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United States v. Leahy

March 24, 2006; as amended March 28, 2006

UNITED STATES OF AMERICA
v.
PAUL J. LEAHY APPELLANT IN NO. 03-4490
UNITED STATES OF AMERICA
v.
TIMOTHY SMITH APPELLANT IN NO. 03-4542
UNITED STATES OF AMERICA
v.
DANTONE, INC. APPELLANT IN NO. 03-4560



On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 01-cr-00260-2). District Judge: Honorable J. Curtis Joyner.

The opinion of the court was delivered by: Fuentes, Circuit Judge.

PRECEDENTIAL

Argued June 8, 2005

Before: FUENTES, VAN ANTWERPEN, and BECKER, Circuit Judges.

OPINION OF THE COURT

I. Introduction

For a period of almost three years, the Defendants, Dantone, Inc., and its two senior managers Paul Leahy and Timothy Smith, were retained by several banks to auction repossessed automobiles at the highest price and reimburse the proceeds, minus fees and expenses, to the banks. With respect to at least 311 automobiles, however, the Defendants did not auction the cars to the highest bidder and remit the proceeds to the banks as promised. Rather, they kept those cars for their own inventories, resold them at higher prices, falsely misrepresented to the banks that they had been auctioned for less, and pocketed the difference between the false and actual prices. A jury found Smith, Leahy, and Dantone guilty of engaging in, and aiding and abetting, bank fraud in violation of 18 U.S.C. § 1344 and 18 U.S.C. § 2.

This matter presents several issues on appeal. First, we address several contentions that the District Court erroneously instructed the jury as to the Government's burden under the bank fraud statute. Second, we consider whether there was sufficient evidence to sustain the Defendants' convictions. Third and finally, we address the scope of the federal bank fraud statute, 18 U.S.C. § 1344, and clarify the intent and loss elements required to support a conviction under the statute.*fn1

Because we ultimately reject the Defendants' arguments with respect to the scope of the bank fraud statute, the District Court's jury instructions, and the sufficiency of the evidence, we will affirm their judgments of conviction. We also decide that, to the extent that the Defendants contend that the imposition of their sentences pursuant to the U.S. Sentencing Guidelines (the "Guidelines" or "U.S.S.G") are in error after Booker, such issues are best determined by the District Court in the first instance. See United States v. Davis, 407 F.3d 162 (3d Cir. 2005).

Accordingly, we will vacate the Defendants' sentences and remand for further proceedings consistent with this opinion. Because the forfeiture and restitution orders are inextricably intertwined with the District Court's loss findings under the Guidelines, we will vacate and remand those orders as well.

II. Background

A. Facts

On May 15, 2001, a federal grand jury sitting in the Eastern District of Pennsylvania returned a ten count indictment charging Defendants Smith, Leahy, and Dantone with bank fraud, in violation of 18 U.S.C. § 1344, and aiding and abetting, in violation of 18 U.S.C. § 2 (the "Indictment"). Dantone is a privately held corporation which owns and operates a public automobile auction in Conshohocken, Pennsylvania, known as Carriage Trade Auto Auction ("Carriage Trade"). Dantone's sole shareholder and president was Dominic Conicelli, Sr. During all times relevant to the Indictment, Smith was the general manager of Carriage Trade, while Leahy was the assistant manager or operations manager.

The Indictment alleged that between approximately 1993 and 1996, Dantone entered into agreements with ten financial institutions (collectively, "the banks") to auction automobiles and remit the full proceeds of the actual sales, minus auction fees and expenses.*fn2 Of the ten banks at issue in this case, nine consigned cars that had been repossessed following the owners' default on a loan obligation, while the tenth, Continental Bank, consigned repossessed cars as well as cars that had been returned at the expiration of lease agreements.

Per their agreements, the banks consigned the automobiles to Carriage Trade to be auctioned to the highest bidder. Nine of the ten banks established a minimum or floor price for each car; if the highest auction price fell below the minimum, the car could not be sold without the bank's consent. The banks typically would set the minimum price based on the condition of the car and in consultation with the auction's employees. The tenth bank, rather than setting minimum bids, informed Carriage Trade personnel of the amounts owed by the bank's customers on the defaulted car loans. Evidence at trial indicated that it was routine for the banks to face a deficiency balance on the outstanding loan even after the car had been auctioned, from which it could be inferred that the amount of the minimum bid set by the banks was typically lower than the outstanding loan obligation on the car. For the most part, the cars were sold "as is." When Carriage Trade sold automobiles at auction on behalf of one of the banks, Carriage Trade would send checks representing the proceeds of the sale, a bill of sale, and documents showing the expenses incurred by the auction in selling the automobiles. If the car was one which had been repossessed by the bank, the money made from the sale of the car at auction could then be put toward satisfying the outstanding loan. The banks assumed or were told that the checks received from the Carriage Trade auction represented the highest bid, minus fees and expenses.

The Indictment alleges that Dantone, Smith and Leahy defrauded the banks by not actually selling certain automobiles at an auction to the highest bidder or at the prices the Defendants represented to the banks. Instead, the Defendants diverted the cars into Carriage Trade's inventory, apparently repaired and/or reconditioned them in limited instances, and then sold them under the Carriage Trade name at a "second sale" at prices equal to or higher than the minimum established by the banks. The Defendants deceived the banks with respect to at least 311 cars, pocketing the difference between the prices they falsely represented to the banks and the real prices they obtained for the cars at the second sale. Typically, the Defendants used two methods to sell the cars for themselves. Most of the cars were sold through the Carriage Trade auction to good faith purchasers who did not know that the Defendants had misappropriated the cars for their own inventories. The Defendants also sold a smaller number of cars in a private auction to a select group of car dealers, who were invited to bid on the cars. The scheme began to unravel, however, when Edward Stigben, a co-schemer with the Defendants, was approached by the FBI regarding an on-going investigation of Carriage Trade; Stigben eventually received immunity from the Government in exchange for his testimony at trial regarding the fraudulent scheme.

A 2 1/2 week jury trial began on December 2, 2002. The Government introduced the testimony of bank representatives as well as employees of Carriage Trade. The Government also introduced a ledger maintained by Leahy (the "Leahy ledger") which detailed the profits realized by Dantone as a result of the Defendants' deceptive conduct. In addition, the Government introduced, for each of the 311 cars, the two sets of documents that Carriage Trade prepared: the false bill of sale and accompanying paperwork which the Defendants sent to the bank along with a check, and the true bill of sale and accompanying paperwork that was generated when the Defendants sold the cars for their own benefit.

On December 20, 2002, the jury returned a verdict of guilty on all counts as to each Defendant.

B. Sentencing

Thereafter, the District Court initiated sentencing proceedings against the Defendants. Because the Defendants' conduct involved a fraudulent scheme in violation of 18 U.S.C. § 1344, they were sentenced under U.S.S.G. § 2F1.1, the Guidelines provision applicable to crimes of fraud and deceit. Section 2F1.1 provides for a base offense level of six with enhancements to the offense level based on the amount of loss to the victim attributable to the fraudulent conduct. At the Defendants request, the District Court held a four hour evidentiary hearing to determine the amount of loss to the victim banks for purposes of the Guidelines. The Defendants, relying on United States v. Dickler, 64 F.3d 818 (3d Cir. 1995), argued that the loss to the banks was zero, or in the alternative, far less than the $418,657 amount relied on by the Government. In particular, the Defendants contended that they had significantly enhanced the values of the consigned automobiles by refurbishing them and by extending certain guarantees and perks such as credit terms to purchasers under the Carriage Trade name. They argued that any such "improvements" in value to the cars should not be credited as loss to the banks for purposes of the Guidelines. At the end of the hearing, the District Court essentially adopted the Government's position, finding that the loss to the banks was $408,970, which was calculated by subtracting from the total gain to the Defendants -- the $418,657 amount representing the difference between the false sales price and the actual sales price for the 311 cars -- the following: (1) $5,000 for a reimbursement payment that Carriage Trade made to one of the banks (Midlantic Bank) after the bank discovered a fraudulent sale and complained to Conicelli; and (2) $4,687 in repairs and enhancements which the District Court found the Defendants made to some of the 311 cars. The loss finding of $408,970 triggered a nine-level enhancement in the offense level pursuant to U.S.S.G. § 2F1.1.

In addition, the Indictment contained a notice of forfeiture pursuant to 18 U.S.C. § 982(a)(2) in the amount of $418,657, which was alleged to be the proceeds of the scheme, i.e., the difference between the false sales prices and the actual sales prices. During trial, the parties agreed to remove the forfeiture issue from the jury and have it decided by the District Court. On February 19, 2003, the Government filed a motion seeking entry of an order of forfeiture and money judgment. The Defendants objected, contending that the gain from their fraud was less than $418,657, based on their physical repairs to the cars as well as the other sales guarantees that were extended under the Carriage Trade name. The District Court eventually entered an order of forfeiture and money judgment in the amount of $418,657, concluding that the Government had established by a preponderance of evidence that the sum constituted proceeds that the Defendants had obtained directly or indirectly as a result of the offenses for which they were convicted.

In addition to the loss and forfeiture calculations, Smith and Leahy objected to several sentencing enhancements for their alleged role in the offense. The District Court, however, found that Smith and Leahy participated in a fraud that was committed by five or more participants, within the meaning of U.S.S.G. § 3B1.1(a); that Smith was a leader or organizer of the fraud; and that Leahy was a manger or supervisor of the fraud. Accordingly, the District Court applied a four-level enhancement to Smith's base offense level, and a three-level enhancement to Leahy's base offense level.

Smith was sentenced to a prison term of 46 months; five years of supervised release; a fine of $10,000; a special assessment of $1,000; restitution, for which he bears joint and several liability, in the amount of the victim banks' loss, i.e., $408,970; and forfeiture, for which he is jointly and severally liable, in the amount of the Defendants' proceeds, i.e., $418,657. Leahy was sentenced to a prison term of 37 months; five years of supervised release; a fine of $5,000; and the same penalties as Smith regarding special assessment, restitution, and forfeiture. The corporate defendant Dantone received five years of probation; a fine of $800,000; and the same penalties as Leahy and Smith regarding restitution and forfeiture.*fn3

In their appeal from their judgments of conviction and sentence, the Defendants raise several arguments. First, the Defendants allege that the District Court's jury instructions were defective in several critical respects and failed properly to instruct the jury as to the requisite elements to convict under § 1344. Second, they contend that there was insufficient evidence to sustain a conviction of bank fraud as the Government failed to proffer any evidence that the banks suffered any loss or that the Defendants acted with the requisite intent to defraud the banks, as opposed to the banks' customers, the borrowers in whose name the cars were titled. With regard to their sentences, the Defendants contend that the District Court erred in calculating the amount of loss suffered by the banks, which was relied upon by the District Court to calculate the Defendants' sentences, including their criminal fines, as well as the amount of restitution and forfeiture. The Defendants also contend that the District Court's imposition of fines, restitution and forfeiture for conduct arising out of the same underlying facts violates the Eighth Amendment's Excessive Fines Clause, and that the District Court erred in imposing joint and several liability on the three Defendants for the orders of restitution and forfeiture. Finally, the Defendants, relying on the Supreme Court's decision in Booker, contend that the District Court's imposition of forfeiture and restitution violated the Sixth Amendment.*fn4

We consider each argument in turn.

III. JURY INSTRUCTIONS

The Defendants were convicted of violating the federal bank fraud statute, 18 U.S.C. § 1344, which imposes criminal penalties upon:

Whoever knowingly executes, or attempts to execute, a scheme or artifice to

(1) defraud a financial institution; or

(2) obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations or promises.

The Defendants argue that the District Court: (A) improperly instructed the jury on the two prongs of the bank fraud statute; (B) improperly defined a scheme or artifice to defraud; (C) failed to give Defendants' requested good faith instruction; (D) improperly gave a willful blindness instruction; (E) improperly gave an intangible rights instruction; and (F) improperly gave a co-schemers' liability instruction.

We exercise plenary review in determining "whether the jury instructions stated the proper legal standard." United States v. Coyle, 63 F.3d 1239, 1245 (3d Cir. 1995). We review the refusal to give a particular instruction or the wording of instructions for abuse of discretion. Id. Finally, "when we consider jury instructions we consider the totality of the instructions and not a particular sentence or paragraph in isolation." Id.

A. Bank Fraud

The District Court provided a lengthy instruction to the jury regarding the elements of bank fraud. The Defendants contend that the bank fraud instruction was in error in at least two material respects under United States v. Thomas, 315 F.3d 190 (3d Cir. 2002), a case decided only days after the jury reached its verdict in this matter.*fn5 First, they contend that the instruction is premised upon a disjunctive reading of § 1344 in violation of Thomas. Second, the Defendants contend that the instruction with regard to § 1344's intent requirement was in error. We find both arguments to be without merit.

In Thomas, we addressed whether the "intent to defraud the bank" element of § 1344(1) was to be read as applying to § 1344(2) as well, or whether the two prongs of the bank fraud statute should be read independently of each other. We concluded that a "disjunctive reading of the two sections of § 1344 . . . gives the statute a breadth of scope that extends well beyond what Congress intended the statute to regulate." 315 F.3d at 196. Relying on our prior decision in United States v. Monostra, 125 F.3d 183 (3d Cir. 1997) (suggesting, but not holding, that the two sections of § 1344 must be read conjunctively), as well as the legislative history of the bank fraud statute, we concluded that the § 1344 must be read in the conjunctive, that the intent to defraud the bank element of § 1344(1) must apply to § 1344(2) as well. Thomas, 315 F.3d at 196. Accordingly, "there can be no such thing as an independent violation of subsection (2). To convict at all under the bank fraud statute, there must be an intent to defraud the bank." Id., 315 F.3d at 197. "The sine qua non of a bank fraud violation, no matter what subdivision of the statute it is pled under, is the intent to defraud the bank." Id.*fn6

After reviewing the District Court's bank fraud instruction in this matter, we find that the instructions did not rest on an erroneous disjunctive reading of § 1344. The instructions explained the two prongs of the bank fraud statute as follows:

The bank fraud law provides that whoever knowingly executes or attempts to execute a scheme or artifice, one, to defraud a federally chartered or insured financial institution, or two, to obtain any of the moneys, funds, credits, assets, security or other property owned by or under the control or custody of a financial institution by means of false or fraudulent pretenses, representations or promises, shall be guilty of the crime of bank fraud.

Members of the jury, the first element is that the government must prove beyond a reasonable doubt that there was a scheme or artifice to defraud a financial institution, or a scheme or artifice to obtain any of the money owned by or under the custody or control of a financial institution by means of false or fraudulent pretenses, representations or promises.

The phrases, scheme or artifice to defraud, and scheme or artifice to obtain money, means any deliberate plan of action or course of conduct by which someone intends to deceive or cheat another, or by which someone intends to deprive another of something of value. A scheme or artifice includes a scheme to deprive another person of tangible, as well as intangible property rights.

App. at 2131a-2332a (emphasis added). Although the District Court did no more than quote the plain language of both prongs of § 1344, the Defendants take issue with the highlighted language, which they contend permitted the jury to convict on a disjunctive reading of the statute in violation of Thomas. However, the Defendants read the quoted paragraphs in isolation, ignoring the District Court's subsequent instructions with regard to the specific intent requirement of § 1344. See Coyle, 63 F.3d at 1245 (noting that the Court will "consider the totality of the instructions and not a particular sentence or paragraph in isolation").

In particular, the District Court instructed the jury that:

The second element of bank fraud, which the government must prove beyond a reasonable doubt, is that the defendants participated in the scheme to defraud with the intent to defraud. To act with an intent to defraud means to act knowingly and with the purpose to deceive or to cheat. An intent to defraud is ordinarily accompanied by a desire or a purpose to bring about gain or benefit to onself or some other person, or by a desire or a purpose to cause some loss to some person. The intent element of bank fraud is an intent to deceive the bank in order to obtain from it money or other property.

App. at 2135a (emphasis added). This is in accord with the holding of Thomas, that "the sine qua non of a bank fraud violation, no matter what subdivision of the statute it is pled under, is the intent to defraud the bank." Thomas, 315 F.3d at 197.*fn7 In Thomas, we recognized that "[b]ank fraud may involve a scheme to take a bank's own funds, or it may involve a scheme to take funds merely in a bank's custody" so long as the government established the requisite intent to defraud. 315 F.3d at 197 (emphasis added). Here, the District Court did precisely that by properly instructing the jury that guilt under § 1344 depended on a finding that the Defendants had the requisite intent to defraud the banks.*fn8

The Defendants' second argument is that the District Court erroneously instructed the jury as to the intent or mens rea requirement of § 1344. In particular, the District Court, while instructing the jury that an "intent to deceive the bank in order to obtain from it money or other property" must be shown, also stated that an "[i]intent to harm the bank is not required." App. at 2135a. Defendants contend that this was in error because conviction under § 1344 requires not only proof of an intent to defraud the bank, but also of an intent to harm the bank. In making this argument, Defendants once again rely on our decision in Thomas. However, we do not believe that this case is controlled by Thomas; rather, we believe it is controlled by our later decision in United States v. Khorozian, 333 F.3d 498 (3d Cir. 2003), which makes clear that Thomas applies to a certain factual context not present here. We explore both decisions in detail below.*fn9

In Thomas, the defendant was employed as a home health care aide to an elderly account holder, who authorized Thomas to complete pre-signed checks, by filling in the amount and name of the payee, to pay for household necessities and other bills. Over a nine- month period, Thomas made out several checks to cash or in her own name allegedly for such purposes as the purchase of groceries; however, in reality, the defendant pocketed the funds for her own benefit. Evidence at trial indicated that the only victim of the defendant's fraud who suffered a loss was the account holder, not the bank. On appeal, after holding that an intent to defraud the bank was a necessary element of bank fraud regardless of what subsection of § 1344 was pled, we endeavored to "decide the thorny question of what is meant by the subsection (1) requirement that the defendant intends to defraud the bank." Thomas, 315 F.3d at 199. We concluded that, in light of the legislative history that "Congress sought to proscribe conduct that victimized banks . . . [,] harm or loss to the bank must be contemplated by the wrongdoer to make out a crime of bank fraud." Id. at 200 (quotation and citations omitted). Thus, under Thomas, conviction under § 1344 requires some proof that the perpetrator of the fraud intended to cause loss or liability -- harm -- to the bank. Id. at 199 (holding that "conduct, reprehensible as it may be, does not fall within the ambit of the bank fraud statute when the intention of the wrongdoer is not to defraud or expose to the bank to any loss but solely to defraud the bank's customer"). Because the record indicated that there was no loss to the banks, let alone any intent to cause such a loss, we reversed the defendant's conviction for bank fraud. See id. at 202 ("Thomas's actions, in fact, demonstrate that she never intended to victimize the banks. Her only victim was [the elderly account holder].").*fn10

Subsequent to our decision in Thomas, we decided Khorozian. In Khorozian, the defendant was charged with bank fraud on account of her attempt to deposit $20 million in counterfeit checks on behalf of an individual that she did not know. As part of the fraudulent scheme, the defendant made misrepresentations to the bank as to the purpose of the deposits as well as the identity of the person who accompanied her during visits to the bank. On appeal, we considered whether there was any evidence of loss or liability to the bank, concluding that such a loss existed by virtue of the fact that the bank, had it negotiated the counterfeit checks, would have been exposed to a $20 million loss under the UCC. Khorozian, 333 F.3d at 505 n.5. The defendant argued that, because she did not know that the checks were counterfeit, she had no intent to harm the bank. In response, we cited with approval the First Circuit's decision in United States v. Moran, 312 F.3d 480 (1st Cir. 2002), for the proposition: "Importantly, Moran held the defendants guilty even though they did not specifically intend to cause the bank a loss (i.e., they intended that the loans would be repaid), but rather intended only to make misrepresentations that made a loss more likely." Khorozian, 333 F.3d at 505 (emphasis in original). Accordingly, "ยง 1344's specific intent requirement is satisfied if an individual commits an act that could put the bank at risk of loss." Id. Thus, Khorozian ...


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