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Sixth Circuit: Bank Fraud Requires … a Bank

A divided Sixth Circuit panel overturned the convictions of two alleged fraudsters because the government failed to prove that they intended to obtain property from a bank (technically, a “financial institution,” under 18 U.S.C. §1344).  Back in the heady 2000s, the defendant homebuilders in the companion cases of U.S. v. Banyanand U.S. v. Puckett used straw purchasers and fraudulent applications to induce mortgage companies to finance purchase of multiple luxury homes, to the tune of $5 million.  Mortgage payments went unmade; the mortgage companies foreclosed; and the FBI investigated.

A Tardy Indictment 

Time passed.  Too much time, in fact, to meet the five year statute of limitations for mail or wire fraud.  Instead, the government chose to indict for bank fraud.  A jury convicted and the defendants appealed.

The Sixth Circuit’s opinion(s) framed the appeals around a single issue under each of the two prongs of §1344:

The basic problem with the government’s case is that neither of the mortgage companies from which the defendants obtained funds were “financial institutions” as defined by § 20, because neither of those companies had deposits that were federally insured. That statutory determination is as straightforward as they come. Yet the government argues that we should regard the mortgage companies as banks because each of them is a wholly owned subsidiary of a bank.

“More than a century of corporate law says otherwise.”

Judge Kethledge (joined by District Judge Oliver, sitting by designation) applied the Supreme Court’s approach in Loughrin v. United States and “carefully interpreted” the bank fraud statute. He found the statutory text clear and precise, as had a similar decision from the 2nd Circuit.  The opinion criticized the government for attempting to “set aside fundamental principles of corporate law in the context of the federal bank statute” (citing the 9th Circuit’s analysis): a parent company exists separatelyfrom the assets of a subsidiary.

Accordingly, incidental impact on the parent from losses to its subsidiary did not mean the defendants had actually obtained any property of the bank, as the statute required.

Sitting by designation, Judge Oliver from the Northern District of Ohio, joined in a concurrence. Accepting the distinction between a parent and its subsidiary, he posited that a conviction might be sustained based on a strand of out-of-circuit precedent addressing mortgage loans with “direct connection” to bank assets. Here, however, the evidence failed to prove it.

Judge Siler dissented.  Relying on many of the same “direct connection” precedents cited by the concurrence, he would’ve concluded that the loss to a wholly owned subsidiary constituted loss to the parent bank.

Not a Loophole

Lest it be supposed this decision identifies a statutory loophole, each of the judges presumed that a fraud occurred and that a timely indictment for mail or wire fraud could have avoided the issue in these cases. Judge Kethledge’s opinion started by sounding this very note:

In this case the government charged the defendants with the wrong crimes.

Even regarding bank fraud, the panel’s opinions repeatedly referred to the “record,” or, more tellingly, the lack thereof.  The government perhaps could have sustained a conviction for bank fraud had it presented additional evidence at trial about the defendants’ intent to obtain bank assets.  Moreover, as the court’s opinion noted, Congress has amended the definition of a bank to expressly include “mortgage lending businesses.” It did so in 2009—a year after the foreclosures at issue, and too late to save the Banyan and Puckett convictions.

© Copyright 2020 Squire Patton Boggs (US) LLP


About this Author

Thomas E. Zeno, Squire Patton Boggs, Healthcare Fraud Lawyer, Economic Crimes Attorney
Of Counsel

Thomas Zeno has more than 25 years of experience in the US Attorney’s Office for the District of Columbia. During that time, Tom investigated and prosecuted economic crimes involving healthcare, financial institutions, credit cards, computers, identity theft and copyrighted materials. As the office’s Healthcare Fraud Coordinator for the last eight years, Tom supervised investigation strategies of agents from the Federal Bureau of Investigation, the Department of Health and Human Services, the Drug Enforcement Administration and the Medicaid Fraud Control Unit regarding...

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Benjamin Beaton Litigation Attorney Squire Patton Boggs Law Firm

Benjamin Beaton is a litigator who handles complex appeals, trial proceedings and regulatory disputes. He has authored more than a dozen briefs at the US Supreme Court, where he previously served as a law clerk, and drafted dozens more in the federal courts of appeal and state supreme courts. In trial proceedings across the country, Ben has tried cases, briefed and argued dispositive motions, defended and examined high-profile witnesses and negotiated settlements. Outside the courtroom, Ben has drawn on his governmental experience to counsel a Fortune 100 CEO appearing before a US Senate committee, resolve congressional investigations of a major bank and represent many of the country’s largest financial institutions before the SEC. Many of Ben’s cases involve complex questions of healthcare, energy, technology, insurance and financial services regulation.

At the start of his legal career, Ben clerked on the US Supreme Court for Justice Ruth Bader Ginsburg and the US Court of Appeals for the DC Circuit for Judge A. Raymond Randolph. He also worked as a legal fellow in Uganda for the International Justice Mission and traveled to London as a Temple Bar Scholar. A native and resident of Kentucky, Ben has handled appeals for the University of Kentucky and several other major institutions in the Commonwealth. He helped found the Kentucky Business Council and sits on the Board of Trustees for his alma mater, Centre College. Before attending law school, Ben served as deputy chief of staff for the Kentucky Cabinet for Health and Family Services, and as a legislative assistant for the US Congressman representing western Kentucky.