Opinion ID: 414470
Heading Depth: 2
Heading Rank: 3

Heading: The Positions of Other Circuit Courts of Appeal

Text: 16 The Fifth Circuit's rule permitting a conviction under Sec. 656 based on a reckless disregard of a bank's interest stands alone. Cases in the other circuits uniformly state that knowledge is the proper mens rea standard for Sec. 656. 17 One of the leading cases in the area is the First Circuit's decision in United States v. Gens, 493 F.2d 216 (1st Cir.1974). There the defendant, Gens, helped two other defendants, Porter and Carleton, gain control of a Massachusetts bank. Porter and Carleton were officers and directors of the bank, and Gens was a director. After Gens reached his loan limit with the bank, he arranged for eight additional loans to other borrowers, who then turned the loan proceeds over to Gens. Among the named borrowers on the eight loans were Gens' business partner and two attorneys who did substantial legal work for Gens. Another loan was made to a neighbor and close friend of Gens who was asked to sign the note alone, in part because Gens had borrowed up to his limit and despite the fact that the proceeds were to be used for a joint investment for the friend and the three defendants. The First Circuit reversed the Sec. 656 convictions of the three defendants, in part because the jury instructions erroneously permitted a finding of guilty if the jury found no more than that the defendants granted loans to named debtors knowing that the proceeds would be turned over to Gens. Noting that a bank official innocently and properly could make loans to a financially capable party, even though the officer may know that the named borrower plans to turn around and lend the proceeds to a third party, the court held that more is required before there is a violation of Sec. 656. The court held that there could be criminal responsibility in three situations: (1) where the bank official knows that the named debtor is either fictitious or wholly unaware that his name is being used; (2) where the banker knows that the named debtor is financially incapable of repaying the loan whose proceeds are being passed on to a third party; and (3) where the banker assures the named debtor, regardless of his financial capabilities, that the bank would look for repayment only to the third party who actually receives the proceeds. In other words, there must be knowing participation n a loan which is de facto to the third party to whom the bank would be unwilling to make a formal loan. See 493 F.2d at 221-22. The jury instructions in Gens permitted a finding of guilty merely upon the jury's finding that the defendant bankers knew that the loan proceeds would be turned over to Gens. Holding that criminal responsibility under Sec. 656 also requires knowledge that the named borrowers were financially incapable of repaying the loan or knowing participation in a deceptive scheme, the court reversed. 9 Thus, with respect to the mens rea issue before us, the Gens opinion establishes the First Circuit position as requiring knowing participation in a deceptive arrangement. 18 Similarly, when considering an appellant's claim that a grand jury was not sufficiently informed about the meaning of wilfully misapplied before returning an indictment, the Second Circuit held that the judge correctly charged that misapplication occurs when an officer of a bank knowingly lends money to a fictitious borrower or causes the loan to be made to his own benefit, concealing his interest from the bank. United States v. Fortunato, 402 F.2d 79, 81 (2nd Cir.1968) (emphasis supplied), cert. denied, 394 U.S. 933, 89 S.Ct. 1205, 22 L.Ed.2d 463 (1969). Subsequently, in United States v. Docherty, 468 F.2d 989 (2d Cir.1972), two Second Circuit judges vigorously debated whether the defendant had violated Sec. 656, but both clearly indicated that knowledge was the required mental state. Judge Friendly wrote that to support a conviction for aiding and abetting in a 'wilful misapplication,' the alleged aider or abettor must have knowledge that the officer intended to effect a conversion. Id. at 993 (emphasis added). Although Judge Lumbard dissented because he believed that the defendant had the mental state necessary to support a Sec. 656 conviction, he agreed that knowledge was the proper standard. Judge Lumbard wrote that [t]o be convicted under section 656 [the defendant] must have known that [the bank officer] was effecting a conversion of bank funds. Id. at 996 (emphasis added). 19 The Third Circuit also has held that knowledge is the appropriate mens rea for Sec. 656. In a fact situation similar to that in Gens, the Third Circuit approvingly quoted the three examples of criminal responsibility set out in Gens and then held: 20 The appellants contend that the trial court's instructions were erroneous because the court failed to charge the jury that it must find that Fredenburgh [the bank officer] knew that those named as debtors lacked the ability or intent to repay the loans. We agree. 21 United States v. Gallagher, 576 F.2d 1028, 1046 (3rd Cir.1978) (emphasis added). 10 22 In United States v. Arthur, 544 F.2d 730 (4th Cir.1976), the Fourth Circuit also indicated that knowledge was the required mental state for a Sec. 656 violation. The district court had instructed the jury that intent to injure or defraud the bank exists if you find that the defendant acted knowingly and that the natural result of his actions were [sic] to injure or defraud the bank, even though this may not have been his motive. Id. at 736. The court of appeals found that the latter portion of the charge was erroneous because it directed, rather than permitted, the finding of the fact of intent 'as the natural result of his actions.'  Id. at 737. However, the court implicitly approved that portion of the instruction which required the jury to find that the defendant acted knowingly. Id. 11 23 The law of the Sixth Circuit is in accord. In Logsdon v. United States, 253 F.2d 12 (6th Cir.1958), the defendant Logsdon was tried for aiding, abetting and inducing co-defendant Barrett, acting as cashier of the bank, to willfully misapply bank funds. The evidence showed that over a period of years Logsdon wrote checks on his personal or business accounts for over $500,000. The checks were paid by the co-defendant cashier, but were hidden away and never charged to the defendant's account. The court recognized that the defendant's knowledge of the scheme was required for a conviction, stating: 24 The crucial issue in the case would seem to be whether the appellant knew that the cashier was paying his checks out of the bank's funds and hiding the checks away. If he had such knowledge and continued over a course of years to engage in a course of conduct which so misapplied the funds of the bank and which required the expected collaboration of the cashier to make it successful, we think the evidence was sufficient to take the case to the jury.... 25 253 F.2d at 15 (emphasis added). The court also expressly articulated the proper role of recklessness, pointing out that the defendant's reckless conduct can be the basis for an inference of intent to injure or defraud: 26 Intent may be shown by circumstantial evidence, and in criminal cases, that is usually the only evidence available. A reckless disregard of the interests of the Bank, as shown by the evidence in this case, was sufficient to warrant a finding by the jury of an intent to injure or defraud the Bank. Id. (emphasis added). 12 27 The Seventh Circuit's decisions regarding the mental state required for a Sec. 656 conviction are, like our own, somewhat problematical. Several early Seventh Circuit decisions approved jury instructions which required the government to establish specific intent by proving that the defendant knowingly did an act which the law forbids purposely intending to violate the law. Such intent may be determined from all the facts and circumstances surrounding the case .... United States v. Johnson, 447 F.2d 31, 34 n. 3 (7th Cir.1971) (emphasis added). See also United States v. Mullins, 355 F.2d 883, 887 (7th Cir.), cert. denied, 384 U.S. 942, 86 S.Ct. 1465, 16 L.Ed.2d 540 (1966). However, in the most recent case directly involving the mental state requirement for Sec. 656, United States v. Larson, 581 F.2d 664 (7th Cir.1978), the court stated that [a] reckless disregard by a bank official of his bank's interest is sufficient to establish the requisite intent to defraud. Id. at 667. The cases cited in support of this statement do not indicate that reckless disregard is actually equivalent to intent to defraud, but simply confirm that the trier of fact is permitted to infer intent to defraud from a bank official's recklessness. 13 Further, the Larson court itself appears to have made this critical distinction later in the opinion when it elaborated on the concept of intent, stating: 28 The question of one's intent is not measured by a psychic reading of his mind but by the surrounding facts and circumstances; i.e., circumstantial evidence. It takes only common sense and good conscience under the facts recited above to reach a permissible inference that Larson deliberately misapplied the Elkhorn Bank's funds to further his personal interest. 29 Id. (emphasis added). Thus, although we acknowledge that the Larson court's use of the recklessness language is somewhat loose, we think that the decision is best read as holding that recklessness can properly serve as the basis for a permissible inference of deliberate intent. 30 It is true that a later Seventh Circuit decision, United States v. McAnally, 666 F.2d 1116, 1119-20 (7th Cir.1981), suggests in dicta that Larson equated recklessness with intent to injure or defraud for Sec. 656 purposes. However, McAnally goes on to note that, even if Larson so held, Sec. 656 requires not only intent to injure or defraud, but also requires willful misapplication, a term that in itself connotes criminal wrongdoing. Id. at 1120. Consequently, even if the McAnally dicta is the proper interpretation of Larson, the Seventh Circuit still requires a higher mens rea for a Sec. 656 conviction than mere recklessness. 31 The Eighth Circuit also has concluded that knowledge, not recklessness, is the required mens rea under Sec. 656. In Snyder v. United States, 448 F.2d 716 (8th Cir.1971), the Eighth Circuit reversed the defendants' convictions for aiding and abetting the embezzlement and misapplication of bank funds because there was no evidence that [the defendants] either knew or must have known that the bank's funds were being embezzled and that they were receiving the proceeds. Id. at 719. The court concluded that the defendants' conduct might be viewed as naive and perhaps reckless but it does not appear to be criminal. Id. (emphasis added). 32 In United States v. Dreitzler, 577 F.2d 539 (9th Cir.1978), the Ninth Circuit approved jury instructions on the definition of willfully in Sec. 656 which stated that  'an act is done willfully if done voluntarily and intentionally with knowledge that it is against the law.'  Id. at 549 (emphasis added). Another recent Ninth Circuit decision, United States v. Beattie, 594 F.2d 1327 (9th Cir.1979), approved an indictment for a Sec. 656 violation which alleged that the defendant 'with intent to defraud and injure' the bank 'did wilfully and knowingly misapply or caused to be misapplied monies' of the bank in that said defendant did cause a specified loan to be made by the bank to a specified individual 'knowing that [such individual] was not the actual beneficiary of the loan.'  Id. at 1329 (emphasis added). Admittedly, the Ninth Circuit did not have to decide whether a lower mens rea standard might support a Sec. 656 conviction in either of these cases, but that court has never approved instructions which included a recklessness standard. Moreover, an earlier Ninth Circuit opinion, Benchwick v. United States, 297 F.2d 330 (9th Cir.1961), indicated that knowledge is the proper mens rea standard under Sec. 656, and properly pointed out that knowledge (or specific intent to injure or defraud) could be inferred from a reckless disregard of the bank's interest. Id. at 333 n. 5. See text after note 14 infra. 33 Finally, the Tenth Circuit also has held that knowledge is the proper mens rea standard for Sec. 656. In United States v. Cooper, 464 F.2d 648 (10th Cir.1972), cert. denied, 409 U.S. 1107, 93 S.Ct. 901, 34 L.Ed.2d 688 (1973), the Tenth Circuit held that [t]he offense of 'misapplication occurs when an officer of a bank knowingly lends money to a fictitious borrower or causes the loan to be made to his own benefit, concealing his interest from the bank.'  Id. at 651 (quoting United States v. Fortunato, supra ) (emphasis added). See also Laws v. United States, 66 F.2d 870 (10th Cir.1933) (holding, under predecessor statute, that specific intent is an element of the offense of misapplication of bank funds). 34 We acknowledge that several circuit court cases discussing the mental state required under Sec. 656 contain loose references to recklessness. 14 However, in most of those cases the issue on appeal was sufficiency of the evidence, and courts have not always been careful to distinguish the test for determining the sufficiency of the evidence from the proper instructions to be given to the jury. Where sufficiency is at issue, a finding that an accused acted recklessly may be enough to sustain a jury verdict, because a jury may properly infer the requisite intent. This proper use of recklessness as an inference of intent is expressly recognized in many cases. See, e.g., United States v. Cooper, 577 F.2d 1079, 1083 (6th Cir.1978) (Acts knowingly done with a reckless disregard for the interests of the bank may justify a finding of intent to defraud or injure the bank) (emphasis added); United States v. Larson, 581 F.2d 664, 667 (7th Cir.1978) (following the statement that reckless disregard is sufficient to establish intent to defraud, the court notes that intent is not measured by a psychic reading of the defendant's mind, but rather by the surrounding facts and circumstances, and concludes that deliberate misapplication was a permissible inference under the facts there); United States v. Kaczmarek, 490 F.2d 1031, 1035 (7th Cir.1974) (evidence supports jury's conclusion with respect to unlawful intent to injure or defraud, because of defendant's obvious reckless disregard for the interests of the bank); Giragosian v. United States, 349 F.2d 166, 168 (1st Cir.1965) (defendant must have acted with such a reckless disregard of the bank's interests as to justify a finding of intent to injure or defraud); Benchwick v. United States, 297 F.2d 330, 333 n. 5 (9th Cir.1961) (pointing out that while the specific intent necessary for a Sec. 656 conviction may not be conclusively presumed from a reckless disregard of the bank's interests, specific intent, like any other fact, may be inferred from all the relevant circumstances ....); Logsdon v. United States, 253 F.2d 12, 15 (6th Cir.1958) (A reckless disregard of the interests of the Bank, as shown by the evidence in this case, was sufficient to warrant a finding by the jury of an intent to injure or defraud the Bank.) (emphasis added); Morrissey v. United States, 67 F.2d 267, 277 (9th Cir.1933) (under predecessor statute, the court regarded recklessness as a mere circumstance from which the jury could determine real intent). 35 In summary, we believe that a careful reading of the cases from other circuits reveals a uniform rule that the appropriate mens rea standard for Sec. 656 is knowledge. The Eighth Circuit has explicitly rejected the lower recklessness standard. The First, Sixth and Ninth Circuits have adopted knowledge as the proper mens rea, expressly placing recklessness in its proper role as evidence from which intent may be inferred. 15 The Second, Third, Fourth and Tenth Circuits have all either stated or held, without discussion, that knowledge is the proper mens rea standard. Further, although imprecise language occasionally has led to confusion, courts generally recognize that the proper role of recklessness is that it may justify an inference of intent to injure or defraud. Such a reading of the case law is buttressed by the government's brief in this case which, after surveying a number of cases, states: 36 It is nowhere suggested that recklessness is the standard of intent under any element of Sec. 656. Rather, reckless disregard has always been used ... to describe the kind of activity the jury must find from the facts before considering whether to make the permissible inference that such activity demonstrated an intent to injure or defraud the bank. 37 Brief of Appellee at 13. Thus, by the government's own admission, the Fifth Circuit's rule, as stated in the outline of cases leading up to Welliver, is inconsistent with the case law of the other circuits. Moreover, as discussed below, numerous other Fifth Circuit cases cast considerable doubt upon the rule. 38