United States v. Johns

• Citation: 686 F.3d 438
• Decision Date: 17 July 2012
• Docket Number: No. 11–3299.,11–3299.
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Christopher JOHNS, Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

686 F.3d 438

UNITED STATES of America, Plaintiff–Appellee,

v.Christopher JOHNS, Defendant–Appellant.

No. 11–3299.

United States Court of Appeals,Seventh Circuit.

Argued April 19, 2012.

Decided July 17, 2012.

Gordon P. Giampietro (argued), Attorney, Office of the United States Attorney, Milwaukee, WI, for Plaintiff–Appellee.

Daniel W. Stiller (argued), Federal Public Defender, Federal Defender Services of Eastern Wisconsin, Incorporated, Milwaukee, WI, for Defendant–Appellant.

Before EASTERBROOK, Chief Judge, and FLAUM and WOOD, Circuit Judges.

FLAUM, Circuit Judge.

In 2005, the housing market in America was near its peak. Allen Banks wanted to cash in on the housing bubble, and Christopher Johns—the defendant in this case—was willing to help. Banks was a construction worker by trade, and he was hoping to purchase houses from distressed homeowners and flip those houses for a profit. The problem, it seems, was that he did not have enough capital to conduct this business. Johns knew a scheme to work around this problem, and taught that scheme to Banks. Together, Johns and Banks would purchase homes from distressed owners at inflated prices, perhaps nearing the highest price that they might sell for if the homes were not approaching a forced sale. As a condition of the purchase, however, the homeowners had to promise that they would return the amount of money they received above and beyond what they owed their own lenders. In essence, Johns and Banks were manufacturing equity, then demanding it back from the homeowners. The owners were willing to go along, since their only other option was foreclosure and a forced sale. Banks' benefit was that he could renovate the newly-acquired houses simply by using the funding he received for the purchase of the home, then pay back his lender after the home was resold. Johns, meanwhile, would collect a broker's fee for each sale.

Eventually Johns and Banks conducted this scheme to purchase a home from a couple in bankruptcy. For whatever reason, Johns and Banks decided that a mortgage was necessary to secure the return payment (what Johns called the “rinsed equity”) from the owners of the home to Banks at closing. Johns wrote up a mortgage document listing Banks' girlfriend as the mortgagee, and he told the trustee of the owners' bankruptcy estate about the second, seemingly fraudulent mortgage. Despite some protestations by the trustee, the sale went through, and Banks used some of the rinsed equity to pay off all of the owners' creditors through the bankruptcy trustee. The owners' bankruptcy lawyer, however, became suspicious, and eventually caught on to Johns and Banks' scheme, which eventually led to the indictment of Johns and Banks. This appeal is from Johns' conviction for making false representations to the debtors' trustee regarding the second mortgage and for receiving property from a debtor with the intent to defeat the provisions of the Bankruptcy Code. Johns challenges the sufficiency of the evidence for all four counts against him and the jury instructions. Johns also challenges two sentencing enhancements the court included in its calculation of Johns' guidelines range—one for the financial loss caused by Johns and one for targeting vulnerable victims—before the court sentenced Johns to 30 months in prison. For the following reasons, we affirm in part and reverse in part the district court's rulings, and remand for further proceedings.

I. Background

Johns and Banks first connected at Prosperity Mortgage, a company owned by Johns, where Banks worked for Johns repairing customers' credit. The genesis of the scheme was Banks' desire to get involved in the real estate business, which, at the time, was very lucrative due to the housing bubble. Banks had a background in construction, and it was his desire to purchase houses, rehabilitate them, and sell them at a profit. The problem, as mentioned above, was that Banks did not have the capital to purchase and rehabilitate these houses.

Johns had a solution this problem. While the record is unclear as to when and how the two decided to begin the scheme at issue, at some point Johns taught Banks how to “rinse equity.” The first step of the scheme was to locate a house on the verge of foreclosure and offer to purchase the house. Instead of offering the reduced price for which a foreclosure house would usually sell, however, Banks would offer an inflated price. This would allow the sellers to pay off their mortgage, avoid the foreclosure process, and have “equity” leftover. The catch was that Banks would require the sellers to return the newly-created equity to him once the sale went through. The sellers would therefore avoid the negative effects of having gone through a foreclosure and would walk away from the deal with their mortgage paid off, but would not leave with any additional monetary benefit. To fund his purchase of these homes, Banks sought financing from a lender, who was unaware of the fact that, in reality, Banks was purchasing homes for less than the amount that he was actually borrowing. In essence, Banks' lender provided loans to purchase homes, but Banks used that money to both purchase and renovate those homes. The benefit to Johns in this scheme was the fee he would receive for acting as broker for the deal. The sellers would not deal directly with Banks until the actual closing; rather, Johns would conduct all negotiations and arrange the purchase. In exchange, he collected a seemingly standard broker's fee.

Johns and Banks first conducted this scheme with Johns' house. Banks purchased the house and, upon closing, received close to $20,000 back from Johns. The check, however, was not made out to Banks, but to a third party, presumably to avoid any suspicions from lenders involved in the purchase.

While there are several relevant sales in this case, the actual charges levied against Johns—charges of false statements in a bankruptcy proceeding and receipt of property in a manner inconsistent with the purposes of the bankruptcy process—stemmed from the purchase of Arthur and Bobbie Ten Hoves' home. At the time that the Ten Hoves were approached by Banks and Johns, they were involved in Chapter 13 bankruptcy proceedings. They were also approaching a sheriff's sale of their home, since they were unable to make their mortgage payments to their lender. The Ten Hoves were introduced to Johns as a “mortgage guy” that would purchase their home and help them avoid the ruinous effects that foreclosure would have on their credit. Johns first attempted to purchase the property by way of short sale, offering $62,000 for the home despite the $87,000 that the Ten Hoves' still owed their lender. The Ten Hoves agreed to the sale, but the lender rejected it. Six weeks later Johns again approached the Ten Hoves, this time acting as Banks' agent. Johns, on behalf of Banks, offered the Ten Hoves $120,000 for their home, but asked that the Ten Hoves promise to pay back $30,000 to Banks at closing, which was all but $3,000 of the “equity” in the Ten Hoves' home. The Ten Hoves agreed to the deal.

In order to secure the Ten Hoves' promise to pay Banks $30,000 at closing, Johns had them sign a mortgage document. The document allegedly secured the $30,000 payment owed to Banks, but the mortgagee listed was Stephanie Fledderman, Banks' girlfriend. Both the Ten Hoves and Fledderman testified that they had never met, and Fledderman confirmed that she never loaned the Ten Hoves any money. While the mortgage document states that it stands as security for a $30,000 note, the parties never actually executed a note. The Ten Hoves testified that they did not know they were singing a mortgage document, and that they thought they were signing something having to do with their bankruptcy proceedings.

Since the Ten Hoves were in bankruptcy at this time, Johns and Banks needed more than the Ten Hoves' consent in order to execute the deal. When individuals are in bankruptcy, any sale of their assets must be approved by the trustee or the Bankruptcy Court, so as to ensure the fair and equitable distribution of assets among all creditors. Accordingly, Johns contacted the Ten Hoves' trustee, asking how much the Ten Hoves owed all of their creditors and whether the trustee would approve the sale of the Ten Hoves' house to Banks. Johns also faxed the trustee numerous documents regarding the sale, including the mortgage document signed by the Ten Hoves. The trustee's office informed Johns that the Ten Hoves had $13,709.37 of debt, but denied him permission to execute the sale of the Ten Hoves' home based on the fact that the $30,000 unrecorded mortgage was not included in the Ten Hoves' bankruptcy petition and payment schedule. Johns nonetheless went through with the sale. Johns, Banks, and the Ten Hoves closed sometime in April 2005. A $13,709.37 check was issued to the Ten Hoves' trustee in satisfaction of their debt in bankruptcy.¹ This money was taken out of the equity that was supposed to be rinsed to Banks, and thus the Ten Hoves were only able to make a $13,723.75 payment instead of the full $30,000. That payment was made to Fledderman—though she was not present at the closing—and despite the fact that it was less than half the amount promised in the mortgage document, it was considered as satisfying the mortgage. Fledderman promptly forwarded the equity payment to Banks. As always, Johns received his standard broker's fee. The Ten Hoves were able to avoid foreclosure and walked away from the deal without any debt, but they did not capture any equity that might have existed in their home. Up until closing, Arthur Ten Hove believed that he might be able to keep some of the equity. He testified that Johns told him originally that he could keep $9,000, but that number was reduced as closing drew near, and at closing it was revealed that he would not be able to keep any of the equity.

The unpermitted sale had the obvious effect...