By Daniel Colbert, ACLR Featured Blogger


           On October 21st, the Supreme Court granted cert. in Robers v. United States to resolve a circuit split in the interpretation of the Mandatory Victims Restitution Act (MVRA).[1] In view of increasing mortgage fraud litigation, the question presented to the court will arise many, many times in the lower courts.[2]

Background and circuit split

           The MVRA requires that defendants in property crimes pay restitution equal to the value of the property involved, “less the value (as of the date the property is returned) of any part of the property that is returned.”[3]Benjamin Robers had been a straw borrower in a mortgage fraud scheme and had obtained loans for two houses by misrepresenting his income and his intention to live in the houses.[4] One bank, Fannie Mae, foreclosed on one of the houses in February 2006, and another bank, American Portfolio, foreclosed on the other house in September of that year.[5] Fannie Mae transferred its house to its insurance company, Mortgage Guarantee Insurance Corporation, which finally sold the house in August 2007.[6] American Portfolio sold its house in October 2008, more than two years after taking the house back.[7]

            Unfortunately, in mid-2007 the housing market collapsed, and the value of the properties decreased substantially. When Robers pleaded guilty to wire fraud and was required to pay restitution, he argued that the MVRA required the court to deduct the value of the houses at the time they were surrendered to the banks.[8]His victims argued that only the amount they actually received for the sale of the houses should be subtracted from what Robers owed them.[9]

            The District Court agreed with the victims.[10] The Seventh Circuit took up Robers’ appeal and also held that the property stolen is “returned” only when the victim sells the house for cash.[11] In its opinion, the court noted a circuit split on precisely this question.[12] The Ninth, Fifth, and Second Circuits have all held that “some part” of the property is returned on the date the house is surrendered to the victim, and therefore the value on that date should be deducted from the restitution award.[13] However, the First, Third, and Eighth Circuits (along with the Tenth in an unpublished decision) have agreed with the Seventh.[14] This circuit split is bound to continue to increase in importance as more and more litigation takes place around foreclosures, which why banking law practitioners were hoping the Supreme Court would hear the case.[15]

The Seventh Circuit’s reasoning

            The MRVA requires restitution awards to subtract “the value (as of the date the property is returned) of any part of the property that is returned” (emphasis added).[16] The Seventh Circuit based its opinion on a “plain meaning” reading of the MVRA.[17] It reasoned that the MVRA’s language allows the defendant to subtract the value of whatever part of “the property” he surrendered, but that “the property” must mean the specific property stolen, which the court held here was the money rather than the house.[18] Yet this formalistic distinction between money and non-monetary property is inconsistent with the court’s own precedent. In United States v. Shepard, the Seventh Circuit had reasoned that an MVRA defendant improving the victim’s real estate and thereby increasing its market value before returning it was “no different in principle from taking the money from one . . . bank account[] and depositing it in another a week later.”[19] That logic is much sounder than the formalistic distinction between money and non-monetary property that drove the court’s decision in Robers.

            The Seventh Circuit’s best argument is that houses are not liquid, and so returning a house in return for money does not make the victim whole. [20] A bank may not be able to sell a house immediately without accepting a substantially discounted price, but the banks in this case held on to the property longer than needed to sell it. MGIC acknowledges that it made a business decision to attempt to reduce its losses by not selling the house, and American Portfolio held on to into its house even longer – more than two years.[21]

            This decision to hold on to the property – not the defendant’s fraud – is the reason the housing market affected the restitution award. The Seventh Circuit decided Robers should bear the risk of the market decline because his fraud caused the loss.[22] But the loss would not have happened if the bank had sold immediately rather than waiting in the hope the houses’ values would improve; the victim’s business decision to wait to sell caused the loss. The court’s decision ignores this alternate cause and ties the amount of restitution owed to the victim’s potentially risky business decisions.

            The court seems to be aware of this downside of its decision when it acknowledges that the additional restitution owed would have decreased if the banks’ bet had paid off and the value of the houses increased.[23]The results of the Seventh Circuit’s decision get even more absurd if one considers what would have happened if the value of the houses had increased so impressively that it exceeded the amount owed. The Seventh Circuit stated that the defendant would owe nothing,[24] but doesn’t its reasoning suggest that the bank should actually owe the difference to the defendant, lest the restitution paid exceed the amount stolen?

            Further absurdity results when one considers what would happen if the bank never sold the properties at all. If, as the court argues, no “return” takes place until the victims sell the collateral property for cash, will a “return” never take place if the victim decides, in its business judgment, to hold on to the property indefinitely? It is ridiculous to argue that Robers did not return any property at all when he handed over the houses.

            The Court’s rule in Robers creates perverse incentives for victims to hold on to properties even in the face of extreme risk. After all, there is always a chance the value of the property increases, and the lender profits. If the property loses value, under the Robers rule, the defendant will be forced to make up the loss. Removing this risk from the decision-maker creates inefficient results.

The proposed solution

            The only workable rule is for the court to subtract the true value of the property when it is surrendered. It is easy in this case to want the fraudster to carry the risk, but the Seventh Circuit’s rule may actually benefit fraudsters in future cases where the property’s value improved.

            The government and the Seventh Circuit noted that the banks incurred significant costs selling the properties, and that those costs should be deducted from whatever value Robers returned.[25] That is undoubtedly correct. The decrease in value between the date the property is returned and the date it is sold might correctly be considered a cost as well, but only if it is sold as quickly as reasonably possible. Such a calculation would yield the correct value of the property returned. The Supreme Court should clarify that collateral property surrendered to a victim of fraud is valued at the market value at the time it is surrendered, less the costs that must be incurred in liquidating it.