United States v. Banyan

933 F. 3d 548 (6th Cir. 2019)

Decided August 5, 2019

Defendants Bayan and Puckett appealed their convictions from the United States District Court for the Middle District of Tennessee.  Both Defendants were convicted of bank fraud under 18 U.S.C. §§1344(1) and 1344(2), in addition to conspiracy to commit bank fraud under § 1349.  The Sixth Circuit reversed the district court’s convictions.

The facts in this case are straightforward.  Bayan and Puckett engaged in a scheme that defrauded mortgage companies of $5 million dollars over the course of two years.  In January 2006, Puckett was a homebuilder in Nashville, Tennessee.  He was in financial trouble when he met Bayan, who had previously worked as a mortgage broker.  They devised a plan to recruit straw buyers to purchase Puckett’s homes with loans from SunTrust Mortgage Company and Fifth Third Mortgage Company.  Each buyer submitted a loan application that overstated the buyer’s income and falsely stated that the buyer intended to live in the home.  None of these misrepresentations reached the parent companies of the mortgage companies – the banks.  Puckett would then take the loan proceeds and tell the buyers he would use the funds to make their mortgage payments.  By late 2007, his fraudulent loan proceeds dried up.  He was out of money and the mortgage companies foreclosed on most of the homes.

The Sixth Circuit bluntly told the government that they blew this case.  Simply put, the government charged the defendants with the wrong crimes.  The Court believed that a wire or mail fraud conviction would have been appropriate, but they were troubled by the government’s decision to charge defendants with bank fraud violations.  The Court reversed the convictions after finding the government failed to meet their burden.

The issues in this case are purely legal.  Most of the Court’s discussion focuses on the statutory definition of the term “financial institution” in 18 U.S.C. § 20.  At the time of defendants conduct, a “financial intuition” was a federally insured depository institution.  To convict a defendant under § 1344(2), the government must prove that the defendant intended to obtain bank property[1] by false means of sale or fraudulent pretenses, representations, or pretenses.  Neither of the mortgages companies in this cases were considered financial institutions under this definition.  The government unsuccessfully argued that legislative intent should clarify the ambiguous term, but the Court did not agree.  It found that the government failed to prove both elements of the offense.  The government did not present any evidence that the banks funded the loans or the defendants intended to receive funds from the banks.

The government’s main argument in this case centers on the business relationship of these defrauded mortgage companies and their parent companies.  The government believes the parent banks “owned” the money supplied to the Defendants by the mortgage companies simply because the banks owned the companies.  The Sixth Circuit quickly dismissed this argument.  It cited to a history of precedent that established a central principle of corporate law – shareholders do not own a corporation’s assets.  In this case, a parent corporation does not own the assets of its wholly owned subsidiaries by virtue of that relationship alone.  The Court refused to disregard the separate corporate forms, and repeatedly stated that the government failed to offer any reliable proof that the banks were involved in this scheme.  It applied similar reasoning to the convictions of defendants under §§ 1344(2) and 1349.  Defendants’ convictions were reversed because the government failed to prove a bank (or financial institution) was defrauded.

Judge Oliver wrote a concurring opinion agreeing with most of the majority opinion, but would have decided otherwise if the government would have shown a closer relationship between the parent bank and the mortgage company.  However, she cited cases where other courts have upheld bank fraud convictions where the loans originated with a subsidiary mortgage company that had a direct connection to the assets of a bank. In those cases, there was evidence that the parent bank itself handled the draw request, signed off on the loan, or the loans were funded from an existing line of credit with the bank.  The government did not offer such proof in this case, thus Judge Oliver agreed there was no evidence in the record to support a similar finding that the banks were defrauded.

In a dissenting opinion, Judge Siler focused on the loss of the entities.  He relied upon case law that suggests a loss of a wholly owned subsidiary constitutes a loss to the parent corporation.  Thus, his thoughts are simple – fraud on the mortgage company is fraud on the bank.  He also mentioned that Congress subsequent actions to amend the statue shows that they wanted to close this particular loophole that the courts had uncovered.  It is important to highlight that Congress later amended the definition of “financial institutions” to include mortgage lending companies.  See Fraud and Enforcement and Recovery Act of 2009, Section 2(a)(3).  This purported loophole is now closed, and future defendants employing a similar scheme against mortgage companies may not get so lucky if they are convicted of bank fraud.

[1] Bank is used as a synonym for financial institutions in the Court’s opinion.