Estrada in effect disappeared and defaulted in the civil litigation that followed. Appellant unsuccessfully defended the civil litigation on the grounds that he was a secured creditor and therefore had priority over the unsecured machinery dealers. In January, 1983 the Pennsylvania court that had issued the restraining order on the day of appellant's U.C.C. sale also issued a recision order, allowing the unsecured creditors to reclaim their machinery which remained at the Huntingdon Valley warehouse. The evidence showed that even after the recision order, appellant tried to seize a grinder which Estrada had ordered on credit and delivered to a local warehouse other than the one at Huntingdon Valley. Appellant also continued to sell the machinery and equipment taken from Huntingdon Valley that Estrada had ordered on credit.

In spite of the successful civil litigation, many of the vendors never completely recovered from Loch Industries for their losses. It is these losses that form the bulk of the restitution awards at issue in this case.

On July 9, 1985, a grand jury returned a nineteen count indictment against appellant and Estrada, charging them each with various counts of mail fraud, wire fraud, interstate transportation of stolen property, and conspiracy to commit each of the above.*fn4

Appellant and Estrada were tried before a jury in June and July, 1986. On July 11, 1986, the jury found appellant guilty of the conspiracy charged in Count 1, guilty of six counts of mail fraud involving vendors named in Counts 2, 3, 4, 8, 10 and 13, guilty of four counts of wire fraud set forth in Counts 5, 11, 15, and 18 and guilty of all three counts of interstate transportation of stolen property. The jury also found Estrada guilty of the conspiracy charged in Count 1 and four counts of mail and wire fraud. Most relevant for purpose of this appeal, appellant was acquitted on Counts 6, 7, 9, 12, and 14, charging mail fraud and wire fraud and naming several specific vendors.

The district court ordered a presentence investigation and report and received sentencing memoranda from the parties. The government filed a memorandum which identified twenty-five victims of the defendants' unlawful conduct and their total losses. The government reported that the total loss to the victims was $397,262.85. Appellant filed a memorandum in response to the government's request for restitution. Appellant argued that the government improperly sought restitution for parties who were not "aggrieved" within the meaning of § 3651, for incidental costs and losses not caused by the offense for which appellant was convicted, and for claims underlying counts for which appellant was acquitted.

On April 24, 1987, the district court sentenced appellant to five years imprisonment on Count 1 and three years imprisonment on Count 2, to run consecutively, for a total term of imprisonment of eight years. The district court also sentenced appellant to five years probation on Counts 3, 4, 5, 8, 10, 11, 13, 15, 16, 17, 18 and 19, to commence after the term of incarceration. The court further ordered, as a condition of probation, that appellant pay restitution to the best of his financial ability. Stating that appellant could not realistically be expected to pay the government's "correct figure" of $397,265.87, the district court directed that appellant "make restitution during [the] period of probation in the sum of $250,000 to be allocated proportionately among the victims listed in the Government's memorandum." J.A. at 1156. Appellant filed a timely notice of appeal from this sentence.

II. RESTITUTION ON ACQUITTED COUNTS

Appellant first contends that the district court improperly ordered restitution on three counts of the indictment for which he was acquitted.*fn5 To address this issue, we must examine the provisions of the Probation Act, 18 U.S.C. § 3651, which authorizes the district court to order restitution as a condition of probation in this case.*fn6

The Probation Act grants district courts broad discretion to design probationary conditions appropriate for each particular case. The statute provides, in part, that a district court,

when satisfied that the ends of justice and the best interests of the public as well as the defendant will be served thereby, may suspend the imposition or execution of sentence and place the defendant on probation for such period and upon such terms and conditions as the court deems best.

18 U.S.C. § 3651.

The statute also lists three specific conditions relating to monetary payments that the district court may impose. As one of these conditions, the defendant "may be required to make restitution or reparation to aggrieved parties for actual damages or loss caused by the offense for which conviction was had." Id. Appellant argues that this language should be construed to limit restitution to only those counts for which appellant was convicted, and that he cannot be made to pay restitution to individual victims named in counts upon which he was acquitted.*fn7

The government, however, contends that Pollak was convicted of a "unitary fraud scheme," and that the individual acquittals on several counts of mail and wire fraud merely reflect that the jury did not find sufficient evidence that the particular communication described in each individual count took place. Consolidated Brief for Appellee at 47. The government asserts that "[a] guilty verdict as to any one of the mail or wire fraud counts necessarily implies that the jury found the existence of the unitary scheme described in the indictment." Id. And because, in the government's view, the individual counts were merely acts in furtherance of the scheme, the government argues that conviction on any one of those counts alone should be sufficient to support the district court's order of restitution "for actual damages or loss caused by the offense for which conviction was had." 18 U.S.C. § 3651.

In the government's view, in cases involving a scheme to defraud where individual counts of the indictment are simply acts in furtherance of a unitary scheme, the district court, as a condition of probation on any one count, may order restitution for the full amount of the loss caused by the overall scheme, regardless of whether the defendant has been acquitted on a particular count.

This court has held that a district court "'lacks power to order restitution in an amount greater than that involved in the particular offense for which defendant was indicted and convicted.'" United States v. John Scher Presents, Inc., 746 F.2d 959, 963 (3d Cir. 1984) (quoting United States v. Buechler, 557 F.2d 1002, 1007 (3d Cir. 1977)). See also United States v. Gering, 716 F.2d 615, 622-25 (9th Cir. 1983); United States v. Johnson, 700 F.2d 699, 701 (11th Cir. 1983). However, as the government correctly points out, "there is substantial precedent in this court that upholds restitution orders for amounts in excess of the dollar amount specifically alleged in the counts for which defendant was convicted." United States v. Sleight, 808 F.2d 1012, 1018 (3d Cir. 1987). In United States v. Woods, 775 F.2d 82 (3d Cir. 1985), for example, we affirmed a restitution order for the full amount of loss to all investors aggrieved by the defendant's fraud, even though the defendant pleaded guilty to only two counts of a multiple count indictment for mail fraud. We stated that

the offense [in Woods ] is a scheme to defraud, and each count is simply an act in furtherance of the unitary scheme; therefore, establishing that a single count caused a specific loss would be difficult. It is the overall scheme that is central to all the counts and gives rise to the victims' financial loss.

Id. at 88.*fn8 Accord United States v. Hawthorne, 806 F.2d 493, 497 (3d Cir. 1986).

Woods, Hawthorne and United States v. Martin, 788 F.2d 184 (3d Cir. 1986), involved situations where restitution was ordered following a guilty plea. In Sleight, we found a particularly strong basis for full restitution, under § 3651, because the defendant was convicted of conspiracy to commit mail fraud and devising a scheme to commit mail fraud, following a trial at which there was evidence substantiating the full amount of the loss. 808 F.2d at 1018-19. However, none of the cases in which we allowed restitution in an amount exceeding that charged in the indictment involved the situation presented here, where the defendant was acquitted on some of the counts. Here, the government drafted its indictment so that each mail and wire fraud count sought to bring within the alleged scheme to defraud an additional machinery vendor. Therefore, when the jury acquitted on some, but not all, of the mail and wire fraud counts, its verdict was an expression of its view as to the contours of the scheme.

Where the jury has acquitted on certain mail or wire fraud counts, no prior decision has ever sanctioned an award of restitution to a party named in the specific count for which the jury acquitted. In United States v. Brown, 699 F.2d 704 (5th Cir. 1983), the defendant, a county commissioner, was convicted of four counts of Hobbs Act extortion, two counts of conspiracy, and thirty-two counts of mail fraud, developing out of a kickback scheme for purchases of supplies and merchandise. Notwithstanding the broad conspiracy and mail fraud allegations, the Fifth Circuit limited the award of restitution by holding that "the district court was empowered to require Brown to make restitution for the amount the vendors and salesmen received from Bowie County's treasury as well as the amount he received but only for each count upon which he was convicted." Id. at 711 (emphasis added) (citation omitted).

Count 2 of the indictment in this case charged a scheme to defraud and alleged that in furtherance of that scheme to defraud a mailing was received by Loch Industries from Komatsu America Corporation. Counts 7, 9 and 12 of the indictment charged similar mail fraud schemes to that charged in Count 2, but alleged that in furtherance of these mail fraud schemes, mailings were made to W.B. Dean & Son and Concord-Soraluce Machine Tool Co. In all other respects, the schemes charged in Counts 7, 9 and 12 are identical to the scheme charged in Count 2. The jury's acquittal on Counts 7, 9 and 12 thus could only mean that the mailings to W.B. Dean and Concord-Soraluce were considered outside the boundaries of the scheme found by the jury. Under these circumstances, the court could not properly hold that either W.B. Dean & Son or Concord-Soraluce was "an aggrieved party" whose loss was "caused by the offense for which conviction was had" within the meaning of § 3651.

In sum, because the individual mail and wire fraud counts in this case incorporated by reference the scheme to defraud, acquittal on some of the counts could indicate, contrary to the government's position, that the "offense" in this case, including the scheme to defraud, was not as pervasive as that alleged in the indictment. The fact of an acquittal on some of the individual counts, therefore, fundamentally distinguishes this situation from other "unitary scheme" cases where we have allowed restitution for the full amount of the victims' losses. Were we to conclude otherwise, the "unitary scheme" exception carved out in Woods and its progeny would swallow the general rule that restitution cannot be ordered in amounts "'greater than that involved in the particular offense for which defendant was indicted and convicted.'" See John Scher Presents, 746 F.2d at 963 (citations omitted) (emphasis added).

Therefore, we conclude that the district court improperly ordered restitution on counts for which appellant was acquitted. We add only that a contrary result would be at odds with the significance of an acquittal in our criminal jurisprudence.*fn9

III. RESTITUTION FOR LEGAL FEES AND TRANSPORTATION AND STORAGE COSTS INCURRED TO RECOVER THE VICTIMS' PROPERTY

Appellant next contends that, as to persons determined to be victims of the scheme, the award of restitution cannot include legal fees and transportation and storage costs incurred in efforts to recover the victims' property.*fn10 This issue requires us to decide whether these monetary amounts constitute "actual damages or loss caused by the offense" within the meaning of § 3651.

The government argues that to exclude these incidental expenses from "actual damages or loss" would frustrate an important policy underlying the district court's restitution power, that is, "to make the victim whole," Sleight, 808 F.2d at 1020. The government rejects appellant's "narrow interpretation" of "actual damages or loss" under § 3651, Consolidated Brief for Appellee at 48, and relies on our opinion in Sleight, where we held that the defendant purchasing agent's profits in the form of kickbacks, which the victim company would have realized as lower prices on its cocoa purchases were it not for the fraud, "fairly represented [the victim company's] damages" for purposes of restitution under § 3651. 808 F.2d at 1018. In Sleight, we also allowed postjudgment interest on restitution. Id. at 1021. If these items are allowable under § 3651, the government argues, then surely the items in this case -- the sales prices for the victims' unrecovered machines and the victims' expenses in trying to recover the machines -- should also be allowable as "actual damages or loss."

Section 3651 lists three types of monetary payments that a district court can impose as a condition of probation: fines, provision of support for persons for whom defendant is legally responsible, and, of course, restitution. Although this court has broadly interpreted the term "offense" in § 3651, we also have stated that the monetary payment provisions of § 3651 must be narrowly construed. John Scher Presents, 746 F.2d at 963. In John Scher Presents, we held that the monetary payment provisions of § 3651 are not "merely illustrative" but restrict the district court's authority to impose monetary conditions of probation not described in the Act. Id. at 964. Thus we held that the district court may not require a corporate defendant, as a condition of probation under § 3651, to "pay money to charitable organizations in no way aggrieved by the offense." Id.

Although we recognized in Sleight that one purpose of restitution under the Probation Act is to make the victim whole, we also explained that restitution "is imposed as part of sentencing and remains inherently a criminal penalty." Sleight, 808 F.2d at 1020. In that case, therefore, we held that even though prejudgment interest might plausibly be considered part of the victim's "actual loss," such interest could not be imposed on an amount ordered to be paid as restitution under § 3651, absent a specific provision in the statute for prejudgment interest. Id. In part, our denial of prejudgment interest in Sleight rested on "judicial unwillingness to expand punishment fixed for a criminal act beyond that which the plain language of the statute authorizes." Id. (quoting Rodgers v. United States, 332 U.S. 371, 374, 92 L. Ed. 3, 68 S. Ct. 5 (1947)).

Most of the courts of appeals that have interpreted the meaning of "actual damages or loss caused by the offense" have also construed this language narrowly. The Second, Fourth and Ninth Circuits have held that restitution under § 3651 is proper only for losses directly resulting from the defendant's offense. See United States v. Tyler, 767 F.2d 1350, 1351 (9th Cir. 1985); United States v. McMichael, 699 F.2d 193, 195 (4th Cir. 1983); United States v. Burger, 739 F.2d 805, 811 (2d Cir. 1984). The Fifth and Eighth Circuits have held that restitution under § 3651 cannot be ordered to repay the government for the cost of defendant's court-appointed counsel. See United States v. Missouri Valley Construction Co., 741 F.2d 1542, 1547 (8th Cir. 1984); United States v. Jimenez, 600 F.2d 1172, 1174-75 (5th Cir.), cert. denied, 444 U.S. 903, 62 L. Ed. 2d 140, 100 S. Ct. 216 (1979). But cf. United States v. Gurtunca, 836 F.2d 283, 287-88 (7th Cir. 1987) (district court was authorized, under § 3651 and the Criminal Justice Act, 18 U.S.C. § 3006A, to condition defendant's probation on reimbursing the government for court-appointed attorneys' fees); United States v. Santarpio, 560 F.2d 448, 455-56 (1st Cir.) (same), cert. denied, 434 U.S. 984, 98 S. Ct. 609, 54 L. Ed. 2d 478 (1977).

No court of appeals has directly confronted the issue, presented here, whether attorneys' fees and other expenses incurred by a private party to recover its property constitute "actual damages or loss caused by the offense" within the meaning of § 3651. However, in United States v. Kutner, 631 F. Supp. 126, 132 (E.D. Pa. 1986), the district court held that victims' losses "incurred from advertising, traveling or other similar expenses" are not part of the actual damages caused by the offense for which the defendant was convicted. Likewise, in United States v. Trettenaro, 601 F. Supp. 183, 185 (D. Colo. 1985), the court determined that expenses connected with the recovery of stolen property are not compensable under the Victim and Witness Protection Act.

Similarly, some courts of appeals have read § 3651 to preclude reimbursement to the government for the costs of investigation and prosecution, even when the government was the victim of the offense. See, e.g., United States v. Vaughn, 636 F.2d 921 (4th Cir. 1980) (construing § 3651 to preclude reimbursement to the government of the costs of investigating defendant's tax evasion offense, and implying that restitution to a private party would be limited to the amount of money or the value of property of which the victim had been defrauded).*fn11 Cf. United States v. Kenney, 789 F.2d 783, 790 F.2d 85 (9th Cir. 1986) (restitution under the Victim and Witness Protection Act could not encompass reimbursement to bank that had been robbed for the wages of its employees who testified at trial and pretrial proceedings, but restitution of a technician's fee for removing film from a surveillance camera was warranted as a direct cost of the robbery).

We conclude that restitution of recovery expenses to victims of the scheme to defraud is not authorized by § 3651. Even though the recovery expenses incurred by the victims in this case might plausibly be considered part of their losses, such expenses are not directly caused by the offense for which appellant was convicted and are too remote from the offense to support an award of restitution under § 3651. This conclusion is consistent with this court's view that the provisions of § 3651 should be narrowly construed whenever the probationary condition sought to be imposed is the payment of money. John Scher Presents, 746 F.2d at 963-64. We thus hold that the district court exceeded its discretion in ordering restitution, as a condition of probation, for the victims' incidental expenses connected with the recovery of their property.*fn12

IV. ADEQUACY OF THE DISTRICT COURT'S FINDINGS ON ABILITY TO PAY

Finally, appellant contends that the district court improperly ordered appellant to pay $250,000 in restitution that he could not reasonably be expected to pay. In particular, appellant contends that "the record is silent as to how the trial court concluded that the appellant would be able to make restitution in the amount of $250,000.00 once he completes an eight year term of incarceration." Appellant's Brief at 25. The district court did not make specific factual findings as to appellant's ability to pay $250,000. After stating that $397,265.87, which the government reported was the victims' total loss, was "a correct figure," the district court merely stated that appellant could not realistically be expected to pay that amount. J.A. at 1156. The court then ordered that appellant make restitution of $250,000, to the best of his financial ability, to be apportioned among the reported victims.

The government acknowledges that "restitution may not be ordered in an amount that a defendant cannot realistically pay within the five year restitution period."*fn13 Sleight, 808 F.2d at 1021 (citation omitted). However, the government contends it is apparent that the district court found that $250,000 was an amount realistically within appellant's financial reach.*fn14 According to the government, this court's function is to determine whether the district court's finding is supported by the record, and hence whether the restitution order is within the limits of the district court's discretion. See id. at 1021-22.

Appellant's position, as recounted to his probation officer, is that his net worth is only $27,000, that he faces an eight year prison term, and that he cannot make restitution payments of $250,000.

The district court made only a conclusory finding as to appellant's ability to make restitution. Under our jurisprudence, however, that will not do. In similar situations where the Victim and Witness Protection Act applies, we have invoked our supervisory power to require district courts to make specific factual findings as to these matters before imposing restitution, in order to facilitate meaningful appellate review of the district court's discretionary ruling. See United States v. Johnson, 816 F.2d 918, 924 (3d Cir. 1987); United States v. Palma, 760 F.2d 475, 480 (3d Cir. 1985). We see no reason not to require specific factual findings in this case, even though restitution was awarded under the Probation Act. Cf. Sleight, 808 F.2d at 1021-22 (record evidence must support finding that defendant is capable of paying the restitution ordered). Because the district court did not make adequate findings with respect to appellant's ability to pay $250,000, we cannot determine whether the district court abused its discretion in imposing restitution for this amount, hence we must vacate the sentence insofar as it grants restitution and remand with instructions to make factual findings to support any award of restitution the court may impose.

V. CONCLUSION

For the foregoing reasons, we will affirm appellant's conviction, but we will vacate the judgment of sentence insofar as it grants restitution and remand this matter to the district court for further proceedings consistent with this opinion.


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