Petitioner N eder was convicted of filing false federal income tax returns and of federal mail fraud, wire fraud, and bank fraud. At trial, the District Court determined that materiality with regard to the tax and bank fraud charges was not a question for the jury and found that the evidence established that element. The court did not include materiality as an element of either the mail fraud or wire fraud charges. The Eleventh Circuit affirmed. It held that the District Court's failure to submit the materiality element of the tax offense to the jury was error under United States v. Gaudin, 515 U. S. 506, but that the error was subject to harmless-error analysis and was harmless because materiality was not in dispute and thus the error did not contribute to the verdict. The court also held that materiality is not an element of a "scheme or artifice to defraud" under the mail fraud, wire fraud, and bank fraud statutes, 18 U. S. C. §§ 1341, 1343, 1344, and thus the District Court did not err in failing to submit materiality to the jury.
1. The harmless-error rule of Chapman v. California, 386 U. S. 18, applies to a jury instruction that omits an element of an offense. Pp.7-20.
stitutional errors, reviewing courts must apply harmless-error analysis. An instruction that omits an element of the offense differs markedly from the constitutional violations this Court has found to defy harmless-error review, for it does not necessarily render a trial fundamentally unfair or an unreliable vehicle for determining guilt or innocence. Omitting an element can easily be analogized to improperly instructing the jury on the element, an error that is subject to harmless-error analysis, Johnson v. United States, 520 U. S. 461, 469. The conclusion reached here is consistent with Sullivan v. Louisiana, 508 U. S. 275, on which Neder principally relies. The strand of Sullivan's reasoning that supports his position that harmless-error review is precluded where a constitutional error prevents a jury from rendering a "complete verdict" on every element of an offense cannot be squared with the cases in which this Court has applied harmless-error analysis to instructional errors, see, e. g., Pope v. Illinois, 481 U. S. 497. The restrictive approach that Neder gleaned from Connecticut v. Johnson, 460 U. S. 73, a concurring opinion in Carella v. California, 491 U. S. 263, and language in Sullivan-under which an instructional omission, misdescription, or conclusive presumption can be subject to harmlesserror analysis only in three rare situations-is also mistaken. Neder underreported $5 million on his tax returns, failed to contest materiality at trial, and does not suggest that he would introduce any evidence bearing upon that issue if so allowed. Reversal without consideration of the error's effect upon the verdict would send the case back for retrial focused not on materiality but on contested issues on which the jury was properly charged. The Sixth Amendment does not require the Court to veer away from settled precedent to reach such a result. pp.8-15.
with errors infringing upon the jury's factfinding role and affecting its deliberative process in ways that are not readily calculable: Is it clear beyond a reasonable doubt that a rational jury would have found the defendant guilty absent the error? See, e. g., Arizona v. Fulminante, 499 U. S. 279. Where an omitted element is supported by uncontroverted evidence, this approach appropriately balances "society's interest in punishing the guilty ... and the method by which decisions of guilt are made." Connecticut v. Johnson, supra, at 86. Pp. 15-20.
2. Materiality is an element of a "scheme or artifice to defraud" under the federal mail fraud, wire fraud, and bank fraud statutes. Pp. 20-25.
(a) Under the framework set forth in United States v. Wells, 519 U. S. 482, the first step is to examine the statutes' text. The statutes neither define "scheme or artifice to defraud" nor even mention materiality. Thus, based solely on a reading of the text, materiality would not be an element of these statutes. However, a necessary second step in interpreting statutory language provides that" '[w]here Congress uses terms that have accumulated settled meaning under ... the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.''' Nationwide Mut. Ins. Co. v. Darden, 503 U. S. 318, 322. At the time of the mail fraud statute's enactment in 1872 and the later enactments of the wire fraud and bank fraud statutes, the well-settled, common-law meaning of "fraud" required a misrepresentation or concealment of material fact. Thus, this Court cannot infer from the absence of a specific reference to materiality that Congress intended to drop that element from the fraud statutes and must presume that Congress intended to incorporate materiality unless the statutes otherwise dictate. Contrary to the Government's position, the fact that the fraud statutes sweep more broadly than the common-law crime "false pretenses" does not rebut the presumption that Congress intended to limit criminalliability to conduct that would constitute common-law fraud. Durland v. United States, 161 U. S. 306, distinguished. Nor has the Government shown that the language of the fraud statutes is inconsistent with a materiality requirement. pp. 20-25.
(b) The Court of Appeals is to determine in the first instance whether the jury-instruction error was, in fact, harmless. Carella v. California, supra, at 266-267. P.25.
136 F.3d 1459, affirmed in part, reversed in part, and remanded.
the judgment, post, p. 25. SCALIA, J., filed an opinion concurring in part and dissenting in part, in which SOUTER and GINSBURG, JJ., joined, post, p. 30.
Javier H. Rubinstein argued the cause for petitioner.
Roy W McLeese III argued the cause for the United States.
Petitioner was tried on charges of violating a number of federal criminal statutes penalizing fraud. It is agreed that the District Court erred in refusing to submit the issue of materiality to the jury with respect to those charges involving tax fraud. See United States v. Gaudin, 515 U. S. 506 (1995). We hold that the harmless-error rule of Chapman v. California, 386 U. S. 18 (1967), applies to this error. We also hold that materiality is an element of the federal mail fraud, wire fraud, and bank fraud statutes under which petitioner was also charged.
*Briefs of amici curiae urging reversal were filed for the American Council of Life Insurance et al. by James F. Fitzpatrick and Nancy L. Perkins; and for the National Association of Criminal Defense Lawyers by Roger W Yoerges and Lisa Kemler.
trolled. U sing inflated appraisals, N eder secured bank loans that typically amounted to 70% to 75% of the inflated resale price of the land. In so doing, he concealed from lenders that he controlled the shell corporations, that he had purchased the land at prices substantially lower than the inflated resale prices, and that the limited partnerships had not made substantial down payments as represented. In several cases, Neder agreed to sign affidavits falsely stating that he had no relationship to the shell corporations and that he was not sharing in the profits from the inflated land sales. By keeping for himself the amount by which the loan proceeds exceeded the original purchase price of the land, Neder was able to obtain more than $7 million. He failed to report nearly all of this money on his personal income tax returns. He eventually defaulted on the loans.
Neder also engaged in a number of schemes involving land development fraud. In 1985, he obtained a $4,150,000 construction loan to build condominiums on a project known as Cedar Creek. To obtain the loan, he falsely represented to the lender that he had satisfied a condition of the loan by making advance sales of 20 condominium units. In fact, he had been unable to meet the condition, so he secured additional buyers by making their down payments himself. He then had the down payments transferred back to him from the escrow accounts into which they had been placed. N eder later defaulted on the loan without repaying any of the principal. He employed a similar scheme to obtain a second construction loan of $5,400,000, and unsuccessfully attempted to obtain an additional loan in the same manner.
and he obtained almost $3 million unrelated to any work actually performed.
Neder was indicted on, among other things, 9 counts of mail fraud, in violation of 18 U. s. C. § 1341; 9 counts of wire fraud, in violation of § 1343; 12 counts of bank fraud, in violation of § 1344; and 2 counts of filing a false income tax return, in violation of 26 U. s. C. § 7206(1). The fraud counts charged Neder with devising and executing various schemes to defraud lenders in connection with the land acquisition and development loans, totaling over $40 million. The tax counts charged N eder with filing false statements of income on his tax returns. According to the Government, Neder failed to report more than $1 million in income for 1985 and more than $4 million in income for 1986, both amounts reflecting profits N eder obtained from the fraudulent real estate loans.
In accordance with then-extant Circuit precedent and over N eder's objection, the District Court instructed the jury that, to convict on the tax offenses, it "need not consider" the materiality of any false statements "even though that language is used in the indictment." App. 256. The question of materiality, the court instructed, "is not a question for the jury to decide." Ibid. The court gave a similar instruction on bank fraud, id., at 249, and subsequently found, outside the presence of the jury, that the evidence established the materiality of all the false statements at issue, id., at 167. In instructing the jury on mail fraud and wire fraud, the District Court did not include materiality as an element of either offense. Id., at 253-255. Neder again objected to the instruction. The jury convicted Neder of the fraud and tax offenses, and he was sentenced to 147 months' imprisonment, 5 years' supervised release, and $25 million in restitution.
v. Gaudin, 515 U. S. 506 (1995), in failing to submit the materiality element of the tax offense to the jury. It concluded, however, that the error was subject to harmless-error analysis and, further, that the error was harmless because "materiality was not in dispute," 136 F. 3d, at 1465, and thus the error "'did not contribute to the verdict obtained,'" ibid. (quoting Yates v. Evatt, 500 U. S. 391, 403 (1991)). The Court of Appeals also held that materiality is not an element of the mail fraud, wire fraud, and bank fraud statutes, and thus the District Court did not err in failing to submit the question of materiality to the jury.
We granted certiorari, 525 U. S. 928 (1998), to resolve a conflict in the Courts of Appeals on two questions: (1) whether, and under what circumstances, the omission of an element from the judge's charge to the jury can be harmless error, and (2) whether materiality is an element of the federal mail fraud, wire fraud, and bank fraud statutes.
Rule 52 (a) of the Federal Rules of Criminal Procedure, which governs direct appeals from judgments of conviction in the federal system, provides that "[a]ny error, defect, irregularity or variance which does not affect substantial rights shall be disregarded." Although this Rule by its terms applies to all errors where a proper objection is made at trial, we have recognized a limited class of fundamental constitutional errors that "defy analysis by 'harmless error' standards." Arizona v. Fulminante, 499 U. S. 279, 309 (1991); see Chapman v. California, 386 U. S., at 23. Errors of this type are so intrinsically harmful as to require automatic reversal (i. e., "affect substantial rights") without regard to their effect on the outcome. For all other constitutional errors, reviewing courts must apply Rule 52(a)'s harmless-error analysis and must "disregar[d]" errors that are harmless "beyond a reasonable doubt." I d., at 24.
In this case the Government does not dispute that the District Court erred under Gaudin in deciding the materiality element of a § 7206(1) offense itself, rather than submitting the issue to the jury. See Brief for United States 10, and n. 1. We must decide whether the error here is subject to harmless-error analysis and, if so, whether the error was harmless.
We have recognized that "most constitutional errors can be harmless." Fulminante, supra, at 306. "[I]f the defendant had counsel and was tried by an impartial adjudicator, there is a strong presumption that any other [constitutional] errors that may have occurred are subject to harmless-error analysis." Rose v. Clark, 478 U. S. 570, 579 (1986). Indeed, we have found an error to be "structural," and thus subject to automatic reversal, only in a "very limited class of cases." Johnson v. United States, 520 U. S. 461, 468 (1997) (citing Gideon v. Wainwright, 372 U. S. 335 (1963) (complete denial of counsel); Tumey v. Ohio, 273 U. S. 510 (1927) (biased trial judge); Vasquez v. Hillery, 474 U. S. 254 (1986) (racial discrimination in selection of grand jury); McKaskle v. Wiggins, 465 U. S. 168 (1984) (denial of selfrepresentation at trial); Waller v. Georgia, 467 U. S. 39 (1984) (denial of public trial); Sullivan v. Louisiana, 508 U. S. 275 (1993) (defective reasonable-doubt instruction)).
trial cannot reliably serve its function as a vehicle for determination of guilt or innocence ... and no criminal punishment may be regarded as fundamentally fair." Id., at 577-578.
Unlike such defects as the complete deprivation of counsel or trial before a biased judge, an instruction that omits an element of the offense does not necessarily render a criminal trial fundamentally unfair or an unreliable vehicle for determining guilt or innocence. Our decision in Johnson v. United States, supra, is instructive. Johnson was a perjury prosecution in which, as here, the element of materiality was decided by the judge rather than submitted to the jury. The defendant failed to object at trial, and we thus reviewed her claim for "plain error." Although reserving the question whether the omission of an element ipso facto" 'affect[s] substantial rights,'" 520 U. S., at 468-469, we concluded that the error did not warrant correction in light of the "'overwhelming'" and "uncontroverted" evidence supporting materiality, id., at 470. Based on this evidence, we explained, the error did not "'seriously affec[t] the fairness, integrity or public reputation of judicial proceedings.''' Id., at 469 (quoting United States v. Olano, 507 U. S. 725, 736 (1993)).
(mandatory rebuttable presumption); Carella v. California, 491 U. S. 263 (1989) (per curiam) (mandatory conclusive presumption); Pope v. Illinois, 481 U. S. 497 (1987) (misstatement of element); Rose, supra (mandatory rebuttable presumption). In other cases, we have recognized that improperly omitting an element from the jury can "easily be analogized to improperly instructing the jury on an element of the offense, an error which is subject to harmless-error analysis." Johnson, supra, at 469 (citations omitted); see also California v. Roy, 519 U. S. 2, 5 (1996) (per curiam) ("The specific error at issue here-an error in the instruction that defined the crime-is ... as easily characterized as a 'misdescription of an element' of the crime, as it is characterized as an error of 'omission' "). In both cases-misdescriptions and omissions-the erroneous instruction precludes the jury from making a finding on the actual element of the offense. The same, we think, can be said of conclusive presumptions, which direct the jury to presume an ultimate element of the offense based on proof of certain predicate facts (e. g., "You must presume malice if you find an intentional killing"). Like an omission, a conclusive presumption deters the jury from considering any evidence other than that related to the predicate facts (e. g., an intentional killing) and "directly foreclose[s] independent jury consideration of whether the facts proved established certain elements of the offens[e]" (e. g., malice). Carella, 491 U. S., at 266; see id., at 270 (SCALIA, J., concurring in judgment).
ysis, the Court concluded that the error was not subject to harmless-error analysis because it "vitiates all the jury's findings," 508 U. S., at 281, and produces "consequences that are necessarily unquantifiable and indeterminate," id., at 282. By contrast, the jury-instruction error here did not "vitiat[e] all the jury's findings." Id., at 281; see id., at 284 (REHNQUIST, C. J., concurring). It did, of course, prevent the jury from making a finding on the element of materiality.
Neder argues that Sullivan's alternative reasoning precludes the application of harmless error here. Under that reasoning, harmless-error analysis cannot be applied to a constitutional error that precludes the jury from rendering a verdict of guilty-beyond-a-reasonable-doubt because "the entire premise of Chapman review is simply absent." Id., at 280. In the absence of an actual verdict of guiltybeyond-a-reasonable-doubt, the Court explained: "[T]he question whether the same verdict of guilty-beyond-areasonable-doubt would have been rendered absent the constitutional error is utterly meaningless. There is no object, so to speak, upon which the harmless-error scrutiny can operate." Ibid.; see Carella, supra, at 268-269 (SCALIA, J., concurring in judgment). Neder argues that this analysis applies with equal force where the constitutional error, as here, prevents the jury from rendering a "complete verdict" on every element of the offense. As in Sullivan, Neder argues, the basis for harmless-error review "'is simply absent.'" Brief for Petitioner 7.
instructed, and consequently did not render a finding, on the actual element of the offense, the defendant's trial did not result in a "complete verdict" any more than in this case. Yet we held there that harmless-error analysis was appropriate. Id., at 502-503.
Similarly, in Carella, the jury was instructed to presume that the defendant "embezzled [a] vehicle" and "[i]nten[ded] to commit theft" if the jury found that the defendant failed to return a rental car within a certain number of days after the expiration of the rental period. 491 U. S., at 264 (internal quotation marks omitted). Again, the jury's finding of guilt cannot be seen as a "complete verdict" because the conclusive presumption "directly foreclosed independent jury consideration of whether the facts proved established certain elements of the offenses." Id., at 266. As in Pope, however, we held that the unconstitutional conclusive presumption was "subject to the harmless-error rule." 491 U. S., at 266.
And in Roy, a federal habeas case involving a state-court murder conviction, the trial court erroneously failed to instruct the jury that it could convict the defendant as an aider and abettor only if it found that the defendant had the "intent or purpose" of aiding the confederate's crime. 519 U. S., at 3 (internal quotation marks and emphasis omitted). Despite that omission, we held that "[t]he case before us is a case for application of the 'harmless error' standard." Id., at 5.
think our decisions in Pope, Carella, and Roy dictate the answer to that question.
Forced to accept that this Court has applied harmlesserror review in cases where the jury did not render a "complete verdict" on every element of the offense, Neder attempts to reconcile our cases by offering an approach gleaned from a plurality opinion in Connecticut v. Johnson, 460 U. S. 73 (1983), an opinion concurring in the judgment in Carella, supra, and language in Sullivan, supra. Under this restrictive approach, an instructional omission, misdescription, or conclusive presumption can be subject to harmless-error analysis only in three "rare situations": (1) where the defendant is acquitted of the offense on which the jury was improperly instructed (and, despite the defendant's argument that the instruction affected another count, the improper instruction had no bearing on it); (2) where the defendant admitted the element on which the jury was improperly instructed; and (3) where other facts necessarily found by the jury are the "functional equivalent" of the omitted, misdescribed, or presumed element. See Sullivan, supra, at 281; Carella, supra, at 270-271 (SCALIA, J., concurring in judgment); Johnson, supra, at 87 (plurality opinion). Neder understandably contends that Pope, Carella, and Roy fall within this last exception, which explains why the Court in those cases held that the instructional error could be harmless.
quired to find to convict (that the material lacked value under a national "reasonable person" standard). Petitioner's submission would have mandated reversal for a new trial in that case, because a juror in Rockford, Illinois, who found that the material lacked value under community standards, would not necessarily have found that it did so under presumably broader and more tolerant national standards. But since we held that harmless-error analysis was appropriate in Pope, that case not only does not support petitioner's approach, but rejects it.
Petitioner's submission also imports into the initial structural-error determination (i. e., whether an error is structural) a case-by-case approach that is more consistent with our traditional harmless-error inquiry (i. e., whether an error is harmless). Under our cases, a constitutional error is either structural or it is not. Thus, even if we were inclined to follow a broader "functional equivalence" test (e. g., where other facts found by the jury are "so closely related" to the omitted element "that no rational jury could find those facts without also finding" the omitted element, Sullivan, 508 U. S., at 281 (internal quotation marks omitted)), such a test would be inconsistent with our traditional categorical approach to structural errors.
We also note that the present case arose in the legal equivalent of a laboratory test tube. The trial court, following existing law, ruled that the question of materiality was for the court, not the jury. It therefore refused a charge on the question of materiality. But future cases are not likely to be so clear cut. In Roy, we said that the error in question could be "as easily characterized as a 'misdescription of an element' of the crime, as it is characterized as an error of 'omission.'" 519 U. S., at 5. As petitioner concedes, his submission would thus call into question the far more common subcategory of misdescriptions. And it would require a reviewing court in each case to determine just how serious a "misdescription" it was.
Difficult as such issues would be when dealing with the ample volume defining federal crimes, they would be measurably compounded by the necessity for federal courts, reviewing state convictions under 28 U. S. C. § 2254, to ascertain the elements of the offense as defined in the laws of 50 different States.
It would not be illogical to extend the reasoning of Sull ivan from a defective "reasonable doubt" instruction to a failure to instruct on an element of the crime. But, as indicated in the foregoing discussion, the matter is not res nova under our case law. And if the life of the law has not been logic but experience, see O. Holmes, The Common Law 1 (1881), we are entitled to stand back and see what would be accomplished by such an extension in this case. The omitted element was materiality. Petitioner underreported $5 million on his tax returns, and did not contest the element of materiality at trial. Petitioner does not suggest that he would introduce any evidence bearing upon the issue of materiality if so allowed. Reversal without any consideration of the effect of the error upon the verdict would send the case back for retrial-a retrial not focused at all on the issue of materiality, but on contested issues on which the jury was properly instructed. We do not think the Sixth Amendment requires us to veer away from settled precedent to reach such a result.
be set aside if the reviewing court may confidently say, on the whole record, that the constitutional error was harmless beyond a reasonable doubt").
IJUSTICE STEVENS says that the failure to charge the jury on materiality is harmless error in this case because the jury verdict "necessarily included a finding on that issue." Post, at 26 (opinion concurring in part and concurring in judgment). While the evidence of materiality is overwhelming, it is incorrect to say that the jury made such a finding; the court explicitly directed the jury not to consider the materiality of any false statements.
because he intended to repay the loans, and that he reasonably believed, based on the advice of his accountant and lawyer, that he need not report the proceeds as income. App. 208-211, 235 (closing argument). In this situation, where a reviewing court concludes beyond a reasonable doubt that the omitted element was uncontested and supported by overwhelming evidence, such that the jury verdict would have been the same absent the error, the erroneous instruction is properly found to be harmless. We think it beyond cavil here that the error "did not contribute to the verdict obtained." Chapman, supra, at 24.
2JU8TICE SCALIA, in his opinion concurring in part and dissenting in part, also suggests that if a failure to charge on an uncontested element of the offense may be harmless error, the next step will be to allow a directed verdict against a defendant in a criminal case contrary to Rose v. Clark, 478 U. S. 570, 578 (1986). Happily, our course of constitutional adjudication has not been characterized by this "in for a penny, in for a pound" approach. We have no hesitation reaffirming Rose at the same time that we subject the narrow class of cases like the present one to harmless-error review.
ted element, and thus there could be no harmless-error analysis. Since we have previously concluded that harmlesserror analysis is appropriate in such a case, we must look to other cases decided under Chapman for the proper mode of analysis.
The erroneous admission of evidence in violation of the Fifth Amendment's guarantee against self-incrimination, see Arizona v. Fulminante, 499 U. S. 279 (1991), and the erroneous exclusion of evidence in violation of the right to confront witnesses guaranteed by the Sixth Amendment, see Delaware v. Van Arsdall, 475 U. S. 673 (1986), are both subject to harmless-error analysis under our cases. Such errors, no less than the failure to instruct on an element in violation of the right to a jury trial, infringe upon the jury's factfinding role and affect the jury's deliberative process in ways that are, strictly speaking, not readily calculable. We think, therefore, that the harmless-error inquiry must be essentially the same: Is it clear beyond a reasonable doubt that a rational jury would have found the defendant guilty absent the error? To set a barrier so high that it could never be surmounted would justify the very criticism that spawned the harmless-error doctrine in the first place: "Reversal for error, regardless of its effect on the judgment, encourages litigants to abuse the judicial process and bestirs the public to ridicule it." R. Traynor, The Riddle of Harmless Error 50 (1970).
We believe that where an omitted element is supported by uncontroverted evidence, this approach reaches an appropriate balance between "society's interest in punishing the guilty [and] the method by which decisions of guilt are to be made." Connecticut v. Johnson, 460 U. S., at 86 (plurality opinion). The harmless-error doctrine, we have said, "recognizes the principle that the central purpose of a criminal trial is to decide the factual question of the defendant's guilt or innocence, ... and promotes public respect for the criminal process by focusing on the underlying fairness of the trial."
Van Arsdall, supra, at 681. At the same time, we have recognized that trial by jury in serious criminal cases "was designed 'to guard against a spirit of oppression and tyranny on the part of rulers,' and 'was from very early times insisted on by our ancestors in the parent country, as the great bulwark of their civil and political liberties.''' Gaudin, 515 U. S., at 510-511 (quoting 2 J. Story, Commentaries on the Constitution of the United States 540-541 (4th ed. 1873)). In a case such as this one, where a defendant did not, and apparently could not, bring forth facts contesting the omitted element, answering the question whether the jury verdict would have been the same absent the error does not fundamentally undermine the purposes of the jury trial guarantee.
Of course, safeguarding the jury guarantee will often require that a reviewing court conduct a thorough examination of the record. If, at the end of that examination, the court cannot conclude beyond a reasonable doubt that the jury verdict would have been the same absent the error-for example, where the defendant contested the omitted element and raised evidence sufficient to support a contrary finding-it should not find the error harmless.
element of materiality to the jury with respect to the tax charges was harmless error.
We also granted certiorari in this case to decide whether materiality is an element of a "scheme or artifice to defraud" under the federal mail fraud (18 U. s. C. § 1341), wire fraud (§ 1343), and bank fraud (§ 1344) statutes. The Court of Appeals concluded that the failure to submit materiality to the jury was not error because the fraud statutes do not require that a "scheme to defraud" employ material falsehoods. We disagree.
the mail and wire fraud statutes, similarly prohibits any "scheme or artifice to defraud a financial institution" or to obtain any property of a financial institution "by false or fraudulent pretenses, representations, or promises." 4 Thus, based solely on a "natural reading of the full text," id., at 490, materiality would not be an element of the fraud statutes.
That does not end our inquiry, however, because in interpreting statutory language there is a necessary second step. It is a well-established rule of construction that" '[w]here Congress uses terms that have accumulated settled meaning under ... the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.'" Nationwide Mut. Ins. Co. v. Darden, 503 U. S. 318, 322 (1992) (quoting Community for Creative Non-Violence v. Reid, 490 U. S.
matter or thing, shall be fined under this title or imprisoned not more than five years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."
730, 739 (1989)); see Standard Oil Co. of N. J. v. United States, 221 U. S. 1, 59 (1911) ("[W]here words are employed in a statute which had at the time a well-known meaning at common law or in the law of this country, they are presumed to have been used in that sense"). Neder contends that "defraud" is just such a term, and that Congress implicitly incorporated its common-law meaning, including its requirement of materiality,5 into the statutes at issue.
"(b) the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it." Restatement (Second) of Torts § 538 (1977).
6We concluded as much in Field v. Mans, 516 U. S. 59, 69 (1995): "'[F]alse pretenses, a false representation, or actual frau[d]' carry the acquired meaning of terms of art. They are common-law terms, and ... . they imply elements that the common law has defined them to include. Congress could have enumerated their elements, but Congress's contrary drafting choice did not deprive them of a significance richer than the bare statement of their terms."
7 The Government argues that because Congress has provided express materiality requirements in other statutes prohibiting fraudulent conduct, the absence of such an express reference in the fraud statutes at issue" 'speaks volumes.'" Brief for United States 35 (citing 21 U. S. C. § 843(a)(4)(A)) (prohibiting the furnishing of "false or fraudulent material information" in documents required under federal drug laws); 26 U. S. C. § 6700(a)(2)(A) (criminalizing the making of a statement regarding investment tax benefits that an individual "knows or has reason to kno[w] is false or fraudulent as to any material matter"). These later enacted statutes, however, differ from the fraud statutes here in that they prohibit both "false" and "fraudulent" statements or information. Because the term "false statement" does not imply a materiality requirement, United States v. Wells, 519 U. S. 482, 491 (1997), the word "material" limits the statutes' scope to material falsehoods. Moreover, these statutes cannot rebut the presumption that Congress intended to incorporate the common-law meaning of the term "fraud" in the mail fraud, wire fraud, and bank fraud statutes. That rebuttal can only come from the text or structure of the fraud statutes themselves. See Nationwide Mut. Ins., 503 U. S., at 322.
to unmoor the mail fraud statute from its common-law analogs by punishing, not the completed fraud, but rather any person "having devised or intending to devise any scheme or artifice to defraud." Read in this light, the Government contends, there is no basis to infer that Congress intended to limit criminal liability to conduct that would constitute "fraud" at common law, and in particular, to material misrepresentations or omissions. Rather, criminal liability would exist so long as the defendant intended to deceive the victim, even if the particular means chosen turn out to be immaterial, i. e., incapable of influencing the intended victim. See n. 3, supra.
The Government relies heavily on Durland v. United States, 161 U. S. 306 (1896), our first decision construing the mail fraud statute, to support its argument that the fraud statutes sweep more broadly than common-law fraud. But Durland was different from this case. There, the defendant, who had used the mails to sell bonds he did not intend to honor, argued that he could not be held criminally liable because his conduct did not fall within the scope of the common-law crime of "false pretenses." We rejected the argument that "the statute reaches only such cases as, at common law, would come within the definition of 'false pretenses,' in order to make out which there must be a misrepresentation as to some existing fact and not a mere promise as to the future." Id., at 312. Instead, we construed the statute to "includ[e] everything designed to defraud by representations as to the past or present, or suggestions and promises as to the future." Id., at 313. Although Durland held that the mail fraud statute reaches conduct that would not have constituted "false pretenses" at common law, it did not hold, as the Government argues, that the statute encompasses more than common-law fraud.
ance" and "damages," for example, plainly have no place in the federal fraud statutes. See, e. g., United States v. Stewart, 872 F.2d 957, 960 (CAlO 1989) ("[Under the mail fraud statute,] the government does not have to prove actual reliance upon the defendant's misrepresentations"); United States v. Rowe, 56 F.2d 747, 749 (CA2) (L. Hand, J.) ("Civilly of course the [mail fraud statute] would fail without proof of damage, but that has no application to criminal liability"), cert. denied, 286 U. S. 554 (1932). By prohibiting the "scheme to defraud," rather than the completed fraud, the elements of reliance and damage would clearly be inconsistent with the statutes Congress enacted. But while the language of the fraud statutes is incompatible with these requirements, the Government has failed to show that this language is inconsistent with a materiality requirement.
Accordingly, we hold that materiality of falsehood is an element of the federal mail fraud, wire fraud, and bank fraud statutes. Consistent with our normal practice where the court below has not yet passed on the harmlessness of any error, see Carella, 491 U. S., at 266-267, we remand this case to the Court of Appeals for it to consider in the first instance whether the jury-instruction error was harmless.
This is an easy case. The federal tax fraud statute, 26 U. s. C. § 7206(1), prohibits the filing of any return that the taxpayer "does not believe to be true and correct as to every material matter." * (Emphasis added.) The Court of Appeals, in accordance with other courts, construed "material matter" to describe "any information necessary to a determination of a taxpayer's income tax liability." 136 F.3d 1459, 1465 (CA111998) (citing United States v. Aramony, 88 F.3d 1369, 1384 (CA4 1996); United States v. Klausner, 80 F.3d 55, 60 (CA2 1996); United States v. Holland, 880 F.2d 1091, 1096 (CA9 1989)). Petitioner has not challenged this legal standard.
The jury found that petitioner knowingly and "falsely reported [his] total income in his 1985 return ... and in his 1986 return." App. 256 (jury instructions). A taxpayer's "total income" is obviously "information necessary to a determination of a taxpayer's income tax liability." 136 F. 3d, at 1465. The jury verdict, therefore, was not merely the functional equivalent of a finding on any possible materiality issue; it necessarily included a finding on that issue. That being so, the trial judge's failure to give a separate instruction on that issue was harmless error under any test of harmlessness.
But the Court does not rest its decision on this logic.
facts contesting the omitted element." Ante, at 19. I cannot subscribe to this analysis. However the standard for deciding whether a trial error was harmless is formulated, I understand that there may be disagreement over its application in particular cases. The three contrasting opinions in Arizona v. Fulminante, 499 U. S. 279 (1991), vividly illustrate this point: Justice White stated that the admission of a defendant's coerced confession, by its very nature, could never be harmless, id., at 295-302; JUSTICE KENNEDY stated that such evidence can be harmless but that the appellate court "must appreciate the indelible impact a full confession may have on the trier of fact," id., at 313 (opinion concurring in judgment); and THE CHIEF JUSTICE, joined by JUSTICE SCALIA, stated that the admission of such evidence presents "a classic case of harmless error" when other evidence points strongly toward guilt, id., at 312 (dissenting opinion). There is, nevertheless, a distinction of true importance between a harmless-error test that focuses on what the jury did decide, rather than on what appellate judges think the jury would have decided if given an opportunity to pass on an issue. That is why, in my view, the "harmless-error doctrine may enable a court to remove a taint from proceedings in order to preserve a jury's findings, but it cannot constitutionally supplement those findings." Pope v. Illinois, 481 U. S. 497, 509 (1987) (STEVENS, J., dissenting).
join his dissenting opinion because it is internally inconsistent and its passion is misdirected.
If the Court's tolerance of the trial judge's Sixth Amendment error in this case were, as JUSTICE SCALIA'S dissent suggests, post, at 30, as serious as malpractice on "the spinal column of American democracy," surely the error would require reversal of the conviction regardless of whether defense counsel made a timely objection. Yet the dissent states that reversal is appropriate only when a defendant made a timely objection to the deprivation. Post, at 35 (opinion concurring in part and dissenting in part). It is for that reason that I find tension between the force of JUSTICE SCALIA'S eloquent rhetoric and the far narrower rule that he actually espouses.
a proper instruction the jury would have acquitted if they thought a more discerning minority would have found true artistic value in the publications. Indeed, under the instruction given to the jury in that case, James Joyce would surely have been convicted for selling copies of the first edition of Ulysses in Rockford, Illinois, even though there were a few readers in Paris who immediately recognized the value of his work. The Pope Court's conclusion that the unconstitutional instruction might have been harmless entirely ignored the danger that individual distaste for sexually explicit materials may subconsciously influence a judge's evaluation of how a jury would decide a question that it did not actually resolve. It is, in fact, particularly distressing that all of my colleagues appear today to endorse Pope's harmlesserror analysis.
Admittedly, that endorsement is consistent with the holding in Part II of the Court's opinion in Walton v. Arizona, 497 U. S. 639, 647-649 (1990), that a judge may make the factual findings that render a defendant eligible for the death penalty. As I have previously argued, however, that holding was not faithful to the history that was reviewed by "the wise and inspiring voice that spoke for the Court in Duncan v. Louisiana, [391 U. S. 145 (1968)]." Id., at 709-714 (STEVENS, J., dissenting). Nor was it faithful to the history that JUSTICE SCALIA recounts today. Of course, Blackstone was concerned about judges exposed to the voice of the higher authority personified by the Crown, whereas today the concern is with the impact of popular opinion. It remains clear, however, that the constitutional right to be tried by a jury of one's peers provides "an inestimable safeguard against the corrupt or overzealous prosecutor and against the compliant, biased, or eccentric judge." Duncan v. Louisiana, 391 U. S. 145, 156 (1968).
obviously correct. In my dissent in United States v. Wells, 519 U. S. 482, 510 (1997), I pointed out that the vast majority of judges who had confronted the question had placed the same construction on the federal statute criminalizing false statements to federally insured banks, 18 U. S. C. § 1014. I repeat this point to remind the Congress that an amendment to § 1014 would both harmonize these sections and avoid the potential injustice created by the Court's decision in Wells.
JUSTICE SCALIA, with whom JUSTICE SOUTER and JusTICE GINSBURG join, concurring in part and dissenting in part.
I join Parts I and III of the Court's opinion. I do not join Part II, however, and I dissent from the judgment of the Court, because I believe that depriving a criminal defendant of the right to have the jury determine his guilt of the crime charged-which necessarily means his commission of every element of the crime charged-can never be harmless.
tion, and unacknowledged by our Laws" in approving legislation "[f]or depriving us, in many Cases, of the Benefits of Trial by Jury." Alexander Hamilton wrote that "[t]he friends and adversaries of the plan of the convention, if they agree in nothing else, concur at least in the value they set upon the trial by jury: Or if there is any difference between them, it consists in this, the former regard it as a valuable safeguard to liberty, the latter represent it as the very palladium of free government." The Federalist No. 83, p. 426 (M. Beloff ed. 1987). The right to trial by jury in criminal cases was the only guarantee common to the 12 state constitutions that predated the Constitutional Convention, and it has appeared in the constitution of every State to enter the Union thereafter. Alschuler & Deiss, A Brief History of the Criminal Jury in the United States, 61 U. Chi. L. Rev. 867, 870, 875, n. 44 (1994). By comparison, the right to counsel-deprivation of which we have also held to be structural erroris a Johnny-corne-lately: Defense counsel did not become a regular fixture of the criminal trial until the mid-1800's. See W. Beaney, Right to Counsel in American Courts 226 (1955).
The right to be tried by a jury in criminal cases obviously means the right to have a jury determine whether the defendant has been proved guilty of the crime charged. And since all crimes require proof of more than one element to establish guilt (involuntary manslaughter, for example, requires (1) the killing (2) of a human being (3) negligently), it follows that trial by jury means determination by a jury that all elements were proved. The Court does not contest this. It acknowledges that the right to trial by jury was denied in the present case, since one of the elements was not-despite the defendant's protestation-submitted to be passed upon by the jury. But even so, the Court lets the defendant's sentence stand, because we judges can tell that he is unquestionably guilty.
Even if we allowed (as we do not) other structural errors in criminal trials to be pronounced "harmless" by judges-a point I shall address in due course-it is obvious that we could not allow judges to validate this one. The constitutionally required step that was omitted here is distinctive, in that the basis for it is precisely that, absent voluntary waiver of the jury right, the Constitution does not trust judges to make determinations of criminal guilt. Perhaps the Court is so enamoured of judges in general, and federal judges in particular, that it forgets that they (we) are officers of the Government, and hence proper objects of that healthy suspicion of the power of government which possessed the Framers and is embodied in the Constitution. Who knows?20 years of appointments of federal judges by oppressive administrations might produce judges willing to enforce oppressive criminal laws, and to interpret criminal laws oppressively-at least in the view of the citizens in some vicinages where criminal prosecutions must be brought. And so the people reserved the function of determining criminal guilt to themselves, sitting as jurors. It is not within the power of us Justices to cancel that reservation-neither by permitting trial judges to determine the guilt of a defendant who has not waived the jury right, nor (when a trial judge has done so anyway) by reviewing the facts ourselves and pronouncing the defendant without-a-doubt guilty. The Court's decision today is the only instance I know of (or could conceive of) in which the remedy for a constitutional violation by a trial judge (making the determination of criminal guilt reserved to the jury) is a repetition of the same constitutional violation by the appellate court (making the determination of criminal guilt reserved to the jury).
error (not susceptible of "harmless-error" analysis) to "'vitiat[e] all the jury's findings.'" Ante, at 11 (quoting Sullivan v. Louisiana, 508 U. S. 275, 281 (1993)). A court cannot, no matter how clear the defendant's culpability, direct a guilty verdict. See Carpenters v. United States, 330 U. S. 395, 410 (1947); Rose v. Clark, 478 U. S. 570, 578 (1986); Arizona v. Fulminante, 499 U. S. 279, 294 (1991) (White, J., dissenting). The question that this raises is why, if denying the right to conviction by jury is structural error, taking one of the elements of the crime away from the jury should be treated differently from taking all of them away-since failure to prove one, no less than failure to prove all, utterly prevents conviction.
The Court never asks, much less answers, this question.
Indeed, we do not know, when the Court's opinion is done, how many elements can be taken away from the jury with impunity, so long as appellate judges are persuaded that the defendant is surely guilty. What if, in the present case, besides keeping the materiality issue for itself, the District Court had also refused to instruct the jury to decide whether the defendant signed his tax return? See 26 U. S. C. § 7206(1). If Neder had never contested that element of the offense, and the record contained a copy of his signed return, would his conviction be automatically reversed in that situation but not in this one, even though he would be just as obviously guilty? We do not know. We know that all elements cannot be taken from the jury, and that one can. How many is too many (or perhaps what proportion is too high) remains to be determined by future improvisation. All we know for certain is that the number is somewhere between tuppence and 19 shillings 11, since the Court's only response to my assertion that there is no principled distinction between this case and a directed verdict is that "our course of constitutional adjudication has not been characterized by this 'in for a penny, in for a pound' approach." See ante, at 17, n. 2.
The underlying theme of the Court's opinion is that taking the element of materiality from the jury did not render Neder's trial unfair, because the judge certainly reached the "right" result. But the same could be said of a directed verdict against the defendant-which would be per se reversible no matter how overwhelming the unfavorable evidence. See Rose v. Clark, supra, at 578. The very premise of structural-error review is that even convictions reflecting the "right" result are reversed for the sake of protecting a basic right. For example, in Tumey v. Ohio, 273 U. S. 510 (1927), where we reversed the defendant's conviction because he had been tried before a biased judge, the State argued that "the evidence shows clearly that the defendant was guilty and that he was only fined $100, which was the minimum amount, and therefore that he can not complain of a lack of due process, either in his conviction or in the amount of the judgment." Id., at 535. We rejected this argument out of hand, responding that "[n]o matter what the evidence was against him, he had the right to have an impartial judge." Ibid. (emphasis added). The amount of evidence against a defendant who has properly preserved his objection, while relevant to determining whether a given error was harmless, has nothing to do with determining whether the error is subject to harmless-error review in the first place.
1 Contrary to JUSTICE STEVENS' suggestion, ante, at 28 (opinion concurring in part and concurring in judgment), there is nothing "internally inconsistent" about believing that a procedural guarantee is fundamental while also believing that it must be asserted in a timely fashion. It is a universally acknowledged principle of law that one who sleeps on his rights-even fundamental rights-may lose them.
be filled by the factfinding of judges. This formulation adequately explains the three cases, see California v. Roy, 519 U. S. 2, 6 (1996) (SCALIA, J., concurring); Carella v. California, 491 U. S. 263, 270-273 (1989) (SCALIA, J., concurring in judgment); Pope v. Illinois, 481 U. S. 497, 504 (1987) (SCALIA, J., concurring),3 that the majority views as "dictat[ing] the answer" to the question before us today. Ante, at 13. In casting Sullivan aside, the majority does more than merely return to the state of confusion that existed in our prior cases; it throws open the gate for appellate courts to trample over the jury's function.
cases involving understatement of income; a finding of intentional understatement would be a finding of guilt-no matter how insignificant the understatement might be, and no matter whether it was offset by understatement of deductions as well. But the right to a jury trial on all elements of the offense does not mean the right to a jury trial on only so many elements as are necessary in order logically to deduce the remainder. The jury has the right to apply its own logic (or illogic) to its decision to convict or acquit. At bottom, JUSTICE STEVENS "obviously" represents his judgment that any reasonable jury would have to think that the misstated amounts were material. Cf. ante, at 16, n. 1. It is, in other words, nothing more than a repackaging of the majority's approach, which allows a judge to determine what a jury "would have found" if asked. And it offers none of the protection that JUSTICE STEVENS promises the jury will deliver "against the corrupt or overzealous prosecutor and against the compliant, biased, or eccentric judge." Ante, at 29 (quoting Duncan v. Louisiana, 391 U. S. 145, 156 (1968)).
3 The Court asserts that this "functional equivalent" test does not explain Pope, since "a juror in Rockford, Illinois, who found that the [allegedly obscene] material lacked value under community standards, would not necessarily have found that it did so under presumably broader and more tolerant national standards." Ante, at 14. If the jury had been instructed to measure the material by Rockford, Illinois, standards, I might agree. It was instructed, however, to "judge whether the material was obscene by determining how it would be viewed by ordinary adults in the whole State of Illinois," 481 U. S., at 499 (emphasis added)which includes, of course, the city of Chicago, that toddlin' town. A finding of obscenity under that standard amounts to a finding of obscenity under a national ("reasonable person") standard. See id., at 504 (SCALIA, J., concurring).
Asserting that "[u]nder our cases, a constitutional error is either structural or it is not," ante, at 14, the Court criticizes the Sullivan test for importing a "case-by-case approach" into the structural-error determination. If that were true, it would seem a small price to pay for keeping the appellate function consistent with the Sixth Amendment. But in fact the Court overstates the cut-and-dried nature of identifying structural error. Some structural errors, like the complete absence of counselor the denial of a public trial, are visible at first glance. Others, like deciding whether the trial judge was biased or whether there was racial discrimination in the grand jury selection, require a more fact-intensive inquiry. Deciding whether the jury made a finding "functionally equivalent" to the omitted or misdescribed element is similar to structural-error analysis of the latter sort.
The Court points out that all forms of harmless-error review "infringe upon the jury's factfinding role and affect the jury's deliberative process in ways that are, strictly speaking, not readily calculable." Ante, at 18. In finding, for example, that the jury's verdict would not have been affected by the exclusion of evidence improperly admitted, or by the admission of evidence improperly excluded, a court is speculating on what the jury would have found. See, e. g., Arizona v. Fulminante, 499 U. S., at 296 (Would the verdict have been different if a coerced confession had not been introduced?); Delaware v. Van Arsdall, 475 U. S. 673, 684 (1986) (Would the verdict have been different if evidence had not been unconstitutionally barred from admission?). There is no difference, the Court asserts, in permitting a similar speculation here. Ante, at 18.
"The inquiry ... is not whether, in a trial that occurred without the error, a guilty verdict would surely have been rendered, but whether the guilty verdict actually rendered in this trial was surely unattributable to the error." 508 U. S., at 279 (emphasis added). Harmless-error review applies only when the jury actually renders a verdict-that is, when it has found the defendant guilty of all the elements of the crime.
The difference between speculation directed toward confirming the jury's verdict (Sullivan) and speculation directed toward making a judgment that the jury has never made (to day's decision) is more than semantic. Consider, for example, the following scenarios. If I order for my wife in a restaurant, there is no sense in which the decision is hers, even if I am sure beyond a reasonable doubt about what she would have ordered. If, however, while she is away from the table, I advise the waiter to stay with an order she initially made, even though he informs me that there has been a change in the accompanying dish, one can still say that my wife placed the order-even if I am wrong about whether she would have changed her mind in light of the new information. Of course, I may predict correctly in both instances simply because I know my wife well. I doubt, however, that a low error rate would persuade my wife that my making a practice of the first was a good idea.
ing" speculation does not disturb that allocation, but "substituting" speculation does. Make no mistake about the shift in standard: Whereas Sullivan confined appellate courts to their proper role of reviewing verdicts, the Court today puts appellate courts in the business of reviewing the defendant's guilt. The Court does not-it cannot-reconcile this new approach with the proposition that denial of the jury-trial right is structural error.
again remembered that delays and little inconveniences in the forms of justice are the price that all free nations must pay for their liberty in more substantial matters; that these inroads upon this sacred bulwark of the nation are fundamentally opposite to the spirit of our constitution; and that, though begun in trifles, the precedent may gradually increase and spread to the utter disuse of juries in questions of the most momentous concern." 4 Blackstone, Commentaries *350.


text:
Native American Rights Attorney | Employment Lawyer | Klimaski & Associates, P.C.
Mr. Racin is of counsel to Klimaski & Associates and principal of the Law Office of John P. Racin in Washington, D.C. He has litigated a broad range of cases in the federal courts for more than thirty years. The focus of his practice is federal Indian law, fair employment and related work.
PRACTICE AREAS: Litigation; Native American Rights; Fair Employment.
Of Counsel to Klimaski & Associates, P.C., Washington, D.C. (August 2007 – Present), AV-rated firm engaged in broad array of litigation.
Geronimo v. United States, Civil Action No. 09-0303 (D.D.C.).
Cheyenne Arapaho Tribes of Oklahoma v. United States, 558 F.3d 592 (D.C. Cir. 2009).
Comanche Nation v. United States, 393 F.Supp. 2d 1196 (W.D. Ok. 2005).
Villines v. United Brotherhood of Carpenters & Joiners, 999 F.Supp. 97 (D.D.C. 1998).
Hunter-Boykin v. George Washington University, 132 F.3d 77 (D.C. Cir. 1998).
Egbuna v. Time-Life Libraries, Inc., 153 F.3d 184 (4th Cir. 1998) (en banc), cert. denied, 119 S.Ct. 1034 (1999).
Saunders v. George Washington University, 768 F.Supp. 843 (D.D.C. 1991).
O’Callaghan v. District of Columbia, 741 F.Supp. 273 (D.D.C. 1990).
Lagon v. Barry, 658 F.Supp. 55 (D.D.C. 1987).
Costello v. Foreign Service Grievance Board, 843 F.2d 540 (D.C. Cir. 1988).
Donahoe v. Watt, 546 F.Supp. 753 (D.D.C. 1982), aff’d., 713 F.2d 864 (D.C. Cir. 1983).
Muth v. Marsh, 525 F.Supp. 604 (D.D.C. 1981).
Crowley v. Muskie, 496 F.Supp. 360 (D.D.C. 1980), rev’d. sub nom Crowley v. Shultz, 802 F.2d 498 (D.C. Cir. 1986), cert. denied, 484 U.S. 869 (1987).
Antioch School of Law, Washington, D.C. (May 1978 to August 1980). Instructor and supervising attorney in Antioch’s clinical program.

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Before WILLIAMS and KING, Circuit Judges, and Cynthia Holcomb HALL, Senior Circuit Judge of the United States Court of Appeals for the Ninth Circuit, sitting by designation.
Affirmed by published opinion. Judge King wrote the opinion, in which Judge Williams and Senior Judge Hall concurred.
ARGUED: Mark Stanton Thomas, MAUPIN, TAYLOR & ELLIS, P.A., Raleigh, North Carolina, for Appellant.
Robert Edward Hoskins, FOSTER & FOSTER, L.L.P., Greenville, South Carolina, for Appellee.
ON BRIEF: Joanne J. Lambert, MAUPIN, TAYLOR & ELLIS, P.A., Raleigh, North Carolina, for Appellant.
Suzanne Bynum initiated this ERISA civil action in the District of South Carolina against CIGNA Healthcare of North Carolina, Incorporated ("CIGNA"), maintaining that CIGNA had improperly denied her infant daughter's claim for health benefits for treatment of a skull deformity. The district court reversed CIGNA's decision and awarded the benefits sought by Ms. Bynum's daughter. CIGNA has appealed the court's ruling, maintaining that its denial of benefits was appropriate. As explained below, we agree that Ms. Bynum's infant daughter, Katrina, was entitled to coverage from CIGNA for treatment of her misshapen head, and we affirm.
Katrina Bynum, along with her twin sister, was born to Ms. Bynum in late 1999 by spontaneous vaginal delivery after a thirty-nine week gestation period. At her birth, Katrina exhibited symptoms of congenital torticollis, i.e., a severely twisted neck, 1 which subsequently resulted in plagiocephaly, i.e., an abnormally asymmetrical head.2 In May 2000, concerned about her nine-month old daughter's medical condition and desiring to obtain treatment for it, Ms. Bynum sought medical care for Katrina from a pediatrician in Matthews, North Carolina. This pediatrician, Dr. Michelle Parish, referred Katrina to a specialist in neurosurgery, and, at the direction of Dr. C. Scott McLanahan, a pediatric neurosurgeon practicing in Charlotte, North Carolina, Katrina's condition was treated with a medical procedure known as "cranial banding" or "dynamic orthotic cranioplasty" (the "DOC Procedure").
In May 2000, Dr. McLanahan submitted to CIGNA a coverage request for the DOC Procedure utilized to treat Katrina's condition ("Katrina's Claim"). Katrina was an insured of CIGNA through insurance coverage provided to her mother, an employee of an entity called Pathways for Learning in Charlotte, North Carolina. Ms. Bynum possessed health insurance through her employer-sponsored health plan, and her family's coverage is governed by the Employee Retirement Income Security Act (ERISA), 29 U.S.C.S. § 1001 et seq. CIGNA serves the plan in two capacities: first, as its insurer, and second, as its plan administrator. The member certificate (the "Plan") provided to each of the Plan's insureds describes the insurance coverage and benefits provided by CIGNA, and it also spells out the administrative procedures under which the Plan operates. The Plan has established a two-level administrative appeal and grievance process for the resolution of claims and benefits questions, and it has granted CIGNA the "final power and discretionary authority to interpret and administer th[e] Member Certificate, including the authority to make eligibility determinations."
Katrina's Claim was filed with CIGNA on May 16, 2000, and the next day one of CIGNA's Medical Directors wrote Ms. Bynum a denial letter, advising, after "careful review," that CIGNA had "determined that coverage is not available . . . because cosmetic services are not covered." CIGNA's denial letter offered no explanation of what constituted a cosmetic service, and the Plan contains no definition for either the terms "cosmetic" or "cosmetic services."
Thereafter, pursuant to the procedures established in the Plan, Dr. McLanahan filed with CIGNA, on behalf of Ms. Bynum and Katrina, what the Plan denominates as a first-level appeal. In this first-level appeal, CIGNA was requested to review and reconsider its earlier decision to deny Katrina's Claim for the DOC Procedure. 5 By letter of May 26, 2000, Dr. McLanahan explained to CIGNA that children suffering from nonsynostoic cranial asymmetries (such as that affecting Katrina) benefit from DOC treatment. He also sought to directly address the "cosmetic services" issue raised in the denial letter, and he further advised CIGNA that "[c]orrection of [Katrina's] defect may in fact lead to a more pleasant appearance, however, it is the functional significan[ce] of the defect that compels the treatment." (emphasis added). In so concluding, he advised CIGNA, referring to the DOC Procedure, that "[i]t is clearly not treatment of a cosmetic deformity." (emphasis added).
CIGNA responded to Katrina's first-level appeal by advising Ms. Bynum that it was denying coverage for Katrina's Claim. In explaining its decision, CIGNA again maintained that use of the DOC Procedure for nonsynostoic plagiocephaly is a "cosmetic procedure," and it also asserted that "[t]he documentation fails to substantiate the medical necessity for the [DOC] service." As in its initial denial of Katrina's Claim, CIGNA offered no definition of what constituted a "cosmetic procedure" under the Plan.
On August 30, 2000, the Committee convened to consider Katrina's Claim. CIGNA representatives were present at the Committee's meeting, but Ms. Bynum and her attorney, though invited, did not attend.10 CIGNA's Committee then reviewed Katrina's Claim, the information submitted to it by Ms. Bynum, and a so-called TEC Assessment Report concerning the DOC Procedure submitted to it by CIGNA.11 By letter to Ms. Bynum of the following day, CIGNA advised that its Committee had "decided to uphold the original decision to deny the Cranial Banding Device." This denial letter explained that the Committee's decision was based on the "Section 5.0 (letter M) Exclusion, [wherein] All Cosmetic procedures or surgery are considered non-covered. The documentation received fails to substantiate the medical necessity for the service."12 This letter, like the earlier ones, made no effort to explain what CIGNA believed to constitute "cosmetic" procedures or surgery.
After exhausting her appeal rights under the Plan, Ms. Bynum, on September 22, 2000, filed suit against CIGNA pursuant to 29 U.S.C. § 1132(a).13 She alleged, inter alia, that the Plan provided coverage for the DOC Procedure, and she sought to have the court direct CIGNA to provide coverage for Katrina's Claim.
On April 12, 2001, with cross motions for summary judgment pending, the parties appeared before the district court. For whatever reasons, both parties then requested the court to dispense with the summary judgment proceedings and to try the case on its merits. With the consent of the parties, the court then proceeded to handle the case as a bench trial.14 On May 9, 2001, the court ruled on the merits of the case, and it determined that the Plan provided coverage for Katrina's Claim. Bynum v. CIGNA Healthcare of North Carolina, Inc., Order, C/A No.: 6:00-3009-13 at 14-16 (D.S.C. May 11, 2001) (the "Opinion"). The court then ordered CIGNA to provide coverage to Katrina for the benefits sought. Id. at 15-16.
On May 16, 2001, CIGNA filed a timely notice of appeal. We possess jurisdiction pursuant to 28 U.S.C. § 1291.
Before turning to the merits of CIGNA's appeal, we must first address and determine the applicable standards of our review of the issues raised here. Generally, decisions made by administrators of ERISA plans are subject to de novo review by the courts. Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101, 115 (1989); see also Bedrick v. Travelers Ins. Co., 93 F.3d 149, 152 (4th Cir. 1996). When, however, an ERISA plan provides the plan administrator with discretionary authority to interpret the terms of the plan and to make coverage determinations, the administrator's decisions are reviewed by the courts only for abuse of discretion. Firestone, 489 U.S. at 115; Bedrick, 93 F.3d at 152. Even if a plan administrator possesses such discretion, if it also operates under a conflict of interest, we have recognized the propriety of reviewing courts "not act[ing] as deferentially as would otherwise be appropriate." Bedrick, 93 F.3d at 152. Indeed, the greater the "incentive for the [plan] administrator . . . to benefit itself by a certain interpretation of benefit eligibility or other plan terms, the more objectively reasonable the administrator['s] . . . decision must be and the more substantial the evidence must be to support it." Ellis v. Metro. Life Ins. Co., 126 F.3d 228, 234 (4th Cir.1997).
These standards of review apply to a district court's review of a plan administrator's coverage determinations in an ERISA case, and they also are applicable on appellate review. In our review of the result of a bench trial, where the district court has made findings and reviewed coverage determinations under the proper standard of review, we do not sit in the same posture as that court. Our review is affected by the principle that when we review a district court's decision on the merits, see Fed. R. Civ. P. 52(a), we are, absent clear error, bound by its factual findings. See id. (requiring that findings of fact made after a bench trial "shall not be set aside unless clearly erroneous"); Sedlack v. Braswell Servs. Group, Inc., 134 F.3d 219, 223 (4th Cir. 1998); Hendricks v. Cent. Reserve Life Ins. Co., 39 F.3d 507, 512-13 (4th Cir. 1994). In this case, however, we are unable to ascertain whether the district court actually applied the abuse of discretion standard of review when reciting its findings. As a result, we conduct our appellate review of the objective reasonableness of CIGNA's denial of Katrina's Claim without relying on the district court's findings.
The Plan provides CIGNA, as the Plan Administrator, with "final and discretionary authority to interpret and administer th[e] Member Certificate, including the authority to make eligibility determinations." Accordingly, we may not disturb a coverage determination made by CIGNA in its capacity as the Plan Administrator, so long as its decision is reasonable. If, however, a coverage decision is unreasonable, then CIGNA has abused its discretion, and such an abuse warrants reversal of an affected coverage determination. See Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342 (4th Cir. 2000); see also Feder v. Paul Revere Life Ins. Co., 228 F.3d 518, 522 (4th Cir. 2000).
In this case, CIGNA performed its duties as Plan Administrator under a plain conflict of interest; that is, CIGNA administered the Plan and at the same time insured it. As such, while the abuse of discretion standard remains applicable to CIGNA's coverage determination, we must, because of its conflict of interest, "lessen the deference normally given under this standard of review . . . to the extent necessary to counteract any influence unduly resulting from the conflict." Ellis, 126 F.3d at 233; see also Bailey v. Blue Cross & Blue Shield of VA, 67 F.3d 53, 56 (4th Cir. 1995) (reducing deference "to the degree necessary to neutralize any untoward influence resulting from the conflict" of interest).
CIGNA's conflict of interest in its handling of Katrina's Claim was a substantial one, i.e., CIGNA possessed a significant incentive, in the nature of its financial self-interest, to deny coverage for Katrina's Claim. First of all, CIGNA was interpreting a disputed plan term - - the term "cosmetic" -- with wide applicability. Because cosmetic procedures are excluded from the Plan's coverage under Section 5.0 (letter L), CIGNA possessed a financial self-interest in defining "cosmetic" in a broad manner. Moreover, as CIGNA's counsel acknowledged at oral argument, CIGNA is presently facing an increasing number of benefit claims for DOC Procedures, because the number of infants with asymmetrical skulls is increasing due to current trends in post-natal positioning.15 Thus, a decision by CIGNA, as Plan Administrator, to provide coverage for Katrina's Claim would have established a precedent adverse to the long-term financial interests of CIGNA, as insurer. Because CIGNA's conflict of interest on this issue is a significant one, we are obliged to reduce the level of deference normally accorded its coverage determinations, and we must ascertain whether its decision to deny Katrina's Claim was objectively reasonable. Therefore, while we will accord CIGNA's coverage determination some deference, its decision must be examined closely to ensure that it is "supported by substantial evidence," and that it resulted from "a deliberate, principled reasoning process." Brogan v. Holland, 105 F.3d 158, 161 (4th Cir. 1997) (internal citations and quotations omitted) (explaining criteria for objectively reasonable).
On appeal, CIGNA maintains that the district court erred by substituting its judgment for CIGNA's reasoned decision, as Plan Administrator, to deny Katrina's Claim. CIGNA makes two contentions in this regard: first, it asserts that the court improperly defined the applicable terms of the Plan; and second, it maintains that the court misapplied the terms of the Plan. We examine each of these points in turn.
A significant question in this case concerns the proper meaning to be accorded the word "cosmetic," as it is utilized in the Plan. CIGNA contends that the court erred in its definition and application of the term. Specifically, although the parties agree that the Plan does not define "cosmetic," CIGNA maintains that the court erred by not adopting CIGNA's proposed definition of "cosmetic," and by instead "find[ing] that the treatment rendered to . . . [Katrina] could not be considered `cosmetic' under any reasonable definition of the word." Opinion at 15.
CIGNA first maintains that the court erred by failing to give proper deference to its proposed definition of "cosmetic." While CIGNA is correct that, as Plan Administrator, its definition must be accepted by a court absent an abuse of discretion, Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Ins. Co., 32 F.3d 120, 123-24 (4th Cir. 1994), CIGNA nonetheless abused its discretion by failing to define this crucial term prior to its denial of Katrina's Claim.
Throughout its administrative handling of Katrina's Claim, CIGNA failed to define the relevant terms "cosmetic," "cosmetic services," or "cosmetic procedures." Instead, it simply advised Ms. Bynum that Katrina's Claim had been denied because the DOC Procedure was of a "cosmetic nature." In addition, the record before CIGNA's Committee lacked any reference to CIGNA's definition of "cosmetic," and CIGNA failed to document why the DOC Procedure, as applied to Katrina's skull deformity, constituted an excluded cosmetic procedure. Because there is no evidence that CIGNA sought to define "cosmetic" before being sued by Ms. Bynum, or that CIGNA applied a reasonable definition of the term to Katrina's Claim, the court did not err in declining to defer to CIGNA's after-the-fact definition of "cosmetic." See id. at 125 (assessing reasonableness of plan administrator's decision based only on facts known at time of decision).
Next, CIGNA maintains that the court erred in concluding that "cosmetic" is an ambiguous term, and that it also erred by not affording the term its ordinary meaning. When interpreting an ERISA health insurance plan, we utilize and apply ordinary principles of contract law, and we "enforc[e] the plan's plain language in its ordinary sense." Wheeler v. Dynamic Eng'g, Inc., 62 F.3d 634, 638 (4th Cir. 1995) (internal citations omitted). When, however, a term used in a plan is ambiguous, that ambiguity is construed against the drafter of the plan, and it is construed in accordance with the reasonable expectations of the insured. Id. (citing Saltarelli v. Bob Baker Group Med. Trust, 35 F.3d 382, 386 (9th Cir. 1994)).
We agree with the district court that the term "cosmetic," as used in the Plan, is ambiguous. The Plan makes no effort to define the term, even though multiple definitions exist, both in common usage and in the medical context. From our review, the various definitions of "cosmetic" are generally placed into two categories. First, certain definitions of "cosmetic" limit the term's application to procedures, products, or services that affect appearance only, or which are performed for a purely superficial benefit. See, e.g., Dorland's Illustrated Medical Dictionary 385; Oxford English Dictionary Online, at http://www.OED.com (last visited March 19, 2002). Second, other definitions of "cosmetic" apply the term more broadly, and such definitions utilize it to include procedures, products, or services intended to correct physical defects, usually by surgical means. Dorland's Illustrated Medical Dictionary 385.
In these circumstances, both categories of definitions of "cosmetic" are reasonable, and each could be utilized in a manner consistent with the term's ordinary meaning. Thus, applying the doctrine of contra proferentum, we must construe any ambiguity in a term's ordinary meaning against CIGNA, and in accordance with the insured's expectations, i.e., those of Ms. Bynum and Katrina. See, e.g., Tester v. Reliance Standard Life Ins. Co., 228 F.3d 372, 375 (4th Cir. 2000) (applying doctrine of contra proferentum in ERISA context); Bailey v. Blue Cross & Blue Shield of VA, 67 F.3d 53, 57 (4th Cir. 1995) (same). In so doing, we must utilize the more narrow of the definitions of "cosmetic," limiting the term to those procedures, products, or services that affect appearance only, or which are performed for a purely superficial benefit. Because the definition of "cosmetic" used by the district court comports with the definition we apply, CIGNA's assignment of error in this regard lacks merit.
Having resolved the ambiguity issue relating to the term "cosmetic," we turn to CIGNA's two specific bases for denying Katrina's Claim for treatment of her misshapen skull. First, CIGNA maintains that Katrina's DOC Procedure was a cosmetic one, and that it was therefore excluded from coverage under the Plan. Second, CIGNA contends that Ms. Bynum failed to provide sufficient documentation to establish that Katrina's DOC Procedure was medically necessary.
CIGNA maintains that its denial of Katrina's Claim was proper because the DOC Procedure was cosmetic. As explained supra, the term "cosmetic," as used in the Plan, is limited to procedures, products, or services that affect appearance only, or which are performed for a purely superficial benefit. Because Katrina's DOC Procedure was not utilized for the sole purpose of providing her with an aesthetically pleasing, symmetrical head shape, the treatment was not "cosmetic." Instead, her DOC Procedure constituted treatment for a congenital birth defect and its related symptoms, with the added hope that it might prevent the onset of serious abnormalities often associated with her birth defect, such as malocclusion of the mandible. Accordingly, CIGNA's determination that the DOC Procedure was "cosmetic" was objectively unreasonable and not supported by substantial evidence. See Ellis v. Metro. Life Ins. Co., 126 F.3d 228, 234 (4th Cir. 1997).
We cannot agree. The uncontradicted evidence shows that the "the DOC band, as used upon Katrina Bynum, was medically indicated," meaning that, in Katrina's circumstances, the DOC Procedure was treatment for the misshapen skull attributable to her birth defect. The documentation that Ms. Bynum submitted in support of Katrina's Claim further established the medical necessity of the DOC Procedure. For example, both of Katrina's treating physicians, a pediatrician and a pediatric neurosurgeon, opined that Katrina's asymmetrical head shape was a medical condition requiring treatment. And the uncontradicted medical evidence indicates that the appropriate treatment for Katrina's medical condition was the DOC Procedure.
In light of the uncontradicted medical evidence, CIGNA's contention that Katrina's DOC Procedure was not medically necessary fails to meet the two-pronged test of Brogan, i.e., it is neither "supported by substantial evidence" nor the result of "a deliberate, principled reasoning process." Brogan v. Holland, 105 F.3d 158, 161 (4th Cir. 1997) (internal citations and quotations omitted). As such, CIGNA's denial of Katrina's Claim was not "objectively reasonable," and the Plan must provide coverage for Katrina's Claim.
Finally, CIGNA's rejection of coverage for Katrina's Claim, whether based on the lack of medical necessity, or on its being an excluded "cosmetic" procedure, was not objectively reasonable, thereby constituting an abuse of discretion. As we have observed, an abuse of discretion occurs when a reviewing court possesses a "definite and firm conviction that . . . a clear error of judgment" has occurred "upon weighing of the relevant factors." Westberry v. Gislaved Gummi AB, 178 F.3d 257, 261 (4th Cir. 1999); see also United States v. General, 278 F.3d 389, 396 (4th Cir. 2002) (observing abuse of discretion occurs when discretion exercised arbitrarily or capri- ciously, considering law and facts). In this instance, we are left with the definite and firm conviction that CIGNA committed a clear error of judgment, and it thereby abused its discretion.
For the foregoing reasons, we affirm the decision of the district court that Katrina's Claim is covered under the Plan.
1 Congenital torticollis is a birth defect involving a severely twisted neck and is typically "due to injury to the sternocleidomastoid muscle on one side at the time of birth and its transformation into a fibrous cord which cannot lengthen with the growing neck." Dorland's Illustrated Medical Dictionary 1723 (28th ed. 1994).
2 Plagiocephaly has been medically defined as "an unsymmetrical and twisted condition of the head, resulting from irregular closure of the cranial sutures." Dorland's Illustrated Medical Dictionary 1299.
3 The administrative record does not reflect the specific treatment protocol prescribed for Katrina. Generally, a DOC Procedure involves wearing the custom-molded orthotic device twenty-three hours per day, with the infant's progress being followed weekly so that any necessary modifications can be made to the orthotic device. The average treatment time is four months. Dynamic Orthotic Cranioplasty, at http://www.cranialtherapies.com (last visited March 19, 2002).
4 Malocclusion of the mandible is a serious condition affecting the teeth, jaw, and facial structure. It involves the malposition of teeth, which results in pain, degeneration, and jaw clicking. If left untreated, malocclusion of the mandible can also affect a person's ability to eat, speak, and maintain good oral hygiene. See Dorland's Illustrated Medical Dictionary 982; World Craniofacial Foundation, Deformities of the Jaw, at http://www.worldcf.org/jaw.html (last visited March 19, 2002).
5 The Plan specifies that CIGNA's Member Services Department will investigate first-level appeals, and that if the matter is "clinical" at least one reviewer will be a medical doctor.
6 Three non-CIGNA employees, that is, Dr. James Lindermann, a Board-Certified pediatrician, plus two employer plan benefit administrators, comprised the Committee which heard Ms. Bynum's second-level appeal. The Plan, in its section 13.3, provides for a second-level appeal to be heard by such a Grievance Committee.
7 In being "medically indicated," the DOC Procedure, as used upon Katrina's misshapen head, was suggested by probable necessity. See On-Line Medical Dictionary, at htpp://cancerweb.ncl.ac.uk (last visited March 19, 2002) (defining "indicate" as "demonstrat[ing] or suggest[ing] the probable necessity or advisability"); see also Dorland's Illustrated Medical Dictionary 835 (defining "indicate" as "a sign or circumstance which points to or shows the cause, pathology, treatment or issue of an attack of disease").
8 The terminology "right anterior ear shift" refers to the right ear being positioned closer to the face than the left ear, and "frontal bossing right greater than left" means that the right side of the head protrudes outward more than the left side.
9 An "approved orthoses" is a medical device that the FDA has approved for use in the treatment of specified conditions.
10 The administrative record does not indicate why Ms. Bynum or her lawyer did not attend the Committee meeting.
11 In general, TEC Assessment Reports are communications disseminated by the BlueCross BlueShield Association which advise regional Blue Cross and Blue Shield insurers whether a treatment meets the coverage cri0.teria (called the TEC criteria) established in Blue Cross and Blue Shield insurance polices. In this case, the TEC Assessment Report involved the DOC Procedure, and it concluded that the procedure failed to meet the Blue Cross and Blue Shield TEC criteria. Thus, because CIGNA's coverage criteria are similar to such TEC criteria, CIGNA likely provided the Committee with the TEC Assessment Report in support of its contention that the DOC Procedure did not conform to CIGNA's coverage criteria.
12 CIGNA's reference to the Section 5.0 (letter M) Exclusion is in error; this particular exclusion refers to "[d]iagnosis or treatment of infertility." In fairness to CIGNA, it likely intended to reference the Section 5.0 (letter L) Exclusion, which refers to "all cosmetic procedures or surgery." As such, we will treat the denial of Katrina's Claim by CIGNA's Committee as being premised on the Section 5.0 (letter L) Exclusion.
13 Section 1132 of Title 29 of the United States Code provides, in relevant part, that "[a] civil action may be brought . . . by a participant or beneficiary . . . to recover benefits due to him under the terms of his plan."
14 While the parties' agreement to waive the summary judgment standards and submit their case to the district court on its merits seems to be unique, the ERISA statute does not preclude such an agreement. See Tester v. Reliance Standard Life Ins. Co., 228 F.3d 372, 374, 377 (4th Cir. 2000) (affirming decision of district court after bench trial to award benefits to insured under ERISA plan because plan's term was vague and ambiguous).
15 Some parents apparently are advised to place infants on their backs to prevent the occurrence of sudden infant death syndrome. See SIDS Alliance, Positional Plagiocephaly, or"flat heads", at http://www.sidsalliance.org (last visited March 19, 2002). Katrina's skull deformity, however, is related to her birth defect. See infra at 14.
16 The Plan defines a Medical Condition as "[a] disease, illness or injury."


Richard G. Jensen, argued, Minneapolis, MN, for Defendants-Appellants.
Thomas P. Malone, Minneapolis, MN, argued (William Huefner, Bradley A. Kletscher and Mark A. Sletto, on the brief), for Plaintiffs-Appellees.
Before MAGILL, BEAM, and LOKEN, Circuit Judges.
A Department of Labor investigation concluded that Robert Regan, trustee of the Osseo-Brooklyn School Bus Company Profit Sharing Plan ("the Plan"), had engaged in prohibited and imprudent transactions that violated his fiduciary duties under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq. After the Department acquiesced in voluntary compliance efforts, including appointment of a new, independent trustee, certain Plan beneficiaries commenced this private action against Regan and the Bus Company seeking compensatory relief on behalf of the Plan. When Regan died before trial, his estate was substituted as a party defendant. After the bench trial, the district court1 concluded that Regan twice breached fiduciary duties as trustee and awarded $287,269.27 to the Plan and $146,750 to plaintiffs for their attorneys' fees. Defendants appeal, challenging only the relief awarded. We affirm.
I. The Relief Afforded to the Plan.
ERISA imposes exacting duties on the fiduciaries who control employee benefit plans to protect the interests of plan participants and beneficiaries. In investing plan assets, for example, ERISA fiduciaries must act solely in the interest of plan beneficiaries and "with the care, skill, prudence, and diligence [of] a prudent man acting in a like capacity and familiar with such matters." 29 U.S.C. § 1104(a)(1)(B). In addition, fiduciaries must avoid engaging in prohibited transactions, such as self-dealing. See 29 U.S.C. § 1106. When these duties are breached, 29 U.S.C. § 1109(a) provides that the fiduciary "shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary." The principal issue on this appeal is whether the district court correctly applied § 1109(a) to two transactions in which Regan improperly invested Plan assets.
A. The School District Transaction.
In November 1988, Regan bought a school bus terminal for $820,000 at a bankruptcy auction, planning to resell the property to Independent School District # 196 (the "School District"). After financing the initial purchase with an $820,000 "bridge loan" from First Bank Robbinsdale ("First Bank"), Regan began negotiating a lease/purchase agreement with the School District and long term financing with First Bank. In January 1989, First Bank offered Regan a long-term $820,000 loan, bearing interest at 11.0% the first year and at a floating rate thereafter, and secured by a mortgage on the terminal property, a corporate guaranty from the Bus Company, a pledge of $200,000 of certificates of deposit owned by Regan, and assignment of the School District's lease payments.
In April 1989, Regan and the School District entered into a lease/purchase agreement. The School District leased the terminal for $17,969 per month for the fifty months commencing May 1,1989, and was granted an option to buy the property for $594,292 at the end of the lease. With this commitment in place, Regan turned down First Bank's permanent loan offer and obtained his financing from the Plan. On May 1, 1989, he caused the Plan to repay the $820,000 bridge loan. No document evidenced this $820,000 "loan." During each month of the lease, Regan received the $17,969 rent payment from the School District. For the first thirty eight months, he remitted $9,969 to the Plan, keeping $8,000 per month as his profit in the transaction. He remitted all of the last twelve rental payments to the Plan. When the School District exercised its option to purchase, the Plan received the full $594,292 purchase price. During the fifty-month lease, Regan held unencumbered title to the terminal and made a gross profit of $304,000 ($8,000 per month for thirty-eight months). The Plan earned 11.75% annual interest, and its $820,000 loan was repaid in full.
The district court concluded that this self-dealing between Regan and the Plan breached Regan's fiduciary duties as defined in ERISA, specifically, 29 U.S.C. §§ 1104(a)(1)(B) and 1106(b)(1). Defendants do not challenge that conclusion on appeal, and rightly so. Even if Regan intended to benefit the Plan, ERISA flatly "prohibits transactions in which the potential for misuse of plan assets is particularly great." Leigh v. Engle, 727 F.2d 113, 123 (7th Cir.1984). Though Regan invested Plan assets in a "loan" that earned 11.75% interest--much better than the 4%-6% return then being earned on the Plan's investments--he did not protect the Plan, as an independent trustee surely would have, by documenting that the Plan was a lender, not an investor, and by obtaining adequate security for the Plan's loan, such as the collateral demanded in First Bank's proposal. Regan evidently knew his self-dealing was suspect because, by reporting that the Plan had made a secured loan to the School District, he concealed the true nature of the transaction from Plan beneficiaries, the Plan's auditors, and the Internal Revenue Service.
Thus, the issue here is remedy. Because the Plan suffered no loss, the question is whether Regan (now his estate) must disgorge to the Plan "profits ... made through use of assets of the plan by the fiduciary." 29 U.S.C. § 1109(a). When a fiduciary has invested his own assets and made use of plan assets in a prohibited transaction, "section 1109 only allows recovery [for the plan] where there is a causal connection between the use of the plan's assets and the profits made by fiduciaries on the investment of their own assets." Leigh v. Engle, 858 F.2d 361, 366 (7th Cir. 1988), cert. denied, 489 U.S. 1078, 109 S.Ct. 1528, 103 L.Ed.2d 833 (1989).2 Defendants argue that Regan did not profit by "using" Plan assets because his profit was locked in when he reached agreement with the School District in April 1989, and because he could have financed the lease/purchase with his own liquid assets, or with a long-term loan from First Bank. The district court rejected that argument and awarded the Plan $275,652.27, Regan's entire net profit from the transaction including prejudgment interest.
On appeal, defendants renew their argument that Regan's entrepreneurial profit was fixed once he had negotiated terms with both the School District and First Bank, before the Plan became involved. The most obvious problem with this argument is that Regan obtained financing from the Plan on different terms than First Bank had offered. Appellants focus only on the fact that the initial interest rate offered by First Bank would have been less than the 11.75% paid to the Plan. But First Bank financing would have involved not only the risk of a floating interest rate, but also extensive collateral requirements--a first mortgage on the terminal property, assignment of the School District's lease payments, a guaranty from the Bus Company, and a continuing pledge by Regan of $200,000 of highly liquid assets. There is no evidence in the record that explains the financial cost of these terms to Regan as borrower at that time. Had Regan lived to testify at trial, he might have convinced the finder of fact that, despite his efforts to cover up the Plan's involvement, he really did transfer all of the "lender's profit" from First Bank to the Plan, deriving no personal profit from his unlawful use of Plan assets. But on this record, the district court was clearly justified in drawing a contrary conclusion--that Regan surreptitiously made use of the Plan's $820,000 at least in part to improve his own financial circumstances and thereby increase his profit from the purchase and resale of the terminal property.
That conclusion resolves this part of the case. Defendants argue only that Regan made no profit through use of the Plan's assets. They do not raise the more complex question whether Regan's entire profit should be attributed to his unlawful use of the Plan's assets. We do not address that question, except to remind future litigants that "once the ERISA plaintiff has proved a breach of fiduciary duty and a prima facie case of ... ill-gotten profit to the fiduciary, the burden of persuasion shifts to the fiduciary to prove that ... his profit was not attributable to the breach of duty." Martin v. Feilen, 965 F.2d 660, 671 (8th Cir.1992), cert denied, 506 U.S. 1054, 113 S.Ct. 979, 122 L.Ed.2d 133 (1993).
In October 1985, Regan lent $200,000 of Plan assets to Reco, Inc., a competing school bus company owned beneficially by several of his nieces and nephews. This term loan was repayable in semiannual $10,000 installments, with the balance due in July 1988. It was secured by a junior mortgage on Reco's new bus terminal. Regan caused the Plan to extend this loan beyond July 1988 and to lend Reco an additional $450,000 in October 1990. Reco repeatedly missed installment payments of principal and interest over the years, but there was evidence that the Plan's loan was always fully secured. In January 1992, at Reco's request, Regan caused the Plan to reduce the interest rate on the unpaid loan balance from 11.0% to 9.5%. Reco repaid the Plan in full in January 1993.
This was not a prohibited transaction, but the district court nonetheless concluded that Regan breached his fiduciary duty of care to the Plan by acting imprudently and by not acting solely in the best interests of the Plan. See 29 U.S.C. § 1104(a)(1)(A) and (B). Again, defendants do not contest this conclusion on appeal. Turning to the question of remedy, the district court awarded $11,617 to reimburse the Plan for the loss attributable to the 1992 interest rate reduction. Defendants argue that this was an improper remedy under § 1109(a), pointing to "uncontradicted and apparently credible" testimony by Patrick Regan, a Reco officer, and Scott Regan, Regan's son, that interest rates declined in 1991, that Reco threatened to refinance elsewhere if the Plan did not reduce its interest rate to 9.5%, and that Regan reasonably acquiesced in this demand because alternative Plan investments did not offer a return better than 9.5%. This is a plausible theory, but lacking proof that Reco had a willing alternative lender waiting in the wings, the district court found that Reco's "threat to [refinance was] an empty one." This finding is not clearly erroneous, and therefore defendants failed to satisfy their burden to rebut plaintiffs' prima facie showing of loss to the Plan.
II. The Award of Attorney's Fees.
ERISA provides that in any action by plan participants or beneficiaries "the court in its discretion may allow a reasonable attorney's fee." 29 U.S.C. § 1132(g). In this case, plaintiffs' two law firms requested a total fee award of $222,332. The district court conducted a thorough review of the litigation, applying the factors set forth in Lawrence v. Westerhaus, 749 F.2d 494, 495-96 (8th Cir.1984), and concluded that plaintiffs were entitled to a reasonable fee award. It then carefully analyzed the fee requests, rejecting substantial portions because they reflected work that was excessive, duplicative, or unnecessary. The court awarded plaintiffs attorneys' fees of $146,750, payable by Regan's estate and the Bus Company. Because defendants concede the court applied the correct legal standard, we review this award for abuse of discretion. See Jacobs v. Pickands Mather & Co., 933 F.2d 652, 659 (8th Cir.1991).
Defendants argue that the fee award is excessive because plaintiffs succeeded on only four of the thirteen claims in their complaint, because plaintiffs recovered only a fraction of the total damages they were seeking, and because it "cannot be disputed that Mr. Regan was acting in good faith," which is one of the Westerhaus factors. Although plaintiffs' excessive fee requests and questionable billing practices concern us, as they did the district court, the lawsuit has resulted in a substantial recovery for the Plan that is significantly greater than the court's fee award. After carefully reviewing the record and the district court's meticulous analysis of the fee issue, we conclude that the fees awarded were well within its considerable discretion.
The amended judgment of the district court is affirmed.


text:
2003 Dagenham & Redbridge v. Doncaster £5.
2005 Carlisle v. Stevenage £5.
2007 Exeter v. Morecambe £5.
2009 Cambridge v. Torquay (includes private box ticket) £6.
2010 Oxford v. York £5.
2016 Forest Green v. Grimsby £5.

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