UNITED STATES OF AMERICA v. JONATHAN WEBER ARRINGTON (2023)

ORDER ON RESTITUTION

Defendant Jonathan Weber Arrington was sentenced on April 26, 2023, to a 36-month term of imprisonment following his conviction on one count of wire fraud. (ECF No. 62.) The parties agreed that Arrington's offense involved a loss amount of $315,835 for purposes of calculating the Sentencing Guidelines range. They disagreed, however, on whether restitution should be awarded in the same amount. The Government believes it should, but Arrington argued that he is entitled to an offset for the value of shares he returned to the victim-company after his fraud was discovered. The Court took the matter under advisement. The Court now concludes that restitution should be awarded in the full amount of $315,835.

I. FACTUAL BACKGROUND

The relevant facts are largely not in dispute—although the parties sharply disagree about the significance of those facts. In February 2019, Arrington began handling the finances for Recon Roofing and Construction, a small business based in Des Moines, Iowa. (ECF 49, ¶¶ 10, 11.) From August 19, 2019, through at least March 21, 2021, Arrington defrauded Recon by making unauthorized payments to himself from Recon's accounts via check and electronic transfer. (Id., ¶¶ 12–17.) Arrington concealed the fraud by, inter alia, making false entries in Recon's books. (Id., ¶¶ 13, 15.) In total, Arrington made unauthorized payments from Recon to himself totaling $315,835. (Id., ¶ 21.)

In April 2020, before Recon's majority owner discovered the fraud, he allowed Arrington to buy 4,500 shares in the company for $450. (Gov't Ex. 2, p. 24.) This gave Arrington a 45% ownership interest. (Id.) In March 2021, after Recon's owner discovered the fraud, he sent an email to Arrington asking him to “make this right” or “do the right thing” by selling his 4,500 shares back to the company. (Gov't Ex. 1; Tr. 12; Tr. 50.) Arrington agreed to do so by selling the shares back to Recon for $1 pursuant to a Unit Surrender Agreement dated March 25, 2021. (Def. Ex. A.) The Unit Surrender Agreement does not say why Arrington was selling back the shares beyond stating that he “wishes to surrender to [the majority owner] all of [Arrington's] right, title, and interest to the Units (the Surrendered Units).” (Id., p. 1.) The Unit Surrender Agreement also states, inter alia: “Payment. As consideration for the Surrendered Units, [the majority owner] will pay [Arrington] $1.” (Id.) The payment was made via check dated March 26, 2021, in the amount of $1. (Id., p. 5.)

During his presentence interview, Arrington told the United States Probation Office that he “still holds a 45% interest in Recon Roofing & Construction, although he indicated this did not have any monetary value.” (ECF 49, ¶ 83.) At the sentencing hearing, however, Arrington presented testimony from a valuation expert who opined that Recon had a total value of $1,099,148 as of March 25, 2021. (Def. Ex. C, p. 3.) According to the expert, this means that Arrington's 45% interest in the company had a value of almost $500,000 when he surrendered his shares—well above the loss amount of $315,835. (Id.) The expert admitted there were caveats to his valuation opinion in light of: “significant evidence of fraud” that called into question the validity of the tax returns on which he relied in rendering his opinion (Tr. 23); the “limited operating history of the company” (Def. Ex. C, p. 4); the fact that the “financials listed in the tax returns for 2020 did not match the company produced financials ․ and there were no reconciling factors in the tax return to explain the discrepancy” (id.); and the “massive growth” experienced by the company in 2020 and 2021, which might result in unsustainable revenue figures if the growth resulted from a “temporary external shock” like the derecho storm that hit Iowa in August 2020 (id.; see also Tr. 36). In addition, one of the expert's three valuation methodologies (the “Asset Based Approach”) depended heavily on a “job completion report” provided by Arrington purporting to show almost $1.9 million in open accounts receivable as of year-end 2020. (Def. Ex. C, p. 8; Tr. 39.) The expert did not audit the job completion report. (Tr. 39–40.) Regardless, the expert testified that the company “definitely has value” and there was a “better chance” of getting someone to buy it for $1.1 million than any other amount. (Tr. 35.)

II. LEGAL STANDARDS AND BURDEN OF PROOF.

When sentencing a defendant in a fraud case, the Court “shall order ․ that the defendant make restitution to the victim of the offense ․” 18 U.S.C. § 3663A(a)(1). “In each order of restitution, the court shall order restitution to each victim in the full amount of each victim's losses as determined by the court and without consideration of the economic circumstances of the defendant.” 18 U.S.C. § § 3664(f)(1)(A). The burden of proof is allocated as follows:

Any dispute as to the proper amount or type of restitution shall be resolved by the court by the preponderance of the evidence. The burden of demonstrating the amount of the loss sustained by a victim as a result of the offense shall be on the attorney for the Government. The burden of demonstrating the financial resources of the defendant and the needs of the defendant's dependents, shall be on the defendant. The burden of demonstrating such other matters as the court deems appropriate shall be upon the party designated by the court as justice requires.

Id., § 3664(e).

The outcome here revolves in substantial part around a question the Eighth Circuit has not clearly answered: who bears the burden of proof when the defendant claims an offset to restitution based on property or value returned to the victim prior to sentencing? “Most circuits that have addressed this issue have held that the defendant has the burden of persuasion with regard to any offset value.” United States v. Howard, 887 F.3d 1072, 1079 (10th Cir. 2018). According to Howard, seven Circuits (counting the Tenth) place the burden of proof on the defendant, versus only two that place it on the Government. Id. at 1079 n.3 (identifying the Second, Third, Fifth, Sixth, Seventh, and Eleventh Circuits as joining the Tenth in the majority, and the Fourth and Ninth in the minority). Courts following the majority rule often do so based on the language in § 3664(e) allowing the burden of proof to be placed upon “the party designated by the court as justice requires” on issues other than the amount of loss or defendant's financial resources. See, e.g., United States v. Sharma, 703 F.3d 318, 325 (5th Cir. 2012).

“It is somewhat uncertain in the Eighth Circuit which party bears the burden of proving an offset.” Howard, 887 F.3d at 1079 n.3. In United States v. Ruff, the Eighth Circuit appeared to place the burden on the defendant, stating: “If Ruff believes he can establish excess recovery by the [victim], he bears the burden to initiate further proceedings regarding any restitution offset.” 420 F.3d 772, 776 (8th Cir. 2005); see also, e.g., United States v. Pugh, 445 F.3d 1066, 1068 (8th Cir. 2006) (“A defendant claiming partial payment of his restitution debt has the burden of proof, and ambiguous evidence may be discounted.”); United States v. Bush, 252 F.3d 959, 962–63 (8th Cir. 2001) (“A defendant ordered to make restitution is not entitled to credit if he fails to offer proper proof of his repayments. In this case, the district court was unable to determine whether Mr. Bush had repaid some of his victims because the checks that he provided as proof contained no facial indication of their purpose.” (internal citations omitted)). By contrast, in United States v. Fonseca, the Eighth Circuit placed the burden on the Government to “prove the proper amount of the reduction” for the value of returned stolen property. 790 F.3d 852, 855 (8th Cir. 2015); see also United States v. Hansmeier, 988 F.3d 428, 440 (8th Cir. 2021) (“[T]he burden is on the government to ‘prove that the restitution awarded does not exceed the actual, provable loss caused by the offense.’ ” (quoting Fonseca, 790 F.3d at 854)). Finally, in United States v. Frazier, the Eighth Circuit did not clearly assign the burden of proof to either side when remanding for further proceedings on restitution in an arson case. 651 F.3d 899, 910–11 (8th Cir. 2011). In Frazier, the question was whether and to what extent the restitution award should have been adjusted to reflect the victim's retention of money that may have represented equity held by the defendant in the burned-down home. Id.

To the extent these cases are irreconcilable, the Court must follow the one decided first. See Mader v. United States, 654 F.3d 794, 800 (8th Cir. 2011) (“[W]hen faced with conflicting panel opinions, the earliest opinion must be followed ‘as it should have controlled the subsequent panels that created the conflict.’ ” (quoting T.L. ex rel. Ingram v. United States, 443 F.3d 956, 960 (8th Cir. 2006))). Meaning: the Court must place the burden on Arrington to prove any offset to the restitution amount. See Pugh, 445 F.3d at 1068; Bush, 252 F.3d at 962–63. This is consistent with how other district courts in the Eighth Circuit have allocated the burden in relatively recent cases involving restitution and offsets. See, e.g., United States v. Clausen, No. CR 16-256 (MJD/LIB), 2018 WL 4224081, at *2 (D. Minn. Sept. 5, 2018), aff'd, 949 F.3d 1076 (8th Cir. 2020); United States v. Rindone, No. 4:15-CR-3083, 2017 WL 963176, at *3 (D. Neb. Mar. 10, 2017).

The Court notes, in any event, that the Eighth Circuit cases are probably reconcilable. Fonseca involved the valuation of stolen property (guns) that was later recovered, thus implicating special language in the restitution statutes requiring the award to be reduced by “the value ․ of any part of the property that is returned.” 18 U.S.C. § 3663A(b)(1)(B)(ii). This is different than the situations in Ruff, Pugh, Bush, and here, where the defendants stole money but argued that they later gave value back to the victims in separate transactions that should have been credited against the restitution obligation. These situations involve offset as it typically arises in civil cases, where it is an affirmative defense for which the defendant bears the burden of proof. See, e.g., United States v. Renda Marine, Inc., 667 F.3d 651, 659 (5th Cir. 2012). It makes sense to place the burden of proving offset on the defendant in criminal restitution cases, too, as “restitution is ‘essentially a civil remedy created by Congress and incorporated into criminal proceedings for reasons of economy and practicality.’ ” United States v. Chalupnik, 514 F.3d 748, 753 (8th Cir. 2008) (quoting United States v. Carruth, 418 F.3d 900, 904 (8th Cir. 2005)). The return of stolen property cases, by contrast, arguably require a different analysis where the Government bears the burden of proving the difference in value between the property in its original form and as later returned.

Regardless, the bottom line here is that the “government bears the burden of demonstrating the amount of the loss sustained as a result of the offense,” but Arrington “bears the burden of establishing entitlement to an offset against that loss.” Rindone, 2017 WL 963176, at *3.

III. ARRINGTON HAS NOT MET HIS BURDEN OF PROVING AN OFFSET TO THE RESTITUTION AWARD.

The allocation of the burden of proof is outcome determinative. The Government satisfied its burden of proving that Recon sustained $315,835 in losses given Arrington's admission that he made unauthorized payments to himself totaling that amount over the course of the fraudulent scheme. Arrington, by contrast, has not met his burden of proving an offset based on his return of his 45% ownership interest in Recon for a nominal payment of $1 in March 2021.

The Court reaches this conclusion for two reasons. First, although Arrington presented sufficient evidence to convince the Court by a preponderance of the evidence that his 45% ownership interest in Recon had some value beyond $1, he has not shown that the value exceeds or even remotely approaches $315,835. Arrington himself told the United States Probation Office that his 45% interest “did not have any monetary value.” (ECF 49, ¶ 83.) The Court discounts this statement to some degree because Arrington presumably had not yet retained a valuation expert when he made it and does not appear to have independent expertise in business valuation. Even so, Arrington had a clear understanding of Recon's business and finances and therefore had at least an informed layperson's sense of what the company might be worth. The fact that he valued his ownership interest at zero must be given some weight and undermines the expert testimony later offered on his behalf at the sentencing hearing.

The expert's testimony was also undermined by shortcomings acknowledged by the expert himself (whom the Court found credible, if not persuasive) on the reliability of the information he used in forming his opinions. For example, the numbers reflected on Recon's tax returns, which the expert relied upon, did not match the numbers on the company's financial statements. The expert also relied heavily on information supplied by Arrington (a twice-convicted fraudster) but not audited by the expert, including a job completion report claiming Recon had approximately $1.9 million in open accounts receivable as of year end 2020. It is difficult to accept such a large number for open accounts receivable in the context of a company that had revenues of only $2.1 million for the entire year in 2019. And even if the $1.9 million figure was accurate, it almost certainly was affected by repair work arising out of the derecho in August 2020, a one-time shock event that resulted in revenues for 2020 and 2021 that were not likely to repeat in future years. Finally, at risk of stating the obvious, the company's books were heavily tainted by fraud. In fact, in addition to Arrington's fraud, a different employee also stole money from the company in or around 2019. The Court does not believe an arms-length buyer would pay anything close to $500,000 for a 45% ownership interest in a business whose operations were under such a heavy cloud of fraud. Instead, at most, the Court would value Arrington's 45% ownership interest as of March 2021 at something closer to $50,000.

This leads to the second problem for Arrington, which is even more significant. He bears the burden not just of proving the value of his ownership interest, but also that he returned that interest in March 2021 in partial repayment of the $315,835 he had stolen, as opposed to returning it for some other purpose. See Pugh, 445 F.3d at 1068 (“A defendant claiming partial payment of his restitution debt has the burden of proof, and ambiguous evidence may be discounted.”); United States v. Manzer, 69 F.3d 222, 230 (8th Cir. 1995) (explaining that “double recovery” is only a concern where repayments arose out of the same conduct prompting the criminal conviction). Arrington has not satisfied his burden by a preponderance of the evidence. The Unit Surrender Agreement does not state that Arrington was surrendering the shares to reimburse Recon for the stolen money, nor does the surrounding context show by a preponderance of the evidence that this was the purpose. At most, the evidence shows that Recon's owner asked Arrington to return his 45% interest to “make it right” (or words to similar effect). The question is: to make what right? It is possible that Arrington was trying to “make it right” in the sense of returning value to the company to reimburse what he had stolen. It is at least equally possible, however, that Arrington was trying to “make right” the fact that he never should have received the 45% ownership interest in the first place. After all, Arrington obtained the 45% ownership interest for nominal consideration ($450) in April 2020, some eight months after he secretly started stealing money from the company. The majority owner surely would not have given Arrington the ownership interest had the majority owner known of the fraudulent scheme. In the face of ambiguous evidence about the purpose of the return of the 45% ownership interest, the Court concludes that Arrington has not satisfied his burden of proof for any offset against the $315,835 in losses he caused to the victim. See Pugh, 445 F.3d at 1068 (refusing to give defendant credit for repayment where purpose of transfer of funds was ambiguous); Bush, 252 F.3d at 963 (affirming district court's refusal to offset where checks to victim “contained no facial indication of their purpose”).

It bears repeating that the allocation of the burden of proof is crucial to the Court's ruling. If the Government had the burden of proving that Arrington was not trying to reimburse Recon for what he had stolen when he surrendered his 45% ownership interest, the Court would conclude that the Government failed to satisfy that burden. The Court would then reduce Arrington's restitution obligation by $50,000. Conversely, if the Court is correct in interpreting Pugh and Bush (among other cases) as placing the burden of proof on Arrington to establish that he was trying to reimburse Recon for what he had stolen when he surrendered his 45% ownership interest, the restitution award should be in the full amount of $315,835 because Arrington has not met his burden. This is the quintessential 50/50 situation where the allocation of the burden of proof is outcome-determinative.

IV. CONCLUSION.

Arrington has proven by a preponderance of the evidence that the 45% ownership interest he surrendered to Recon in March 2021 had value beyond the nominal $1 payment he received for it. He has not proven by a preponderance of the evidence, however, that his purpose in surrendering those shares was to reimburse Recon for what he had stolen (as opposed to some other purpose). The Court therefore concludes that restitution should be awarded in the full amount of the victim's loss of $315,835. An Amended Judgment and Conviction will be entered awarding restitution in this amount.

IT IS SO ORDERED.

Dated this 8th day of May, 2023.

Stephen H. Locher UNITED STATES DISTRICT JUDGE