U.S. v. Rice, s. 93-30383

• Decision Date: 02 November 1994
• Docket Number: 93-30407,Nos. 93-30383,s. 93-30383
• Citation: 38 F.3d 1536
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Bruce J. RICE, Defendant, and Rice Aircraft, Inc., Defendant-Appellant. UNITED STATES of America, Plaintiff-Appellee, v. Bruce RICE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1536

38 F.3d 1536

UNITED STATES of America, Plaintiff-Appellee, v. Bruce J. RICE, Defendant, and Rice Aircraft, Inc., Defendant-Appellant.

UNITED STATES of America, Plaintiff-Appellee, v. Bruce RICE, Defendant-Appellant.

Nos. 93-30383, 93-30407.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 12, 1994.

Memorandum Filed Aug. 22, 1994.

Decided Nov. 2, 1994.

Jeffrey H. Daichman, Feltman, Karesh, Major & Farbman, New York City, for defendants-appellants.

Bruce D. Carter, Asst. U.S. Atty., Seattle, WA, for plaintiff-appellee.

Thomas H. Mabie, Morgan, Lewis & Bockius, Los Angeles, CA, for amicus Hi-Shear. Bart J. Freedman, Preston, Gates & Ellis, Seattle, WA, for amicus Grumman Aerospace Corp.

Appeals from the United States District Court for the Western District of Washington.

Before: GOODWIN, D.W. NELSON, and HALL, Circuit Judges.

ORDER

The government's request for publication is GRANTED.

The memorandum filed August 22, 1994, is redesignated as an authored opinion by Judge Goodwin.

OPINION

GOODWIN, Circuit Judge:

After pleading guilty to charges of conspiracy and mail fraud, Rice Aircraft, Inc., a distributor of high-technology aircraft fasteners, and Bruce Rice, its chief executive officer (collectively "Rice") appeal a final judgment ordering them to pay restitution to four companies injured by their criminal conduct. We affirm.

I.

Rice Aircraft buys aircraft parts from parts manufacturers and distributes them to airplane manufactures. Hi-Shear Corporation ("Hi-Shear") manufactures high-technology aircraft fasteners (specially designed nuts and bolts or "Hi-Lok" parts) used to attach aircraft engines to wings and wings to aircraft fuselage.

Because fastener failure has serious consequences, both military and commercial aircraft manufacturers require fasteners to meet rigorous quality assurance standards. Shipments must be accompanied by testing reports and documentation, identifying the fasteners by production lot and confirming that samples from the lot, as well as the relevant raw materials, have been tested for quality control. This documentation enables aircraft manufactures to trace discrepant fasteners to certain lots and raw materials.

Rice admits that, beginning in 1982 and continuing "at least until" October 1987, Rice engaged in a scheme to defraud customers and evade these quality assurance procedures. As part of this scheme, Rice employed an unauthorized reprocessing firm to reprocess approximately 7.5 million fasteners. Rice then fraudulently sold these reprocessed fasteners as new. In order to evade their customers' quality assurance procedures, Rice bribed certain Hi-Shear employees to provide them with Hi-Shear test reports and then arbitrarily sent these test reports with untested, reprocessed, fasteners, thereby falsely assuring customers that the reprocessed fasteners had been manufactured and tested under Hi-Shear-approved procedures.

The plea agreement provided that Rice and Rice Aircraft would be jointly and severally liable for restitution and would collectively pay no more than one million dollars in restitution. The district court sentenced Bruce Rice to four years imprisonment for Count I (conspiracy) ¹ and to probation on counts II and III (the mail fraud counts); the court sentenced Rice Aircraft to probation and fines.

On appeal, we affirmed the convictions and Bruce Rice's sentence, specifically affirming the district court's sentencing findings. However, we reversed in part Rice Aircraft's sentence, holding that the district court erred in sentencing Rice Aircraft to probation. Unpublished Memorandum, 937 F.2d 614 (9th Cir.1991). The Supreme Court denied certiorari. --- U.S. ----, 112 S.Ct. 966, 117 L.Ed.2d 132 (1992). On remand, the parties again stipulated that the restitution would be limited to one million dollars, with specific amounts to be determined in subsequent proceedings. April 29, 1992, Stipulated Order, ER 101-02. On the government's motion, the district court ordered Rice and Rice Aircraft to pay one million dollars in restitution, divided pro rata between Grumman Aerospace Corp. ("Grumman"), Hi-Shear, Special-T-Fasteners ("STF") and Defense Industrial Supply Center ("DISC"). Rice timely appealed.

II. RESTITUTION

Within the statutory framework, a restitution order is reviewed for abuse of discretion. United States v. Parrott, 992 F.2d 914, 916 (9th Cir.1993). The legality of a restitution order is reviewed de novo, id., while the district court's underlying factual findings are reviewed for clear error. United States v. Smith, 944 F.2d 618, 623 (9th Cir.1991), cert. denied, --- U.S. ---- 112 S.Ct. 1515, 117 L.Ed.2d 651 (1992).

Rice's restitution award is legal if either the Federal Probation Act ("FPA") or the Victim and Witness Protection Act ("VWPA") authorizes it. ² Parrott, 992 F.2d at 916-17; United States v. Weir, 861 F.2d 542, 546 (9th Cir.1988), cert. denied, 489 U.S. 1089, 109 S.Ct. 1555, 103 L.Ed.2d 858 (1989). Under either statute, the government has the burden of establishing by a preponderance of the evidence that the victim's damages were caused by the conduct of which the defendant was convicted. Parrott, 992 F.2d at 917.

III. GRUMMAN

Grumman is a Rice customer which manufactures military and civilian aircraft for the Navy and other customers. When Grumman learned of the criminal charges against Rice, it impounded its entire inventory of Rice-supplied fasteners. Since then, it has allegedly been unable to sort potentially fraudulent Rice-supplied fasteners from properly tested and authenticated ones. Because its clients, including the Navy, require all parts to be properly tested and authenticated, Grumman contends it cannot use any of its Rice-supplied fasteners. The district court found that Rice's conduct had tainted Grumman's entire inventory and awarded Grumman restitution based on the value of its entire Rice-supplied inventory. ³

A. The Offense of Conviction.

Rice first argues that the restitution award to Grumman was illegal because Grumman's alleged losses were not related to Rice's offense of conviction. See Hughey v. United States, 495 U.S. 411, 413, 110 S.Ct. 1979, 1981, 109 L.Ed.2d 408 (1990) (Under the VWPA, restitution may be awarded only for losses "caused by the specific conduct that is the basis of the offense of conviction."); United States v. McHenry, 974 F.2d 1031, 1033 (9th Cir.1992) (In conspiracy and fraud cases, restitution under the VWPA is available only for losses caused by the specific acts of which the defendants were convicted.); United States v. Sharp, 941 F.2d 811, 815 (9th Cir.1991). But see United States v. Hammer, 967 F.2d 339, 340 (9th Cir.1992) (upholding FPA restitution awarded to a fraud victim who did not receive the specific mailings which formed the basis of the defendant's guilty plea and noting that Hughey does not apply to restitution awarded under the FPA).

Specifically, Rice contends that it admitted sending false reports with reprocessed parts. However, the district court found Rice stopped sending reprocessed fasteners to Grumman in 1984. Grumman bought the impounded inventory after 1985 and thus, according to Rice, the impounded inventory does not contain any reprocessed fasteners. Rice contends that Grumman can recover restitution only for reprocessed fasteners, and not for its impounded inventory.

We disagree. Rice and Rice Aircraft pled guilty not only to reprocessing fasteners but also to sending false test reports. Both Rice and Rice Aircraft specifically admitted paying Hi-Shear employees for test reports during 1986 and 1987 and sending mismatched test reports "beginning in 1985 and continuing until at least October 21, 1987" (Count II). In addition, both stated that they "knowingly used these test reports to misrepresent to certain fastener purchasers that certain fasteners being sold were identified by, and traceable back to, a particular Hi-Shear manufacturing production lot number with the indicated test results." ER 71-72. These admissions are not limited to reprocessed parts.

Rice argues that Grumman cannot prove that any particular part in its inventory was accompanied by a false test report. This argument misstates the issue. Grumman alleges that it cannot use any fasteners without reliable documentation and test reports; a Navy employee confirmed that the Navy will not buy aircraft without such documentation and reports. Thus, the issue is not whether Grumman can prove that any particular documents are false, but whether it can prove to its customers' satisfaction that any particular test reports and documentation are valid.

According to Grumman, it attempted to obtain such proof: it contacted Hi-Shear and attempted to determine which parts were traceable. However, it found that, because of Rice's false documentation, Grumman could not accurately trace Rice's fasteners. In support of this argument, Grumman presented affidavits documenting various "suspicious" paperwork including mismatched numbering and purchase orders which did not correspond to actual inventory. See, e.g., Second Affidavit of Ernest Frank. Rice admits sending purchase orders which did not correspond to actual inventory.

The district court's finding that, because of Rice's fraudulent paperwork, Grumman cannot prove to its customers' satisfaction that its Rice-supplied parts meet industry standards was not clear error. To the extent that the victim is unable to determine which merchandise is safe and which is not because of the very fraudulent conduct of which the defendant was convicted, a district court acts well within its discretion in awarding restitution for the entire value of the contaminated merchandise which cannot be resold. Cf. United States v. Seligsohn, 981 F.2d 1418, 1421 (3rd Cir.1992) (upholding insurance fraud award for fraudulent claims even though some of the defendant's claims were legitimate where the defendant's own fraudulent conduct...