United States v. James Edgar
1992 U.S. App. LEXIS 15587 · 1992 WL 158561 · 971 F.2d 89
July 9, 1992 · Docket 91-2480NE
Opinion
James M. Edgar appeals the sentence imposed by the district court after a jury found him guilty of bankruptcy fraud and conspiracy to commit bankruptcy fraud. We reverse and remand.
I.
Edgar’s conviction for bankruptcy fraud stemmed from his legal representation of Peter Salter. Salter was the owner of Du-plitech Corporation, a copying and printing business. Although Duplitech had filed for Chapter 11 bankruptcy protection in 1983, the bankruptcy was still pending in early 1987 when Dan Fuss approached Salter about the possibility of purchasing his business. Edgar, acting as Salter’s attorney, handled the successful negotiations for this sale and drew up many of the documents. The final purchase agreement provided that Salter would receive a total of $35,000 up front and a specified percentage of gross receipts over a period of twenty years. This agreement also contained a clause stating that Fuss would pay off or compromise the bankruptcy claims against Duplitech “as the BUYER shall determine in the buyer’s sole discretion.” Pl.’s Ex. 19. In addition to the purchase agreement, Salter and Fuss entered an employment agreement in which Fuss agreed to employ Salter for a period of seven years with a specified monthly salary that included use of a car. Despite the fact that the assets of Duplitech formally belonged to the bankruptcy estate, neither Edgar nor Salter informed the bankruptcy court of their sale to Fuss. In fact, Edgar structured the sale so that the assets of Duplitech and the proceeds from their sale would be difficult to trace. Salter did not use any of the proceeds he received up front to pay Dupli-tech creditors.
Approximately seven months after completion of the sale, the bankruptcy court was informed that Salter had sold all of Duplitech’s assets to Fuss. In response, the court appointed á trustee to investigate the sale and attempt to recover for the estate either the assets transferred or the value of those assets. The trustee’s investigation led to his filing of a civil suit against, inter alia, Edgar and Fuss. Edgar settled his suit for $5000. Fuss, from whom the trustee was attempting to recover either the assets of Duplitech or the value of those assets, settled for $300,000. This settlement amount was based on the present value of the payments Salter was to receive under the purchase agreement and the employment agreement.
The bankruptcy court also informed the FBI of the sale. The FBI’s investigation led to the indictment of Edgar for bankruptcy fraud and conspiracy to commit bankruptcy fraud, in violation of 18 U.S.C.
Edgar now appeals his sentence. He claims that the district court erred in denying a two-level reduction for acceptance of responsibility, in denying a downward departure from the sentencing range, and in calculating the loss caused by his fraud. We discuss each of his claims in turn.
II.
A. Acceptance of Responsibility
The Sentencing Guidelines provide that the court may reduce the defendant’s offense level by two “[i]f the defendant clearly demonstrates a recognition and affirmative acceptance of personal responsibility for his criminal conduct.” U.S.S.G. § 3El.l(a). We give great deference to the district court “when reviewing its evaluation of a defendant’s acceptance of responsibility, and will disturb the district court’s decision only if it is without foundation.” United States v. Russell, 913 F.2d 1288, 1295 (8th Cir.1990), cert. denied, — U.S. -, 111 S.Ct. 1687, 114 L.Ed.2d 81 (1991).
Prior to being found guilty by a jury, Edgar denied any intent to defraud the creditors. Only after the jury returned its verdict of guilty did Edgar voluntarily relinquish his license to. practice law and state that he accepted the jury’s verdict of guilty and thought that it was correct. The district court did not clearly err in denying the reduction based on Edgar’s refusal to admit an essential element of bankruptcy fraud before his conviction. U.S.S.G. § 3E1.1, comment, (n. 2); see also, e.g., United States v. Stuart, 923 F.2d 607, 613 (8th Cir.), cert. denied, — U.S.-, 111 S.Ct. 1599, 113 L.Ed.2d 662 (1991) (no acceptance of responsibility reduction when defendant put the government to its burden of proof at trial by denying any intent to distribute a controlled substance); United States v. Sloman, 909 F.2d 176, 182 (6th Cir.1990) (no acceptance of responsibility reduction when defendant gave statements to officers and expressed regret over what happened, but never admitted any fraudulent intent).
B. Downward Departure
The Sentencing Guidelines allow a court to depart downward from the applicable sentencing range if the court finds “ ‘that there exists [a] ... mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines....’” U.S.S.G. § 5K2.0, p.s. The district court’s ruling that it could depart from the sentencing range only if it found that such a mitigating circumstance existed was a correct interpretation of the guidelines.
C. Amount of Loss
Under the Sentencing Guidelines, the offense level for fraudulent conduct is increased according to the amount of loss. The amount of loss used to increase the offense level may be either the amount of loss the defendant intended to inflict or the actual loss resulting from the fraudulent conduct, whichever is greater.
As the above facts make clear, the calculation of loss in a bankruptcy fraud case can be rather complicated. It is thus not surprising that the district court made both some correct and some incorrect assumptions in calculating the loss. The district court correctly used the greater of the intended loss and the actual loss to calculate the offense level increase. The court also did not err in using the going-concern value of Duplitech rather than its liquidation value in calculating the value of the concealed assets. There was no proof that the creditors would have recovered only the liquidation value of Duplitech if it had not been sold to Fuss without the bankruptcy court’s approval. Additionally, the court properly concluded that the present value of the amount Fuss was willing to pay for Duplitech is a valid measure of Duplitech’s value. It is well established that the fair market value of a business as a going concern is “that price a willing seller could secure from a willing buyer.” Albrecht v. Herald Co., 452 F.2d 124, 131 (8th Cir. 1971); see also Malley-Duff & Assocs. v. Crown Life Ins. Co., 734 F.2d 133, 148 (3d Cir.), cert. denied, 469 U.S. 1072, 105 S.Ct. 564, 83 L.Ed.2d 505 (1984); Banco Nacional De Cuba v. Chase Manhattan Bank, 505 F.Supp. 412, 459-60 (S.D.N.Y.1980), rev’d on other grounds, 658 F.2d 913 (2d Cir.1981), rev’d, 462 U.S. 611, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983). In this case, Fuss was a purchaser willing to buy Dupli-tech, and Salter was an owner willing to sell it. In fact, the amount Fuss agreed to pay for Duplitech was the most reliable evidence of Duplitech’s value available to the district court. The $300,000 settlement between Fuss and the bankruptcy trustee had little, if no, independent significance in the valuation of Duplitech because it was derived from the present value of the amount Fuss agreed to pay under the purchase agreement and employment agreement.
Although the court correctly treated the amount Fuss paid for Duplitech as reliable evidence of Duplitech’s value, the court erred when it treated the amount Salter was to receive under the employment agreement as part of the purchase price for Duplitech. The monthly salary Fuss agreed to pay Salter and the car Fuss gave Salter to drive were not compensation for the assets of Duplitech.
In addition to not being properly included in the valuation of Duplitech, the present value of the employment agreement cannot, in its own right, constitute a portion of the intended loss. Salter’s future earnings from personal service were never part of the bankruptcy estate. Cf. 11 U.S.C. § 541(a)(6) (1988) (the bankruptcy estate does not include “earnings from services performed by an individual debtor after the commencement of the case”). Edgar could not have intended to deprive Duplitech creditors of an amount they were not entitled to in the first place.
Another error the district court made in calculating the intended loss was to deduct the $100,000 it found that Fuss was going to pay the Duplitech creditors from the amount Fuss was going to pay Salter. Fuss had agreed to pay Salter approximately $150,000 in 1987 dollars, and to pay the creditors approximately $100,-000. This indicates that Fuss valued Dupli-tech at approximately $250,000, not at the difference between these two amounts. Thus, based on the amount Fuss was willing to pay for Duplitech, Salter, with the help of Edgar, fraudulently transferred assets worth approximately $250,000. Obviously, however, Edgar did not intend to deprive the creditors of the entire $250,000 because Fuss was to pay $100,000 of Dupli-tech’s value to the creditors rather than to Salter. Accordingly, Edgar could not have intended to conceal from the creditors more than the $150,000 that Salter was to receive.
If calculation of the intended loss stopped here, we could simply affirm Edgar’s sentence, which was based on a loss range of $120,000 to $200,000. It is possible, however, for the intended loss to be less than the value of the concealed property. This situation arises when an individual debtor or the sole owner of a corporate debtor is the party who benefits from the concealment, and the value of the concealed property exceeds the amount of debt owed to the creditors.
A hypothetical can best illustrate this situation. Assume that an individual debt- or has one asset, a painting worth $5000, and debt of $1000. Assume further that because her creditors are threatening to execute judgment — forcing her to sell the painting — the debtor, with the help of a third party, fraudulently conceals the painting and files for bankruptcy, depriving her creditors of $1000. After the third party who helped the debtor is found guilty of fraud, the sentencing court must determine the amount of intended loss. Because the debtor is the party who benefited from the concealment, the third party clearly intended no loss to the debtor. The only remaining entities that could be injured by the concealment are the creditors and the bankruptcy estate. The third party clearly intended to deprive the creditors of the $1000 they were owed. Additionally, because all the debtor’s property goes into the bankruptcy estate, 11 U.S.C. § 541 (1988), the estate was deprived of $5000, the full value of the concealed painting. The estate, however, would not have kept this $5000 indefinitely. Rather, the estate trustee would have used it to pay the creditors, and then would have returned the remaining portion, approximately $4000, to the debtor. Because this $4000 would have been returned to the same person who obtained it as a result of the fraudulent concealment, we do not believe it is appropriate to include it in the amount of intended loss. In this situation, the third party’s culpability is more comparable to that of a con artist who swindles a person of $1000 than to that of a con artist who swindles a person of $5000. Cf. Smith, 951 F.2d at 1167 (noting that the relative culpability of a defendant is a relevant factor in calculating the amount of loss); United States v. Schneider, 930 F.2d 555, 559 (7th Cir.1991) (same). We thus conclude that the amount of debt places a cap on the intended loss when an individual debtor or the sole owner of a corporate debtor is the party who benefits from the concealment.
Of course, the amount of debt is not fixed in Chapter 11 bankruptcies. Accordingly, the sentencing court must make a reasonable estimate of the amount of debt anticipated at the time of the fraudulent transfer. When estimating this debt, the court should include the liabilities likely to be incurred by the on-going operations of the debtor and the foreseeable costs of administering the estate. Additionally, the court should deduct from these estimated liabilities any payments that the defendant intended the creditors to receive. Although it is always possible that an intended payment will not be made, intended loss is not the same as possible or potential loss. See Kopp, 951 F.2d at 529; United States v. Hughes, 775 F.Supp. 348, 350 (E.D.Cal.1991).
In this case, Salter, the owner of Duplitech,
Because the district court did not calculate the intended loss within the structure here provided, we must reverse and remand for resentencing. In recalculating the intended loss, the court need not reach an exact number. All the guidelines require is a reasonable estimate of the loss. U.S.S.G. § 2F1.1, comment, (n. 8). Once the court has recalculated the intended loss, it should again compare it to the actual loss, and use the greater amount to determine the appropriate increase in offense level.
III.
In conclusion, we affirm the district court’s denial of a two-level reduction for acceptance of responsibility and its refusal to depart downward from the applicable sentencing range. Because we conclude that the district court incorrectly calculated the intended loss, however, we reverse and remand for further findings consistent with this opinion.
. Salter also was indicted and found guilty of bankruptcy fraud and conspiracy to commit bankruptcy fraud.
. At this hearing, the district court heard testimony on both acceptance of responsibility and the amount of loss.
.The court also correctly noted that a departure for substantial assistance was not available because the government had not made a motion for departure. U.S.S.G. § 5K1.1, p.s.; see also United States v. Kelley, 956 F.2d 748, 757 (8th Cir.1992).
. At the time Edgar was sentenced in 1991, the Sentencing Guidelines specifically provided that ‘‘if a probable or intended loss that the defendant was attempting to inflict can be determined, that figure would be used if it was larger than the actual loss.” U.S.S.G. § 2F1.1, comment. (n. 7) (1990). This note was changed on November 1, 1991, to provide that "if an intended loss that the defendant was attempting to inflict can be determined, this figure will be used if it is greater than the actual. loss.” U.S.S.G. § 2F1.1, comment, (n. 7) (1991). The only difference between these two notes is the inclusion of “probable loss” in the version applicable to Edgar at the time of his original sentencing. "Probable loss” is an ambiguous term. See United States v. Kopp, 951 F.2d 521, 531 n. 16 (3d Cir.1991) (discussing alternative interpretations of "probable loss”). Fortunately, the district court clearly based Edgar’s sentence on intended loss, and not on probable loss. App. at 60. Because we conclude that the district court incorrectly calculated intended loss, and thus are remanding this case for resentencing, it is not necessary for us to define "probable loss” here. Additionally, because the district court will apply the guidelines in effect at the time of resentencing (including the current version of note seven), the district court also will not have to define "probable loss.” 18 U.S.C. § 3553(a)(4), (5) (1988); Kopp, 951 F.2d at 526. Only when the retroactivity of a guidelines' change results in a harsher penalty, and thus an ex post facto problem arises, is the district court required to apply the earlier version. Id. Given that the earlier note required the district court - to increase the offense level based on either probable loss, intended loss, or actual loss, whichever is larger, deletion of the phrase "probable loss” could not result in a harsher penalty. Thus, no ex post facto problems can arise by applying the most current version of note seven.
. A present value calculation discounts a stream of future payments to that amount which, if presently received, could be invested at a given interest rate to yield the future payments. See, e.g:, DuBois v. DuBois, 335 N.W.2d 503, 506 (Minn.1983). In this case, the accountant discounted the amount of the future payments to arrive at the present value on the date the purchase agreement and employment agreement were executed.
. No expert testified that the payments Salter was to receive under the employment agreement were properly included in a valuation of Duplitech. Gregory Nielsen, the accountant hired by the bankruptcy trustee, testified on the present value of the payments Salter was to receive under the purchase agreement and the employment agreement. He did not testify that the payments due under the employment agreement reflected on the value of Duplitech. In fact, another accountant testified that compensation for future services is not properly included in a valuation of a company. Sentencing Tr. at 130-31 (held June 11, 1991).
. Although Salter also was to receive a 20% ownership interest in the surviving entity, there was no evidence introduced as to the value of this interest.
. Although the record contains some ambiguous references to other shareholders of Duplitech, it appears that, at the time Duplitech’s assets were transferred to Fuss, Salter was the sole owner. The disclosure statement prepared in conjunction with the bankruptcy goes so far as to call Duplitech Salter's alter ego.
. There are clearly some liabilities included in the 1990 figure that were not reasonably foreseeable in 1987. For example, the large amount of insider claims included in the 1990 figure were probably not anticipated by Edgar.