Opinion ID: 743011
Heading Depth: 2
Heading Rank: 1

Heading: Actual vs. Potential Loss Under the Statute

Text: The bank fraud statute provides: 40 Whoever knowingly executes, or attempts to execute, a scheme or artifice-- 41 (1) to defraud a financial institution; or 42 (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. 43 18 U.S.C. § 1344. Jacobs argued in the district court, and reasserts here, that the presentment of the fraudulent certified drafts did not create any enhanced risk of loss to the banks. The underlying debts were not discharged upon receipt of the certified drafts, but would have been discharged only if and when the drafts were paid. Since the drafts were never paid, no debts were ever discharged. Additional costs, such as interest or expenses incurred in attempting to collect the drafts were chargeable to the debtor. Thus, Jacobs argues that the element of intent to defraud a financial institution was never proved, and could not have been proved, by the government. The district court disagreed, stating that 44 actual loss need not be proven. The scheme to defraud clause of the bank fraud statute requires only that defendant expose the bank to a risk of loss .... even proof of an extremely remote risk will suffice,.... 45 .... 46 Defendant argues that the submission of the drafts did not put the banks at risk. Rather, the risk arose directly from the terms of the original agreement with the customer, ... Risk of loss, defendant contends, was present from the time a bank extended a line of credit and was in no way increased by submission of a worthless draft, ... 47 This Court disagrees. Submission of a worthless certified draft to a financial institution creates a risk of loss different in kind and different in degree from the risk of loss present at the time the institution extended the line of credit. Submitting a worthless certified draft creates a risk that the bank will honor the draft, return its evidence of the existence of the debt, and discharge the debt. This risk does not inhere in the creation of a line of credit. Submitting the worthless draft also creates the risk that the bank will release its security for invaluable consideration, another risk that does not inhere in the creation of a line of credit. Because of these additional risks of loss, different in kind and degree, the evidence concerning loss that defendant seeks to elicit is of no consequence and will be excluded as irrelevant. 7 48 In order for the bank fraud statute to apply, the fraud must be against the bank. For example, a scheme to pass bad checks is not bank fraud. United States v. Orr, 932 F.2d 330 (4th Cir.1991). Here, Jacobs argues that he cannot be convicted of bank fraud because he never intended that the banks would incur any loss. Instead it was the debtors who were the victims of the fraud. This ignores the fact that the conspirators instructed the debtors to present the certified drafts to the creditor banks in discharge of their debts. 49 The bank fraud statute was enacted to  'protect[ ] the financial integrity of [federally guaranteed financial] institutions, and ... assure a basis for Federal prosecution of those who victimize these banks through fraudulent schemes.'  Stavroulakis, 952 F.2d at 694 (quoting S.Rep. No. 225, 98 TH C ONG., 2d Sess. 377 (1983), reprinted in, 1984 U.S.C.C.A.N. 3182, 3517). The statute was modeled on the mail and wire fraud statutes, and Congress indicated that it wanted the bank fraud statute to be interpreted as broadly as those statutes. Id. Consequently, a conviction under the 'scheme to defraud' clause of the bank fraud statute requires ... a pattern or course of conduct designed to deceive a federally chartered or insured financial institution into releasing property, with the intent to victimize the institution by exposing it to actual or potential loss. Id. 50 In United States v. Blackmon, 839 F.2d 900, 904 (2d Cir.1988), this court held that where the fraud (a pigeon drop scheme 8 ) is aimed not at the bank, but at an individual, the offense is not bank fraud. In Blackmon, the victim was induced to voluntarily withdraw all of her money from a bank and turn it over to certain confidence men. This, we held, was not conduct covered by the bank fraud statute. Id. On the other hand, a scheme can be primarily directed at a third party and still give rise to bank fraud. In Morgenstern, the defendant engaged in a scheme to embezzle money from his employer by representing to the employer that it owed more in payroll taxes than was actually the case. The employer wrote and signed checks payable to Chemical Bank which the defendant deposited into an account over which he had control. United States v. Morgenstern, 933 F.2d 1108, 1112-13 (2d Cir.1991). We held that Morgenstern had committed bank fraud, because, in order to effectuate his scheme, the defendant was required to misrepresent to the bank that he had the authority to deposit these checks into an account over which he had control. Further, he engaged in a scheme designed to misrepresent his status to the bank, by mixing legitimate business with his fraudulently obtained checks. In this way, he misrepresented himself to the bank in order to fraudulently obtain control over money which was not his to control. Id. at 1113. 51 The problem now before us is that, had the certified drafts never been created, sold and presented, the risk of loss would have turned on the debtor's ability to pay. After presentation of the fraudulent drafts, the bank's risk would ultimately have similarly turned on the debtor's ability to pay. There is, therefore, a real question whether the bank's risk has been increased. 52 But, for purposes of this statute, the risk can be said to have been increased in that there was some possibility--at least a potential--that the bank would release security, delay efforts at collection or otherwise act in reliance upon its receipt of the certified drafts. Admittedly, the possibility of such actions in reliance may be rather remote since banks are cautious; but such actions are not impossible and, under the case law, a mere possibility of detrimental reliance is enough. In other words, the bank has been put in harm's way and, for purposes of construing the statute, we must assume a highly incautious bank. Another way of analyzing the problem is to think of the bank's acquisition of the certified draft as decreasing its risk (admittedly in the illusory belief that the draft might be good). Subsequently, this decreased risk was again heightened when the certified draft proved to be worthless. Thus, there was an increase in risk though only back to the level that existed before the draft was presented. 53 The case law indicates that an intent to victimize the institution by exposing it to actual or potential loss is required. Stavroulakis, 952 F.2d at 694. Here Jacobs apparently had little realistic prospect of actually causing loss to the bank. But this is not required. What is required is an intent to place the bank at risk of diminishing or delaying its ability to collect the debt. In this case, there was also an intent to create expectations in the bank, which were later dashed. 54 Stavroulakis presents a fact situation somewhat analogous to the one before us. In Stavroulakis the defendant engaged in a scheme of selling stolen blank checks, for which he was convicted of bank fraud. Even though he argued that he only intended to sell the checks, and had no fraudulent intentions with respect to the bank, we found that [i]nherent in a sale of stolen checks is that they will eventually be presented to the drawee bank for payment; and payment over a forged signature exposes a bank to real loss. Stavroulakis, 952 F.2d at 695. Similarly, Jacobs may have intended to defraud his customers by inducing them to purchase certified drafts which he knew were not worth the paper they're printed on, but inherent in that transaction was the risk that the certified drafts would eventually be presented to the creditor as payment, and acceptance of a false certified draft would expose the creditor bank to real loss. The risk of release of collateral or other action in reliance by the banks here is perhaps less than that of a forged signature in Stavroulakis, but for purposes of construing the statute, a potential is all that is required. 55 The bank fraud statute covers Jacobs' conduct because his DEP scheme exposed the banks to a risk of loss through the invalid certified drafts.