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March 10, 1986


The opinion of the court was delivered by: CAHN

 This case presents the novel issue of how an award of restitution imposed on a criminal defendant in a mail fraud scheme should be distributed among the various victims of the scheme. After having a hearing on this issue, I have concluded that the distribution of restitution should not be limited to only the victims named in the indictment. Therefore, this case will be remanded to a federal magistrate to provide a method for validating and quantifying the losses incurred by the various victims of the scheme.


 This case arose from the dealings of a corporation called Chalfont Industries, Inc. ("Chalfont"). Mr. Jerome Kutner was the president and sole shareholder of Chalfont. *fn1" In 1977, Mr. Kutner founded Chalfont to market an automotive product known as Stop-A-Flat. The product is a liquid sealant which is pumped into the inside of automobile tires. Reportedly, the product would seal tire punctures of less than a certain size and prevent a tire from becoming flat.

 Stop-A-Flat was distributed nationally by Chalfont through a network of franchises. Each franchisee was granted a geographical area and was supposed to sell Stop-A-Flat to automobile dealers in their region. These dealers would then install the product in the tires of cars which they sold. Although their was no initial franchise fee, each franchisee was required to make an initial purchase of the product when the franchise was granted. These initial purchases ranged from $5,000 to $100,000.

 Although Mr. Kutner maintained that Chalfont was a legitimate business enterprise which had fallen on hard times and was then forced into bankruptcy, he agreed to plea nolo contendere to the charges against him. I agreed to accept the nolo contendere pleas on the condition that elongated sentencing hearings would be held. The purpose of these hearings was to determine whether pervasive fraud existed in this scheme as the government contended or whether it was merely a case of unrealistic statements being made to keep a troubled business from becoming insolvent. After lengthy hearings, I concluded that there was not sufficient evidence to prove pervasive fraud as alleged by the government. However, there did exist numerous instances of deliberate misrepresentation by Chalfont and Mr. Kutner. *fn4"

 On May 21, 1984, I sentenced the defendant to two years in jail and placed him on probation for five years commencing with his release from prison. As a condition of probation, the defendant was ordered to pay restitution in the amount of $500,000 which was to be distributed among the twenty-two victims named in the indictment. The defendant appealed this sentence to the United States Court of Appeals for the Third Circuit.

 In August of 1985 the defendant filed a motion for modification of his sentence in light of his economic condition and pursuant to my comments at the sentencing. *fn5" An agreement was reached between the government and Mr. Kutner whereby the defendant would pay $500,000 in restitution and dismiss his pending appeal. The government would recommend that the period of incarceration be changed to a period of probation. I was not totally pleased by this agreement because of the lack of incarceration which should have been imposed on the defendant for his illegal activities. However, I approved the modification because I felt that it was more important to obtain some restitution for the victims of this scheme rather than merely punish the defendant with a prison term.

 The $500,000 was paid to the court along with other money collected from other defendants in this same scheme. It was brought to the attention of this court that the law was unclear as to whether the court was restricted in distributing the amount of restitution to only the named victims in the indictment or to all of the victims of the scheme. To allow all of the parties interested in this matter an opportunity to be heard on this legal issue, a hearing was held on November 15, 1985. *fn6" Also, I allowed all interested parties to file briefs on this issue.


 The power of the federal courts to suspend sentences and place defendants on probation is not an inherent power of the courts, rather it arises from statute. U.S. v. John Scher Presents, Inc., 746 F.2d 959, 961 (3d Cir. 1984). The Probation Act, 18 U.S.C. § 3651, provides the power for judges to suspend a sentence and place a defendant on probation upon such terms and conditions as the court deems best. Although judges are granted a broad discretion in determining the terms of probation, the statute does provide certain limitations. The statute states that:

While on probation and among the conditions thereof, ...

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