Article courtesy of Michael D. Robson (Greenberg Traurig)
U.S. v. Banyan, et al., Nos. 17‑6410 & 17‑6493, 2019 WL 3540794 (6th Cir. 08/05/19).
In a case before the 6th U.S. Circuit Court of Appeals (the “Court”), a split panel reversed the conviction of two parties for bank fraud arguing that the United States federal government (“USG”) had failed to prove the defendants had intended to defraud the federally insured financial institutions rather than their wholly‑owned subsidiaries. The Court reasoned that the institutions for which the USG claims were brought under 18 U.S.C. §1344 (the “Statute”) did not meet the requirements to be defined as “financial institutions” under that statute, amongst other deficient claims made by the USG.
Throughout 2006 and 2007, Amir B. Banyan and Brian Puckett (collectively, the “Defendants”) engaged in a series of straw purchases and made further misrepresentations in connection with mortgage loans (the “Loans”) from SunTrust Mortgage Co. and Fifth Third Mortgage Co. (the “Subsidiaries”) which were secured by various properties (the “Properties”). The Defendants became unable to make the appropriate payments on several of Loans related to certain of the Properties and by the end of 2008 the Subsidiaries had foreclosed on a majority of the Properties. Due to an unexplained government delay, the Defendants were not initially charged under wire fraud or bank fraud charges. Instead, the USG decided to press charges under the Statute as that offense had a longer limitations period and thus provided the USG with the best opportunity to convict the Defendants. The Defendants were convicted and then appealed the convictions arguing that (i) the Subsidiaries did not qualify as “financial institutions” for purposes of the Statute and accordingly, the Statute was inapplicable to the Defendants’ conduct and the convictions therefore invalid and (ii) the Defendants’ actions did not constitute an attempt to procure bank property by means of its misrepresentation under clause (2) of Section 1344.
In addressing the Defendants’ arguments, the Court found that the USG failed to prove the Defendants sought to “defraud a financial institution” as required under clause (1) of Section 1344. The Court turned to the language of 18 U.S.C. §20(1) which provides that the term “financial institution” means a federally “insured depository institution”. The Court noted that neither of the Subsidiaries were insured depository institutions and therefore failed to meet this definition despite their relationship to their parent corporations (SunTrust Bank and Fifth Third Bank, collectively, the “Parent Companies”) which were federally insured and therefore so qualified. The Court held that the USG’s argument would disregard established jurisprudence as to the separate legal structure afforded to American corporations and business entities.
The Court then addressed whether the Defendants’ action gave rise to an attempt to obtain bank property by means of misrepresentation under clause (2) of Section 1344. The Court noted that first element of clause (2) required USG prove that the Defendants intended to obtain property from banks which required an intent by the Defendants to obtain property from the Parent Companies rather than the Subsidiaries. The Court found no evidence that the misrepresentations made by the Defendants were relied upon by the Parent Companies or that the Parent Companies provided the funds used in the fraudulent Loans. Furthermore, the Court was not swayed by the USG’s claim that as the Parent Companies owned their respective Subsidiaries as the sole shareholder, the Parent Companies essentially owned the property at question.
Citing the above reasoning and lack of support from established jurisprudence regarding corporate law and textual review, the Court reversed the lower court’s judgments and remanded the case with instructions for acquittal.
