Monday, June 19, 2006

Fair Market Value Should Generally Be Used to Determine Value of Offset Property in Setting Amount of Restitution

United States v. Francis Boccagna, Docket No. 04-5099-cr (2d Cir. June 13, 2006) (Jacobs, Sack, Raggi):

(By Lara Samet, rising 2-L at NYU Law School and intern at FDNY)

Boccagna ran an intricate scheme. Distilled to its essentials, he made false statements to procure loan guarantees from the Department of Housing and Urban Development (HUD), purchased properties after obtaining those guarantees, and then quickly resold the properties for a profit. Unfortunately, the scheme proved too intricate even for him and eventually unraveled. Boccagna confessed to the authorities and later pleaded guilty.

By the time Boccagna’s crime was discovered, many of the 162 properties at issue were in foreclosure proceedings. HUD ultimately acquired title to approximately one-third of these by paying the outstanding loan balances and other out-of-pocket expenses. HUD suffered $20.6 million in losses as a result of Boccagna’s misconduct.

Instead of reselling the properties on the open market to recoup its losses, however, HUD sold the foreclosed property to the New York City Department of Housing Preservation and Development (HPD) at nominal prices. The sale price for all the properties was approximately $2 million, far below their fair market value. In return, the HPD guaranteed, among other things, that the properties would be developed as low-to-middle income properties.

In ordering restitution, the district court used the nominal amount recouped by HUD through the sales to HPD ($2 million) offset the total loss amount ($20.6 million). It thus ordered Boccagna to pay $18.6 million in restitution.

Boccagna appealed, arguing that the district court erred in using the nominal sale price to HPD, rather than the properties’ fair market value, to offset the loss amount for restitution purposes. The Circuit agrees, holding that the district court abused its discretion by using the nominal resale price to calculate the amount of restitution owed.

Judge Raggi writing for the Court begins by scrutinizing the text of the Mandatory Victims Restitution Act (“MVRA”), codified at 18 U.S.C. §§ 3663A, 3664. She concludes that while much of the statute is unambiguous, the MVRA does not expressly state how property is to be valued, either for determining the loss amount or the value of an offset. See also United States v. Simmonds, 235 F.3d 826, 831 (3d Cir. 2000) (“While the statute does not expressly define “value” as “replacement value,” neither does it define “value” as “market value.”). Moreover, the Court points out, the law recognizes a number of ways of proper valuation. See, e.g., BFP v. Resolution Trust Corp., 511 U.S. 531, 543 n.7 (1994) (foreclosure price); Simmonds, 235 F.3d at 832 (replacement value). Since there is no overarching default, the Court undertakes a more normative assessment of how restitution should be valued.

The Court concludes that “value” is a flexible concept under the MVRA. More often than not, however, fair market value will be the best measure. When the property is unique or whenever the market is incapable of capturing the true value of the good, though, a court can look to replacement cost or another mode of valuation. See United States v. Shugart, 176 F.3d 1373, 1375 (11th Cir. 1999) (century-old church); Simmonds, 235 F.3d at 832 (residential furniture with “personal value”). Judge Raggi would make most economists proud: Focus on the market value, she instructs, except when the market fails.

Although the Court recognizes that valuation should remain flexible, it expressly holds that the district court’s discretion is limited. The overarching principle is that a court cannot order restitution in excess of the amount of the victim’s loss. As Judge Raggi puts it, a court “cannot award the victim a windfall, i.e., more in restitution than he actually lost.” This limiting principle derives from the underlying purpose of restitution. Restitution is compensatory; it seeks solely to make the victim whole. The goal of a restitution order is simply to put the victim back in the same position s/he would have occupied but for the defendant’s crime.

By using the nominal sale price to offset the loss caused by Boccagna’s misconduct in setting the restitution amount, the district court improperly awarded HUD more than it actually lost. The restitution order here “effectively awards [HUD] both restitution in the full amount of loss offset only by the nominal sale price and the benefit of the recouped property to the extent that [HUD] is able to gift [HPD] in an amount equal to the difference between the property’s fair market value and the nominal sale price.” Op. 24. Such a valuation, Judge Raggi notes, “does not put the victim in the same position he would have been in but for the defendant’s criminal conduct; it puts him in a better position.” Id.

In other words, “the nominal price was not the only value HUD received for the properties.” Op. 24. It also “obtained HPD’s guarantee that the properties would be developed as low-to-middle income residences.” Id. And this “guarantee had a value to HUD equal, at least, to the market price that it decided to forego.” Id. The district court’s restitution order is erroneous because it allows “HUD to receive both the benefit of this development guarantee and a restitution award offset only by a nominal sale price.” Id.

Judge Raggi offers the following illustration to show why HUD is put in a better position (than it would have been in but for Boccagna’s misconduct) by virtue of the district court’s restitution order:

“If a theft victim suffered the loss of a jewel with a fair market value of $100,000, and if he thereafter recouped from the defendant a substitute jewel with a market value of $50,000, and if the victim sold the substitute jewel to his son for $1, the use of that nominal sale price as offset value would allow the victim to receive the benefit of both a $49,999 gift to his son, and $99,999 in restitution from the defendant, for a total recovery of $149,998 on his $100,000 loss.”

Op. 21. Such a restitution calculation contradicts the compensatory core of restitution, as it “would put the victim in a significantly better position than he was in before the theft.” Op. 21-22.

Despite the sound analysis, there is one glaring ground for concern – the Court’s cursory dismissal of the argument that this case might constitute a special exception. The Government pointed out that HUD sold the properties at nominal prices in order to create affordable housing opportunities. Of course, part of HUD’s mission is to spur the development of such housing. Therefore, the district court should be able to consider the nominal resale price to HPD. The Court disagrees:

"However laudable HUD’s motives in entering into its agreement with HPD, that fact does not help us resolve this appeal. The issue before us is not, after all, whether the district court could insist that HUD sell the foreclosure properties to the highest bidder. It could not. The issue is whether HUD’s voluntary decision to sell the foreclosure properties at a nominal rather than fair market price entitles it to recoup the difference between these two amounts as part of a restitution award . . .”

It may be appropriate to limit the possible measures that can be used to determine the amount of restitution that a defendant owes. It may be appropriate to limit any incentive to try to scam the system. But it seems incorrect to conclude that this was a “voluntary decision” and that there is no room for carving out an exception to the general rule. Under Boccagna, HUD now has every incentive to resell property on the open market to the highest bidder, rather than at nominal prices to organizations (like HPD) dedicated to developing low and middle income housing.


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June 19, 2006 at 6:23 PM  
Anonymous Anonymous said...

Why carve out an exception? Just because HUD wants to do something "good" with the properties? HUD can continue to sell to entities such as HPD for bargain basement prices -- the only cost that it "eats" is the difference between the fair market value and the nominal price. HUD would "eat" that same amount if it purchased the properties on the open market and made the same bargain sale to HPD. HUD's decision to foreclose on the properties (which was voluntary) is exactly the same as purchasing the properties on the open market.

June 22, 2006 at 1:44 AM  

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