Crime & Punishment & Bankruptcy at U.S. Supreme Court (Lagos v. United States)

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A sentence to federal prison

By: Donald L. Swanson

It’s not every day that the U.S. Supreme Court makes a pronouncement on criminal law in the context of a bankruptcy case.

But that’s what happened on Tuesday (May 29, 2018) in the Supreme Court’s Lagos v. United States opinion (Case No. 16-1519).

Bankruptcy Facts

On February 2, 2010, a trucking enterprise, USA Dry Van Logistics, L.L.C., and affiliates, filed their Chapter 11 cases in the Bankruptcy Court for the Southern District of Texas (see Case No. 10-20102).

On November 17, 2010, the Bankruptcy Court confirmed debtors’ Chapter 11 plan of reorganization. Thereafter, the debtors continued operating under new ownership. The new owners are described by one news source as “a conglomerate of lenders and shareholders led by GE Capital Corporation, CapitalOne, and FCC.”

Meanwhile, GE Capital Corporation conducted an investigation of debtors’ activities and alerted federal law enforcement officials to possible crimes.

Criminal Allegations Against Owners/Officers

On August 27, 2013, the United States of American filed a Criminal Indictment (Case No. 4:13-cr-00554) in the Southern District of Texas against three owners/officers of the bankruptcy debtors.

The Indictment alleges that the three owners/officers defrauded GE Capital Corporation by making false representations about “the true value” of accounts receivable. Such fraudulent activity included:

“Booking fictitious sales” for use as “collateral to obtain additional loan funds”;

Transferring funds “by interstate wire transfer . . . in order to disguise the payments as customer payments”;

“Re-aging” accounts receivable “by issuing credits for historical sales invoices” and “rebooting” them to appear more recent;

“Tracking” fictitious sales “in a separate register”;

“Creating false support documentation” for fictitious sales; and

“Knowingly submitting” false statements “to accounting auditors” and “in connection with execution of amendments” to a credit agreement.

The Indictment also alleges that, as “a result” of such fraudulent acts, GE Capital Corporation “was induced to forward funds” to the debtors “via interstate wire transfer” and incurred losses “of approximately $26,254,781.00.”

The indictment was based, in part, on investigation results provided to law enforcement officials by GE Capital Corporation.

Guilty Plea and Sentence

All three defendants named in the Indictment plead guilty.

The sentence for each defendant (issued on February 18, 2016) included both restitution and prison time as follows:

“Restitution Ordered, $15,970,517.37” for each defendant; and

Federal Prison:

“97 months” for Defendant Sergio Fernando Lagos; and
“47 months” and “24 months” for the other two defendants respectively.

Appeal to Fifth Circuit

Lagos appeals to the Fifth Circuit Court of Appeals. But the appeal relates only to the “Restitution” portion of his sentence—not to the prison term. And it covers only a portion of the award: he wants to exclude GE’s investigation costs (“legal, expert, and consulting fees”) from the “Restitution” award.

The Fifth Circuit affirms the “Restitution” award. Here is its reasoning.

–Legal Standard for Restitution

The Mandatory Victims Restitution Act authorizes restitution for a victim’s “actual loss directly and proximately caused by the defendant’s offense of conviction.” 18 U.S.C. § 3663A(b)(4).

–Facts Supporting Restitution Award

For two years, Lagos and his co-conspirators “misled GECC about the value of their accounts receivable.”

Their scheme induced GECC to “increase the amount” of its loan and to provide Lagos and his co-defendants “with uncollateralized funds.”

Their scheme also caused GECC to “employ forensic experts to secure and preserve electronic data” and “lawyers and consultants” to “investigate the full extent and magnitude of the fraud” and “provide legal advice relating to the fraud.”

Fees incurred by GECC during investigation of the fraud “were necessary and compensable in the restitution award” under 18 U.S.C. § 3663A(b)(4).

U.S. Supreme Court

Lagos appeals to the U.S. Supreme Court, which grants certiorari.

On May 29, 2018, the Supreme Court, in a unanimous opinion, reverses the Fifth Circuit’s ruling. Here is the Supreme Court’s reasoning.

–Legal Standard for Restitution

18 U.S.C. § 3663A(b)(4) authorizes restitution for:

“lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.”

–The Question

“We must decide whether the words ’investigation’ and ‘proceedings’” in § 3663A(b)(4) are (i) “limited to government investigations and criminal proceedings,” or (ii) “include private investigations and civil proceedings.”

–The Conclusion

“In our view,” such words “are limited to government investigations and criminal proceedings” and do not include expenses for private investigations.

This is a “narrow” interpretation of the statute.

–The Rationale

The Supreme Court’s narrow interpretation is drawn from the language of the statute, “both its individual words and the text taken as a whole.”

A “broader” reading would have the “practical” effect of creating “significant administrative burdens”—it would “invite disputes” on, for example, the necessity of expenses “incurred during” attendance at “a bankruptcy proceeding” or expenses for interviewing witnesses or reviewing documents.

The Court’s narrow interpretation leaves a victim like GE with other remedies for “losses not covered by the Mandatory Victims Restitution Act.”  GE, for example, brought a civil lawsuit against Lagos “and obtained an over-$30 million judgment against him.”

While it is true that “GE has largely been unable to collect on that judgment,” the collection of criminal restitution awards fare no better: “the Justice Department considers 91% of outstanding criminal restitution” awards to be “uncollectible.”

Practicalities

The restitution amounts at issue in this appeal are the costs incurred by GE Capital Corporation in conducting its own investigation. Such amounts are substantial—“about $5 million.” In other words, about one-third of the $15 million restitution award is at issue and is disallowed by the Supreme Court.

–Some Questions

So . . . all of the foregoing invites these practical questions:

Why is Lagos appealing (all the way to the U.S. Supreme Court) a $5 million portion of a $15 million restitution award?

Does he have access to enough money to pay a $10 million award so that the Supreme Court’s ruling has practical significance?

If he has assets worth less than $1 million, hypothetically, why bother with this appeal?

–Some Assets

The “Presentence Investigation Report” for Sergio Fernando Lagos (Doc. 249) does not identify a huge amount of assets. But it does suggest:

That he liked to spend money on showy things, including the purchase of a Breitling Chronographe and a Rolex watch for $100,207.50 and $74,700.00 respectively; and

That he may own assets held in other peoples’ names, including trailers purchased in Mexico, another trucking company, a ranch, etc.

Conclusion

Lagos v. United States is another reminder that:

Bankruptcy cases can have criminal law implications; but

As in most bankruptcy contexts, collection can be a tricky thing.

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