United States v. McDermot

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT

____________

No. 95-31305
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UNITED STATES OF AMERICA,

Plaintiff-Appellant,

versus

PETER MCDERMOT, II and GORDON L RUSH, JR,

Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Louisiana

December 19, 1996

Before BARKSDALE, EMILIO M. GARZA, and BENAVIDES, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Appellee Gordon L. Rush, Jr. was convicted of multiple counts

of mail fraud under 18 U.S.C. § 1341, wire fraud under 18 U.S.C.
§ 1343, and conspiracy to commit mail and wire fraud under 18

U.S.C. § 371. Appellee Peter McDermot II was convicted of two

counts of wire fraud under 18 U.S.C. § 1343 and one count of

conspiracy to commit mail and wire fraud under 18 U.S.C. § 371.

The United States appeals from the district court’s sentencing

determinations entered after remand, arguing that the court erred

in failing to increase Rush’s and McDermot’s offense levels under
United States Sentencing Guidelines § 2F1.1(b)(6) (Nov. 1991).

I

Rush was the president, chief executive officer, and principal

stockholder of Presidential Fire & Casualty Company

(“Presidential”) from its incorporation in 1985 until its

liquidation by the Louisiana Department of Insurance in 1991.

McDermot became a director of Presidential in 1991.

Rush and McDermot were convicted for their roles in a scheme

to infuse fraudulent securities into Presidential to disguise its

insolvency and allow it to continue selling insurance policies. In

particular, Rush was convicted of orchestrating various fraudulent

transfers of municipal bonds, Federal National Mortgage Association

certificates (“FNMAs”) and Government National Mortgage Association

certificates (“GNMAs”), and of making false representations on

Presidential’s financial statements and to various state boards of

insurance. McDermot participated in the scheme by entering into a

Surplus Contribution Agreement falsely purporting to sell more than

$9 million in FNMAs and municipal bonds to Presidential.

After the trial but prior to sentencing, Judge George

Arceneaux, Jr., who had presided over the trial and pre-trial

proceedings, died, and the case was transferred to Judge Lansing L.

Mitchell. After conducting a hearing and reviewing extensive

memoranda filed by the parties, Judge Mitchell sentenced Rush to a

forty-six-month term of imprisonment and imposed a $25,000 fine, a

$950 special assessment, and a three-year term of supervised

release. The court sentenced McDermot to a forty-one-month term of

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imprisonment and imposed a $7,500 fine, a $150 special assessment,

and a three-year term of supervised release.

Both Rush and McDermot appealed their convictions on various

grounds, and the government cross-appealed, contending that the

district court applied the sentencing guidelines incorrectly. In

particular, the government argued that the district court erred in

failing to apply, as to each defendant, a four-point enhancement

for jeopardizing the safety and soundness of a financial

institution under U.S.S.G. § 2F1.1(b)(6). We affirmed Rush’s

conviction, dismissed McDermot’s appeal for want of prosecution,

and vacated and remanded Rush’s and McDermot’s sentences for

further proceedings. United States v. McDermot, No. 93-3603 (5th

Cir, June 5, 1995) (unpublished). On remand, the district court

again declined to apply the § 2F1.1(b)(6) enhancement. The

government appeals again.

II

We review de novo the district court’s application of the

Sentencing Guidelines, and we will affirm the court’s factual

findings unless they are clearly erroneous. United States v.

Clements, 73 F.3d 1330, 1338 (5th Cir. 1996).

Section 2F1.1(b)(6) of the Guidelines provides: “If the

offense substantially jeopardizes the safety and soundness of a

financial institution . . . increase by 4 levels. If the resulting

offense level is less than level 24, increase to level 24.”

U.S.S.G. § 2F1.1(b)(6)(A). Application Note 14 to § 2F1.1 defines

“financial institution” to include an insurance company. The

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commentary further states that:

An offense shall be deemed to have
“substantially jeopardized the safety and
soundness of a financial institution” if, as a
consequence of the offense, the institution
became insolvent; substantially reduced
benefits to pensioners or insureds; was unable
on demand to refund fully any deposit,
payment, or investment; was so depleted of its
assets as to be forced to merge with another
institution in order to continue active
operations; or was placed in substantial
jeopardy of any of the above.

U.S.S.G. § 2F1.1(b)(6), comment. (n.15). Guideline commentary is

“controlling when it functions to interpret a guideline or explain

how it is to be applied.” United States v. Radziercz, 7 F.3d 1193,

1195 (5th Cir. 1993), cert. denied, ___ U.S. ___, 114 S. Ct. 1575,

128 L. Ed. 2d 218 (1994).

In its original sentencing determination, the district court

explicitly rejected the government’s assertion that Presidential

was insolvent from its inception as a result of fraud because Rush

founded the company using encumbered assets to satisfy certain

statutory reserve requirements. Instead, it found that

Presidential became insolvent prior to the fraud due to the failure

of its reinsurer in 1986, and therefore rejected an enhancement for

either Rush or McDermot under § 2F1.1(b)(6).

Application Note 15, however, lists four types of dangers to

the safety of a financial institution, only one of which is

insolvency. U.S.S.G. § 2F1.1(b)(6), comment. (n.15). United

States v. Krenning, 93 F.3d 1257, 1270 (5th Cir. 1996); cf. United

States v. Bullard, 13 F.3d 154, 158 n.10 (5th Cir. 1994) (noting

that Application Note 10 to § 2B1.1(b)(7)(A), which is worded

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identically to § 2F1.1(b)(6), “does not limit the meaning of the

terms ‘substantially jeopardized the safety and soundness of a

financial institution’ to the situation where the institution

becomes insolvent as a consequence of the defendant’s conduct”).

Because we were unable to discern from the sentencing hearing

transcript whether the district court considered and rejected the

other three bases for enhancement, we vacated the sentence and

remanded for consideration whether the fraud “substantially reduced

benefits to . . . insureds” or whether Presidential was “unable on

demand to refund fully any deposit, payment, or investment” as a

result of the fraud, notwithstanding its prior insolvency.1

On remand, the district court reaffirmed its previous finding

that the total loss attributable to the failure of the reinsurer

was approximately $8 million and that “a fair assessment of the

additional losses that could be attributed to the fraud” fell

somewhere between $5 million and $10 million. In addition, the

court specifically found that “[t]he $5 - $10 million total loss

found by the Court to be attributable to the fraud, was, of course,

in the form of unrefunded premiums and unpaid claims.”

Notwithstanding these clear findings of fact, however, the

district court again declined to increase Rush’s and McDermot’s

offense levels. The court held that “[w]hile a strictly literal

reading of the factors in Application Note 15 might seem to compel

the application of the enhancement,” the guideline compels the

1
The fourth basis for enhancement, where an institution is “so
depleted of its assets as to be forced to merge with another institution,” does
not pertain to Presidential’s situation.

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enhancement only “if the offense itself substantially jeopardized

the safety and soundness of a financial institution.” The court

concluded that once an institution becomes insolvent, it has no

“safety” or “soundness” which may be substantially jeopardized.

Presidential was already insolvent due to the failure of the

reinsurer prior to the fraud, and well prior to McDermot’s

involvement in the conspiracy; therefore, the court concluded that

Presidential’s inability in the end to refund unearned premiums or

pay claims did not trigger the enhancement.

We cannot agree. In the previous appeal, we considered the

question of whether prior insolvency negates the possibility of a

four-point enhancement and found that it does not. McDermot, No.

93-3603 at 24. Application Note 15 does not define safety and

soundness solely in terms of the institution’s solvency. A

defendant who perpetrates fraud with respect to an already

insolvent institution may still “substantially reduce benefits to

. . . insureds” or cause the institution to be unable “on demand to

refund fully any deposit, payment, or investment” over and above

the consequences of the initial insolvency. Indeed, the district

court so held in the original sentencing hearing, stating that

“[w]ithout those [fraudulent securities] going on the books, I

believe Presidential would have been shut down, and the loss would

have been limited to something less than it wound up being.”

Although the language “as a consequence of the offense” mandates a

causal connection between the fraud and the loss, we do not read

this language to require that all losses associated with a given

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institution be directly attributable to fraud. We therefore find

that the court’s legal conclusion that the enhancement does not

apply is irreconcilable with its factual conclusion that $5 to $10

million in losses were caused by the fraud, independent of the

initial failure of the reinsurer.

The language of § 2F1.1(b)(6) is mandatory, directing the

court to “increase by 4 levels” if the factual predicates of the

enhancement are met. See United States v. Tello, 9 F.3d 1119,

1129-30 (5th Cir. 1993) (holding that imperative clause in U.S.S.G.

§ 3E1.1 directing sentencing court to "decrease the offense level

by 1 additional level" if certain factual predicates are determined

eschews any court discretion to act otherwise); United States v.

Velgar-Vivero, 8 F.3d 236, 242 (5th Cir. 1993) (holding that

enhancement for obstruction of justice which uses similar mandatory

language must be applied where factual predicates are satisfied),

cert. denied, ___ U.S. ___, 114 S. Ct. 1865, 128 L. Ed. 2d 486

(1994), and cert. denied, ___ U.S. ___, 114 S. Ct. 2715, 129 L. Ed.

2d 840 (1994). Section 2F1.1(b)(6) and Application Note 15

instruct the court to increase the offense level where the

defendant’s actions substantially reduced benefits to insureds,

rendered the institution unable to refund deposits or payments, or

simply placed the institution in substantial jeopardy of the same.

The district court erred in refusing to apply the mandatory

enhancement to Rush and McDermot’s sentences once it explicitly

determined that $5 to $10 million in unpaid claims and unrefunded

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premiums were directly attributable to the fraud.2

III

Rush asserts in the alternative that the district court

explicitly effected a downward departure from the Guidelines when

it refused to apply the four-point enhancement to his sentence. At

the outset, we note that a refusal to apply an upward adjustment in

a particular case does not constitute a downward departure from the

guidelines. United States v. Madison, 990 F.2d 178, 183 (5th Cir.

1993) (noting that “adjustments” vary total applicable offense

level and are generally mandatory, whereas “departures” disregard

guideline sentences altogether in extraordinary circumstances and

are inherently discretionary).

A sentencing court may depart from the applicable Guideline

range after all appropriate adjustments have been made only if “the

court finds that there exists an aggravating or mitigating

circumstance of a kind, or to a degree, not adequately taken into

consideration by the Sentencing Commission in formulating the

guidelines that should result in a sentence different from that

described.” 18 U.S.C. § 3553(b); see U.S.S.G. § 5K2.0, p.s.

(noting district court’s authority to depart from Guidelines under

2
Rush argues that the government failed to satisfy its burden of proof
with respect to the enhancement. In particular, Rush asserts that the district
court explicitly credited the expert who testified on his behalf and questioned
the reliability and competence of Presidential’s liquidators who testified on
behalf of the government. The district court, however, took these credibility
assessments into account when it determined that the total amount of loss
attributable to the fraud fell between $5 and $10 million, rather than the $12
million urged by the government. Rush’s argument, therefore, is a thinly-veiled
attack on the district court’s estimation of the loss. Rush challenged this
determination in the initial appeal, and we upheld the court’s calculation of
loss as reasonable. Rush may not again challenge this finding in opposition to
the government’s appeal of his sentence after remand.

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§ 3553(b)). The Guidelines carve out a “‘heartland’ set of typical

cases” and provide that when the sentencing court finds “an

atypical case, one to which a particular guideline linguistically

applies but where conduct significantly differs from the norm, the

court may consider whether departure is warranted.” U.S.S.G. ch.

1, pt. A, intro. comment. 4(b). When the court departs from the

guideline range, the court must offer specific reasons explaining

why the departure is justified in terms of the policies underlying

the sentencing guidelines. United States v. Mejia-Orosco, 867 F.2d

216, 221 (5th Cir.), cert. denied, 492 U.S. 924, 109 S. Ct. 3257,

106 L. Ed. 2d 602 (1989).

In rejecting the four-point enhancement on remand, the

district court concluded that Ҥ 2F1.1(b)(6)(A) should not be

applied to enhance the sentence of a defendant in Rush’s position

where the defendant is charged with causing the failure of an

institution that he set up and operated on his own behalf.” In the

alternative, the court held that “even if it could be applied in

such a case, it should not be applied to enhance the sentence of

either Rush or McDermott [sic] in this particular case because of

the reasons stated above and at the original sentencing.” The

district court never explicitly indicated that it intended to

depart from the Guidelines, but rather maintained that

§ 2F1.1(b)(6) simply does not apply in this case. Accordingly, we

find Rush’s departure argument to be without merit.3

3
Moreover, we note that the neither Rush nor McDermot specifically
requested a downward departure at sentencing.

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 We note, however, that the court found that Rush’s ownership

of Presidential presented an atypical circumstance inadequately

considered by the Guidelines Commission in promulgating

§ 2F1.1(b)(6).4 Thus, the district court could have intended to

effectuate a departure on this basis.5 Assuming that the court

meant to depart from the Guidelines, however, the result would be

the same.

We review a district court’s decision to depart for abuse of

discretion. Koon v. United States, ___ U.S. ___, ___, 116 S. Ct.

2035, 2043, 135 L. Ed. 2d 392 (1996). The district court opined

that the Sentencing Commission did not intend for § 2F1.1(b)(6) to

apply to a defendant who jeopardized the safety and soundness of an

institution he himself established and of which he is the principal

stockholder, as opposed to an outsider or mere employee of that

institution. We discern no conceivable basis for this conclusion.

Application Note 15 defines the relevant harm in terms of

“substantially reduced benefits to . . . insureds” and inability to

“refund fully any deposit, payment, or investment.” The focus is

not only on the institution qua institution, but also upon, among

others, the harm that befalls policyholders who fail to receive the

benefits for which they contracted. Cf. Krenning, 93 F.3d at 1270

4
The district court did not make a similar finding with respect to
McDermot.
5
According to the Supreme Court’s interpretation of Rule 32 of the
Federal Rules of Criminal Procedure, the district court was required to provide
notice to the government before sua sponte departing downward from the applicable
guideline range. See Burns v. United States, 501 U.S. 129, 131 & 135 n.4, 111
S. Ct. 2182, 2183 & 2185-86 n.4, 115 L. Ed. 2d 123 (1991). The government did
not object to lack of notice, however, and it does not raise the issue on appeal.

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(interpreting § 2F1.1(b)(2) and holding that loss to individual

insureds who buy insurance backed by insolvent institution, not

loss to institution itself, is proper measure of harm).

Policyholders and taxpayers who fund the associations that

guarantee the policies are no less victimized when the failed

insurance company is owned by the fraudfeasor than when an outsider

perpetrates the fraud. Rush’s ownership of Presidential does not

take his case out of the heartland of typical cases under

§ 2F1.1(b)(6); therefore, a downward departure on this basis would

have been improper.6

IV

For the foregoing reasons, we VACATE Rush’s and McDermot’s

sentences and REMAND for application of the four-point enhancement

under § 2F1.1(b)(6) and for resentencing in accordance with this

opinion.

6
The district court notes that both the probation officer and the
government contacted the Sentencing Commission directly concerning the
§ 2F1.1(b)(6) enhancement. The Commission initially stated that the enhancement
applied only to a defendant who jeopardized an independent institution, but later
retreated from this opinion, leaving its application to the discretion of the
judge. The district court cited the Commission’s own difficulty in applying the
enhancement as support for the proposition that the Commission did not adequately
consider the defendant’s ownership of the jeopardized institution in promulgating
the guideline. However, when determining whether a circumstance was adequately
considered by the Commission, the court may “consider only the sentencing
guidelines, policy statements, and official commentary of the Sentencing
Commission,” 18 U.S.C. § 3553(b); Koon, ___ U.S. at ___, 116 S. Ct. at 2044, not
unofficial, post-hoc contacts with the Commission. We therefore find that the
Commission’s statements to the district court do not support the asserted basis
for departure.

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