No Gain, Yes Pain

United States v. Woolf Turk, No 09-5091-cr (2d Cir. November 30, 2010) (Katzmann, Hall CJJ, Jones, DJ)

Ivy Woolf Turk was a principal in a real estate development company. Between 2003 and 2007 she and her partner persuaded investors to lend them $27 million, primarily to renovate apartment buildings in upper Manhattan. They induced the loans by promising that the investors would hold recorded first mortgages on the buildings as collateral. This was a lie – they never recorded the mortgages, so the investors were merely unsecured creditors. At the same time, the developers obtained loans from banks, and those liens were recorded.

Eventually Woolf Turk began defaulting on the victims’ loans. The victims became suspicious and discovered that, despite Woolf Turks’ representations, their mortgages had never been recorded. In May of 2007, the investors sued; only then did they learn that, not only were their mortgages unrecorded, but that the bank loans were recorded, and thus that their interests in the properties, if any, were secondary to the banks’.

Eventually, the development company went bankrupt and its assets were liquidated. Most went to the banks – the secured creditors – and the rest to pay various court and regulatory fees. The bankruptcy trustee was only able to distribute half a million dollars to the victims, who thus lost nearly all of the $27 million they lent to Woolf Turk.

Woolf Turk pled guilty to conspiracy to commit mail and wire fraud. At sentencing, the district court agreed with the government that the loss calculation for Guidelines purposes was more than $20 million, and calculated the Guidelines accordingly. With a resulting range of 121 to 151 months, the court sentenced Woolf Turk to 60 months’ imprisonment.

On appeal, Woolf Turk disputed the district court’s loss calculation, pursuing the same argument she made in the district court – that the victims’ loss was caused by the housing-market crash and not by Woolf Turks’ fraud. The circuit disagreed that “the loss amount should have been treated as zero because the properties in which her victims thought they were investing arguably had some market value at the time her fraud was discovered.”

This argument was based on the faulty premise that the loss was measured by the decline in value of what was promised as collateral. Rather, the victims’ loss “is the principal value of the loans they made to Woolf Turk which were never repaid and which the buildings were supposed to have collateralized but never did.”

Here, the buildings were “arguably” not collateral at all because the victims’ mortgages were never recorded, and under New York law, an unrecorded mortgage is void as against a lien on the same property recorded in good faith. It did not matter that, had the value of the properties had gone up, instead of down, the victims might have recovered all or part of their losses. Here, the purported collateral had no meaningful value at the time of sentencing.

The Guideline holds defendants accountable for any “reasonably foreseeable pecuniary harm,” which it defines as harm that the defendant knew or should have known could result from the offense. The potential for loss that Woolf Turk’s victims faced by not having recorded mortgages met this standard. Thus, the loss amount was the full principal of the loans that Woolf Turk fraudulently obtained. And it is irrelevant that some value might have remained in the collateral at the time the fraud was discovered, because the victims had no interest in the collateral, obtained no value from its sale, and no value remained at the time of sentencing.