Filed: Aug. 17, 1994
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit 8-17-1994 United States of America v. Daddona Precedential or Non-Precedential: Docket 93-7338 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994 Recommended Citation "United States of America v. Daddona" (1994). 1994 Decisions. Paper 117. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/117 This decision is brought to you for free and open access by the Opinio
Summary: Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit 8-17-1994 United States of America v. Daddona Precedential or Non-Precedential: Docket 93-7338 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994 Recommended Citation "United States of America v. Daddona" (1994). 1994 Decisions. Paper 117. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/117 This decision is brought to you for free and open access by the Opinion..
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Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
8-17-1994
United States of America v. Daddona
Precedential or Non-Precedential:
Docket 93-7338
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
Recommended Citation
"United States of America v. Daddona" (1994). 1994 Decisions. Paper 117.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/117
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 93-7338
No. 93-7683
No. 93-7725
No. 93-7351
___________
UNITED STATES OF AMERICA,
Appellee,
vs.
JOHN L. "JACK" DADDONA,
Appellant in Nos. 93-7338, 93-7683, and 93-7725.
SIDNEY COHEN,
Appellant in No. 93-7351
___________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
(D.C. Criminal Action Nos. CR-92-179-01 and -02)
___________
ARGUED MAY 19, 1994
BEFORE: BECKER, LEWIS, Circuit Judges,
and IRENAS, District Judge.*
(Filed August 17, 1994)
___________
* Honorable Joseph E. Irenas, United States District Judge
for the District of New Jersey, sitting by designation.
David Barasch
United States Attorney
Kim David Daniel (Argued)
Assistant United States Attorney
Federal Building, 228 Walnut Street
Harrisburg, PA 17108
Attorneys for Appellee
James G. Wiles, Esquire (Argued)
Law Offices of James G. Wiles
1411 Walnut Street, Suite 200
Philadelphia, PA 19102
James L. Heidecker, Jr., Esquire
Lawyers Professional Building
27 North Street, 4th Floor
Allentown, PA 18101
Attorneys for Appellant Daddona
Francis Recchuiti, Esquire (Argued)
Vangrossi & Recchuiti
319 Swede Street
Norristown, PA 19401
Attorneys for Appellant Cohen
___________
OPINION OF THE COURT
___________
IRENAS, District Judge.
Appellants were convicted of various counts of fraud
stemming from their attempts to disclaim performance and payment
bonds issued in connection with a construction project. Pursuant
to U.S.S.G. § 2F1.1(b), the trial court determined the amount of
loss for sentencing purposes to be in excess of $1,500,000, most
of which represented the mortgagee's cost to complete the project
after taking it over from the mortgagor/developer. Although the
mortgagee was not an obligee under the bonds, the district court
nonetheless concluded that its loss was properly attributable to
the appellants' fraudulent conduct.
Appellants raise a number of challenges to their convictions
and sentences and to the district court's denial of motions for a
new trial. We will affirm the judgments of conviction and the
district court's denial of appellants' motions for a new trial.
However, because we find that the trial court improperly
calculated the losses resulting from the appellants' fraudulent
conduct, we will vacate the sentences and remand both cases for
resentencing.
I.
FACTS AND PROCEDURAL HISTORY
Appellant Sidney Cohen ("Cohen") was a principal in Green
Hill Associates ("Green Hill"), a limited partnership and the
developer of the Green Hill Apartment Building Project ("the
project") in Susquehanna Township, Pennsylvania. The project was
financed by an $8.9 million mortgage loan to Green Hill from the
Summit Tax Exempt Bond Fund, L.P. ("Summit"), which in turn was
headed by Stuart J. Boesky ("Boesky").
Construction on the project began in July of 1986. By the
spring of 1987, the project was substantially behind schedule.
Cohen sought to replace the general contractor, Susquehanna
Construction Company ("Susquehanna"), with Eastern Consolidated
Utilities, Inc. ("ECU"), a building contractor owned and operated
by appellant John L. ("Jack") Daddona ("Daddona"). Summit agreed
to the substitution, provided ECU obtain performance and payment
bonds in the amount of $3 million.1 Summit also threatened
foreclosure unless the bonds were produced by July 29, 1987.
Daddona consulted Daniel Culnen ("Culnen") of the Culnen &
Hamilton Agency ("C & H"), one of the largest independent surety
bond brokers on the East Coast and Daddona's long-time insurance
agent. He advised Culnen of Summit's demand, and Culnen agreed
to issue the bonds through Employers Insurance of Wausau
("Wausau"), for whom he was a registered independent agent.
However, as a condition to his agreement, Culnen required that
Daddona, Cohen, and their families agree in writing to personally
indemnify Wausau for any claims paid on the bonds.2
By letter dated June 15, 1987, Culnen advised Summit that in
the event ECU were to become the project's general contractor, it
1
A performance bond guarantees the owner that the general
contractor will perform his contract. A payment bond, sometimes
referred to as a labor and materials bond, guarantees the that
the general contractor's subcontractors and materialmen will be
paid for their services. The bonds are usually issued in tandem.
It should be noted that while Green Hill, as owner, had rights
under both bonds, and the subcontractors and materialmen had
rights under the payment bond, Summit was not an obligee under
either bond. See p. 24, infra.
2
The requirement that Cohen execute an indemnity agreement
was unusual in that it essentially vitiated any benefits that
might have inured to Cohen from the bonds. At trial, Culnen
explained his concern that Cohen, who had earlier filed what
Culnen considered to be specious claims against the bonds held by
Susquehanna, would make similar claims against ECU's bonds. The
indemnity agreement was expressly designed to prevent Green Hill
from filing claims under the bonds.
would be able to obtain the necessary bonding. Thereafter, on
July 6, 1987, Cohen, Daddona, and their families executed an
indemnity agreement. On July 20, 1987, ECU and Green Hill
entered into a $3.4 million contract for the completion of the
project.
On July 27, 1987, Culnen directed his bond manager, Pamela
Hayes ("Hayes"), to prepare the bonds on Wausau forms. Hayes
prepared the bonds, affixed the Wausau corporate seal, and
attached power of attorney forms. Hayes, purportedly at Culnen's
behest, did not follow the usual procedure and give the bonds a
new number. Rather, she affixed a number that had been used on a
previous ECU project and then twice witnessed Culnen's signature
under the fictitious name of "B. Adams."
Culnen signed both bonds and delivered them to Daddona along
with a cover letter explaining the method of calculating the bond
premium. Although Culnen did have authority to execute and
deliver Wausau bonds, he breached his own agreement with Wausau
by failing to report his execution and delivery of the bonds and
by failing to obtain Wausau's prior approval.
Daddona signed the bonds on July 29, 1987, and forwarded
them to Cohen. Cohen witnessed Daddona's signatures on the bonds
and directed his attorney, Mitchell Leiderman ("Leiderman"), to
forward copies of the bonds to Summit, which Leiderman did on
July 30, 1994. Summit halted its foreclosure proceedings, and
ECU commenced work on the project in August of 1987.
A. Padding the Invoice
In August Culnen prepared and mailed to Daddona an invoice
for the bond premiums in the amount of $42,413. Shortly
thereafter Cohen called Culnen and instructed him to prepare a
new invoice in the amount of $52,413, the difference representing
an unrelated $10,000 consulting fee owed by Cohen to Culnen.
Daddona indicated that he had no objections to the request.
At Daddona's direction, Culnen forwarded the upwardly
revised invoice to Cohen, who submitted it to Summit on October
7, 1987, as part of a monthly requisition. When Summit released
the funds to Cohen on October 21, 1987, Cohen immediately
forwarded the monies to Culnen and received a check back from
Culnen for $10,000 on November 27, 1987.
Culnen retained the remaining $42,413 for a period of time,
but was pressured by Cohen and Daddona to divide the money.
Consequently, Culnen agreed to give Daddona a $32,413 credit
against his outstanding account balance, which was memorialized
in a credit memo dated May 11, 1988. On May 16, 1988, Culnen
forwarded a second check for $10,000 to Cohen.
B. Resuming Construction
Once the new general contractor was in place, Cohen sought
to entice the subcontractors, many of whom had left the project
for non-payment, to return to work on the project. At several
jobsite meetings conducted in August of 1987, Cohen and ECU
employees displayed copies of the bonds and assured the
subcontractors that the bonds guaranteed their payment. At least
two subcontractors, Thomas Strawbridge and Robert Yingling,
subsequently executed contracts with ECU for work on the project.
Copies of the bond were also mailed to Les Stewart ("Stewart") of
York Excavating Company ("York"), thereby inducing him to return
to work.
C. Disclaiming the Bonds
By the end of 1987, the project was still behind schedule,
and Summit was again threatening foreclosure. In or around
December of 1987, Cohen and Daddona returned the original bonds
to Culnen without informing Summit or the subcontractors.3 By
January of 1988, most of the subcontractors had left the site for
non-payment, and on February 5, 1988, Summit commenced
foreclosure proceedings.
In a settlement reached on April 8, 1988, Summit agreed to
pay Green Hill $216,000 less the amount of any unpaid
subcontractor bills then due and owing on the project. In
return, Green Hill agreed to deed the project to Boesky's
nominee, Green Hill Investors,4 to assign to Summit Green Hill's
rights (but not its obligations) in the contract with ECU, and to
3
While it may be that Cohen or Daddona thought that by
returning the original bonds to the issuer they were limiting the
rights of potential claimants, and thereby their indemnity
obligations to Wausau, there is no legal basis for concluding
that the rights of parties who entered into contracts or
performed labor in reliance on the bonds could have their rights
unilaterally terminated in this manner. Indeed, the indictment
itself was premised, at least in part, on the validity of the
bonds. If the bonds were in fact not valid when issued, there
could be no fraud in disavowing them.
4
For convenience, we will refer to Summit and Green Hill
Investors collectively as "Summit."
escrow Cohen's beneficial interest in the bonds to pay off liens
that might accrue on the property in the four months following
the settlement.5
In March, Wausau began to receive claims on the payment
bond. On March 16, 1988, the attorney for the International
Brotherhood of Electrical Workers Union ("IBEW") filed a claim
against the bond with Wausau's home office in Wisconsin and
forwarded copies to Cohen and Daddona. On March 21, 1988, Jack
Meyers ("Meyers") of Construction Management Corporation ("CMC")
also made a claim by sending a copy of the claim letter to
Wausau's regional bond manager in Totowa, New Jersey, Ken Gelok
("Gelok"). CMC and York filed formal claims against Wausau on
April 14, 1988.
Gelok was surprised by the claims. Company policy required
both regional manager and home office approval prior to the
issuance of any bonds in excess of $750,000. Gelok knew nothing
of the bonds and called Culnen on or about March 25, 1987, to
clarify the situation. Culnen advised Gelok that the claims were
not valid because he had the cancelled bonds in his possession.
At a meeting in Culnen's office on March 29, 1988, Culnen
5
The four-month escrow period tracked the Pennsylvania
statute of limitations for the filing of mechanic's liens. 49
P.S. § 1502. It is clear that Green Hill's assignment was
strictly limited to the possible liability to existing unpaid
subcontractors who were either known at the closing or who filed
claims within four months. The essence of the settlement was that
Summit's nominees would take the project free and clear of any
existing claims of ECU's subcontractors. In fact, those debts
were paid by deductions from the $216,000 owed to Green Hill, and
Summit's limited rights under the four-month escrow period were
never exercised.
delivered the bonds to Gelok and falsely assured him that the
bonds were not valid, that he had never signed them, and that
someone else -- perhaps Meyers -- had forged his signature.
Culnen repeated this tale in a letter dated April 15, 1988, in
which he advised Gelok that the bonds were forgeries and that
York's and CMC's claims were "phoney claims filed by crooks who
probably stole blank forms and forged [Culnen's] signature."
On April 20, 1988, Gelok again met with Culnen at the
latter's office. During the course of the meeting, Gelok advised
Culnen that he had been unable to contact Cohen to confirm
Culnen's story about the bonds. Culnen then picked up the
telephone, dialed some numbers, and handed the phone to Gelok. A
man who identified himself as Sidney Cohen informed Gelok that
"there was no bond in force, there never was and there never
would be." Daddona App. at 325. The man also advised Gelok that
the bonds on which Meyers' and Stewart's claims were based were
forgeries, and that Meyers may have been the one who forged
Culnen's signature.
On April 22, 1988, Culnen wrote a second letter to Gelok, in
which he informed Gelok that he had contacted Daddona, then on a
hunting trip in Alaska, and "the conclusion we [i.e., Culnen and
Daddona] came to is . . . that Meyers signed the bond form, which
was blank, in Jack's office pending finalization of negotiations
with the owner." Daddona App. at 223-24. Relying on the letters
from Culnen and Gelok's conversation with Cohen, Wausau advised
Meyers by letter dated April 20, 1988, that no Wausau bonds
existed on the Green Hill project. Thereafter, on April 26,
1988, Wausau issued a second letter, denying Stewart's and
Meyers' bond claims on the grounds that no valid bonds existed
for the project. On May 6, 1988, Wausau denied the IBEW claim.
On June 16, 1988, Summit, while in the midst of hiring a new
general contractor, sent a letter to Wausau inquiring about the
status of the bonds. Culnen advised Wausau by letter dated June
21, 1988, that he had neither executed nor delivered the bonds.
Wausau subsequently advised Summit on June 27, 1988, that no
bonds existed on the project. On September 30, 1988, Summit
filed a formal claim against the bonds, in which it alleged that
ECU's failure to perform had cost it $3 million in damages. The
claim was denied by Wausau in a letter dated October 7, 1988.
The letter recited that no valid bonds existed on the project,
and that even if there were valid bonds, Summit was not a proper
claimant.
D. The Unravelling of the Scheme
In July of 1988, Meyers contacted the United States Postal
Inspectors, prompting an investigation into the project. On
August 5, 1988, grand jury subpoenas were served on Pamela Hayes
and C & H. On October 13, 1988, Culnen admitted to Wausau that
he had indeed executed and delivered the bonds in July of 1987
and that they were not forgeries. Culnen and C & H were indicted
in June of 1991. In November of 1991, Culnen entered into a plea
agreement by which he agreed to plead guilty to two counts of
mail fraud and cooperate with the government in its investigation
of Cohen and Daddona.
Appellants were indicted in July of 1992 and charged with
conspiracy to commit mail fraud and two counts of mail fraud. In
addition, Cohen was charged with conspiracy to transport a
fraudulently obtained security (the $52,413 check issued by
Summit for the inflated bond premium), interstate transportation
of a fraudulently obtained security, and interstate
transportation of a mail fraud victim. The frauds on which the
indictment was based were threefold: (1) a fraud on Wausau in not
reporting the issuance of the bonds or the receipt of premiums
therefor; (2) a fraud on Summit by inflating the invoice for the
bond premium to cover an unrelated indebtedness to C & H; and (3)
a fraud on potential bond claimants by first returning the
original bonds for attempted cancellation and then claiming that
the signatures were forgeries.
A five-day joint trial of the appellants was held from
September 14-18, 1992. The jury convicted both men of conspiracy
to commit mail fraud and of the two counts of mail fraud. The
jury also convicted Cohen of interstate transportation of a
fraudulently obtained security, but acquitted him of conspiracy
to transport a fraudulently obtained security.6
On September 25, 1992, appellant Cohen moved for a new trial
and, in the alternative, for a judgment of acquittal. That same
day, appellant Daddona filed motions to set aside the verdict and
for a new trial. In October, both parties filed motions for a
6
The charge of interstate transportation of a fraud victim
was dismissed by the judge during the trial.
new trial based on newly-discovered evidence. All of these
motions were denied by memorandum and order dated January 25,
1993.
Appellant Daddona subsequently filed two additional motions
for new trial on the grounds of newly-discovered evidence, which
were denied by the district court initially and on
reconsideration. Each of the motions was followed by a motion to
this Court to remand the matter back to the district court, which
were also denied.
E. The Sentencing
The presentence reports prepared by the U.S. Probation
Office set each appellant's base offense level at 6, applying
U.S.S.G. § 2F1.1.7 Then, relying on the findings of fact made by
the court during the Culnen sentencing, the probation officer
calculated the approximate amount of losses to the victims to be
$1,562,500.8 Pursuant to U.S.S.G. § 2F1.1(b)(1)(j), he
7
Counts 2 (transportation of a fraudulently obtained
security), 3 (conspiracy to commit mail fraud), 4 and 5 (mail
fraud) were counted as a single offense pursuant to U.S.S.G.
§ 3D1.2(d).
8
See Presentence Report of John L. Daddona at 14;
Presentence Report of Sidney Cohen at 14:
The monetary losses caused by the offenses are
$1,562,500. This amount is based on the Court's
finding regarding losses in the case of Daniel J.
Culnen (Dkt. #1:CR-91-105-001). In the Court's
sentencing memorandum in the Culnen case, filed on July
30, 1992, it was determined that for the purposes of
sentencing, approximate losses to victims were as
follows:
Summit Bond Tax Exempt Fund, L.P. $1,500,000
recommended a nine-level increase to the base offense level. The
probation officer also recommended a two-level increase for more
than minimal planning under U.S.S.G. § 2F1.1(b)(2)(A).
All sides objected to the offense level calculation. Cohen
contended that the losses claimed were either erroneous, not
covered by the bonds, or settled prior to sentencing. Daddona
insisted that he was ignorant of any wrongdoing in the issuance
of the bonds, and could not therefore be held accountable for
losses incurred. In the alternative, Daddona argued that
Summit's losses could not be included in the calculation, as
Summit was not a co-obligee on the bond. The government, on the
other hand, objected to the lack of a two-point enhancement to
Cohen's offense level for obstruction of justice.
Loss hearings were held on March 30 and April 2, 1993. The
government proffered the testimony of Norman Tandy, of Norman
Tandy & Associates, the company hired by Summit to oversee the
completion of the project.9 Tandy essentially undertook a "cost
of completion" analysis -- examining the Summit invoices for the
period after Eastern left the project site to determine how much
more Summit spent because of the Eastern default, then
Construction Management Corporation/
Aljohn, Inc. 53,000
Yingling Construction Company 9,500
$1,562,500
9
Tandy did not testify in person at the loss hearings.
Rather, the government moved to supplement the record by
incorporating the testimony Tandy had given at the sentencing
hearing for Daniel Culnen, which motion was granted on March 9,
1993.
subtracting the cost of changes to the project specifications and
the amount of the original Eastern contract. He concluded that
Summit had suffered losses of $1,524,761 as the result of
appellants' fraudulent conduct.
Appellant Daddona offered rebuttal testimony from S. Leonard
DiDonato of Hill, International, who was qualified as an expert
construction analyst. DiDonato independently reviewed Summit's
records and Tandy's calculations, indicating places where he
believed Summit had overspent or Tandy had overestimated the
amount of loss. From these he concluded that Summit could have
completed the project for $414,719 less than the Eastern contract
price, and hence had suffered no loss.
The trial court resolved the various objections to the
presentence report in a memorandum dated April 13, 1993. Most of
the discussion focused on the amount of loss that properly could
be attributed to the defendants' fraudulent conduct. Recognizing
that each of the experts were "less than fully objective," the
court set out to determine who was the more reliable. It noted
that Tandy's calculations had been adopted at the Culnen
sentencing and therefore had some indicia of reliability. The
court also contrasted the "carefully and specifically enumerated"
deductions of Tandy with the "speculative and repetitive
deductions" and "artificial numbers" used by DiDonato.
The Court found Tandy's testimony to be more dependable, and
adopted the figure of $1,524,761 as the amount of Summit's loss
and $1,568,830 as the total loss for sentencing purposes.10
However, the court declined to impose a two-level increase for
more than minimal planning and denied the government's request
for a two-level enhancement to Cohen's offense level for
obstruction of justice. The decision left each appellant with an
offense level of 15 and a criminal history category of I,
resulting in a sentencing range of 18 to 24 months. On
application of the appellants, the court granted a downward
departure and sentenced appellants to nine-month terms of
imprisonment.11
II
LEGAL ANALYSIS
Both appellants challenge their judgments of conviction and
sentences, and Daddona also appeals the district court's denial
of his second and third motions for new trial. We have appellate
jurisdiction pursuant to 28 U.S.C. § 1291 over final orders of a
district court and jurisdiction pursuant to 18 U.S.C. § 3742 to
review sentences imposed under the United States Sentencing
Guidelines.
Appellants' challenges to their convictions and to the
district court's denial of Daddona's new trial motions are
10
The court also found that Wausau had incurred $44,069 in
legal fees as a result of the fraud. It did not, however,
address the claims of the other subcontractors, concluding that
Summit's loss alone was sufficient to place defendants in the $1-
$2 million range.
11
Appellants are out on bail pending appeal.
without merit.12 However, their claims regarding the calculation
of their sentences require further analysis.
A. The Standard of Review
"When reviewing the sentencing decisions of the district
courts, '[w]e exercise plenary review over legal questions about
the meaning of the sentencing guidelines, but apply the
deferential clearly erroneous standard to factual determinations
12
Daddona's claims included the following: (1) the
evidence was insufficient to support his convictions; (2) the
trial court erred in denying appellant's motion for a new trial
based on an alleged Brady violation without conducting an
evidentiary hearing; (3) the trial court erred in admitting
certain government exhibits and testimony; (4) the trial court
erred in allowing the government to use a summary chart during
its closing arguments; (5) the trial court erred in submitting
the indictment to the jury, in drafting the verdict form, and in
answering a question from the jury; and (6) the trial court
improperly allowed the government to question Daddona about a
"check-swapping" arrangement.
Cohen's claims included the following: (1) the trial court
erred in denying appellant's motion for new trial based on an
alleged Brady violation without conducting an evidentiary
hearing; (2) the evidence was insufficient to support his
convictions; (3) the trial court erred in permitting the
introduction of an "inaccurate and fabricated 'closing
statement'"; (4) the trial court erred in allowing the government
to use a summary chart during its closing arguments; (5) the
trial court erred in submitting the indictment to the jury, in
drafting the verdict form, and in answering a question from the
jury; (6) the trial court improperly permitted evidence of a
"check-swapping" arrangement; and (7) the trial court erred in
incorporating by reference testimony from the Culnen sentencing
hearing.
Cohen also challenged the failure of the district court to
depart downward, either based on his acceptance of responsibility
or on his age and infirmity. However, because on remand the
district court is free to revisit the issue of departures from
the properly calculated sentencing range, we need not consider
these claims here.
underlying their application.'" United States v. Fuentes, 954
F.2d 151, 152-53 (3d Cir.), cert. denied, --- U.S. ----,
112
S. Ct. 2950,
119 L. Ed. 2d 573 (1992), quoting United States v.
Inigo,
925 F.2d 641, 658 (3d Cir.1991).
Under the Sentencing Guidelines, the base offense level for
fraud is six, U.S.S.G. § 2F1.1(a), which must be increased
according to the size of the loss attributed to the fraud.
U.S.S.G. § 2F1.1(b). Because appellants challenge the district
court's interpretation of the "loss" concept in § 2F1.1(b), our
review is plenary. See Kopp, 951 U.S. at 526; United States v.
Bierley,
922 F.2d 1061, 1064 (3d Cir. 1990).
B. Calculating the Amount of Loss for Sentencing Purposes
The version of U.S.S.G. § 2F1.1(b) in effect at the time the
offenses were committed set forth the following method of
adjusting the offense level :
(1) If the loss exceeded $2,000, increase the offense
level as follows:
Loss Increase in Level
. . .
(G) $100,001 - $200,000 add 6
(H) $200,001 - $500,000 add 7
(I) $500,001 - $1,000,000 add 8
(J) $1,000,001 - $2,000,000 add 9
. . . .
U.S.S.G. § 2F1.1(b) (Nov. 1987); see generally U.S.S.G. § 2B1.1,
commentary at 2 ("'Loss' means the value of the property taken,
damages, or destroyed.").13 The district court found the total
13
Although it is proper to use the Guidelines in effect at
the time of sentencing, see U.S.S.G. § 1B1.11(a), application of
loss for sentencing purposes to be $1,568,830. U.S.S.G.
§ 2F1.1(b). Appellants assert, and we agree, that the losses
claimed by Summit were not caused by their fraudulent activity
and should not have been included in the U.S.S.G. § 2F1.1
calculation.
C. Cost to Complete as a Measure of Loss
It should be noted at the outset that we do not question
the district court's factual determination that Summit's cost to
complete the Green Hill project exceeded $1,500,000. The trial
judge heard extensive testimony on that issue and his factual
determination finds more than adequate support in the record.
What the record does not contain is any indication that this loss
was due to the fraud of the appellants rather than the obvious
failure of two general contractors, Susquehanna and ECU, to
fulfill their contractual obligations in a timely fashion.
Culnen was a registered independent agent of Wausau with
actual and apparent authority to execute and deliver surety
bonds. While there may have been fraud in the failure to advise
Wausau of the issuance, in the inflated invoice, in their
redelivery to Culnen, and in the effort to mislead possible
obligees concerning their validity, the fact remains that the
the version of § 2F1.1 contained in the November 1992 Guidelines
Manual would have resulted in the imposition of more severe
penalties. The district court and the probation officer
therefore properly applied the Guidelines in effect at the time
of the offense. See U.S.S.G. § 1B1.11(b).
bonds appear to have been validly issued and enforceable by any
proper obligee who relied on their issuance.14
Under Pennsylvania law, a principal is liable for the acts
of its agent committed in the scope of its employment, even
though the principal did not authorize the act. Aiello v. Ed
Saxe Real Estate, Inc., 508 Pa. 553,
499 A.2d 282 (1982); see
also Pennsylvania Nat'l Mut. Casualty Ins. Co. v. Insurance
Comm'r of the Commonwealth of Pennsylvania, 121 Pa.Cmwlth. 618,
551 A.2d 368 (Pa. Commw. Ct. 1988). Thus, to the extent that
Summit (or any other claimant) has any rights under the bonds,
either initially or pursuant to later agreements, those rights
would continue to exist.
Although Summit was the project lender, it was not a named
obligee under either the performance or payment bonds as they
were initially issued. Green Hill was the obligee on the
performance bond, while the payment bond named as obligees only
those
having a direct contract with [ECU] or with a
subcontractor of [ECU] for labor, material or both,
used or reasonably required for use in the performance
14
In a recent decision from the Middle District of
Pennsylvania, York Excavating Co., Inc. v. Employers Insurance of
Wausau, No. CV-91-1037 (M.D. Pa. Oct. 21, 1993)(Memorandum
Opinion of Hon. James F. McClure, Jr., U.S.D.J.), the court
denied claims brought by one of the project subcontractors
against the Wausau bonds for work done pursuant to written and
oral agreements entered into in 1987. However, the decision was
not premised on the validity of the bonds, but rather on the
validity of York's claims. The court found insufficient evidence
of an oral agreement with ECU. Furthermore, the court found that
since ECU was not a party to the written contracts by which York
agreed to perform work, York could not collect under the Wausau
bonds.
of the Contract, labor and material being construed to
include that part of water, gas, power, light, heat,
oil gasoline, telephone service or rental of equipment
directly applicable to the Contract.
York Excavating, slip. op. at 13.
There is also indication in the record that Summit was aware
that it was not an obligee when it agreed to accept ECU as the
new general contractor. Daddona App. at 259. Of course, a lender
benefits indirectly by the existence of a performance or payment
bond in favor of the owner and subcontractors. However, because
of the Cohen family indemnity, it is clear that Green Hill,
controlled by Cohen, would have been reluctant to exercise its
rights under the bonds. However, the indictment in this case does
not charge the existence of this indemnity as an act of fraud,
nor did Summit insist in April of 1988, when negotiating the
foreclosure settlement, that Green Hill exercise its rights under
the bonds. The record is clear that Summit feared a protracted
foreclosure battle and wanted a quick settlement to take control
of the project.
It is equally clear that Green Hill's assignment and escrow
of the bonds was limited to guaranteeing that existing debts to
subcontractors were paid by Green Hill.15 There is nothing in the
15
The Escrow Agreement specifically provides in the first
paragraph that the bonds
shall be held
for the benefit of [Summit] until such time as there
are no mechanics liens filed against the Project
resulting from events that occurred prior to the date
hereof . . . provided, however, that in the event no
Mechanics Liens have been filed against the Project by
August 10, 1988, then this Escrow Agreement shall
automatically terminate.
record to suggest that Summit ever had to pay debts to
subcontractors that were outstanding at the time it took over the
property. When Wausau denied Summit's bond claim on October 7,
1988, there is no indication that Summit thereafter took any
legal action against Wausau, notwithstanding the significant
amount at issue.
It does not appear from the record before us that Summit was
harmed in any way by the issuance of the bonds. Nor can we say
that Summit was harmed by the efforts of Cohen, Daddona, and
Culnen at various times to deny the existence of the bonds. As
previously noted Summit has no direct rights under the bonds as a
named obligee, and its rights as assignee of Green Hill in the
settlement of April, 1988, were not only sharply limited, but
also unnecessary since the condition of the escrow was satisfied.
A recent decision from the Seventh Circuit offers insight
into the issue of measuring damages for sentencing purposes in a
fraud case. The appellant in United States v. Marlatt, 24 F.3d
1005 (7th Cir. 1994), owned a title company which sold title
insurance underwritten by Ticor Title Insurance Company
("Ticor"). Marlatt purchased a resort hotel and converted it
into time-shared condominium units. With each unit sold, he
issued a title insurance policy underwritten by Ticor. However,
while the policies represented clear title to the units, the
titles were in fact heavily encumbered. When Ticor discovered
this, it spent $476,000 to clear the titles. Later, in response
Cohen App. at 330a.
to the threat of lawsuits from the purchasers of the
condominiums, Ticor spent an additional $565,000 to repurchase
all of the units sold.
Marlatt pled guilty to one count of mail fraud and one count
of making false statements to the Department of Labor. In
determining the amount of loss pursuant to U.S.S.G. § 2F1.1(b),
the district court included both the money spent clearing the
title and the money spent repurchasing the units, presumably
concluding that both were elements of the loss caused by the
fraud. The Seventh Circuit vacated the sentence, even though it
conceded that the expense of repurchasing the units might be
considered as having been caused by the appellant's fraud, in the
sense of "but for" causation:
Even if it had been, it was not chargeable to the
defendant under section 2F1.1 of the guidelines.
Application Note 7(b) distinguishes between loss on the
one hand and consequential and incidental damages on
the other and makes it clear that with irrelevant
exceptions the latter two items are not to be counted
in computing the loss for purposes of sentencing under
this guideline. The reason for that distinction is no
doubt to prevent the sentencing hearing from turning
into a tort or contract suit. The distinction is
nicely illustrated by this case. The defendant
extracted from Ticor by fraud a bunch of insurance
policies on which Ticor was required to make good to
the tune of $476,000. In the wake of the loss Ticor
incurred other expenses, which were consequences,
perhaps even foreseeable consequences, of the fraud,
but were not the thing actually taken from Ticor. . . .
Id. at 1007-08 (citations omitted).
Other circuits have likewise drawn a distinction between
losses that were directly caused by the fraud and "consequential
and incidental damages." See, e.g., United States v. Newman, 6
F.3d 623, 630 (9th Cir. 1993)("[The measure of loss] does not
include consequential losses. If the Sentencing Commission had
intended to include consequential losses, it would have included
them in the definition of loss."); United States v. Wilson, 993
F.2d 214, 217 (11th Cir. 1993)("The phrase 'property taken,
damaged or destroyed' does not allow for inclusion of incidental
or consequential injury, and it is error to rely on evidence of
such injury in calculating loss when the value of the property
may be ascertained."), citing United States v. Thomas, 973 F.2d
1152, 1159 & n.9 (5th Cir. 1992); cf. United States v. Stanley,
12 F.3d 17, 20-21 (2d Cir. 1993).
While it may be that Summit's excess cost to complete the
project is in some sense a consequence, at least in part, of its
involvement with Cohen and Daddona, this loss is "not the thing
actually taken" from Summit as a result of their fraudulent
activities.
We do not mean to suggest that no financial losses were
incurred by the fraudulent activities of the appellants. Wausau
has suffered actual harm in the form of legal expenses, and
potential harm in the form of possible claims against the bond.
Some of the subcontractors and materialmen who were covered by
the payment bond may also have suffered losses, although only a
few claims have surfaced and one of the largest has been recently
rejected by the Middle District of Pennsylvania.
Whatever losses Summit or others may have suffered from
appellant's fraud, Summit has not demonstrated any losses which
can fairly be measured by its cost to complete the project, and
it was therefore error for the district court to incorporate
Tandy's calculations into the U.S.S.G. § 2F1.1 determination of
the loss caused by the fraud. The sentences will be vacated, and
the matter remanded to the district court for resentencing.
