Argued: Dec. 21, 2012.
James W. Grable, Jr., Connors & Vilardo, LLP, Buffalo, N.Y., for Defendant-Appellant.
Joseph J. Karaszewski (Richard D. Kaufman and Gretchen L. Wylegala, on the brief), Assistant United States Attorneys for William J. Hochul, Jr., United States Attorney for the Western District of New York, Buffalo, N.Y., for Appellee.
Before: SACK and LYNCH, Circuit
SACK, Circuit Judge:
The defendant, Frank E. Peters, was charged in the United States District Court for the Western District of New York with various counts related to a scheme to defraud Chase Manhattan Bank (" Chase" ) by overvaluing assets used to secure and maintain a revolving line of credit. In addition to imposing a term of imprisonment and ordering restitution, the district court (William M. Skretny, Judge ) ordered forfeiture in the amount of $23,154,259 pursuant to 18 U.S.C. § 982(a)(2). The district court concluded that section 982 requires forfeiture of the " receipts" of the criminal violation, i.e., " the draws from the revolving line of credit between July 1998 and October 2000." United States v. Peters, 257 F.R.D. 377, 388 (W.D.N.Y.2009). The district court also concluded that although the loan proceeds were disbursed to corporations owned and controlled by Peters and his wife, because they were in fact his corporate alter egos, it would " pierce the corporate veil" and hold the defendant liable for the proceeds reaped by the corporations.
The defendant advances several arguments challenging his conviction and the loss amount calculated for Sentencing Guidelines and restitution purposes, all of which we resolve in a summary order filed today. In this precedential opinion we address only the defendant's challenge to the order of forfeiture. The defendant objects to it on two grounds: (1) section 982 requires him to forfeit only the " profits" of the fraudulent scheme, not all payments that his companies received under the Chase loan, and (2) the district court erred when it " pierced the corporate veil" to find that he personally " obtained" the loan proceeds paid to his companies.
We conclude that (1) section 982 requires forfeiture of the gross receipts attributable to the criminal violation, not only the profits, and (2) in light of his near total control over the companies and their assets, the defendant " indirectly" obtained the Chase loan proceeds and can be held accountable for criminal forfeiture of those proceeds pursuant to section 982.
Peters and his wife, Marta Chaikovska, purchased World Auto Parts, Inc. (" WAPI" ) in 1990. In 1995, WAPI acquired a company Peters and his wife renamed Bighorn Core, Ltd. (" Bighorn" ). WAPI and Bighorn (together, the " Companies" ) sold aftermarket auto parts. Chaikovska was WAPI's chief executive officer and owned 85 percent of the Companies. Peters was the president and owned 13 percent. Peters's sister-in-law owned one percent, and a fourth individual, Peter Van Domelen, owned one percent.
The Chase Loan
In 1996, the Companies entered into an asset-based credit agreement with Chase in which the bank agreed to extend to the Companies a $9 million revolving line of credit secured by the Companies' assets. In June 1998, the parties renewed the agreement for two years, raising the available credit to $10.5 million. The cash available to the Companies on any given day was determined by the Companies' " borrowing base" : the sum of the values of the Companies' inventory and accounts receivable.
The Companies were permitted under their arrangement with the bank to borrow up to an amount equal to 85 percent of the value of current accounts receivable, plus 60 percent of the value of the current inventory, less whatever loan principal was outstanding (never to exceed the $10.5 million maximum).
The loan agreement provided that the Companies would deposit all payments from customers into " blocked" accounts at Chase, from which only the bank could make withdrawals. Chase would then " sweep" the accounts periodically, using the money taken from them to pay down the Companies' loan balance.
Certain accounts receivable were deemed " ineligible" for purposes of determining the borrowing base because the bank considered it unlikely that those amounts would be repaid. For example, the Companies were not permitted to borrow against accounts receivable more than 90 days past due or purchase orders that had not yet been fulfilled. The Companies would periodically file a " borrowing base report," which was supposed to reflect the combined value of accounts receivable and inventory. To confirm the information in the borrowing base report, and to verify generally the Companies' accounting standards, Chase " field examiners" were permitted to audit random samples of the Companies' records. One such field examiner, Edward Grayeski, testified at trial that he had conducted field tests between 1996 and 1998, and that his review raised red flags with respect to some of the accounts receivable. Although the Companies were initially able to deflect the bank's concerns about the accuracy of their records, examiners eventually uncovered the fraudulent scheme, described below, that underlies this case.
Peters does not dispute that the Companies engaged in a fraudulent scheme to manipulate the accounts receivable in order to inflate their borrowing base. Starting sometime in 1997, the Companies began experiencing cash-flow shortages due to a low sales volume. In response, the Companies developed ways to increase cash flow. Gregory Samer, a WAPI employee who pleaded guilty under the same indictment that named Peters as a defendant, testified as a cooperating witness at Peters's trial. Samer detailed three different fraudulent accounting practices committed by Peters and the Companies in order to increase the cash available through the Chase loan: (1) " holding the month open" ; (2) " prebilling" ; and (3) " rebilling."
The practice of " holding the month open" consisted of including in a particular month an account receivable that did not actually ripen until the following month. For example, Samer might instruct Cheryl Martinez, who worked in WAPI's billing department, to include invoices from the first two weeks of February in the January Accounts Receivable Report. Martinez would then backdate what should have been a February invoice to make it appear as though the goods sold had been shipped in January. If the product did eventually ship to the customer, Martinez would produce a hand-typed invoice that reflected the actual date of shipment.
" Prebilling" referred to the practice of creating a sales invoice for an order before any goods were shipped, thereby making an unripe purchase order appear to be an account receivable. For example, in January 2000, a company named ATCO placed a purchase order with Bighorn for $850,000 worth of air-conditioning cores. Bighorn lacked both the inventory to fulfill the order and sufficient cash to purchase
the inventory. Employees at Bighorn created an invoice falsely indicating that the ATCO order had shipped, which allowed them to include an $850,000 order in the Accounts Receivable Report for that month. As a result, Chase was duped into lending the Companies more money— money that Chase expected to be repaid through a sale that, in fact, might never come to fruition.
The practice of " rebilling" was, in effect, an end-run around Chase's policy of excluding accounts receivable that were more than 90 days old from the borrowing base. Employees at the Companies would generate a new invoice for an old sale with a false date somewhere within the previous 90 days so that the receivable could be included in the borrowing base report.
Although there was evidence in the record that Chase was aware of at least some of these practices, the bank appears to have been unaware of the extent to which the Companies' employees were artificially inflating the Companies' borrowing base. Chase ultimately uncovered the full extent of the fraud in or around May 2000, when a Bighorn employee named Ron Hall disclosed it to Chase examiners.
The Creation of ITEC
In early 2000, Peters created a corporation named Innovative Transmission and Engine Company (" ITEC" ) into which he spun off the Companies' heavy-duty equipment department. Peters opened a bank account for ITEC at another institution, M & T Bank. Several customers who had sent payments to WAPI were sent correspondence informing them that WAPI had changed its name and asking that the payment be reissued to ITEC. The reissued checks were deposited in ITEC's account at M & T Bank, instead of in the Companies' Chase accounts, where the loan ...