Bank Fraud Convictions Reversed

The Sixth Circuit’s in United States v. Banyan, reversed the defendants’ bank fraud convictions. The reason: the government didn’t show the defendants got any money from a bank. The court held: “…the government charged the defendants with the wrong crimes.”

The defendants were a homebuilder and a mortgage broker. The builder fell into financial distress, and the two submitted a number of fraudulent mortgage applications to two different mortgage companies, which were wholly-owned subsidiaries of two different banks, Sun Trust and Fifth Third. Subsequently, the defendants were charged with bank fraud in violation of 18 U.S.C. § 1344(1) and (2) and conspiracy to commit bank fraud in violation of 18 U.S.C. § 1349. A jury found them guilty; the government did prove the defendants fraudulent conduct in submitting false mortgage applications to obtain loans.

The defense argued that neither of the mortgage companies had deposits that were federally insured, and, therefore, neither was a “financial institution,” which is the type of entity to which sections 1344 and 1349 apply. The court labeled as “nearly frivolous” the government’s argument that the mortgage companies should be considered banks “because each of them is a wholly owned subsidiary of a bank” for two reasons. One was that “a basic tenet of American corporate law” that a corporation (the mortgage companies) and their shareholders (the banks) are “distinct entities.” The second reason was Congress' pains to define “precisely” the term “financial institutions” as “institutions that hold federally insured deposits – which the defrauded mortgage companies undisputedly did not.”

The government argued that the parent banks “owned” the funds that the mortgage companies provided to the defendants, because the banks owned those companies. As to the first element of § 1344(2), the government argued that “the jury could reasonably infer . . . that the funds obtained from the mortgage companies belonged to the parent banks[,]” because any losses incurred by the mortgage companies would “flow directly up” to the banks. Gov’t Br. at 24. The Circuit court rejected this argument, citing United States v. Bennett, 621 F.3d 1131, 1136 (9th Cir. 2010): “[I]t almost goes without saying that a parent corporation does not own the assets of its wholly owned subsidiary by virtue of that relationship alone.” The government also argued that the banks had “custody or control of” the mortgage companies’ funds, 18 U.S.C. § 1344(2), because “the jury could reasonably assume that a parent company has some ‘duty’ to protect the funds of its wholly owned subsidiary and, moreover, has the ‘power or authority to guide or manage’ those funds.” Gov’t Br. 28. The government offered no evidence to support this argument. The Circuit Court held that this argument is merely a rehash of the government’s argument that the court should disregard the separate corporate forms of the mortgage companies and the parent banks.

The Circuit court further held that that argument disregards the statutory text that the Supreme Court so carefully interpreted in Loughrin v. United States, 573 U.S. 351, 355 (2014). That text requires the government to prove the defendant’s “intent to obtain bank property,” 573 U.S. at 355 (emphasis added), not merely to diminish its value. Accord Bennett, 621 F.3d at 1138 (holding that the same argument “fail[s] to appreciate the distinction between the act of misapplying funds belonging to a financial institution and the act of diminishing the value of a financial institution’s assets”). Similarly, the Circuit Court held that §1344(1) requires the government to prove that a defendant specifically “intend[ed] to ‘defraud a financial institution[,]’”Loughrin, 573 U.S. at 357 (quoting § 1344(1)), as opposed to a mortgage company. To prove fraud under § 1344(1), in contrast, the government at a minimum needed to prove that the defendants intended to “cause[] a federally insured bank to transfer funds under its possession and control.” United States v. Everett, 270 F.3d 986, 991 (6th Cir. 2001). The Circuit Court also found that the government failed to prove that the defendants sought to obtain bank property by means of” a misrepresentation . 18 U.S.C. §1344(2): “That element of § 1344(2) limits the provision’s scope to “frauds in which a false statement will naturally reach [a federally insured] bank (or a custodian of the bank’s property). Loughrin, 573 U.S. at 365 n.8.” The court reasoned that the mortgage companies were not custodians of the bank’s property because they did not fund the subject loans and that on the evidence presented at trial, there was no evidence that the misrepresentations on the subject loan applications ever reached the ears of anyone at the parent banks.