State v. Johnson

DA 10-0398 June 1 2011

IN THE SUPREME COURT OF THE STATE OF MONTANA
2011 MT 116

STATE OF MONTANA,

Plaintiff and Appellee,

v.

DAVID C. JOHNSON,

Defendant and Appellant.

APPEAL FROM: District Court of the Fourth Judicial District,
In and For the County of Missoula, Cause No. DC 08-545
Honorable Douglas G. Harkin, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Joslyn Hunt, Chief Appellate Defender; Matthew M. Wilcox,
Assistant Appellate Defender; Helena, Montana

For Appellee:

Steve Bullock, Montana Attorney General; Mark W. Mattioli,
Assistant Attorney General; Helena, Montana

Fred R. Van Valkenburg, Missoula, County Attorney; Missoula,
Montana

Roberta Cross Guns, Special Deputy Missoula County Attorney,
State Auditor’s Office; Helena, Montana

Submitted on Briefs: March 8, 2011

Decided: June 1, 2011

Filed:

__________________________________________
Clerk
Justice Beth Baker delivered the Opinion of the Court.

¶1 David C. Johnson (Johnson) appeals the District Court’s restitution order based on

the State’s failure to submit sworn victim affidavits as required by § 46-18-242(1)(b),

MCA.

PROCEDURAL AND FACTUAL BACKGROUND

¶2 Johnson was licensed by the Montana Insurance Department as a life and

disability insurance producer. The State Auditor’s Insurance Department investigated

Johnson following claims that he was transferring his clients’ annuities without fully

disclosing the penalties and financial consequences of the transfers. Johnson admitted to

taking loans from his clients that he did not return, transferring annuities without full

disclosure of penalties and financial consequences, and earning a commission for every

transaction.

¶3 On July 21, 2009, Johnson entered a plea agreement in which he agreed to plead

guilty to two counts of felony theft in violation of § 45-6-301(8), MCA, and to pay

restitution for the loss incurred as a result of his fraudulent acts. Johnson agreed to make

full restitution with respect to loans he took from the victims, and does not challenge that

portion of the restitution order on appeal. With respect to the annuity transfers, the

amount of restitution was not set forth in the plea agreement. Rather, the plea agreement

provided: “[t]he parties will continue to negotiate the amount due on such restitution

between the time of entry of plea and sentencing but agree that if they are unable to reach

agreement, the court shall conduct a restitution hearing to determine the amount of

restitution due.” On September 15, 2009, a pre-sentence investigation report (PSI) was

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completed. The PSI did not contain a precise restitution figure and stated, “[a]ccording to

the plea agreement restitution has yet to be determined.”

¶4 Following the parties’ failure to reach agreement on the amount of restitution, and

in accordance with the plea agreement, the District Court set an evidentiary hearing to

determine restitution. The court directed the parties to file proposed findings of fact and

conclusions of law in advance of the hearing, along with detailed trial briefs supporting

their legal arguments. Johnson’s prehearing brief noted the disagreement between the

parties as to whether any of the victims “suffered a loss as a result of an annuity transfer.”

He acknowledged he did not anticipate the State would produce victim affidavits and

stated he “does object to the award of restitution absent an affidavit or evidence in this

matter in [sic] regarding the annuities.” (Emphasis added.) Johnson agreed the law

allowed restitution for anyone suffering a pecuniary loss as a result of the offense, but

questioned whether “any insurable losses” had occurred in this matter.

¶5 On January 28, 2010, the court held a hearing on restitution. The State did not

present sworn affidavits or testimony from any of the elderly victims at the hearing. The

State provided excerpts from the victims’ financial portfolios as well as expert testimony

from Lynne Egan (Egan), Deputy Commissioner of Securities for the State Auditor’s

Office. Egan explained the Securities Division’s net economic damages calculation in

cases involving fraudulent annuity transfers, or what she termed “flipping annuities.” As

she described, annuities are long-term investments and therefore include extended

surrender periods. A surrender period is a period of time during which the investor will

incur significant penalties if his or her money is withdrawn. After the surrender period

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expires, the investor may choose to annuitize by setting up a payment schedule. The

investor then also has the freedom to remove some or all of his or her investment without

incurring a surrender penalty.

¶6 Egan testified that different annuities have different surrender periods. As a result,

the surrender penalties an investor may incur also will vary. Surrender penalties are

substantial and usually serve to prohibit investors from withdrawing more money than

permitted without incurring a fee. When money is removed from one annuity and put

into another, as Johnson did here, the surrender period starts over under the terms of the

new annuity. Johnson moved his clients’ investments from one annuity to another and, in

some cases, into a third annuity all within the surrender period, and substantial penalties

were immediately applied to their investments.

¶7 The State contended that the victims’ losses were the amounts incurred through

surrender penalties. Egan determined the amount of restitution by calculating the

difference between the estimated value of the investment, had it been kept in the original

annuity without penalty, and the value of the new annuity as of June 30, 2009, the date

originally set for Johnson’s change of plea hearing.

¶8 Johnson introduced expert testimony from Keith Jakob (Jakob), Associate

Professor of Finance at the University of Montana. Jakob opined that the loss incurred, if

any, could be determined by comparing the value and theoretical return of the annuities at

the time of Johnson’s unauthorized transfer to the current value and anticipated return on

the new annuities. Johnson’s theory was that any loss incurred from surrender penalties

should be offset by any overall gain in the value of the new annuity. Johnson supported

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his theory with Jakob’s opinion that Johnson’s transfer of annuities ended up, given

economic circumstances, providing an advantage to the investors who otherwise would

have been transferring into new investments at a time when interest rates had decreased

significantly. Despite pleading guilty to insurance investment fraud and the plea

agreement to pay restitution to the elderly victims, Johnson theorized he did not owe

restitution as a result of annuity transfers because the victims’ annuities would experience

an overall increase in value.

¶9 At the close of the hearing, the District Court postponed sentencing and ordered

subsequent briefing on the principles of calculating restitution in analogous civil cases.

The State argued that “the direct and measurable damage was the incursion of surrender

penalties for the premature surrender of the original annuity contracts.” The State’s

theory was one of conversion, which presumes the measure of damages to be the value of

the property at the time of conversion. Johnson, however, argued that the surrender

penalties needed to be offset by the bonuses or better rates of return on the new annuities.

He disputed the State’s claim that he had “churned” the annuities, arguing he had placed

his customers in good investments with better rates of return. Johnson acknowledged,

however, that despite the parties’ disagreement, they had agreed to resolve the charges by

plea agreement and to submit the matter of restitution on the annuities to the court. In

reply to the State’s brief on the measure of restitution, Johnson emphasized his position

that no one suffered actual loss on the annuities and supported his argument with tables

showing the values of the victims’ investments before and after the annuity transfers.

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Again, he noted the parties’ agreement to “reserve argument on damages related to

annuities.” (Emphasis added.)

¶10 The District Court ultimately adopted the rationale proposed by the State and,

based on Egan’s testimony and calculations, ordered that Johnson pay $71,364.50 in

restitution. The District Court relied in part on the reasoning in Nesbit v. McNeil, 896

F.2d 380 (9th Cir. 1990). In Nesbit, the Ninth Circuit held that the deterrent principles

underlying securities law require prohibiting a fraudulent broker from profiting from

increases in investment and gains in a client’s portfolio, and therefore, any increase in

value may not be used to offset losses when calculating the client’s damages. Nesbit, 892

F.2d at 386.

¶11 At the time of sentencing, Johnson renewed his objection to the court’s measure of

restitution, which the District Court denied. Johnson also objected to an award of

restitution because the PSI did not include sworn victim affidavits. On appeal, Johnson

contends that without such victim affidavits, the restitution order was unlawful and the

case must be remanded for correction of his sentence.

STANDARD OF REVIEW

¶12 We review de novo whether a district court had statutory authority to impose the

sentence, whether the sentence falls within the applicable sentencing parameters, and

whether the court adhered to mandates of the applicable sentencing statutes. State v.

McMaster, 2008 MT 268, ¶ 20, 345 Mont. 172, 190 P.3d 302.

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¶13 The appropriate measure of restitution is a question of law, which we review for

correctness. State v. Pritchett, 2000 MT 261, ¶ 18, 302 Mont. 1, 11 P.3d 539. In

reviewing a district court’s findings of fact as to the amount of restitution, our standard of

review is whether those findings are clearly erroneous. State v. Hilgers, 1999 MT 284,

¶ 6, 297 Mont. 23, 989 P.2d 866.

DISCUSSION

¶14 Because this Court has not previously considered the appropriate restitution

measure for fraudulent investment annuity transfers, the District Court looked to other

jurisdictions and adopted the rule articulated in Nesbit. The District Court noted, “[m]ost

commonly, the courts apply remedies under tort law by awarding out of pocket damages

. . . . This approach reflects tort goals of compensating the injured party for harm and

returning them to the position they occupied prior to the fraud.” Citing Miley v.

Oppenheimer & Co., 637 F.2d 318 (5th Cir. 1980), the District Court explained that there

was no reason Johnson’s victims should be denied a recovery because their portfolio

increased in value, either because of or in spite of the activities of the defendant. The

District Court therefore concluded that any losses incurred by the victims at the time of

the annuity transfers are damages the victims are entitled to recover as restitution for the

offense, and declined to offset those damages by any gains in the victims’ portfolios.

¶15 While Johnson does not challenge the measure of restitution on appeal, he claims

that because no victim affidavits were submitted, the sentence was illegal and not

supported by competent evidence. Johnson argues that without affidavits, the victims

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were not required to prove they had sustained actual losses or to answer Johnson’s claim

that they had failed to mitigate their damages.

¶16 Sentencing courts are required to impose a sentence that includes payment of full

restitution whenever the court finds the victim of an offense has sustained a pecuniary

loss. Section 46-18-201(5), MCA. However, district courts are not authorized to order

restitution until all additional statutory requirements found in §§ 46-18-241 through -249,

MCA, are satisfied. Pritchett, ¶ 7 (citing Hilgers, ¶ 8). At issue in this case is the

provision designed to ensure that restitution orders are based on documented evidence of

the victim’s loss. Section 46-18-242(1)(b), MCA, provides:

(1) Whenever the court believes that a victim may have sustained a
pecuniary loss or whenever the prosecuting attorney requests, the court
shall order the probation officer, restitution officer, or other designated
person to include in the presentence investigation and report:

. . .

(b) an affidavit that specifically describes the victim’s pecuniary loss
and the replacement value in dollars of the loss, submitted by the victim.

¶17 In Hilgers, we upheld a district court’s restitution order where the PSI did not

contain any documentation of the victim’s pecuniary loss as required by statute. Hilgers,

¶ 12. Hilgers had accepted a plea agreement and pled guilty to issuing bad checks,

stealing cash, and diverting checks and money orders from his employer. Id. at ¶ 3. The

plea agreement allowed the district court to decide restitution if the parties were

otherwise unable to agree. Id. at ¶ 9. At Hilger’s sentencing hearing, a Certified Public

Accountant (CPA) and the victim testified as to the amount of restitution owed, but stated

different amounts of loss. Id. at ¶ 3. Hilgers also testified to taking significantly less

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money than either the CPA or victim calculated. Id. The District Court ultimately relied

on the restitution figure offered by the CPA. Id. at ¶ 4. Although we remanded the case

for other reasons, we held that the District Court had substantial credible evidence to

support the amount of restitution ordered. Id. at ¶ 12.

¶18 In Pritchett, we reversed a district court’s restitution order because the PSI failed

to provide any documentation of the victim’s loss as required by statute. Pritchett, ¶ 13.

We expressly distinguished our holding in Hilgers because Hilgers, unlike Pritchett, had

agreed to allow the district court to determine restitution. Id. at ¶ 11. While both Hilgers

and Pritchett involved a prior version of the statute that did not require a sworn affidavit,

the statute did require the PSI to include “documentation” of the loss, “submitted by the

victim.” Section 46-18-242(b), MCA (2001). The defendants in both cases challenged

the legality of the restitution order for lack of the required documentation.

¶19 Here, like Hilgers, Johnson signed a plea agreement explicitly allowing the

District Court to determine the amount of restitution if the parties were unable to agree,

and the District Court held a full evidentiary hearing to establish the amount of restitution

owed. In his pre-hearing filing, Johnson argued that proof of actual loss must be

substantiated by evidence in the record, but did not expressly contend that proof in this

case had to come from the mouths of the victims. He filed two more briefs prior to

sentencing, neither one of which referenced or objected to the absence of victim

affidavits.

¶20 Johnson argues that the affidavit requirement in § 46-18-242(1)(b), MCA, may be

overcome only by providing “extensive and scrutinized” victim testimony at a hearing,

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such as the testimony provided in McMaster. McMaster, ¶ 25. However, Johnson’s

dispute with an award of restitution in this case was premised on his challenge to the

measure of restitution which, as noted above, is a question of law. He did not challenge

the fact that surrender penalties were incurred at the time of transfer or the amount of

those penalties, but whether the penalties should be used to determine the victims’ losses.

Johnson did not at any time argue to the District Court that “scrutinized” testimony of the

victims was required.

¶21 This Court consistently has held that “we will not put a district court in error for

failing to address an issue or an argument that was not made before it.”

State v. Payne, 2011 MT 35, ¶ 39, 359 Mont. 270, 248 P.3d 842. An objection must be

sufficiently specific in order to preserve it for purposes of appeal. In re Mental Health of

T.J.F., 2011 MT 28, ¶ 21, 359 Mont. 213, 248 P.3d 804. Except for his lone objection on

the date of sentencing, Johnson did not alert the trial court to any claim that victim

affidavits were required for an order of restitution in this case. His objection, however,

was inconsistent with Johnson’s position up to that point. His plea agreement expressly

consented to the court’s determination of restitution upon hearing, his own filings

acknowledged the accuracy of the surrender penalty figures, and his pre-sentencing briefs

stated the dispute in terms of legal argument regarding the measure of loss, which the

parties had agreed to submit to the court for resolution—a ruling he does not challenge on

appeal. We conclude that Johnson failed to preserve his objection to the PSI’s omission

of victim affidavits.

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¶22 The judgment of the District Court is affirmed.

/S/ BETH BAKER

We concur:

/S/ JAMES C. NELSON
/S/ MICHAEL E WHEAT
/S/ BRIAN MORRIS
/S/ JIM RICE

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