United States v. Gross

               IN THE UNITED STATES COURT OF APPEALS
                       FOR THE FIFTH CIRCUIT



                               No. 93-1812



UNITED STATES OF AMERICA,

                                                        Plaintiff-Appellee,


                                    versus


WAYNE WESLEY GROSS,

                                                        Defendant-Appellant.




           Appeal from the United States District Court
                for the Northern District of Texas
                            (July 11, 1994)




Before GOLDBERG, KING, and WIENER, Circuit Judges.
WIENER, Circuit Judge:

     Convicted on a guilty plea of wire fraud and aiding and

abetting,1 Defendant-Appellant Wayne Wesley Gross challenges the

district court's calculation of his sentence under the Sentencing

Guidelines, alleging that, because he was the only criminally

culpable   person   involved   in    the     offense,   the   district   court

erroneously assessed a four-level increase in his offense level,



     1
      18 U.S.C. §§1343, 2.
pursuant to U.S.S.G. §3B1.1(a), for his role as an organizer or

leader of a criminal activity.        As we agree with Gross, we reverse

and remand for resentencing.

                                      I

                            FACTS AND PROCEEDINGS

     Acting alone from March 1, 1988 through January 25, 1991,

Gross   used   his   companies,   Resolve    Technology    Corporation   and

Continuing     Technology    Group,   to   defraud    sellers   of   computer

equipment.     Gross devised a scheme in which Resolve Technology

Corporation entered into purchase agreements with entities that

desired to sell used computer equipment.             The sellers would ship

their computer hardware to Resolve in exchange for Resolve's

promise to resell the equipment to other purchasers.                 Once he

received payment on the equipment from such purchasers, however,

Gross consistently "neglected" to forward to the sellers their

shares of the proceeds.

     Whatever good faith intentions Gross may have originally had

to remit funds to the sellers, it is clear that at some point he

began receiving computer equipment knowing full well that he would

never pay the seller the contract price.         As the scheme unraveled

and sellers began to press Resolve for payment, Resolve filed for

bankruptcy.     Gross then activated a shell corporation, Continuing

Technology Group, and resumed the fraudulent scheme. Gross finally

brought the swindle to a halt on January 25, 1991.

     In February 1993, Gross was formally charged in a 17-count

indictment.    Pursuant to a plea agreement, Gross pleaded guilty to


                                      2
one count of wire fraud and aiding and abetting in exchange for

dismissal of the remaining sixteen counts.

     The presentence report (PSR) recommended a four-level increase

in Gross' offense level pursuant to U.S.S.G. §3B1.1(a).          Gross

contends that in applying the Sentencing Guidelines the district

court erred when it assessed a four-level increase in his offense

level under U.S.S.G. §3B1.1(a).     That section provides

     [i]f the defendant was an organizer or leader of a
     criminal activity that involved five or more participants
     or was otherwise extensive, increase by 4 levels.

The PSR's recommendation was made on grounds that Gross had a total

of nine employees over a two-year period,2 and that "the criminal

activity was otherwise extensive in light of the amount of loss,

the number of victims, and the fact that the scheme took place over

a course of almost three years."3

     Gross objected to the PSR, asserting that a §3B1.1 adjustment

for criminal activity that is "otherwise extensive," cannot be

applied to a defendant who acted alone.      He contends that to be

subject to the four-level increase he must have acted in concert

with at least one other criminally responsible person. Even though

the government agreed with this contention, the district court

nevertheless found the enhancement appropriate.

     Like the PSR, the district court justified the enhancement on

two alternative grounds.   First, the court found that the criminal


     2
      None of the nine employees, however, was criminally
involved in Gross' scheme.
     3
      PSR ¶ 28.

                                  3
activities were "otherwise extensive" under §3B1.1(a) due to the

amount of   money   lost,   the   number     of   victims,   the   interstate

character of the scheme, and the fact that Gross used corporate

forms to carry out the fraud.      Alternatively, the court determined

that even if this circuit should require the involvement of another

criminally responsible person for the adjustment to apply, such

requirement was satisfied here by the two corporations which Gross

used to defraud sellers of computer equipment, even though "neither

of [the corporations] was charged or convicted in this crime."            On

those alternative grounds, the district court increased Gross'

offense level by four as recommended by the PSR.                   The court

sentenced Gross to a thirty-month prison term and ordered him to

pay $695,950 in restitution.       Gross timely appealed.

                                     II

                                  ANALYSIS

     As noted, Gross contests the application of the aggravating

role adjustment of U.S.S.G. §3B1.1(a) because his offense was

committed by only one criminally responsible person))himself.             We

review a sentencing court's application of the Guidelines de novo.4

A.   "Otherwise Extensive"

     Section §3B1.1(a) directs the sentencing court to increase a

defendant's offense level by four "[i]f the defendant was an

organizer or leader of a criminal activity that involved five or

more participants or was otherwise extensive."               The language of

§3B1.1(a) does not specifically inform whether the involvement of

     4
      United States v. Brown, 7 F.3d 1155, 1159 (5th Cir. 1993).

                                     4
another participant, i.e., another criminally responsible person,5

is essential to the adjustment under the "otherwise extensive"

prong.   But the commentary accompanying this section))by which we

are bound6))makes clear that the adjustment only applies if an

     5
      Neither does United States v. Mejia-Orosco inform whether
the involvement of another criminally responsible participant is
essential to the adjustment under the "otherwise extensive"
prong. 867 F.2d 216 (5th Cir.), cert. denied, 492 U.S. 924, 109
S. Ct. 3257, 106 L. Ed. 2d 602 (1989). In Mejia-Orosco, the
defendant challenged the district court's finding that he was a
manager, supervisor, organizer, or leader of a criminal activity.
A panel of this court held that the introductory statement to
§3B1.1 "clearly indicates that there must be more than one
participant involved in the criminal activity for this section to
apply," but stated that "managerial status may attach by the
orchestration of unwitting or duped participants, as well as
through the leadership of criminally responsible participants."
Id. at 220. The relevant commentary, application note 3,
provides that
     [i]n assessing whether an organization is "otherwise
     extensive," all persons involved during the course of
     the entire offense are to be considered. Thus, a fraud
     that involved only three participants but used the
     unknowing services of many outsiders could be
     considered extensive.
The court determined that the persons who had facilitated the
crime in that case either were criminally culpable themselves, or
if not, application note 3 to the commentary allows consideration
of unwitting participants))as long as the participants were
involved in the commission of the crime. The portion of the
commentary relied on in Mejia-Orosco does not signify that a
defendant's sentence can be enhanced when there are no other
criminally responsible participants. Mejia-Orosco simply informs
which individuals may be considered as persons supervised to find
that a defendant is a manager, supervisor, and so on: A wholly
innocent additional person may add to the count of persons
supervised in determining whether the offense is "otherwise
extensive." As the commentary to §3B1.1 and this opinion make
clear, however, a wholly innocent additional person can never
supply the requisite second "participant" under §3B1.1.
     6
      Stinson v. United States,     U.S.    , 113 S. Ct. 1913,
1915, 123 L. Ed. 2d 598, 603 (1993) (holding that commentary
"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").

                                5
offense was committed by more than one criminally responsible

person.

     The introductory commentary to section 3B1.1 states that

     [w]hen an offense is committed by more than one
     participant, §3B1.1 or §3B1.2 (or neither) may apply.
     Section 3B1.3 may apply to offenses committed by any
     number of participants.7

Application note 1 of the commentary then limits the definition of

"participant" to a person who is

     criminally responsible for the commission of the offense,
     but need not have been convicted. A person who is not
     criminally responsible for the commission of the offense
     . . . is not a participant.8

Taken     together,   these   two   provisions   demonstrate   that   the

Sentencing Commission intended for §3B1.1 to be applied only if a

defendant was an organizer or leader of at least one other person

who was criminally culpable in, though not necessarily convicted

for, the endeavor.9

     Effective November 1, 1993, the commentary to this section of

the Guidelines was amended to state expressly what we hold today,

i.e., that

     [t]o qualify for an adjustment under this section, the
     defendant must have been the organizer, leader, manager,
     or supervisor of one or more other participants.10

     7
        Emphasis added.
     8
        Emphasis added.
     9
      U.S.S.G. App. C ¶414 ("This amendment clarifies the
operation of this guideline in accord with the holding in United
States v. Carroll, 893 F.2d 1502 (6th Cir. 1990)" (holding that
to apply §3B1.1, court must find that there were at least two
participants involved in committing the crime).
     10
          U.S.S.G. §3B1.1, comment. (n.2.)

                                     6
Although this amendment did not take effect until after Gross was

sentenced, we may consider a post-sentencing amendment if it is

intended to clarify application of a guideline which "was not

intended to make any substantive changes to it or its commentary

. . . even though it was not in effect at the time of the

commission of the offense."11 The Sentencing Commission has by this

amendment clarified that §3B1.1 requires the participation of more

than one culpable person.12

     Every other circuit court that has addressed this question has

held that §3B1.1 requires the participation of more than one

criminally responsible person.13       Today we join the circuits that


     11
       United States v. Maseratti, 1 F.3d 330, 340 (5th Cir.
1993), cert. denied,      U.S.    , 114 S. Ct. 1096, 127 L. Ed. 2d
409 (1994) and      U.S.    , 114 S. Ct. 1552, 128 L. Ed. 2d 201
(1994); United States v. Evbuomwan, 992 F.2d 70, 74 n.1 (5th Cir.
1993).
     12
      U.S.S.G. App. C ¶500 ("This amendment clarifies the
operation of this section to resolve a split among the courts of
appeal.").
     13
      United States v. Veilleux, 949 F.2d 522, 524 (1st Cir.
1991) (holding that to apply §3B1.1, court must find that there
were at least two participants involved in committing the crime);
United States v. Katora, 981 F.2d 1398, 1403 (3d Cir. 1992)
(requiring the participation of multiple, criminally culpable
persons under §3B1.1); United States v. Carroll, 893 F.2d 1502,
1507-09 (6th Cir. 1990) (same); United States v. Anderson, 942
F.2d 606, 614-16 (9th Cir. 1991) (en banc) (same); United States
v. DeCicco, 899 F.2d 1531, 1535-37 (7th Cir. 1990) (holding that
§3B1.1 applies only under circumstances in which the offender
organizes or leads criminally responsible individuals); United
States v. Bauer, 995 F.2d 182, 183 (10th Cir. 1993) ("All of the
roles defined by §3B1.1 require the involvement of more than one
participant."). See also United States v. Speenburgh, 990 F.2d
72, 74-76 (2d Cir. 1993) (holding that another criminally
responsible participant is necessary for downward adjustment
under U.S.S.G. §3B1.2).

                                   7
have decided this issue and require at least two "participants"

under §3B1.1(a), i.e., at least two criminally culpable persons.

And we add that the express language of the commentary allows a

court to count a person as a "participant" even if such person has

not been convicted.

B.   Corporation as "Participant"?

     The      question        remains,    however,       whether     a    defendant's

corporation may be considered a "participant" for purposes of

§3B1.1.      As noted, the commentary defines "participant" as "a

person who is criminally responsible."14                  The district court held

that Gross' two corporations "probably qualify as participants even

though neither of them was charged or convicted in this crime."

     In Chapter 8 of the Guidelines, which details the criminal

responsibility           of   organizations,       the    commentary     defines   an

organization as "a person other than an individual," and lists

corporations        as    a   type   of   organization.15       The      introductory

commentary     to    Chapter     8   notes       that   generally,   under   federal

criminal law, organizations are vicariously liable for offenses

committed by their agents.                As a corporation is defined as a

person, and such a "person" can be liable for offenses committed by

its agents, it is arguable that a corporation could qualify as a

participant for purposes of §3B1.1.

     But §3B1.1 does not contain a cross-reference to §8A1.1 and

its definition of organization, and we have not been shown any

     14
          U.S.S.G. §3B1.1, comment. (n.1) (emphasis added).
     15
          U.S.S.G. §8A1.1, comment. (n.1) (emphasis added).

                                             8
justification for making such a stretch on our own.            To do so would

run contrary to the expressed intent of the Sentencing Commission

to provide, under §3B1.1, a range of adjustments "to increase the

offense level based upon the size of a criminal organization[,

]i.e., the number of participants in the offense[, ]and the degree

to   which      the   defendant   was    responsible    for   committing   the

offense."16      To presume that the Sentencing Commission intended to

include individuals who happen to commit their crimes utilizing

corporations, a more explicit connection between the definition of

persons as used in §3B1.1 and how it is used in §8A1.1 would appear

to be necessary.17       We need not answer today, however, the broad

question whether a corporation may ever be used to satisfy the

additional participant requirement. For even if we assume arguendo

that    a     corporation   may   be    used   to   satisfy   the   additional

participant requirement for purposes of §3B1.1, Gross is the only

person))natural or corporate))criminally culpable in this case.


       16
            U.S.S.G. 3B1.1, comment. (backg'd).
       17
      In United States v. Katora, the Third Circuit rejected the
argument that use of corporate forms warranted an application of
§3B1.1. 981 F.2d 1398, 1404 (3d Cir. 1992). In that case, the
court did not address §8A1.1. Instead the court relied on a
prior decision by that court, United States v. Fuentes, in which
that circuit determined that management of "real property" would
not suffice for a §3B1.1 enhancement. 954 F.2d 151, 154 (3rd
Cir.), cert. denied,     U.S.    , 112 S. Ct. 2950, 119 L. Ed. 2d
573 (1992); accord U.S.S.G. App. C. ¶500; cf. United States v.
Chambers, 985 F.2d 1263, 1268 (4th Cir.), cert. denied,     U.S.
   , 114 S. Ct. 107, 126 L. Ed. 2d 73 (1993) (holding that one
who manages property without supervising people can be a
"manager" within the meaning of §3B1.1(b)").) In Katora, the
Third Circuit determined that §3B1.1 would similarly not apply to
defendants whose only criminal cohorts are corporate entities.
981 F.2d at 1404.

                                         9
     Each corporation is merely an alter ego of Gross.                     He is the

sole shareholder, sole officer, and sole director of each of his

corporations.        On these facts, Gross' two alter ego corporations

may not be used to assess a four-level increase in Gross' offense

level:       Here    the     only    criminally    responsible      agent       of   the

corporation was the defendant, Gross.                    We cannot bootstrap the

existence     of     a     second    participant      by    counting      the    first

participant's alter ego corporation when he is the sole "agent"

whose acts can make the corporation vicariously responsible under

§8A1.1.   To do so under the instant facts would be to whipsaw the

defendant with a classic vicious circle.

                                         III

                                      CONCLUSION

     Section 3B1.1 does not apply to a defendant who is the sole

criminal participant in the commission of an offense; there must be

at   least    one     more    "person"       who   (or     which)   is    criminally

responsible,        albeit    not    necessarily      convicted.         Moreover,    a

defendant's     wholly       owned    and    solely      orchestrated     alter      ego

corporation may not be counted as an additional "participant" under

that section.        For the foregoing reasons, the sentence of Wesley

Wayne Gross is REVERSED, and the case REMANDED for resentencing.




                                            10