Restitution for Federal Crimes: Supreme Court Agrees to Hear Case Involving Money Owed by Defendant Involved in Mortgage Fraud

Federal criminal cases often result in a Defendant being sentenced to jail time, as well as being ordered to pay “restitution”. A 1996 law called the Mandatory Victims Restitution Act (or “MVRA”) says that when the victim of a crime is entitled to restitution for the loss of “property”, and it is impossible, impracticable, or inadequate to return that property, then a defendant must pay “an amount equal to (i) the greater of * * * (I) the value of the property on the date of the damage, loss, or destruction; or (II) the value of the property on the date of sentencing, less (ii) the value (as of the date the property is returned) of any part of the property that is returned.” Earlier this week, the United States Supreme Court accepted a case involving questions surrounding how to calculate restitution when the Defendant committed mortgage fraud. The question in Robers v. United States is whether the district court erred in calculating restitution for banks who lost money because of the Defendant’s loan fraud when the court reduced the victims’ losses by the amount they recouped years later from the sale of the collateral securing the loans, as opposed to reducing the amount based on the value of the collateral at the time when the victims foreclosed on the mortgaged properties. This type of questions arises with some frequency in federal criminal cases, so it’s important to keep an eye on how the high Court resolves the case.

Mr. Robers was like so many Americans in the past decade. Some sharp operators figured out that inflated real estate values could be used to skim money off the top of mortgage loans. One necessary component of these schemes is that there needs to be a “straw buyer”, a person without any blemishes on their credit score, but who merely signs the paperwork for the loan application, and who has no intention in actually moving into the property. The straw buyer signs bogus paperwork claiming that he or she actually makes far more money that they really do, so the foolish banks and mortgage lenders regularly gave large loans to such people to fund the purchase of inflated real estate. When the loan closed, some of the loan proceeds would get skimmed to pay for the brokers or others who organized the scheme, the straw buyer normally got a small amount of money for signing the documents, and the house went into foreclosure when the straw buyer did not make any payments. The bank or mortgage lender then was stuck with a non-performing loan. Lenders generally then took the property back, which played a large part in the recent real estate debacle.

Mr. Robers was a straw buyer. He got $500 for each of the two times he signed on as a straw buyer. The feds brought criminal charges, and Mr. Robers pled guilty. At sentencing, the judge had to decide the amount of restitution Mr. Robers owed to the banks (or the entities that purchased the mortgage loans). Roberd’s attorney argued that the amount of the loan should be reduced by the value of the “property” that the bank took back, meaning the house. Robers also argued that the value of the house should be measured at the time when the bank foreclosed on the house, and not the greatly reduced value years later after the real estate market had crashed and depressed values nationwide. The Judge disagreed, using the lower value for the house, thus increasing the amount Roberd owed in restitution.

It seems that the federal courts of appeal are split in their approach to this issue. Some courts say that the word “property” means the real estate that secures the loan signed for by the straw buyer. Under this approach, the courts look to the value of that property at the time it is returned to the victim, meaning at the point when the bank forecloses and takes back the real estate. Using any other approach, these courts say, gives the banks an incentive to hold on to bad real estate hoping that values drop and the Defendant will need to make up the difference.

A second group of federal courts say that the word “property” in this context refers only to the money that a Defendant illegally got the bank to loan based on the bogus loan application. These courts hold that while the Defendant gets a credit if the underlying collateral is sold, there is no requirement that a judge must value the underlying real estate as of the date that the bank takes the property back.

Again, restitution issues pop up regularly in our practice. We look forward to reading the briefs in this case and seeing how the Supreme Court resolves this important federal sentencing question.