A blog of the Philadelphia Bar Association’s Criminal Justice Section

By Burt Rose

UNITED STATES of America, Appellant v. Alexander MARTINEZAppellee, 2012 WL 3763622, # 11–3547 (Aug. 31, 2012), was an a Government appeal from the United States District Court for the Eastern District of Arkansas (Little Rock). A jury had found Martinez guilty of conspiring to commit bank fraud in violation of 18 U.S.C. § 1349, committing bank fraud in violation of 18 U.S.C. § 1344, and making a false statement to a financial institution in violation of 18 U.S.C. § 1014. The district court sentenced Martinez to twelve months and one day of imprisonment and did not order restitution. The Government appealed the district court’s decision to use Martinez’s gain, instead of the actual or intended loss, for purposes of calculating the advisory sentencing guidelines range, and to not order Martinez to pay any restitution.

You may find this difficult to believe, but the Government lost this appeal.

Martinez was the chief financial officer at a food distribution company, Affiliated Foods Southwest. Affiliated had a multi-million dollar line of credit with U.S. Bank collateralized by Affiliated’s accounts receivable and inventory. U.S. Bank determined the amount that Affiliated could borrow based on the amount of eligible collateral Affiliated possessed. In 2008, Affiliated began struggling with cash-flow issues. In order for Affiliated to obtain additional funds from U.S. Bank on the line of credit, Martinez used various methods to enhance the apparent financial status of Affiliated. One such method was to instruct employees at subsidiaries of Affiliated to write checks to Affiliated even though the money paid to Affiliated by the subsidiaries would ultimately be provided by Affiliated. The Government characterized this method of fraud as a check-kiting scheme.

At the time U.S. Bank discovered the fraud in February 2009, Affiliated owed U.S. Bank in excess of $55 million. U.S. Bank froze the line of credit temporarily to determine the actual status of the collateral. U.S. Bank then entered into a forbearance agreement with Affiliated Foods under which U.S. Bank continued to lend money but required Affiliated Foods to hire a “turnaround consultant.” During this period, Affiliated Foods continued to operate. Affiliated eventually filed for bankruptcy in May 2009, at which time it owed U.S. Bank a little over $28 million.

Prior to Martinez’s sentencing, U.S. Bank was able to recover from collateral all but approximately $2.8 million of the principal it was owed by Affiliated. The Presentence Investigation Report used the $2.8 million of unrecovered principal as the amount of loss for which Martinez was responsible. The Government argued that Affiliated obtained approximately $11.6 million in extra loans from U.S. Bank as a result of Martinez’s fraudulent activity and that this amount was the intended loss for which Martinez was responsible. Martinez argued that U.S. Bank’s loss was not caused by his fraud and that, in any event, U.S. Bank had additional collateral available that he claimed was sufficient to cover the $2.8 million in unrecovered principal. The district court concluded that it did not have a reasonable basis on which to determine the actual or intended loss. Therefore, for purposes of determining the advisory sentencing guidelines range, the district court used as an alternative loss measurement the gain to Martinez from his fraudulent activities—that is, the $48,000 in salary payments he received during the period of the scheme.

At sentencing, the Government also sought an order of restitution for the approximately $2.8 million of unrecovered principal plus about $2.3 million in interest. Martinez argued that because outstanding collateral was sufficient to satisfy the amount Affiliated owed U.S. Bank, restitution should not be awarded. The Government countered that U.S. Bank’s prior efforts to collect on various collateralized accounts receivable of Affiliated had resulted in a recovery of only a portion of the amounts owed and that it had been unable to obtain any sizeable amount of funds from the remaining accounts in recent months. The district court, due to the complexity of determining the loss to U.S. Bank properly attributable to Martinez’s fraudulent behavior, declined to order any restitution.

On appeal, the Government argued that $11.6 million was the proper loss amount for purposes of the sentencing guidelines or that, in the alternative, the court should have used the outstanding $2.8 million of principal as the loss amount. In addition, the Government contended that restitution should have been awarded to U.S. Bank.

The Court of Appeals first considered whether the value of the collateral pledged to U.S. Bank prior to the detection of the fraud was a proper consideration in determining actual or intended loss. The Government argued that the amount of actual loss must be determined based on the amount in float at the time the check kiting scheme is discovered, not at the time of sentencing, rendering the existence of any collateral irrelevant. The Court ruled that Martinez’s fraud was more akin to a scheme to inflate assets or income in a loan application to obtain a loan in an amount greater than that justified by the actual financial condition, rather than a traditional check-kiting scheme, and concluded that the district court did not err by taking into account the collateral available to U.S. Bank in deciding whether it reasonably could determine the amount of loss. The Court cited U.S.S.G. § 2B1.1 cmt. n. 3(E)(ii), which states  that “in a case involving collateral pledged or otherwise provided by the defendant,” the amount of loss shall be reduced by “the amount the victim has recovered at the time of sentencing from disposition of the collateral, or if the collateral has not been disposed of by that time, the fair market value of the collateral at the time of sentencing.” Therefore, the value of the collateral pledged to U.S. Bank prior to the detection of the fraud properly should be included in calculating actual or intended loss.

As to whether the district court could reasonably determine the fair market value of the outstanding collateral at the time of sentencing, the district court heard testimony relating to U.S. Bank’s efforts to collect on Affiliated’s collateralized accounts receivable and the likelihood that U.S. Bank would be able to reduce or eliminate its loss through future collection efforts. The Government failed, however, to provide a satisfactory basis for estimating the fair market value of the outstanding collateral. Although a U.S. Bank employee testified that recent collection efforts had become less fruitful, she provided no estimate of the amount of outstanding collateral that might be collected. Thus the district court did not clearly err in holding that it could not reasonably determine the fair market value of the outstanding collateral. Because the district court was required to reduce the amount of actual or intended loss by the fair market value of the outstanding collateral, it could not reasonably determine the loss, citing U.S.S.G. § 2B 1.1 cmt. n. 3(B). Therefore, the Court affirmed the district court’s decision to use Martinez’s gain for purposes of determining the advisory guidelines range.

With regard to restitution, the district court relied on 18 U.S.C. § 3663A(c)(3)(B) which states that mandatory restitution is not required for property offenses where the district court finds that “determining complex issues of fact related to the cause or amount of the victim’s losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process.” The district court invoked this exception due to the complexity of determining the amount of loss properly attributable to Martinez and noted that the Second Circuit has explained that § 3663A(c)(3)(B) “reflects Congress’s intent that ‘sentencing courts not become embroiled in intricate issues of proof,’ and that the ‘process of determining an appropriate order of restitution be streamlined.’ “ United States v. Marino, 654 F.3d 310, 317 (2d Cir.2011). Here, the district court found that Affiliated was going out of business regardless of Martinez’s fraud and that U.S. Bank would have had the same difficulty recovering funds lent to Affiliated absent the fraud. The district court stated that it would be necessary to subpoena numerous additional witnesses in order to determine what amount of the unrecovered loan proceeds were attributable to the fraud. Given the district court’s concerns about the complexity of determining the extent of loss properly attributable to Martinez’s scheme, the Court ruled that the district court did not abuse its discretion by declining to order restitution.

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