Opinion ID: 793369
Heading Depth: 7
Heading Rank: 1

Heading: pvf

Text: 265 With respect to PVF accounts, Defendants had specific accounts with PVF for use in their check cashing business. The mechanics of such an account was that Defendants would deposit customer checks that they had cashed into an account on Day 1. PVF would then give instant credit to Defendants, so that they could withdraw the full amount of the checks deposited on Day 1, even though PVF had not received credit from those checks. On Day 2, PVF would find out which checks deposited were actually good and which were returned by the computer. As a result, a possibility existed that Defendants' account would be negative, if they had withdrawn on Day 1 an amount that was greater than the actual amount credited on Day 2. 266 PVF allowed these accounts to become negative, because it had $500,000 in collateral from Defendants. If the account was negative, Defendants on Day 2 had to deposit funds sufficient to place the balance at zero. 267 PVF also charged a fee for the instant credit given to Defendants on Day 1. This was in connection with expenses in handling the accounts and for the time value of money. 268 We agree with Defendants that this system was created for the benefit of Defendants, so that they could have money on Day 1 without having actual deposits until Day 2. Of course, the banks also benefitted from this arrangement through the fees charged. 269 The fact that the banks created this system did not give Defendants free license to abuse the system by check kiting. The purpose of the system was to give Defendants instant credit for checks they had cashed, not for checks from Defendants' other accounts with insufficient funds. Defendants were mixing checks from their own insufficient accounts with checks cashed from customers and depositing these into their accounts. In other words, Defendants were disguising the fact that they were drawing instant credit with checks from their own accounts. 270 Defendants seem to be arguing that because they could run a negative balance on PVF Account 1, and because they could run a negative balance on PVF Account 2, they were authorized to cycle checks between Account 1 and Account 2 to artificially inflate the balances of the two accounts. This is simply incorrect; no one had given them permission to do so. We find our previous decision in Stone to be directly on point. There, the banks allowed the defendant to run a negative balance for a service charge. The defendant argued that this system was essentially bank approval of check kiting between accounts where the bank imposed such a charge. This Court disagreed: 271 [The defendant's] elaborate check-kiting scheme was never authorized, negotiated, secured, or known to the bank. . . . While simple overdrafts by themselves may not rise to the level of misapplication of bank funds, the evidence presented in this case showed a complicated scheme wherein a series of worthless checks were systematically written, none of which had any monetary substance.. . . [The bank's] assessment of a service charge did not in any sense confer a right upon [the defendant] to engage in the otherwise illegal activity of check kiting. 272 Stone, 954 F.2d at 1192-93 (quoting United States v. McKinney, 822 F.2d 946, 948-49 (10th Cir.1987)) (emphasis supplied). Likewise, while bank officials in this case did authorize simple negative balances on Defendants' accounts, no one authorized check kiting. 273 The testimony of the bank officials proved that they did not give such authorization. Schimmelman testified that he was notified by Curschman in June of 1999 about suspiciously heavy activity in Defendants' accounts. Schimmelman and Curschman held a meeting with Defendants in early July to discuss the issue. There, Schimmelman asked Defendant Elie Abboud if he could explain the large volume of transactions, to which Defendant Elie Abboud said he could not. Schimmelman testified that he told [Defendant Elie Abboud] that I thought it looked like it might be kiting, and if it was, it was not legal, and it had to be stopped. 10 (J.A. at 753.) 274 This statement unequivocally shows that Schimmelman did not approve of the check kiting. He did not know that Defendants were depositing checks from their own accounts along with the cashed customer checks until Curschman informed him of this fact in June 1999. In other words, he did not previously know about the check kiting; therefore, he could not have approved of it. Moreover, as soon as he found out about the check kiting, Schimmelman warned Defendants that such a practice was illegal and had to be stopped. 275 The fact is that no bank official approved of the check kiting scheme. Defendant Elie Abboud points to testimony from Schimmelman and Swaney. As explained, supra, Schimmelman approved of the negative balances in Defendants' accounts, not check kiting. Swaney elaborated on this procedure by stating that Defendants could run a negative balance as great as the collateral on the accounts. This meant that bank officials approved negative balances with a maximum of $500,000, the value of Defendants' collateral; this did not mean approval for the actual negative balances of $1.6 to $4.5 million Defendants were running during the three-month period in 1999. 276 Next, Defendant Michel Abboud cites to testimony from John Male as evidence of bank approval of check kiting. The pages to which Defendant cites do not support this contention; in fact, the testimony shows that John Male did not know Defendants were getting the benefit of carryover, i.e., the benefit of the extra day of float created by the system, until the investigation by Curschman and Schimmelman. (J.A. at 743.) If John Male did not even know about the nature of the accounts, Defendant cannot claim that John Male approved such accounts for check kiting purposes. John Male also testified that because of the investigation, he did not trust Defendants. Either Defendant did not correctly cite to John Male's testimony, 11 or Defendant is being disingenuous with the Court. 277 Defendant Michel Abboud further cites to the facts that Defendants had unlimited overdraft protection, and that PVF had the right to offset the negative balances with the collateral. As explained, supra, Defendants did not have unlimited overdraft protection; their protection was the value of the collateral, $500,000. Furthermore, the right to offset could hardly be considered a comfort to PVF, considering that the actual negative balances soared considerably above the collateral it held. 278