Opinion
6:12–CR–06081 EAW
12-28-2017
UNITED STATES of America, v. Angelo LOUISSAINT and Jennifer Johnson, Defendants.
John J. Field, U.S. Attorney's Office, Rochester, NY, for United States of America. Robert Blossner, The Pawar Law Group, PC, New York, NY, William T. Easton, Rochester, NY, Mark J. Mahoney, Harrington and Mahoney, Buffalo, NY, for Defendants.
John J. Field, U.S. Attorney's Office, Rochester, NY, for United States of America.
Robert Blossner, The Pawar Law Group, PC, New York, NY, William T. Easton, Rochester, NY, Mark J. Mahoney, Harrington and Mahoney, Buffalo, NY, for Defendants.
DECISION AND ORDER
BACKGROUND
ELIZABETH A. WOLFORD, United States District Judge
Defendants Angelo Louissaint and Jennifer Johnson (collectively, "Defendants") were convicted by guilty pleas of conspiracy to commit mail and wire fraud in violation of 18 U.S.C. § 1349. (Dkt. 139; Dkt. 140). Defendants admitted that they devised a scheme to defraud Flaherty Funding Corporation ("FFC") through materially false mortgage applications and fake supporting documents completed by straw buyers. (Dkt. 139 at ¶ 4; Dkt. 140 at ¶ 4). Defendants were sentenced and ordered to pay restitution consistent with their plea agreements and pursuant to the Mandatory Victims Restitution Act, 18 U.S.C. § 3663A (the "MVRA"), in the amount of $646,300. (Dkt. 169; Dkt. 171). However, because the parties did not agree on the amount of additional restitution, if any, owed for one of the transactions at issue in the fraudulent scheme, the Court reserved decision on that issue at sentencing pursuant to 18 U.S.C. § 3664(d)(5). (Dkt. 169; Dkt. 171). After additional briefing (Dkt. 174; Dkt. 179), the Court ordered an evidentiary hearing to go forward (Dkt. 180 at 7–8).
On December 18, 2017, the Government presented the testimony of one witness—Thomas Flaherty—who described himself as the 100 percent common stockholder of FFC. The Government also offered into evidence Exhibits 1 through 8, which were received without objection. Ms. Johnson did not appear at the hearing, having waived her and her attorney's appearance. (Dkt. 182). Mr. Louissaint appeared at the hearing with his counsel, and offered into evidence Exhibits A through I, which were received without objection.
Although the parties agreed that restitution was owed to FFC as a result of the fraudulent scheme, the evidentiary hearing related to whether Defendants owed restitution for the transaction involving straw buyer Joselyn Joseph ("Joseph"). The parties agreed that a loan was provided by FFC to Joseph in the approximate amount of $533,850, related to property at 16404 107th Avenue, Jamaica, New York 16404 (hereinafter the "Property" or the "Joseph Property"). According to the Presentence Investigation Report ("PSR"), on or about June 13, 2008, Mr. Louissaint, acting as Blackstone Corp., entered into a contract to purchase the Joseph Property for a cash payment of $250,000. (Dkt. 160 at 29). Then, sometime prior to September 12, 2008, at the direction of Mr. Louissaint, Joseph purchased the Property as a straw buyer from Mr. Louissaint at an inflated price of $594,000. (Id. at ¶¶ 30, 32). Through false and fraudulent loan documentation, including fraudulent documents reflecting a deposit by Joseph of $59,400 through a cashier's check drawn on a bank account controlled by Ms. Johnson (Dkt. 167 at ¶ 31), FFC funded a loan to Joseph in the amount of $533,850, secured by the Property. (Dkt. 160 at ¶¶ 31–39).
The PSR indicates that on December 31, 2009, FFC sold the Joseph Property to Dianne C. Flaherty LLC in a non-arms-length transaction reflecting a "necessary accounting maneuver to keep [FFC] in business." (Id. at ¶ 76). A few months later, the Joseph Property was sold for approximately $135,000. (Id. at ¶ 77). The PSR calculated the restitution owed by Defendants as a result of the Joseph Property transaction as $398,850, reflecting the $533,850 loan less the $135,000 sale proceeds. (See id. at ¶¶ 19–40, 112).
Mr. Louissaint filed objections to this restitution calculation, arguing that the Joseph Property was worth substantially more than the sale price of $135,000. (Dkt. 154 at 1–2). Mr. Louissaint requested that the Court "adjust the restitution figure by the value of the real property that Flaherty received as a result of the foreclosure of the mortgage of the [Joseph Property] or in the alternative hold a hearing on the issue." (Id. at 2). Ms. Johnson joined in Mr. Louissaint's objections to the restitution calculation. (Dkt. 163).
At the evidentiary hearing on December 18, 2017, Mr. Flaherty testified that Dianne C. Flaherty LLC was a company established by his mother to prevent FFC from going out of business due to the impact of the fraudulent scheme. As described by Mr. Flaherty, FFC is a mortgage banker regulated by New York State and the United States Department of Housing and Urban Development ("HUD"). As such, it was required to have audited financial statements prepared on an annual basis, and in 2008 and 2009 (when the fraudulent scheme took place), FFC was required by New York State to have at least $250,000 minimum net capital, and HUD required $100,000. If FFC's net capital fell below those amounts, it would have been required to cease operations.
Mr. Flaherty testified that FFC funded the Joseph Property transaction by drawing on its line of credit from First Star Bank, S.S.B. ("First Star"). Consistent with its business model, FFC planned to sell the mortgage to Wells Fargo within approximately 30 days of closing. However, Wells Fargo requested additional tax records pertaining to Joseph, which ultimately revealed irregularities in the documentation, causing Wells Fargo not to purchase the loan pertaining to the Joseph Property. The matter was turned over to federal law enforcement for investigation. As explained by Mr. Flaherty:
[T]here was no way that on our audited financial statements as a company on 12/31/09 we were going to be able to legitimately justify having a $533,000 asset. That was a non-performing note. It hadn't been paid in months. We had evidence that it was total fraud and now people are getting arrested.
The quote is based upon the Court's notes, as no transcript from the evidentiary hearing has been prepared. Similarly, the Court's recitation of the testimony throughout this Decision and Order is based on its notes. Therefore, if the transcript differs from the Court's notes, the transcript controls.
Mr. Flaherty explained that FFC had a debt to First Star of $533,850, and another debt pertaining to another transaction that was part of the fraudulent scheme (but not involving Mr. Louissaint or Ms. Johnson). As a result, if FFC continued to carry the loans from First Star on its books, it would have had a negative net worth on its 2009 audited financial statements and would have been required to immediately cease operations.
Mr. Flaherty explained that at the time the 2008 audited financial statements were prepared, the extent of the fraud was unknown, and the note was performing. As a result, the same concerns were not at issue when the 2008 audited financial statements were prepared.
Consulting with its attorneys, accountants, and First Star, FFC entered into a transaction to remove both the Joseph Property debt and asset from FFC's books by having his mother (through Dianne C. Flaherty LLC) purchase the Joseph Property and the Joseph loan from FFC. First Star arranged for an appraisal to be performed on the Property, which valued the Property at $135,000. (See Gov't Ex. 3). First Star conditioned its agreement to the transaction involving Mr. Flaherty's mother by requiring that she post additional collateral. Although the initial loan amount was for $533,850, Mr. Flaherty testified that by December 2009, the principal balance was lower because there were some initial payments made on the loan after it closed, and then FFC continued to pay down the debt. Therefore, the debt secured by Mr. Flaherty's mother with First Star was $525,000. (See Gov't Ex. 7b). As a result of the transaction, the non-performing note was acquired by Dianne C. Flaherty LLC, which also assumed the debt to First Star Bank.
Joseph, who had been arrested at this point, signed the Property over to FFC on December 19, 2009, through a deed in lieu of foreclosure. (See Gov't Ex. 6).
In early January 2010, Mr. Flaherty and his father inspected the Joseph Property and discovered that it was in poor condition, with no electrical wiring, no plumbing, and no drywall. Faced with the option of either selling the Property as is or investing additional capital to make it inhabitable, they elected to immediately sell the Property. Evidence was introduced at the hearing reflecting the various efforts by Mr. Flaherty to sell the Joseph Property (see Gov't Ex. 4 & 8), which was ultimately sold in July 2010 for $135,000. The taxes and fees associated with the transaction were $2,803. Thus, the net proceeds received as a result of the transaction were $132,197. (See Gov't Ex. 5).
The documentation reflects that additional fees may have been paid by Dianne C. Flaherty LLC, such as $2,515.90 in attorneys' fees (see Gov't Ex. 5), although no reference or claim was made about these amounts at the hearing. Rather, the Government cited $2,803 as the sum total of the expenses.
ANALYSIS & FINDINGS
The Government bears the burden of proof to establish FFC's loss by a preponderance of the evidence. See 18 U.S.C. § 3664(e) ("Any dispute as to the proper amount or type of restitution shall be resolved by the court by the preponderance of the evidence. The burden of demonstrating the amount of the loss sustained by a victim as a result of the offense shall be on the attorney for the Government."). Moreover, consistent with the holding in Robers v. United States, ––– U.S. ––––, 134 S.Ct. 1854, 1856, 188 L.Ed.2d 885 (2014), the "value" of the "property" taken and then returned to FFC is not the fair market value of the Joseph Property that served as collateral, but rather the cash that was paid by FFC and then the cash that it received once the Property was sold. Thus, as the Court concluded in its Decision and Order entered November 27, 2017 (Dkt. 180 at 6), for purposes of the Government's burden of proof, the fair market value of the Property is not relevant.
Here, the Government established by a preponderance of the evidence that FFC paid out $533,850, which is the value of its loss before any credit or offset. The evidence also established that Dianne C. Flaherty LLC paid compensation to FFC of $525,000 by assuming that amount of debt owed to First Star. Thus, the loss to FFC proven by the Government in connection with the Joseph Property is $8,850 (the difference between $533,850 and $525,000).
The consideration reflected on the property records paid by Dianne C. Flaherty LLC to FFC is $531,582. (See Gov't Ex. 7). However, it appears that a portion of that amount was used to pay various real estate transaction fees incurred in connection with the transaction—fees that would not be appropriate to offset against FFC's loss, since they would not have been incurred absent the need to transfer the Property to Dianne C. Flaherty LLC. In other words, those fees did not reimburse FFC for its loss. Rather, in the Court's view, the amount that was paid to FFC to cover its loss was the extent of the debt assumed by Dianne C. Flaherty LLC—in other words, the $525,000 note between Dianne C. Flaherty LLC and First Star.
Mr. Flaherty testified that some initial payments on the loan were made in the regular course by an unknown third party in 2008. Although not raised by either party, there is an argument that those payments should be offset against any loss to FFC. However, in view of the additional unrequested fees, expenses, and taxes paid by FFC as a result of the fraud involving the Joseph Property, the Court views an award of the total difference between the amount paid out by FFC ($533,850) and the amount received by FFC from Dianne C. Flaherty LLC ($525,000) as the appropriate measure of restitution under the circumstances. See United States v. Jafari , 104 F.Supp.3d 317, 323 (W.D.N.Y. 2015) (reasonable approximation of restitution can be appropriate in fraud case), aff'd, 663 Fed.Appx. 18 (2d Cir. 2016).
However, the inquiry does not end with that calculation. Pursuant to 18 U.S.C. § 3664(j)(1) :
If a victim has received compensation from insurance or any other source with respect to a loss, the court shall order that restitution be paid to the person who provided or is obligated to provide the compensation, but the restitution order shall provide that all restitution of victims required by the order be paid to the victims before any restitution is paid to such a provider of compensation.
Here, Dianne C. Flaherty LLC is a provider of compensation to the victim, FFC. Dianne C. Flaherty LLC paid $525,000 to FFC to cover its loss. Dianne C. Flaherty LLC then received a total of $132,197, when the Property was sold, and thus, that entity is entitled to recover as restitution $392,803, pursuant to 18 U.S.C. § 3664(j)(1). The fact that Dianne C. Flaherty LLC paid the moneys to FFC as a favor (as opposed to some contractual obligation) is irrelevant. The statutory language makes no distinction as to the reason that the third party pays the compensation to the victim, so long as the victim is paid for loss incurred as a result of a defendant's criminal conduct—which clearly was the case here. Cf. United States v. Frazier, 651 F.3d 899, 906 (8th Cir. 2011) (if Red Cross and Bureau of Indian Affairs paid victim of arson losses caused by the fire, then those entities would be entitled to restitution pursuant to 18 U.S.C. § 3664(j)(1) ).
As the Court also indicated in its Decision and Order entered November 27, 2017 (Dkt. 180 at 6–7), Defendants could challenge the loss incurred by FFC (or Dianne C. Flaherty LLC) by establishing that the sale price for the Joseph Property was less than fair market value, and thus devalued for reasons unrelated to Defendants' criminal conduct, such as a market fluctuation caused by an unreasonable delay in selling the Property, Robers, 134 S.Ct. at 1860 (Sotomayor, J., concurring), or a nominal sale price for reasons unrelated to the criminal conduct, United States v. Boccagna, 450 F.3d 107, 117 (2d Cir. 2006). However, Defendants did not meet that burden. Rather, based on the evidence presented at the evidentiary hearing, including Mr. Flaherty's credible testimony, the sale of the Joseph Property for $135,000 represented a fair and reasonable price for the Property. The appraisal in December 2009, acquired by First Star, indicated a fair market value for the Property of $135,000. (See Gov't Ex. 3). The condition of the Property plainly impacted its value, and Mr. Flaherty's testimony established the reasonable efforts that he undertook to sell the Property for a reasonable price. (See Gov't Ex. 4). Indeed, it was in all parties' interests for the Property to be sold at as high a price as possible. Thus, while Defendants presented evidence of other market values attributable to the Joseph Property (see Def. Ex. E, F, H, I), that evidence failed to establish that the Property was sold by Dianne C. Flaherty LLC for less than fair market value or that some factor other than Defendants' criminal conduct caused the loss to FFC and Dianne C. Flaherty LLC.
Mr. Flaherty testified, and the Court agrees, that it is reasonable to conclude that the fluctuating values attributable to the Property, such as varying assessed values, were undoubtedly influenced, at least in part, by the fraudulent conduct of Defendants, who orchestrated the straw purchase of the Property at an inflated value.
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CONCLUSION
Accordingly, for the reasons set forth above, the Court hereby orders that an amended judgment will be entered awarding restitution on a joint and several basis to be paid by Defendants as follows: (1) $655,150 to be paid to FFC (representing the prior agreed upon amount of $646,300 plus the additional $8,850 loss to FFC discussed above, as a result of the Joseph Property transaction); and (2) $392,803 to be paid to Dianne C. Flaherty LLC after restitution is paid to FFC, pursuant to 18 U.S.C. § 3664(j)(1).
SO ORDERED.