When a court orders restitution after a fraud conviction, is the restitution amount based on the value returned to the lender when it takes title of the property at foreclosure; or is the amount due based on how much the lender receives when the property is sold later?
Benjamin Robers pled guilty to conspiracy to commit wire fraud for his role as a straw man in a mortgage fraud scheme. Under the Mandatory Victims Restitution Act of 1996, Robers was ordered to pay restitution to the lenders he defrauded. The amount owed was determined based on the amount the lenders lost minus the amount they received when the homes were resold. Robers argues that the statute offsets damages based on the remaining value due after the lenders received part of the property they lost, which he argues is when the lenders took title to the foreclosed homes. The government counters that the property lost, for which restitution is owed, is the cash the lenders lost because of Robers’s fraudulent actions. Thus, restitution should be determined based on the amount of cash the lender recovers after selling the home. The Supreme Court’s resolution of this case will settle whether the property is returned and restitution set when the lender takes over the title at foreclosure or when the lender receives cash at resale. This case will address the consequences for criminals convicted of fraud who are required to pay restitution and the amount they are responsible for paying.
Questions as Framed for the Court by the Parties
- Whether a defendant—who has fraudulently obtained a loan and thus owes restitution for the loan under 18 U.S.C. § 3663A(b)(1)(B)—returns “any part” of the loan money by giving the lenders the collateral that secures the money?
- Whether the district court correctly calculated a restitution award for victims who lost money because of the defendant’s loan fraud when the court reduced the victims’ losses by the amount of money they recouped from the sale of the collateral securing the loans.
Benjamin Robers pled guilty to conspiracy to commit wire fraud under 18 U.S.C § 371. In the mortgage fraud scheme, Robers acted as a straw buyer, meaning he took over title to two properties in order to conceal the true owner and ringleader of the scheme, James Lytle. Although the scheme involved fifteen houses in a small county in Wisconsin, Robers only served as a straw buyer for two of the houses. For his role, Robers received $500 for each loan.
As part of the scheme, Robers made material misrepresentations about his income, qualifications, and intent to live in the houses he purchased and to repay the mortgages. These misrepresentations led lenders to wire loan funds to settlement companies, which closed the loans. Later, the loans went into default and the banks foreclosed on and sold the houses as collateral for the loans.
Once the government uncovered the fraud, Robers waived indictment and pled guilty to one count of conspiracy to commit wire fraud. After his plea, the United States Probation Office made a Presentence Investigation Report that included an estimate of how much Robers should pay in restitution.
Based on the Mandatory Victims Restitution Act of 1996 (“MVRA”), the Probation Office recommended Robers pay $218,952.18. Under this law, restitution is mandatory for crimes “resulting in damage to or loss or destruction of property of the victim.” The court shall order a defendant to (A) return the property to the owner of the property or (B) pay an amount equal to the greater value of either (i) the value of the property on the date of damage, loss, or destruction, or (ii) the value of the property on the date of sentencing. The greater value is then reduced by the value of any part of the property that is returned.
A representative of the first lender, Mortgage Guaranty Insurance Corporation (“MGIC”), explained that Fannie Mae submitted a claim for $159,214.91. In response, MGIC paid the full amount of the loss and acquired the property, rather than a percentage of the claim. MGIC then sold the property and reduced its total loss to $52,952.18 but also incurred additional costs for insurance, maintenance, and realtor costs. FBI Special Agent Michael Sheen explained that the second property had a mortgage note of $330,000 and after the property was foreclosed, it was sold for $164,000.This resulted in a $166,000 loss. In total, the costs accrued for the two properties as a result of Robers’s fraud amounted to $218,952.18.
The district court sentenced Robers to three years probation and ordered him to pay $218,952.18 in restitution, consistent with the MVRA. Robers appealed this decision but only challenged the restitution award.
Robers argues that under MVRA, the “offset value” should be based on the fair market value that the real estate collateral had on the date the lenders obtained title to the houses after foreclosure because that was the date the property was returned. The government argues that because the stolen property was cash, the property to be returned should be the cash from the sale of the property. Therefore, the offset value is based on the eventual cash proceeds recouped after the sale of the collateral real estate.
The Seventh Circuit Court of Appeals agreed with the government and the Third, Eighth, and Tenth Circuits that the offset value should be based on the proceeds recouped after a foreclosure sale. Accordingly, the court affirmed the restitution award, minus the lawyers’ fees and other costs that the lower court improperly awarded.Robers’s petition for a hearing en banc was denied.
Benjamin Robers argues that the MVRA’s purpose is to make victims whole by requiring offenders to pay restitution damages equal to the damage the offender caused. As such, Robers claims that the amount of restitution should be determined when the property (i.e., the house) is returned to the lender and not when it is sold later at a lower price. The government counters that restitution is owed for the cash the lender lost because of the offender’s actions in the fraudulent transaction. Therefore, the restitution amount should be determined based on the cash the lender receives when it sells the house, not when it takes title. The Supreme Court’s resolution of this case will settle whether restitution is set when the lender takes over the title at foreclosure or when the lender receives cash at resale. This case will impact criminals convicted of fraud who are required to pay restitution and the amount they end up paying.
CONGRESSIONAL LIMIT ON RESTITUTION
Robers argues that Congress intended the MVRA to limit restitution to the harms the offender directly or proximately caused. Robers notes that there are many causes for injuries but not all of them should result in legal liability. Accordingly, Robers argues that under the Seventh Circuit’s interpretation that courts must reduce the restitution award only by the houses’ value at resale rather than at foreclosure, the offender could end up paying for harm that he did not cause. Because the value of the houses dropped between foreclosure and resale as a result of the financial crisis, Robers believes he is being ordered to pay for a harm for which he is not responsible. Robers contends that the lenders could have disposed of the property before the resale to avoid the market decline. As such, Robers argues that congressional intent to limit restitution to the damage he directly and proximately caused is defeated if he is responsible for the loss of value after foreclosure and before resale.
Alternatively, the government argues that Robers’s scheme was the cause of the victims’ losses and the reduced amount of money the victim recouped due to the recession. The government argues that the Court is flexible when determining what causes contribute to the harm done and how they should be factored into restitution. The government points out that if it were not for Robers’s actions, the bank would not have lent him hundreds of thousands of dollars and would not have ended up in possession of the two houses he purchased with the loans just before the recession. Finally, the government cites the Second Circuit assertion that independent market forces are irrelevant to restitution calculations. Otherwise, the government notes, the victims would have to bear the risk of loss from a declining market.
PURPOSE OF PROPERTY AS COLLATERAL
Robers also argues that the collateral houses were replacement property for the lost loan proceeds and serve to compensate the lenders for their losses. Robers states that the purpose of property as collateral is to satisfy lender claims after foreclosure. Since there is a significant risk that any homebuyer will default on a loan, Robers contends that the security interest a lender receives in the property is valuable to the lender as a means to protect the loan. Furthermore, Robers remarks that both the lenders in this case chose to waive their rights to deficiency judgments and accepted the houses as collateral in full satisfaction of their claims. Therefore, Robers argues that the lenders could not and should not have expected to receive any further damages against Robers beyond the foreclosed houses.
The government counters that even if the lenders received collateral from the secured loan, the lender is not restored to its pre-crime status, and therefore the offender has not made up for his actions. Accordingly, the lender only receives a value that can be offset when the property is sold and the lender receives the proceeds in cash, which is what the lender lost in the first place. Furthermore, the government notes that the value of the house at foreclosure is not an accurate statement of the actual market value of the property; rather, this value must be calculated once the lender sells the house.
Finally, Robers claims that the purpose of the MVRA is to make victims whole by restoring them to their pre-crime status but without granting them windfalls to punish the defendant. Robers notes the risk of either overcompensating victims or under-compensating them. He argues that if a court decides the restitution owed based on the value when the house is sold instead of when it is foreclosed, the court may have to wait years to compensate the victims. Robers argues that ultimately, the court will refuse to order restitution at all to avoid prolonging the sentencing process; or the court will order restitution and the victims will receive a windfall later when they sell the house for a profit. Robers contends that Congress only intends to make the victims whole, not allow them to recover twice the value of their loss and punish the victim.
The government counters that it is very rare for a lender to still be in possession of the property at the time of sentencing because in a typical mortgage-fraud case, the lender will have foreclosed and sold the house long before the offender is sentenced. Furthermore, the government argues that courts can give credit for amounts the victim returns before the court orders restitution to ensure the offender is not overpaying.
The pertinent statute in this proceeding is the Mandatory Victims Restitution Act ("MVRA"). The disputed section requires a defendant in a case of mortgage fraud to pay the victim the value of the property on the date of sentencing minus the value (as of the date the property is returned) of “any part of the property that is returned.” This is known as the “offset provision.” The question here concerns the meaning of the phrase “any part of the property that is returned.” While Robers contends that part of the property is returned when the lender receives title through foreclosure proceedings to the property used to perpetrate the fraud, the United States argues that the property is only returned once the lender sells the house and recoups its money.
STATE FORECLOSURE LAWS AND THE UNDERLYING PURPOSES OF THE MVRA
According to Robers, under this offset provision, a sentencing court must calculate the amount that a defendant owes according to the value of the property on the day it is returned to the owner, not the day the owner turns around and sells the property. A contrary reading, Robers asserts, conflates the statute’s use of the broadly-defined word “returned” with “recouped.” That is, the statute’s focus is on “any part of the property that is returned.” Under state foreclosure laws, the property is “returned” when a lender forecloses and takes title to the property. The MVRA must be interpreted, Robers argues, in accordance with this common understanding of foreclosure proceedings at the state level.
The United States counters, however, that it is inappropriate to take state mortgage law rules into account because the MVRA is not limited to cases of mortgage fraud. Moreover, the United States argues that it is irrelevant in this case that the lenders agreed to waive their rights to pursue a deficiency claim on the remainder of the loans after foreclosure. The MVRA is intended not only to compensate victims for their losses but also to mete out appropriate criminal punishment. To this end, the statute explicitly states that any compensation the victim has received other than through the MVRA is irrelevant for purposes of calculating restitution under the statute. Furthermore, state foreclosure laws do not shed any light on the meaning of the phrase “any part of the property that is returned” according to the United States. That phrase, argues the United States, should have a consistent meaning whenever the MVRA is applied; thus, it should not be interpreted to have a “special” meaning only applicable in the mortgage fraud context.
THE MEANING OF “PROPERTY” WITHIN THE MVRA
Robers additionally argues that the lower court misinterpreted the meaning of the word “property” in the offset provision. According to the lower court, the property that is returned under the statute must be the same as the property that was originally given to the defendant. In this case, that is the money lent to Robers so that he could purchase the two properties in question. Robers argues, however, that the statute explicitly allows for substitute property to be returned to the original owner where the return of the original property would be impossible, impracticable, or inadequate. The lower court thus read the statute too narrowly, according to Robers. This interpretation, Robers contends, imposes liability on him for injuries that his conduct did not proximately cause, in contravention of the fundamental rule of criminal law that a defendant is only liable for injuries proximately caused by his conduct. That is, because under the lower court’s interpretation a victim is only repaid once the house is resold on the open market – and not at the moment it is foreclosed – then a defendant like Robers must pay for any decline in the house’s value between the time of foreclosure and resale. Robers argues, however, that market forces, not the defendant’s conduct, is the proximate cause of any such losses.
The United States, however, contends that the meaning of the word “property” is consistent throughout the MVRA, and in this case “property” refers to the money that was lent to Robers. Although that money was used to purchase houses, the titles which the lenders later obtained through state foreclosure proceedings were merely collateral, not the actual “property” that was transferred to Robers initially. According to the government, because the houses were not part of the property that he initially received, Robers could not have returned “any part of the property” when he relinquished title to the houses through foreclosure. Rather, the property was only “returned” when the lenders were able to sell the houses and thus recoup a portion of the money they had initially lent Robers.
The United States also argues that Robers’s conduct was the proximate cause of the losses that the lenders suffered in this case. The United States explains that but for Robers’s fraudulent conduct, the institutions in question never would have lent him the money in the first place. The fact that the real estate market faltered after the banks obtained titles to the properties is irrelevant for purposes of calculating the restitution that Robers owes them. Indeed, government maintains, the declining real estate market is only an issue due to the defendant’s fraud. The United States contends that if Robers’s view were adopted, then this would unfairly force victims to bear the full risk of loss from a declining market, which would be directly contrary to the purposes of the MVRA.
WHETHER THE STATUTE IS AMBIGUOUS AND THUS REQUIRES APPLICATION OF THE “RULE OF LENITY”
Finally, Robers argues in the alternative that the “rule of lenity,” which requires that ambiguities in a criminal statute be interpreted in the defendant’s favor, supports his interpretation of the offset provision. That rule is applied whenever a statute is considered to be grievously ambiguous. Robers thus contends that if neither (1) the offset provision’s text, structure, or purpose, (2) background rules of mortgage law, (3) nor any other interpretive device sheds light on its meaning, then the Court must apply the rule of lenity. Applying that rule, Robers argues that the offset provision must be interpreted to grant offset credit for mortgage collateral returned to a victim. Otherwise, if the lower court’s interpretation is adopted, then nearly all defendants who make pre-sentencing returns of collateral or other property would receive a lower offset value.
The United States counters that the rule of lenity is inapplicable here. According to the government, the meaning of the phrase “any part of the property” is clear from the MVRA’s text, structure, and purpose, and that meaning clearly is that the property that is returned must be exactly the same as the property that was initially taken.
This proceeding asks the Court to interpret the meaning of the phrase “any part of the property that is returned” under the Mandatory Victims Restitution Act where the defendant has perpetrated mortgage fraud. The defendant, Robers, contends that he “returned” part of the “property” when the lenders received title to his property through state foreclosure proceedings. Accordingly, any restitution due should be calculated based on the value of the houses on the date of the foreclosure. The United States, however, argues that “property” must be interpreted consistently throughout the statute and means in this case the money that the banks lent Robers initially. Under this interpretation, Robers did not “return” any of the property until the lenders were able to sell the houses and recoup a portion of their initial loan. In this case the Court will consider the meaning of the word “property” in the offset provision of the MVRA as well as who Congress potentially intended to bear the effects of declines in property value in the case of mortgage fraud – the victims of that fraud, or the perpetrators.
- Sean T. Carnathan, Circuits Split on Valuing Offset Against Criminal Restitution, American Bar Association Litigation News, (Nov. 19, 2012).
- T. Dietrich Hall, The Arithmetic of Justice: Calculating Restitution for Mortgage Fraud, Columbia Law Review, (Nov. 2013).