Opinion ID: 806318
Heading Depth: 3
Heading Rank: 2

Heading: Acts of Concealment

Text: As the Fourth Circuit in Colton and other courts have recognized, “acts taken to conceal, create a false impression, mislead, or otherwise deceive in order to ‘prevent the other party from acquiring material information’” may demonstrate a scheme to defraud under sections 1341, 1343, and 1344(1). Colton, 231 F.3d at 898 (citation and alteration marks omitted). See also Neder, 527 U.S. at 22 (noting that “the well-settled meaning of ‘fraud’” includes “concealment of material fact” (emphasis omitted)); McNeive, 536 F.2d at 1251 (reversing a conviction under section 1341 because there was no evidence that the defendant “materially misrepresented any facts . . . or that he actively concealed his scheme”). The Government argues that Steffen acted to conceal material facts from the Bank by: failing to inform the Bank of the sale of the collateral; depositing funds from the sale into his personal bank account as opposed to the account specified in section 10.21 of his loan agreement with the Bank; and drawing against the loan, which impliedly represented that no sale had taken place. However, the Fourth Circuit also observed that the common law and the courts have historically drawn a distinction between “passive concealment—mere nondisclosure or silence—and active concealment, which involves the requisite intent to mislead by creating a false impression or representation.” Colton, 231 F.3d at 899. 6 Indeed, the record reflects that the Bank filed a civil suit alleging breach of contract against Steffen, Pyramid Construction, and MB Lofts in state court shortly after discovering Steffen’s sale of the collateral. The case was settled, and the Bank recovered $775,000 of the proceeds it lent to MB Lofts. -16- See also Stewart v. Wyo. Cattle Ranche Co., 128 U.S. 383, 388 (1888) (noting that “mere silence is quite different from concealment” and that silence must be accompanied by “concealment or suppression” in order to be equivalent to a false representation). The latter consists of “deceptive acts or contrivances intended to hide information, mislead, avoid suspicion, or avert further inquiry into a material matter.” Colton, 231 F.3d at 901. We find that the indictment fails to allege any acts to conceal. Rather, the Government alleges only nondisclosure. According to the facts set forth in the indictment, Steffen sold the collateral and deposited the proceeds in his personal account. By the Government’s own admission, the indictment contained no allegations of acts tending to show that Steffen entered into the loan agreement with the intention of defrauding the Bank by later selling the collateral. Indeed, the Government stated that “[t]he indictment is not premised on that theory,” and expressly agreed that the indictment did not allege that any scheme to defraud existed at the outset of the loan agreement. The indictment also alleged no actions undertaken by Steffen to hide the sale of the collateral from the Bank’s discovery. See, e.g., Britton, 9 F.3d at 709 (noting that the defendant concealed the location of the collateral and took steps to transfer it so as to avoid detection). When he issued a draw request to the Bank, Steffen did not make reference to the collateral or attempt to hide the fact that he had sold the collateral. Throughout the indictment, the only alleged “act” to conceal was Steffen’s silence about the sale to the Bank, which is insufficient to show a scheme to defraud. 3. Omissions from an Independent Legal Duty to Disclose The court in Colton implied that silence or nondisclosure could be fraudulent if it violated a “fiduciary, statutory, or other independent legal duty to disclose material information.” Colton, 231 F.3d at 898. The Government relies on this to argue that the security agreement between Steffen and the Bank gave rise to an -17- independent legal duty to disclose the sale of the security. Specifically, the Government relies on sections 5 and 7(c) of the security agreement, in which Steffen promised to send a draft of any sale agreement to the Bank and to obtain the Bank’s approval before a sale. The Government further contends that Steffen’s silence breached this duty and amounted to a scheme to defraud by material omission. The Government relies on United States v. Autorino, 381 F.3d 48 (2d Cir. 2004), to argue that the failure to disclose information pursuant to a contractual agreement may demonstrate a scheme to defraud on its own. In Autorino, an indictment charging violations of sections 1343 and 1344 was found sufficient where it alleged that the defendant failed “to advise the FDIC, as required by [a] pledge agreement, of the subsequent cancellation of the pledged [stock] certificate, the issuance of a replacement certificate, and the sale of the stock represented by the certificate.” Id. at 52. However, the indictment also alleged that Autorino knowingly made false statements to the issuer of the stock certificate in connection with the breach of the pledge agreement by claiming that the certificates had been “lost or destroyed.” Id. at 50. The certificates were cancelled and replaced, and Autorino then pledged one of the cancelled certificates to the FDIC. Id. Unlike in Autorino, Steffen’s breach of the security agreement was not accompanied or preceded by express misrepresentations, and we therefore find Autorino inapplicable to the instant case. Colton indicates that nondisclosure in the face of an independent legal duty to disclose may support a criminal fraud prosecution, but we agree with the district court that “in order for a fraudulent disclosure to be actionable fraud (either criminal or civil) the duty to disclose must be independent of any duty imposed by the contract.” In the civil context, “‘[a] fraud claim is permitted only if it arises from acts that are separate and distinct from the contract.’” Dubinsky v. Mermart, LLC, 595 F.3d 812, 820 (8th Cir. 2010) (quoting O’Neal v. Stifel, Nicolaus & Co., 996 S.W.2d 700, 702 (Mo. Ct. App. 1999)). If the same rule did not apply in the criminal context, every -18- breach of a bank loan agreement could give rise to criminal fraud prosecution. See United States v. Dowling, 739 F.2d 1445, 1450 (9th Cir. 1984) (holding that nondisclosure may form the basis of a scheme to defraud only where there is a fiduciary or explicit statutory duty to disclose and further noting that “[t]o hold otherwise . . . would have the potential of bringing almost any illegal act within the province of the mail fraud statute”), rev’d on other grounds, 473 U.S. 207 (1985). Here, the Government does not argue that Steffen was bound by a fiduciary or statutory duty to disclose. Rather, the alleged omissions are indistinguishable from breaches of Steffen’s contractual duties under the security agreement. Accordingly, the indictment fails to allege a scheme to defraud based on this theory. 4. Implied Misrepresentation The Government’s final theory as to why the indictment alleges a scheme to defraud is based on Steffen’s draw request to the Bank on March 7, 2008. The Government alleges that Steffen’s draw request implicitly represented that all of the representations and warranties in the security and loan agreements were true and correct in all material respects. The Government alleges that this representation was false because Steffen had already violated the agreements by selling the collateral. Once again, we find no authority to support finding a misrepresentation imputed by contract when the defendant is silent and does not suppress or conceal his breach of the contract. As discussed above, Steffen’s draw request was unaccompanied by any reference to the collateral; he made no false representation, submitted no misleading or falsified documents, and took no affirmative steps to conceal that he had sold the collateral. This distinguishes Steffen’s case from others where courts have found a draw request sufficient to show a defendant’s scheme to defraud. See, e.g. United States v. Wantland, 135 F. App’x 893, 895-96 (8th Cir. 2005) (unpublished per curiam) (upholding convictions for bank fraud related to the submission of draw requests where the defendants submitted fabricated and altered -19- invoices to support the requests). Accordingly, we find that Steffen’s breach of the security agreement and subsequent silence do not demonstrate a scheme to defraud.