Wednesday, December 13, 2006

Third Circuit finds unlimited "but for" theory of restitution calculation erroneous; reiterates admissibility of custom & practice testimony

On December 12, 2006, the Third Circuit ruled in United States v. Fallon, Case No. 03-4184, that awarding restitution owed under the Mandatory Victims Resolution Act ("MVRA") pursuant to a theory of unlimited "but for" causation is error requiring a new restitution hearing. The Third Circuit also held that the exclusion of testimony about industry custom and practice was error as a matter of law, but that such error was harmless in this case.

At the restitution hearing, the district court found by a preponderance that American Business Leasing ("ABL"), which had purchased microdermabraders from Mr. Fallon’s company and then leased the devices to doctors, would not have purchased the devices but for Mr. Fallon’s forgery of the FDA approval letter that Mr. Fallon provided to ABL during their negotiations. The district court consequently found that all of ABL’s losses from unpaid lease payments were caused by Mr. Fallon’s misrepresentation. It assessed restitution of over $55,000 ($125,000 in unpaid lease payments, minus about $30,000 for paid lease payments and $40,000 for the value of the devices owned by ABL).

On appeal, the Third Circuit vacated this award as erroneous and remanded the case for a new restitution hearing. The Third Circuit ruled that while "a . . . rebuttable inference arises that subsequent losses suffered by the victim are sufficiently linked to the underlying fraud to support an award of restitution" where a "transaction was consummated due to [the defendant’s] fraud," the argument that no loss would have occurred but for the fraud is insufficient to bear the government's burden of showing direct causation of the harm where, as here, the defendant rebuts the presumption with evidence that the loss occurred for reasons unrelated to the fraud. Mr. Fallon showed that at least $34,000 of ABL’s loss arose when two doctors defaulted on their lease payments for reasons unrelated to the fraud. One doctor filed for bankruptcy. The other passed away.

The Third Circuit also reiterated in this opinion that "[t]his court has consistently allowed ‘testimony concerning business customs and practices,'" and that "a witness need not represent an entire industry in order to have sufficient knowledge of that industry’s customs and practices so as to render substantial assistance to the jury." The Court consequently found the district court's exclusion of Mr. Fallon's proffered custom and practice testimony to be erroneous. However, it went on to hold that such error was harmless in this case because Mr. Fallon was able to impeach the testimony of the government witness who testified that the FDA approval letter was a required part of the negotiations, and because another witness testified that he had never required such approval letters from device manufacturers during his fifteen years in the leasing industry.

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