U.S. v. Johns

Summarized by Madison Conquest , State of Tennessee Real Estate Asset Management
13 years 7 months ago

Citation:

Case No. 11-3299 (7th Cir. July 17, 2012)

Tag(s):

Ruling:

Court of Appeals upheld criminal convictions of Johns on all four counts of bankruptcy fraud under 18 U.S.C. § 152(8), 18 U.S.C. § 157, 18 U.S.C. § 1519, and 18 U.S.C. § 152(5). Court of Appeals upheld all four counts of Johns' criminal convictions for bankruptcy fraud, three counts for making a material false statement to the chapter 13 trustee with respect to the existence of the second mortgage, and one count for taking an action to intentionally defeat the purposes of the Bankruptcy Code. Because the mortgage purported to secure a debt that did not in fact exist to a third party, Fledderman, who had never even met the debtors, the mortgage did not exist and therefore Johns' statement that such mortgage was valid and enforcable was materially false. The Court of Appeals agreed with Johns that the creditors, who received 100% of their claims, were not harmed and therefore the bankruptcy distribution policy was not implicated, The Court also agreed with Johns that the debtors' fresh start was not implicated where the debtors never expected to keep any of the "rinsed equity" anyway. However, the Court upheld the convinction for acting to defeat the purposes of the Bankruptcy Code because Johns ignored and usurped the Chapter 13 trustee's exclusive right to admininster the debtors' bankruptcy estate. The Court of Appeals overtuned the 31-month sentence because the Court agreed that there are no "victims" and no "losses" to be calculated to reach a higher sentencing guideline range where the victims are no worse off financially after the offense than before it. As to two of the three homeowners, the lower court found that there was no actual pecuniary loss to the victims but found that being made an instrument of a fraud alone was sufficient to make the homeowners "victims" and also found that losses were to be measured by the gross profit gained by Johns and Banks as a result of the fraudulent scheme on each sale. As to one of the homeowners, the lower court did not make findings as to actual pecuniary loss. The Court of Appeals remanded the case for the lower court to make factual finding regarding the third homeowner. The homeowner would be a "victim" if it suffered an actual pecuniary loss as a result of the sale, but not otherwise. Because the enhancement factor could be applied if there was a single "vulnerable victim," the Court went on and held that financial distress alone can render a victim "vulnerable" to financial fraud crimes.

Procedural context:

Christopher Johns was convicted of four counts of bankruptcy fraud and sentenced to 31 months in federal prison as a result of application of a sentencing guideline range calculated by measuring "losses" to victims by the amount of "rinsed equity" profit made by the fraudfeasors, and as a result of a sentencing enhancement factor deeming financially distressed victims as "vulnerable victims". Johns appealed both the convictions and the sentence.

Facts:

Christopher Johns taught his colleague, Allen Banks, a fraudulent scheme whereby Banks would offer to purchase homes of financially distressed homeowners in imminent danger of foreclosure at inflated prices, wherein the homeowners would agree to pay all sale proceeds after payment of the secured debt, the manufactured "rinsed equity," to Banks and Johns at closing. To hide their involvement in the scheme, Banks and Johns would get the homeowners to grant a second mortgage to the benefit of Banks' girlfriend, Stephanie Fledderman. Banks and Johns succeeded in closing two transactions before they tried this "equity rinsing" scheme on homeowners who were Chapter 13 debtors. Johns presented an offer to the Chapter 13 Trustee for Banks to purchase the Debtors' home, presenting a copy of the unrecorded second mortgage to Fledderman as a basis to justify the sale. When the Trustee refused to approve the sale, the debtors closed the sale anyway and Banks and Johns paid off Debtors' creditors 100% and kept the remaining "rinsed equity" for themselves. Debtors' counsel and the trustee discovered the fraud, leading to the indictment of Banks and Johns. Johns was convicted of four counts of bankruptcy fraud and sentenced to 31 months in federal prison.

Judge(s):

Easterbrook, Flaum and Wood. Opinion by Circuit Judge Flaum.

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