On Appeal From The United States District Court For The District of New Jersey; D.C. Crim. No. 89-00264-01
Before: Becker and Hutchinson, Circuit Judges, and Fullam, District Judge*fn*
Defendant Larry Kopp pled guilty to procuring a $13.75 million bank loan by fraudulent misrepresentations, in violation of 18 USC § 1344 (1988) (subsequently amended). The district court for the District of New Jersey sentenced him to a term of 33 months in prison. In calculating the sentence under United States Sentencing Guideline ("U.S.S.G.") § 2F1.1, the district court had to determine, as a specific offense characteristic, the amount of the "loss." The defendant argued that the "loss" was zero (and therefore that no offense level increase was necessary) on the following grounds: (1) the bank's actual loss was nil because the bank later sold the security for the loan for more than the loan balance; (2) even if the bank did incur an out-of-pocket loss, such loss resulted from misconduct by the bank and the defendant's nephew David Kopp, thus the defendant was not responsible for any actual loss; and (3) the defendant did not intend to inflict any loss on the bank. The court rejected the defendant's position and also declined to accept the probation officer's calculation that the bank's actual loss was only $3.4 million (an estimate which also took into account operating expenses, lost interest, and the cost of a low-interest loan to the new purchaser). Instead, the court agreed with the government that the "loss" was the amount that the defendant fraudulently obtained (the full $13.75 million face value of the loan), thereby increasing the offense level by eleven levels and the applicable sentence range to 30-37 months.
The defendant's appeal from the judgment of sentence requires us to decide how to apply the fraud guideline in this context, a question on which other circuits have split. For the reasons that follow, we conclude that the district court erred in fixing the "loss" as the face value of the loan. Rather, we hold that the district court should have calculated the "loss" as actual loss, substituting intended or probable loss if either amount was higher and determinable. In our view, the court's error stemmed in part from its failure to recognize fundamental differences between theft and fraud crimes, differences which the sentencing guidelines covering the two types of offenses take into account. We further hold that the guideline "loss" should not be reduced simply because the bank or David Kopp may have augmented it. When sentencing, the district court may, however, depart downward if any such augmentation caused the properly calculated "loss" to overstate the seriousness of the offense. Correspondingly, if the court finds that the "loss" understates the seriousness of the offense (which might be the case if actual and intended loss were zero and the risk of loss were significant), it may depart upward, so long as the sentence does not exceed the statutory maximum, in this case five years' imprisonment.*fn1 Because the district court made no findings on actual or intended loss, we will vacate the judgment of sentence and remand for resentencing. That court remains free not only to recalculate the "loss," but also to reevaluate other facts pertinent to its decision whether to depart from the guideline range.
The defendant also raises several other issues. He objects to added offense levels for more than minimal planning and for a supervisory role, and he complains that the district court should have granted him an offense level reduction for minor participation. We find these arguments without merit. He also alleges that the district court improperly refused to depart downward from the guideline range based on a misconception of its legal ability to do so. Because the district court is free to revisit the departure issues on remand, we need not reach that issue.
I. FACTS AND PROCEDURAL HISTORY
In the early 1980s, the defendant and his brother, Marvin Kopp, began a real estate development business, which they operated through various corporations and partnerships. The seed capital came largely from the family of Barbara Kopp, the defendant's wife. In November 1984, Marvin Kopp died, and, as the business faced ever more severe financial problems, disputes arose between the defendant on one side and Marvin Kopp's widow Judith Kopp and her son David Kopp on the other.*fn2 By the spring of 1987, David Kopp had become the managing partner, although the defendant remained involved. Financial difficulties, however, continued, even though the Kopps sank still more of their own funds into the partnerships.
In August 1987, the Kopp partnership began to negotiate with Ensign Bank, FSB ("the bank") for a $14 million loan, $12.3 million of which was necessary to refinance a shopping mall owned by one of the real estate partnerships. The refinancing was apparently required because an earlier lender, having discovered that the Kopps had obtained a second mortgage on the property without permission, was about to declare a default. To induce the bank to make the loan, Stuart Sherer, the Kopp partnership's office manager, prepared and signed false leases and estoppel letters*fn3 that inflated the true amount of rental income the shopping center was then generating. The defendant was aware of the fraudulent inducement of the bank loan and, Sherer claims, personally directed the forgeries. The defendant also personally certified two rent rolls he knew to be false. The misrepresentations suggested that the shopping center was fully occupied and that the rental income stream would be sufficient to cover the mortgage payments on the loan, neither of which was true.
Relying on the misrepresentations, the bank loaned the Kopp partnership $13 million in December 1987 and $750,000 more in January 1988. Apparently the debt-service ratio was insufficient to collect the remaining $250,000 of the $14 million loan commitment. To obtain the first installment, Sherer, with the defendant's knowledge, submitted five forged leases and twenty-one forged estoppel letters, along with three more leases that the partners knew would be broken by tenants. To obtain the second installment, Sherer further submitted a lease that overstated the rent due, as well as a new forged estoppel letter and an updated fraudulent rent roll.
B. The Default and the Bank's Actual Loss
The loan went into default in February 1988: no payments were made after the second loan installment was received. The defendant blames the failure to repay in part on David Kopp's diversion of partnership money and his failure to collect all amounts receivable. The government doubts that the defendant ever intended that the loan be repaid. In any event, the bank demanded and received a deed in lieu of foreclosure and eventually sold the property for $14.5 million, $750,000 more than the face value of the loan. The bank nonetheless calculated that it actually lost approximately $3.4 million overall, due to lost interest ($1.5 million), the bank's operating expenses when taking over the property ($0.4 million), and the cost of a low-interest loan to the new purchaser ($2.3 million).
The defendant, however, contends that the $3.4 million actual loss estimate was overstated and that any actual loss was a result of misconduct by David Kopp and bank officer Brian Maloney. He called a real estate appraiser, who testified that the value of the foreclosed property was at least $17.5 million, $3 million more than the sale price. He also introduced evidence that the lower sale price and a linked low-interest loan were due to an unethical "sweetheart" deal between the bank (in the person of Maloney) and David Kopp. The bank wanted control over the shopping center more quickly, so sought a deed from both Kopps in lieu of foreclosure. The defendant alleges that to obtain rapid title, Maloney secretly agreed to steer the resale to David Kopp's friend Clifford Streit, who in turn would give David Kopp back a 25% interest in the property.*fn4 The defendant claims that he was trying to arrange a profitable sale to third parties at that time but consented to giving the bank the deed when Maloney falsely told him there would be no criminal referral if he agreed. Pursuant to the secret exclusive option deal, the bank sold the property to Streit and his hidden partner David Kopp for below-market value. This underhandedness, the defendant continues, also led to an unnecessary low-interest loan, with the result that the bank's loss, if any, was inflated.
The defendant also claims that the actual loss figure of $3.4 million was improperly calculated, even given the way the resale took place. He argues that Maloney, who made that calculation, had an incentive to distort it because of Maloney's own misconduct. Moreover, he contends, the bank's own remaining records*fn5 show that the bank recorded an operating surplus on the property, not a $400,000 deficit, and fail to support the claimed $1.5 million in lost interest on the bad loan. Finally, the defendant asserts that the operating surplus would have been higher but for the bank's failure to credit rents received in June and July, 1988 and the bank's payment of $15,000 to the defendant and his wife for their equity interest. In short, the defendant claims that if the resale had not been tainted by misconduct, the bank would have profited, and that even as events transpired, the bank's actual loss was far less than $3.4 million.
C. The Criminal Proceedings
The federal authorities discovered the fraud in May 1988, when David Kopp reported the offense, admitted his complicity, and agreed to cooperate in prosecuting Stuart Sherer and his uncle, the defendant. David Kopp began secretly to record his conversations with the other conspirators. Confronted with the recordings, Sherer later agreed to cooperate and record additional conversations with the defendant. On August 8, 1989, the defendant was indicted for, among other things, one count of bank fraud under 18 USC § 1344 and one count of conspiracy to commit bank fraud. On June 11, 1990, under a plea bargain, the defendant pled guilty to those counts; the remaining ten counts, five of which related to other alleged crimes, were dropped.
The U.S. Probation Office submitted a Presentence Investigation Report on September 10, 1990, which adopted the bank's estimate of $3.4 million in out-of-pocket loss as the "loss" for purposes of U.S.S.G. § 2F1.1, the applicable sentencing guideline. Both parties objected. The government claimed that because the bank would not have made the loan at all had it known the truth, the defendant fraudulently obtained $13.75 million, which was therefore the proper measure of the "loss."*fn6 The defendant argued, as discussed above, that the "loss" was zero. The district court held hearings on the defendant's objections on October 25 and November 2 and 5, 1990, but ruled on April 30, 1991, that the full $13.75 million the defendant put at risk was the appropriate measure of loss. Hence an increase of eleven offense levels was required under original U.S.S.G. § 2F1.1 because the "loss" exceeded $5 million.*fn7 On May 17, 1991, the district court sentenced the defendant to 33 months in prison (roughly in the middle of the guideline range) for the reasons stated in its April 30, 1991 opinion. The defendant filed a timely appeal.
The impact of the challenged ruling is significant. Because the defendant had no prior criminal record, if the "loss" was zero (as he claims), the sentencing range would drop from the 30-37 months that the district court considered to a range of 2-8 months. If the district court also found that no upward departure was warranted, it might have elected to impose probation conditioned on a combination of community confinement, home detention or intermittent confinement under U.S.S.G. §§ 5B1.1 and 5C1.1(c), rather than continuous incarceration in prison. For this reason, the defendant sought bail pending appeal from the district court. The district court agreed that the defendant was not dangerous, was unlikely to flee, and that the grounds for appeal were substantial. It stated that if this court did reverse, the probable reduction would be eleven levels, leaving the sentence range at 2-8 months. It therefore ordered the defendant to begin serving an eight-month sentence on July 8, 1991, noting its inclination to impose the maximum in that range if resentencing proved necessary. It further ordered that bail pending appeal would be granted only if no decision from this court came down in eight months.
The defendant then sought bail pending appeal from this court. A motions panel denied that request without prejudice to reconsideration after hearing the merits. After hearing oral argument and anticipating the probable outcome on the merits, we issued an order granting the defendant bail pending our final decision and eventual resentencing.
II. DEFINITION OF "LOSS" IN THE ...