United States v. Kelley

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 95-1658

UNITED STATES,

Appellee,

v.

EDWARD C. KELLEY,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ronald R. Lagueux, U.S. District Judge]

Before

Torruella, Chief Judge,

Cyr, Circuit Judge,

and Skinner,* Senior District Judge.

Edward C. Roy, by Appointment of the Court, with whom Roy &

Cook, was on brief for appellant.

Margaret E. Curran, Assistant United States Attorney, with

whom Sheldon Whitehouse, United States Attorney, and Charles A.

Tamuleviz, were on brief for appellee.

February 20, 1996

* Of the District of Massachusetts, sitting by designation.

SKINNER, Senior District Judge. Defendant-appellant
SKINNER, Senior District Judge.

Edward Kelley was charged in a six count indictment of mail fraud

in violation of 18 U.S.C. 1341 and making false statements to a

federal agency in violation of 18 U.S.C. 1001. Pursuant to a

guilty plea on the three mail fraud counts, Kelley was sentenced

to 21 months incarceration, followed by three years supervised

release. On appeal of his sentence, Kelley argues (1) that the

district court erred in determining the amount of the loss for

sentencing purposes, and (2) that the district court abused his

discretion in denying a two point offense level reduction for

acceptance of responsibility. We affirm.

I. BACKGROUND
I. BACKGROUND

A.Facts
A.Facts

This prosecution arose out of Edward Kelley's efforts

to enlist the assistance of the Small Business Administration

("S.B.A.") in refinancing his commercial lobster boat, the "Alter

Ego II." Kelley purchased the boat in June 1992 for $5,000 in

cash and a $22,000 promissory note, and quickly sold a 45%

interest to his brother Robert Fletcher for $20,000. The vessel

sustained substantial damage during a severe storm in December

1992.

Kelley applied for disaster relief from the S.B.A., in

the course of which he submitted a Personal Finance Statement

stating that the vessel purchase price was $60,000, rather than

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$27,000, and that he had paid cash in full without incurring any

debt. Both of these averments were false.

Based on this application, the S.B.A. agreed to loan

Kelley $55,100, secured by a mortgage on the vessel and a third

mortgage on Kelley's house. After an initial disbursement of

$10,000 in April 1993, Kelley submitted a Progress Certification

Report indicating that he had purchased lobster traps from Robert

Fletcher's R.A.F. Lobster Company for $32,000. This statement

was also false. After the S.B.A. disbursed the balance of the

loan, Kelley used approximately $15,000 of the S.B.A. funds for

personal expenses. After a total of $864 in repayments over

three months, the loan went into default. Kelley was

subsequently indicted on the basis of the false statements

contained in his Personal Finance Statement and his Progress

Certification Report, and pled guilty to three counts of mail

fraud.

B.The Sentencing Proceeding
B.The Sentencing Proceeding

At the sentencing proceeding, the government argued

that Kelley's total offense level should be fifteen, representing

eleven points for fraud involving more than $40,000 under

U.S.S.G. 2F1.1(b)(1)(F), increased by two points for "more than

minimal planning" under U.S.S.G. 2F1.1(b)(2)(A), and augmented

by an additional two points for obstruction of justice under

U.S.S.G. 3C1.1. In support of the obstruction points, the

government cited two attestations Kelley made in completing his

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presentence report submission to the probation office, namely (1)

that he had nothing to do with the theft of navigational

equipment from the Alter Ego, and (2) that he used all disbursed

funds to try to keep the Alter Ego afloat.

At the sentencing proceeding, Kelley contested the

government's calculated offense level, contending that the

government overvalued the loss in light of the S.B.A.'s failure

to pursue civil remedies. Kelley also argued that his submission

to the probation department did not obstruct justice.

After hearing testimony from eight witnesses, the

sentencing court rejected the S.B.A.'s valuation of its loss at

$54,236. Specifically, the sentencing court rejected the

testimony of an S.B.A. witness who appraised the value of the

vessel at $5,000. The court implicitly adopted the testimony of

Kelley's expert marine surveyor, Steven Mainella, who testified

that the vessel was worth between $18,000 and $25,000. The

defendant did not, however, attempt to rebut the testimony of an

S.B.A. loan officer as to the potential recovery from Kelley's

house. Consequently, the only evidence before the sentencing

court on the value of the house was that a foreclosure proceeding

would fetch an estimated $104,000, which after satisfying $95,000

in superior mortgages and auction expenses would produce a

negligible recovery.

The court concluded that the S.B.A.'s loss was between

$20,000 and $40,000, resulting in an offense level of ten.

Finding that the S.B.A. had failed to pursue pledged collateral,

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the sentencing court denied restitution. The court added two

points for more than minimal planning, and two more for

obstruction of justice; it concluded that his criminal history

category was one. Accordingly, Kelley was sentenced to 21 months

imprisonment, followed by three years supervised release, which

was within the guideline range.

II. ANALYSIS
II. ANALYSIS

A.Calculation of the S.B.A.'s Loss
A.Calculation of the S.B.A.'s Loss

Kelley argues that the district court's conclusion that

the S.B.A.'s loss ranged between $20,000 and $40,000 was clearly

erroneous in light of evidence adduced at trial. Under the

Sentencing Guidelines, crimes involving fraud are uniformly

assessed a base offense level of six. See U.S.S.G. 2F1.1(a).

This base offense level is increased in proportion to the

magnitude of the loss if the victim's loss exceeded $2,000. See

U.S.S.G. 2F1.1(b)(1). The commentary to the Guidelines

provides a set of formulae to apply in determining the amount of

the loss in particular circumstances. For example, the

commentary instructs that to calculate the loss in a fraudulent

loan application, the sentencing court starts by taking "the

amount of the loan not repaid at the time the offense is

discovered, reduced by the amount the lending institution has

recovered (or can expect to recover) from any assets pledged to

secure the loan." See U.S.S.G 2F1.1, comment. (n.7(b)). This

formula is binding in cases involving the procurement of

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fraudulent loans and is clearly applicable to Kelley's

misconduct. See United States v. Bennett, 37 F.3d 687, 695 (1st

Cir. 1994); see also Stinson v. United States, 113 S. Ct. 1913,

1915 (1993) ("[C]ommentary in the Guidelines Manual that

interprets or explains a guideline is authoritative unless it

violates the Constitution or a federal statute, or is

inconsistent with, or a plainly erroneous reading of, that

guideline.").

Kelley challenges the court's findings as to the value

of the mortgage and the vessel. A sentencing court's valuation

of loss is subject to the "clearly erroneous" standard of review.

See, e.g., United States v. Brandon, 17 F.3d 409, 457 (1st Cir.),

cert. denied, 115 S. Ct. 80 (1994). Although the Guidelines

suggest that a rather specific formula should be applied in this

case, the Sentencing Commission has recognized that it may be

difficult to calculate a specific loss with any degree of

precision. Precise loss may be hard to determine where the value

of collateral is in dispute, either because the victim has not

exercised rights against the collateral, or it is alleged that

such efforts did not bring a fair market price. Cf. United States

v. Chorney, 63 F.3d 78, 82 (1st Cir. 1995) (rejecting defendant's

argument that he had been denied sufficient opportunity to

establish fair market value of unpledged assets). In light of

potential difficulties in calculating the loss, the sentencing

court "need only make a reasonable estimate of the loss, given

the available information." See U.S.S.G. 2F1.1, comment (n.8).

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With respect to the Alter Ego, the district judge

rejected the government witness' testimony that the vessel had a

value of $5,000, implicitly adopting Steven Mainella's appraisal

of $18,000 to $25,000. Neither party contests use of this figure

on appeal.

With respect to the house, the parties agree that the

property was appraised at $130,000 and subject to two superior

mortgages totalling $95,000. At the sentencing hearing, the

S.B.A. loan officer testified that it was standard practice in

the banking industry to value property to be liquidated at

auction at 80% of appraisal value, or $104,000 for Kelley's

house. The S.B.A. loan officer further testified that this

liquidation value would be further offset by the $95,000 in prior

mortgages, and by the estimated $5,000 to $8,000 in auction

expenses. Foreclosure on Kelley's house would thus yield a net

return of $1,000 to $4,000. Kelley did not offer testimony at

the sentencing hearing to dispute this accounting, nor does he

attempt to factually undermine its premises on appeal.

Kelley does make the suggestion that the S.B.A.'s

accounting method is wrong as a matter of law. Specifically,

Kelley argues that the sentencing court must accept the value of

the collateral to the defendant, rather than the victim lending

institution, and that he should be credited for the full $35,000

in equity he could have obtained if he sold the house on the open

market. But the commentary to the Guidelines specifies that

valuation of collateral is the amount the "lending institution"

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could expect to receive from pursuing a security interest. See

U.S.S.G. 2F1.1, comment. (n.7(b)). The express reference in

the Guidelines to the mortgagee rather than the mortgagor

precludes Kelley's argument. The value of the loss is to be

offset by the amount the lender could expect to recover from

pursuit of pledged collateral. Consequently, the $1,000 to

$4,000 expected recovery is the proper measure of the value of

the house.

To summarize, the evidence before the sentencing court

demonstrated that if the S.B.A. had pursued civil remedies

against the house and the boat, it could have recouped between

$19,000 and $29,000. Deducting this amount from the $54,236

outstanding loan balance, the S.B.A.'s loss was somewhere between

$24,000 and $35,000. This range is well within the range of loss

found by the court.

Kelley makes a final argument that it was inconsistent

for the sentencing court to deny restitution, while valuing the

S.B.A.'s loss as greater than $20,000. Although Kelley properly

points out that the authority of a sentencing court "to decline

to order restitution is limited," the commentary to the

Sentencing Guidelines suggests there are several factors a court

may consider in declining to order restitution. See U.S.S.G.

5E1.1, comment. (backg'd). Prominent among these factors are the

lack of victim's need, uncertainty in calculating the amount of

restitution, and fairness to the victim. See also 18 U.S.C.

3664(a). The judge went on at some length in explaining his

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reasons for denying restitution, specifically finding that

because the S.B.A. failed to avail itself of civil remedies, it

was both difficult to ascertain the proper amount of restitution

and fair to deny all restitution.1 Kelley erroneously argues

that an absolute denial of restitution necessarily implies the

conclusion that the S.B.A. had no loss. There is no logical

reason to make such a leap.

B.Obstruction of Justice
B.Obstruction of Justice

Kelley also challenges his two point enhancement for

obstruction of justice. Under the Sentencing Guidelines, the

provision of a materially false statement to a probation officer

during the preparation of a presentence report constitutes

obstruction of justice. See U.S.S.G. 3C1.1, comment (n.3(h)).

The sentencing court found that the following two passages of the

signed statement which the defendant filed with the probation

department were materially false:

In addition, I hoped to upgrade the boat
with the proceeds of the loan. Some time
after the gear was lost at sea, all of
the electronic equipment on the boat was
stolen by my son. As a result of this
theft, which I had absolutely nothing to
do with, the boat was inoperable. The
boat could not generate any income.

At the time of the application, I was in
a very difficult financial situation and
I was desperate to get the boat back
working. I used all of the funds that I

1 The government has not filed a cross-appeal to challenge these
findings.

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received to pay for boat related
expenses.

A sentencing court's finding of material falseness will be

overturned only where clearly erroneous. See, e.g., United States

v. Tracy, 36 F.3d 199, 202 (1st Cir.), cert. denied, 115 S. Ct.

609 (1994).

Although Kelley argues that the sentencing court erred

in failing to evaluate all testimony used to support a finding of

falseness "in a light most favorable to the defendant," this

interpretative principle only applies to the construction of

allegedly perjurious language, not to the determination of

credibility of fact witnesses. See U.S.S.G. 3C1.1, comment.

(n.1). Furthermore, lenitive interpretations only apply "to the

extent that an innocent reading may be plausible." See Tracy, 36

F.3d at 204.

Although Kelley argues that neither of his statements

was false, there was ample evidence before the sentencing court

to support its findings. Kelley's claim that he had nothing to

do with theft of electronic equipment from the Alter Ego was

discredited by the testimony of his son. Mark Kelley testified

that his father asked him to temporarily remove equipment from

the Ego in order to support a fraudulent insurance claim.

Similarly, Kelley's claim that S.B.A. funds were uniformly

dedicated to boat expenses was contradicted by bank records and

cancelled checks indicating almost $15,600 of the S.B.A. loan was

used for mortgage payments, parochial school tuition, and

miscellaneous household expenses. In view of this evidence, the

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defendant's statements were not susceptible to an innocent

interpretation. The sentencing court was warranted in finding

that both statements were false.

Kelley also suggests that neither of these statements

was material. The materiality requirement for an allegedly false

statement "is not a stringent one." United States v. Ovalle-

M rquez, 36 F.3d 212, 226 (1st Cir. 1994), cert. denied, 115 S.

Ct. 1322 (1995). Under the Sentencing Guidelines, a statement is

material which, "if believed, would tend to influence or affect

the issue under determination." See U.S.S.G. 3C1.1, comment.

(n.5). Materiality does not require a factual nexus with the

underlying criminal conduct. Rather, for the purposes of a

sentencing determination, materiality involves some attestation

that could influence the court's sentencing discretion, including

(but not limited to) determination of a period of incarceration,

conditions of supervised release, or whether restitution is

awarded. For example, this court has held that lying about

citizenship in a submission to the probation department was

material because of a particular district judge's policy to

suspend supervised release in order to facilitate the deportation

of illegal aliens. See United States v. Biyaga, 9 F.3d 204, 205

(1st Cir. 1993). A false statement may be material even "if the

falsehood is designed to mitigate significantly the wrongful

conduct and so affect the court's exercise of discretion in

choosing a sentence within the range." See United States v.

Agoro, 995 F.2d 1288, 1292 (1st Cir. 1993).

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The making of false statements in the probation

submission is similar enough to the underlying charged conduct

(making false statements to a governmental entity) to establish a

close nexus. Furthermore, both of the statements (if believed)

could have impacted the decisions of the sentencing court.

Kelley's denial of knowledge about the theft and its insurance

implications could have swayed the determination that Kelley had

exhibited "more than minimal planning" under U.S.S.G.

2F1.1(b)(2) or that Kelley had a role as an "organizer" under

U.S.S.G. 3B1.1. Similarly, Kelley's statements about the

expenditure of the proceeds of the S.B.A. loan could have

affected the sentencing court's decision on restitution or

minimal planning. Moreover, the suggestion that the default was

the result of Kelley's "desperation" constituted an attempt to

evoke sympathetic mitigation from the sentencing court. See

Agoro, 996 F.2d at 1292. As each of these potential impacts

would independently satisfy the materiality requirement, the

findings of the sentencing court were free of error.

III. CONCLUSION
III. CONCLUSION

For the foregoing reasons, the sentence is affirmed.

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