United States District Court, E.D. Virginia, Richmond Division
ROBERT E. PAYNE, Senior District Judge.
This matter is before the Court on the parties' supplemental pleadings on sentencing in accordance with the Court's December 5, 2014 Order. For the reasons set forth herein, the Government's loss and gross receipts calculation methods will be adopted for the Defendant's sentencing hearing.
Janelle Irene Davis pled guilty on February 25, 2014, with a plea agreement, to Conspiracy to Commit Mail Fraud, Wire Fraud, and Make False Statements to FDIC-Insured Institutions, in violation of 18 U.S.C. § 371. By providing false information to financial institutions during the mortgage loan application process, the Defendant qualified for loans that she might not have otherwise received. When she defaulted on her loans, the banks were left to recover whatever collateral value they could through foreclosure sales. The losses to the financial institutions were compounded by the downturn in the housing market, which reduced the value of the collateral well below the outstanding principal still due on the loans.
Under the United States Sentencing Guidelines ("USSG" or "Guidelines"), the recommended sentence for offenses involving fraud or deceit depends heavily upon the amount of loss attributable to the crime. In addition, there is an enhancement available when the defendant derives more than $1, 000, 000 in gross receipts from financial institutions as a result of the offense.
On December 5, 2014, this Court requested briefing on the propriety of the calculation methods employed by the Government for determining loss and gross receipts under the Guidelines in such mortgage fraud cases. This opinion resolves those questions ahead of the Defendant's sentencing hearing.
I. Mortgage Fraud Loss Calculation under USSG § 2B1.1(b)(1)
Under USSG § 2B1.1(b)(1), the offense level attributable to the defendant's acts varies by the amount of loss caused by the offense. Generally, this loss is determined to be the greater of the intended loss or the "actual loss." See USSG § 2B1.1, cmt n. 3(A). Although the meaning of "intended loss" is rather self-evident, the term "actual loss" is defined as "the reasonably foreseeable pecuniary harm that resulted from the offense." USSG § 2B1.1, cmt n. 3(A)(i). To be "reasonably foreseeable, " the harm must be harm "that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of the offense." USSG § 2B1.1, cmt n. 3(A)(iv). In cases of fraud involving collateral pledged by the defendant, the amount of "actual loss" should be offset by the amount recovered from the sale of the collateral. See USSG § 2B1.1, cmt n. 3(E)(ii). Unlike the initial determination of "actual loss, " which requires that the losses be reasonably foreseeable, the "credits against loss" provision does not require that the amount recovered from the sale of the collateral be reasonably foreseeable. See United States v. Mallory, 709 F.Supp.2d 455, 458 (E.D. Va. 2010) aff'd, 461 F.Appx. 352 (4th Cir. 2012).
As the court in Mallory explained:
Taken together, these provisions teach a two-step approach for calculating the loss attributable to a defendant in home loan fraud cases such as this one. The first step is to calculate the reasonably foreseeable pecuniary harm resulting from the fraud. This amount will almost invariably include the full amount of unpaid principal on the fraudulently obtained loan, as an unqualified borrower's default is clearly a reasonably foreseeable "potential result of the offense" within the meaning of Application Note 3(A)(iv). After all, the entire purpose of loan qualification criteria is to reduce the risk to banks that debtors will default on their loans.... Partial recovery of this loss through seizure and sale of collateral may reduce the net loss amount through operation of the "credits against loss" provision, but it does not diminish the foreseeability of the financial institutions' loss of the unpaid principal amounts in the first instance.
The second step in calculating the loss amount requires application of the "credits against loss" provision. In applying this provision, courts must deduct from the calculated loss the amount actually recovered or actually recoverable by the creditor from sale of the collateral. This calculation is made as of the time of sentencing and without regard for whether this amount was reasonably foreseeable by the defendant. Where the financial institutions have sold the collateral, courts should credit the amount actually recovered in the sale. Where the collateral is held by the institution at the time of sentencing, then the fair market value of the collateral at the time of sentencing is properly credited instead. By operation of Application Note 3(E)(ii), it is irrelevant whether the diminished value of the credit against loss was reasonably foreseeable to defendant, as the loss of the entire amount of unpaid principal was a reasonably foreseeable potential consequence of defendant's conduct. Accordingly, defendant is only entitled to a credit against loss in the amount actually recovered by the banks from sale of the subject properties.
Mallory, 709 F.Supp.2d at 458-59. This Court finds the reasoning of Mallory persuasive. To be "reasonably foreseeable" under the Guidelines, the loss need not be the likely or probable aggregate outcome of the fraud, only an outcome the defendant "should have known... was a potential result of the offense." USSG § 2B1.1, cmt n. 3(A)(iv) (emphasis added). It is reasonably foreseeable that the potential loss could be any amount up to the unpaid principal remaining on the loan. The Defendant need not - and indeed, could not - know the exact quantum of the final loss that would result at the time of the offense. However, the Defendant surely knew that the value of the underlying collateral could be diminished and that default would result in the loss of all unpaid principal.
For this reason, it is inevitable that the loss calculation and restitution calculation would yield the same amount, despite the fact that reasonable foreseeability is applicable only in the former case. This is because the Defendant could not only reasonably foresee that the loss of any remaining unpaid principal - whatever the quantum - was a potential result of the offense, but because the loss of unpaid principal will, in all likelihood, always be the result of such an offense. The restitution owed will, by virtue of the pledged collateral, be reduced by the actual sales price received by the financial institution disposing of the collateral, and an offset in the exact amount of this later, unpredictable collateral sale value is precisely what the credit against loss provision provides for the loss calculation. ...