The unprecedented real estate crash of recent years cost banks billions of dollars, forced many homeowners into foreclosure and nearly ruined the nation’s economy, but should it also be a mitigating factor when judges sentence individuals who have committed the types of mortgage fraud crimes that led to the housing crisis in the first place?
That was one of the defense theories proposed last week by Myrtle Beach resident Alissa Smith.
Smith and her common-law husband, Jim Putnam, were sentenced in federal court Thursday to prison terms for their roles in a widespread mortgage fraud scheme that took place along the Grand Strand just as the real estate boom was ending.
Smith’s lawyer argued in court documents that no one could have foreseen the plummet in housing prices caused by the subsequent real estate crash, and it was those unexpected market forces – not Smith’s fraudulent acts – that led to at least some of the bank’s financial losses on the deals in which she participated.
By arguing that the financial losses were the economy’s fault – and not hers – Smith hoped to lower the dollar amount of damages attributed to her under federal sentencing guidelines, thus reducing her possible prison sentence.
Leon Stavrinakis, Smith’s defense lawyer, ultimately decided not to pursue that line of thinking in front of Judge Bryan Harwell during sentencing last week in Florence, according to John Potterfield, the assistant U.S. attorney who prosecuted the case. Stavrinakis could not be reached for comment.
Smith, age 30, was sentenced to five months in prison followed by two years of home detention and then three years of supervised release. Putnam, age 42, was sentenced to 27 months in prison followed by three years of supervised release.
Smith and Putnam – who pleaded guilty to accepting fraudulent payments from real estate closings – will report to prison at an unspecified future date. The couple must also pay a combined $6.3 million in restitution to RBC Bank, which made the loans from which Smith and Putnam took their payments.
Harwell apparently did not consider the market-collapse defense posed in Smith’s court filing as a mitigating factor in her prison sentence. A more important mitigating factor in her case, Potterfield said, was her cooperation with investigators and the special care needed by her 9-year-old son, who has autism, and 6-year-old daughter.
Some legal experts, however, say there is plenty of merit in the market-collapse defense, and its use as a mitigating factor could become more frequent in future mortgage fraud sentencings.
“Who is responsible for the amount of the bank’s loss is subjective,” said Richard Lovelace, a Conway lawyer who specializes in banking and real estate law. Lovelace, who had no role in the Smith and Putnam cases, said both the buyer and the bank take a risk when property is sold, “and the economy decides who wins and who loses.”
The fraudulent acts by Smith and Putnam certainly contributed to the ultimate loan defaults, Lovelace said, but the extent of the bank’s losses on those loans was determined by market fluctuations that took place between the real estate closing and its foreclosure.
If the real estate crash hadn’t occurred, the bank’s loss might have been minimal. If property values had continued to rise, there might not have been any loss at all. Or – as was the case here – the bottom could have fallen out of the market and the loss would be substantial.
The same fraudulent acts would have occurred in each scenario, but it would have been the economic fluctuations that determined how much money the bank lost.
“They’re being punished for the criminal act, not the market collapse,” Lovelace said, adding that prosecutors would probably argue just as convincingly that the type of fraud perpetrated by Smith and Putnam “furthered the market’s deterioration.”
The National Association of Criminal Defense Lawyers is proposing changes to the federal sentencing guidelines that would put more responsibility for financial losses on banks and market conditions in mortgage fraud cases. Those changes are being considered by a U.S. Senate commission.
“A foreclosing bank’s decision to hold on to a declining property long after it could or should have sold the asset should not drive the length of imprisonment an offender receives,” Lisa Monet Wayne, president of the group, said in a March 19 memo to the commission. “Likewise, precipitous drops in real estate markets, unforeseen by expert appraisers, bankers or real estate experts, should not add years to the sentences of defendants who may never have intended to create any losses at all.”
Stavrinakas said in court filings that federal sentencing guidelines hold defendants responsible only for the foreseeable consequences of their criminal acts.
“I do not believe the largest real estate collapse, and corresponding bank losses, since the Great Depression were foreseeable,” Stavrinakas said in court documents, adding that Horry County’s real estate values dropped an average of 35 percent to 40 percent from their peaks around 2007.
“Alissa Smith is only 30 years old,” Stavrinakas said. “A person her age and older grew up in an era where gains were all she ever had expected because it was all she had ever seen. A catastrophe of the degree seen in the real estate market was not foreseen by the banks making loans, their hired experts or by professional investors or their hired experts, so they certainly were not foreseeable by someone like Alissa.”
Bill Nettles, the U.S. attorney for South Carolina, filed a memorandum in Smith’s case objecting to the market-collapse argument. Nettles, in the court filing, said the foreseeable loss to the bank was clear from the outset – the full amount of money being loaned against the property that was clearly shown on the HUD-1 closing statement. Smith received credit for the amount of money the bank recovered from foreclosure sales, which is all she was entitled to receive, Nettles said.
“It would seem that the defendant would argue that the credit against loss is insufficient, in that the reduction in the value of the real estate was not reasonably foreseeable,” Nettles said in the court filings. “There is no requirement under the guidelines that the amount of the credit against loss be reasonably foreseeable, but simply that the defendant be given credit for that amount.”
Several circuit courts around the country have rejected the market-collapse argument in recent mortgage fraud cases, according to a March report by the U.S. Sentencing Commission. The National Association of Criminal Defense Lawyers hopes to change that by pushing for permanent new guidelines that hold defendants accountable only for the intended effects of their actions, not the resulting effects of market forces.
If the association is successful, it could lead to lighter sentences for those who committed the fraudulent acts that many experts say led to the real estate collapse in the first place.
Trustee proposes Triton Stone sale
Bankruptcy court trustee Robert Anderson has proposed selling the entire remaining inventory at the former Triton Stone dealerships in Conway and Charlotte, N.C., to Triton Stone Group, the wholesale distributor for Triton Stone dealerships throughout the South.
Anderson proposed selling the inventory – which includes hundreds of stone slabs, plumbing supplies, tools and office supplies – for $372,882.50 in a court filing last week. The sale to Triton Stone Group will proceed unless an objection is filed, in which case a hearing will be held on Sept. 10 in Charleston. The sale is part of the Chapter 7 bankruptcy liquidation of Congaree Triton Acquisitions LLC, which purchased the Conway and Charlotte dealerships in 2010.
Congaree Triton Acquisitions – which is owned by Carroll “Tumpy” Campbell III, son of the former S.C. governor, and John Cattano, former treasurer of the S.C. Republican Party – has been in a bitter legal dispute with Triton Stone Group over the purchase of the franchises. Campbell and Cattano say Triton Stone misrepresented the franchises’ finances and then used extortion and “strong-arm tactics” to get them to pay debts owed by the previous franchisees.
Triton Stone denies the allegations, saying Campbell and Cattano agreed to take on the franchises’ liabilities when they bought the dealerships for about $3 million – nearly $2 million less than their book value without the liabilities.
That dispute is pending in federal court in Florence with an April 2013 trial date scheduled.
Congaree Triton Acquisitions had asked for Chapter 11 reorganization in its separate bankruptcy filing, but Judge John Waites converted the case to a liquidation following a blistering report by a court-appointed financial examiner that alleged mismanagement of the dealerships and financial records that are missing, inaccurate or misleading.
Joshua Kessler, the managing director of Triton Stone Group, said he intends to re-sell the Conway and Charlotte inventories to other Triton dealerships. Kessler said he will use all of the proceeds from those sales – minus legal fees and moving expenses – to help pay off creditors in the Congaree Triton Acquisitions bankruptcy. Some of those creditors work with other Triton dealerships and Kessler said using the inventory to help pay them will build good will between the creditors and other franchises.
“I’m not taking a single penny from the sales,” Kessler said. “I’ll pay the attorney’s fees and the cost of moving the stuff, and 100 percent of the remaining proceeds will go to the creditors.”
Cattano, in a written statement, said he is disappointed in Anderson’s decision.
“It is unfortunate that the same group that placed us into this situation is attempting to profit from the situation,” Cattano said, referring to Triton Stone Group. “This continues to be a very serious matter that will be decided in federal court next April. It is very apparent to me and my partner, Carroll Campbell, that fraud was committed against us and our families, and we remain confident that justice will be served through the outcome of our litigation.”
Spain signs guilty plea agreement
Kashief Spain – the Myrtle Beach man who police say was caught with a stolen handgun belonging to a former public safety director – has signed an agreement to plead guilty to charges of being a felon in possession of a handgun, according to documents filed in federal court Friday.
Spain signed the agreement on June 26 but it was not filed until last week.
Spain was arrested on Nov. 14 following a pursuit along the Carolina Bays Parkway. During the police chase, Spain tossed a handgun out of the window of his car, according to a police report. Police found a .40-caliber Glock pistol, which turned out to be a police service weapon that had been stolen nearly two years earlier from a vehicle belonging to William Bailey, the former public safety director in North Myrtle Beach.
The federal charge carries a sentence of not less than 15 years in prison because Spain has been convicted of at least three previous violent felonies or drug offenses.
Contact DAVID WREN at 626-0284.