In United States v. Rainford, the Second Circuit (Jacobs, Menashi, and Merriam, concurring in part and dissenting in part) affirmed the judgments of conviction of three defendant-appellants who had been found guilty of conspiracy to commit mail and wire fraud in connection with slip-and-fall schemes, while remanding as to certain issues relevant to sentencing and forfeiture.  The lengthy majority opinion and similarly thorough partial dissent addressed a host of issues, but this post focuses on two particularly notable questions concerning the Sentencing Guidelines.  First, the majority concluded, over Judge Merriam’s sharp dissent, that unindicted co-conspirators qualified as “victims” for purposes of certain Guidelines enhancements under the facts presented.  Second, for the first time in a published opinion, the majority addressed—albeit in a footnote and without the benefit of briefing on the issue—the significant question of whether “loss” for purposes of calculating the Guidelines’ loss amount enhancement includes “intended loss” in the wake of the Supreme Court’s decision in Kisor v. Wilkie, 588 U.S. 558 (2019).   

Background

Defendant-appellants Rainford, Locust, and Duncan were co-conspirators in fraudulent slip-and-fall schemes.  The schemes operated by recruiting poor and unhoused persons to stage accidents and seek unnecessary medical treatment for injuries from those staged accidents—treatment that included, in some cases, unnecessary surgeries.  In an earlier version of the scheme, the recruits would be referred to a lawyer, who would sue the owner of the property on which the “accidents” occurred; the proceeds (usually in the form of a settlement payment) would be split among the co-conspirators.  The recruits, who appeared to have engaged in the scheme voluntarily, were among the recipients of the proceeds, although typically obtained a much smaller share.  A later version of the scheme operated similarly, but with the involvement of a litigation-funding company.

Rainford, Locust, and Duncan were found guilty of conspiracy to commit wire fraud (and, in the case of Duncan, certain other related counts) following a jury trial.  At sentencing, the district court applied Guidelines enhancements pursuant to U.S.S.G. §§ 3A1.1(b)(1) and 2B1.1(b)(2)(A) on the respective grounds that the appellants knew or should have known that “a victim of the offense was a vulnerable victim” and that the schemes involved “10 or more victims.”  In connection with both Guidelines, the district court understood the recruits to qualify as “victims.”  The district court also applied significant Guidelines enhancements—of between 20 and 22 levels—for each appellant pursuant to § 2B1.1(b)(1), concluding that each intended to cause loss in the tens of millions of dollars by determining that each fraudulent accident involved approximately $100,000 in intended loss (calculated as the intended value of settlement) and that the schemes involved hundreds of fraudulent accidents.  

On appeal, the appellants (or some subset of them) argued, among other things, that the district court improperly applied the “victim” and loss amount Guidelines enhancements. 

The Majority Opinion and Partial Dissent

The Second Circuit panel unanimously agreed that the appellants’ judgments of conviction should be affirmed.  But the majority and dissent parted ways in their analysis of, among other things, the relevant Guidelines provisions.

            “Victim” Enhancements

As to the “victim” enhancements, appellant Rainford contended that the enhancements were improper because the recruits were co-conspirators, rather than victims of the fraudulent accident schemes. 

Addressing the “vulnerable victim” enhancement first, the majority primarily relied on a thirty-year-old bank fraud case, United States v. Borst, 62 F.3d 43 (2d Cir. 1995), in which the Circuit determined that borrowers on whose ostensible behalf the defendant submitted false documentation to obtain loans for mobile homes were “vulnerable victims”—even though at least one of the borrowers noticed discrepancies in the defendant’s paperwork.  Although Borst did not squarely address the implications of the borrowers’ potential knowledge of wrongdoing in upholding the vulnerable victim enhancement—instead focusing on whether socio-economic status alone could serve as a basis for the enhancement and whether a true victim had to be harmed in connection with an element of the offense of conviction—the majority determined that Borst “controlled” and “applie[d] straightforwardly in this case.”  According to the majority, the recruits were “vulnerable victims” regardless of whether they knew of and willingly participated in the slip-and-fall scheme because “they were exploited” by the defendant-appellants based on their economic vulnerability and “suffered harm,” in the form of unnecessary medical procedures, “as a result of the fraud.”  The majority went on to confirm its understanding through analysis of the plain meaning of the term “victim,” which is undefined in the vulnerable victim Guideline and associated commentary, and determined that the dictionary definition, “a person harmed by a crime, tort, or other wrong,” encompasses co-conspirators. 

Moving on to the “10 or more victims” enhancement, the application note which defines a victim as, among other things, anyone who “sustained bodily injury as a result of the offense,” U.S.S.G. § 2B1.1, comment. (n.1), the majority determined that recruits who obtained injuries from the medical treatment received were properly victims despite their involvement in the schemes, so that the enhancement properly applied. 

Judge Merriam dissented from the majority’s rulings on the victim enhancements.  According to Judge Merriam, the recruits could not be victims under either enhancement where they knowingly joined the slip-and-fall schemes, willingly participated in them, and suffered bodily injury that was “the very essence of each [recruit’s] criminal agreement.”  Judge Merriam distinguished Borst, emphasizing that the case focused on the meaning of “vulnerable”; that it did not address whether co-conspirators could be considered victims and that the borrowers in Borst “clearly were not co-conspirators” and took no affirmative steps to advance the fraud; that the Borst opinion made only fleeting reference to any knowledge of the defendant’s criminal conduct; and that the borrowers had not agreed to the harms they suffered.  Judge Merriam addressed the majority’s plain meaning analysis in a footnote, deeming the dictionary definition of “victim” “too broad to apply in this context,” given that it would encompass even a defendant who suffered harm during the commission of his own crime.  As to the “10 or more victims” enhancement, Judge Merriam implicitly acknowledge that the application note defining a victim to reach anyone who “sustained bodily injury as a result of the offense” would encompass the recruits.  However, Judge Merriam determined that the note constituted a “plainly erroneous” reading of the Guideline because it would lead to “absurd outcomes where individuals who had repeatedly manifested their criminal intent and were active and essential participants in a conspiracy could be considered victims.” 

            Loss Amount Enhancement

As to the enhancements for loss amount, the majority and partial dissent both agreed that the district court erred (at least as to certain appellants) by failing to make sufficient factual findings to support its conclusion about the number of fraudulent accidents caused by the schemes, which conclusion was key to calculating loss amount.  Unlike the majority, the partial dissent also determined that another aspect of the district court’s analysis—its conclusion that each fraudulent accident involved $100,000 in intended loss—was speculative and not grounded in evidence, and would have remanded as to all appellants on that basis as well.  In this regard, the majority and dissent disputed just how specific the district court’s findings need to be regarding loss amount and how substantial the evidentiary basis for that finding needs to be. 

Perhaps more notable than this disagreement, however, was a footnote in the majority’s opinion regarding an issue that was not presented in the appeal at all but offers the first indication in a published opinion about how the Second Circuit will rule on a question that has generated substantial interest in white-collar cases:  whether the Guidelines’ enhancement for loss amount includes “intended loss” as well as actual loss.  

The relevant Guideline, § 2B1.1(b)(1), provides that a defendant’s offense level should be increased by specified amounts depending on the monetary amount of “loss” caused by the offense.  The Guideline does not itself refer to “actual” or “intended” loss, but the Guidelines commentary specifies that “loss is the greater of actual loss or intended loss,” where “actual loss” means “the reasonably foreseeable pecuniary harm that resulted from the offense” and “intended loss” means “the pecuniary harm that the defendant purportedly sought to inflict,” even including harm “that would have been impossible or unlikely to occur.”  U.S.S.G. § 2B1.1, comment. (n.3(A)).  Pursuant to long-standing Supreme Court precedent, Guidelines commentary like this interpreting the meaning of a Guideline has been treated with so-called Auer deference, i.e., has been considered “authoritative unless it violates the Constitution or a federal statute, or is inconsistent with, or a plainly erroneous reading of, that guideline.”  Stinson v. United States,” 508 U.S. 36, 38 (1993).

In Kisor v. Wilkie, 588 U.S. 558, 573 (2019), however, the Supreme Court clarified that “the possibility of [such] deference can arise only if a regulation is genuinely ambiguous . . . even after a court has resorted to all the standard tools of interpretation.”  Moreover, under Kisor, courts must “make an independent inquiry into whether the character and context of the agency interpretation entitles it to controlling weight.”  Id.  Relying on Kisor, many defendants have argued that the Guidelines commentary defining loss amount to include “intended loss” is not entitled to deference and that the § 2B1.1(b)(1) should encompass only actual loss.  Several Circuits have weighed in on the question, generating a Circuit split.  Compare United States v. Banks, 55 F.4th 246, 256–58 (3d Cir. 2022) (concluding for purposes of the Guideline that “ordinary meaning of the word ‘loss’ is the loss the victim actually suffered”) with United States v. You, 74 F.4th 378, 397–98 (6th Cir. 2023) (deferring to commentary’s interpretation of “loss”). 

No appellant appears to have challenged pursuant to Kisor the permissibility of using “intended loss” as the loss amount under § 2B1.1(b)(1), instead focusing on propriety of the district court’s loss calculations, as discussed above.  Nevertheless, the majority opinion addressed the issue in a footnote, acknowledging that “[t]he continuing vitality of Stinson is subject to debate” following Kisor but “defer[ring] to the application note” both because the Supreme Court had not expressly overruled Stinson and because “the guidelines commentary would meet the Kisor standard in any event.”  The partial dissent, meanwhile, emphasized that the question had not been presented on appeal and “neither concur[red] nor dissent[ed]” from the majority’s footnote. 

Discussion

As to the Guidelines “victim” enhancements, majority and partial dissent’s dispute over the “victim” enhancement Guidelines highlight the extent to which differing doctrinal approaches to legal questions may dictate different outcomes.  To the majority, the plain meaning of the term “victim” was conclusive; the majority found little need to dwell on the implications of deeming co-conspirators victims for purposes of these enhancements. 

But, as Judge Merriam warned, the majority’s approach, if followed faithfully, would lead to strange results.  For example, it is hard to dispute that a substantial number of people who engage in criminal activity are “vulnerable” within the meaning of the Guidelines based on their economically precarious positions and are recruited for participation in such activity precisely because of that vulnerability—this is a recurrent theme for defendants in prosecutions of gangs engaging in violence and drug offenses.  And many such vulnerable recruits sustain injuries in the course of their criminal activity.  It is hard to imagine that prosecutors would deem a recruit to a violent gang who sustained a wound in, for example, a drug deal gone awry a victim under either Guideline at issue, but similarly hard to see on what principled basis the Circuit should differentiate this recruit from the recruits involved in the slip-and-fall schemes. 

An analogy can also be drawn to the in pari delicto doctrine in fraud law:  when there is mutual wrongdoing, it is inappropriate to say that one party is responsible for making a victim out of the other.  See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985).  A perpetrator of a crime cannot also be a victim of the crime.

As to the loss amount enhancement, it is interesting that the majority chose to address the continuing viability of Stinson and deference to the Guidelines commentary on loss in the fashion that it did—in a footnote, with the question unpresented, and without the benefit of briefing from the parties.  Given this presentation, it was not surprising that the Court dealt with the issue of intended loss in a more extensive manner, in a case in which the issue was briefed, and then came to the same conclusion.  See United States v. Zheng, 23-6070 (Aug. 28, 2024).

Finally, since the issuance of this decision, the Sentencing Commission acted to resolve this Circuit split, and in the government’s favor.  As of November 1, 2024, U.S.S.G. § 2B1.1(b)(1), Note (A), now provides that “[l]oss is the greater of actual loss or intended loss” and Note (C)(ii) further defines “Intended loss” to  “(I) mean[] the pecuniary harm that the defendant purposely sought to inflict; and (II) include[] intended pecuniary harm that would have been impossible or unlikely to occur (e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value).”  In light of this amendment, the intended loss argument presented here has been extinguished for future offenses, as the Guideline itself (and not merely the commentary) treats intended loss as equivalent to actual loss.