Opinion ID: 754755
Heading Depth: 2
Heading Rank: 2

Heading: Misapplication of Funds

Text: 36 To establish a misapplication of BancPLUS funds in violation of 18 U.S.C. § 657, 6 the government must prove: 1) that BancPLUS was authorized under the laws of the United States; 2) that the defendants were officers or directors of BancPLUS; 3) that the defendants knowingly and willfully misapplied BancPLUS funds; 4) that the defendants misapplied these funds with the intent to injure or defraud the institution. Parks, 68 F.3d at 863. The government can prove the necessary intent by  'showing a knowing, voluntary act by [each] defendant, the natural tendency of which may have been to injure the bank even though such may not have been his motive.'  Id. (quoting United States v. Parekh, 926 F.2d 402, 408 (5th Cir.1991)). 37 The defendants contend that the government failed to prove that they misapplied BancPLUS funds. Relying on our decision in Beuttenmuller, they argue that the government failed to prove a criminal misapplication because BancPLUS sold burdensome property, reduced its real estate holdings, and obtained something of value--the Dallas property--in exchange for the $26 million purchase price and the $15 million down payment. The government, on the other hand, argues that BancPLUS's purchase of the Dallas property for $26 million constituted a criminal misapplication of BancPLUS funds because the defendants knew that Scott's Cattle had paid only $13 million for the property a few days before. 38 In Beuttenmuller, Shamrock Savings, like BancPLUS, owned burdensome real estate--the Tanglewood property. 29 F.3d at 975. Shamrock decided to sell the Tanglewood property because it was causing the savings and loan substantial losses. The Southmeadow Joint Venture, which was formed by Larry Gill and Richard Billings, expressed interest in purchasing the Tanglewood property. At that time, Gill and Billings were also operating the Mansfield 150 Joint Venture to develop some real estate known as the Mansfield property, which had an appraised value of over $4 million and an equity value of approximately $1.8 million. 7 Just as Pettigrew, through Scott's Cattle, conditioned the Cal-Tex purchase of the Houston property on BancPLUS's agreement to buy the Dallas property, Gill and Billings, through the Southmeadow Joint Venture, conditioned their agreement to purchase the Tanglewood property on Shamrock's agreement to buy a 45% share in the Mansfield 150 Joint Venture, which owned nothing but the Mansfield property. Id. at 975-76. 39 Shamrock agreed to the conditional sales and the parties established a circular funding arrangement identical to the one in this case. Shamrock agreed to purchase a 45% share of the Mansfield 150 Joint Venture for $753,000. In exchange, the Southmeadow Joint Venture agreed to purchase the Tanglewood property for $2.725 million with a 20% down payment of $555,000. Gill and Billings then returned $555,000 of the $753,000 Shamrock payment to Shamrock as Southmeadow Joint Venture's down payment on the Tanglewood property. Id. at 975-77. 40 Like BancPLUS, Shamrock recorded an immediate profit on the sale of its property. Id. at 977. As in this case, however, Shamrock later foreclosed on the real estate it sold when the purchaser defaulted on its loan. Id. at 978. 41 As a result of their roles in this transaction, Gill and Billings were indicted. Gill was charged with aiding and abetting bank fraud and the misapplication of Shamrock funds. Beuttenmuller, the lawyer responsible for closing the transaction for Shamrock, was charged with conspiracy to commit bank fraud. Both were tried before a jury, and both were convicted. Id. 42 On appeal, this court reversed their convictions reasoning that Shamrock's purchase of a 45% interest in the Mansfield Joint Venture and its circular funding of the Southmeadow Joint Venture down payment on the Tanglewood property could not constitute a criminal misapplication of funds or bank fraud unless Shamrock Savings effectively gave Gill and Billings the down payment money for the purchase of the Tanglewood property. Id. at 979. But as the court noted, Shamrock did not provide Gill and Billings this down payment money as a gift. Instead, by investing in the Mansfield 150 Joint Venture, Shamrock acquired a 45% interest in the Mansfield property. Id. at 979-80. Under these circumstances, criminal liability for bank fraud and misapplication turned on whether the Mansfield property had no value or the value of this property was so low that the transaction was essentially a sham designed to cover the fact that Shamrock Savings was gratuitously providing Gill and Billings with the down payment money. Id. at 980. 43 The court concluded that a reasonable juror could not find beyond a reasonable doubt that the transaction was a sham. In exchange for its $753,000 cash payment, Shamrock obtained a 45% interest in property with an appraised value of over $4 million and approximately $1.8 million in equity value. Thus, the record in Beuttenmuller clearly indicated that the sale of the Mansfield property to Shamrock was not part of a criminal venture because it was within the range of a value-for-value transaction. Id. 44 Given the factual parallels between this case and Beuttenmuller, we find that the defendants' convictions for misapplication cannot stand unless the government's evidence sufficiently demonstrates that BancPLUS's payment of $26 million for the Dallas property was outside the range of a value-for-value transaction. Notwithstanding the fact that the price that Scott's Cattle paid for the Dallas property was not a matter of public record and the absence of evidence indicating that anyone who knew of this price provided it to the defendants, the government argues that BancPLUS's $26 million purchase price was not within the range of a value-for-value transaction because the defendants knew that Scott's Cattle had paid only $13 million for this property. In support of its contention that the defendants were aware of the Scott's Cattle purchase price, the government points to evidence in the record that Century Corporation, which owned BancPLUS, also owned Texas National Title, where the records documenting the Scott's Cattle purchase price were located. To show that the defendants had access to the records at Texas National Title, the government notes that Carlton testified on cross examination that the defendants arranged for her to have access to the records at Texas National Title upon her request. 8 From these two pieces of evidence, the government contends that the jury could reasonably infer that the defendants gained access to the records and Texas National Title and discovered Scott's Cattle's $13 million purchase price. 45 For this inference to be a reasonable one, and not the result of unguided speculation, the government needed to provide the jury with at least two pieces of additional evidence: 1) testimony or corporate documents demonstrating that the defendants could have taken certain steps to obtain for themselves the records at Texas National Title documenting Scott's Cattle's $13 million purchase price for the Dallas Property; and 2) testimony indicating that the defendants were likely to have taken these steps in the three days following Scott's Cattle's purchase of the Dallas property from Lintex Land. The government, however, never asked its witnesses from Texas National Title whether the defendants, by virtue of their positions at BancPLUS or Century Corporation, had or were given access to the records at Texas National Title documenting the price Scott's Cattle paid for the Dallas property. Likewise, the government failed to elicit testimony explaining why the defendants would have sought these records in the three days preceding the simultaneous closings on BancPLUS's sale of the Houston property and purchase of the Dallas property. We therefore hold that the government failed to prove sufficiently that the defendants knew, at the time BancPLUS purchased the Dallas property for $26 million, that Scott's Cattle was selling this property for a $13 million profit. 46 Consequently, there were only two pieces of evidence before the jury establishing the value of the Dallas property at the time of BancPLUS's purchase. On the one hand, Merwin's memorandum, which was sent to Ross and Barber, indicated that the $26 million purchase price was $6 million over fair market value. On the other hand, Brandt's appraisal, which was furnished to the defendants, suggested that the Dallas property was worth $35 million. Although the government argues that the jury could discredit this appraisal because it was paid for by Pettigrew, this argument ignores the fact that Brandt's prior appraisals on the Dallas property clearly indicated that Pettigrew's involvement did not affect Brandt's valuation. Thus, the evidence before the jury established that BancPLUS knew that the Dallas property had a fair market value between $20 and $35 million and agreed to the $26 million price after performing due diligence. Under these circumstances, a reasonable juror could not conclude that a purchase price of $26 million was outside the range of a value-for-value transaction. 47 In the alternative, the government, focusing solely on the purchase of the Dallas property, argues that the $6 million portion of the $15 million down payment that was not used to fund the Cal-Tex down payment on the Houston property represents a separate misapplication. We do not dispute that there may be circumstances where a large down payment will constitute a misapplication even when part of a value-for-value transaction. The government, however, did not prove a criminal misapplication in this case simply by demonstrating that the defendants, in order to secure Pettigrew's purchase of the Houston property, provided him with a $15 million rather than a $9 million down payment on the Dallas property. To impose criminal liability under these circumstances would punish the defendants for taking the steps necessary to sell BancPLUS's nonperforming property and reduce its real estate holdings. For the portion of the BancPLUS down payment that was not used to fund the Cal-Tex down payment on the Houston property to constitute a criminal misapplication of BancPLUS funds, the government was obligated to prove that this excess funding was itself a sham. Cf. id. at 980 (requiring proof that value was not received in exchange for value given). 9 48 Although the government does not expressly argue that BancPLUS did not receive value in exchange for the additional $6 million, it implies that the defendants knew, or had reason to believe, that Pettigrew, through Cal-Tex, was unlikely to return this money in the form of loan payments on the Houston property. Cf. Parekh, 926 F.2d at 407 (stating that a loan is a sham if there was little likelihood or expectation that the named debtor would repay) (quotations omitted). The evidence, however, shows that the defendants investigated Pettigrew's financial condition before selling the Houston property to Cal-Tex and determined that Pettigrew had the resources, independent of the proceeds of the sale of the Dallas property, to make this purchase and to make him a good credit risk. Accordingly, without additional evidence indicating that Pettigrew was unlikely to repay the BancPLUS loan, a reasonable juror could not conclude that the large down payment was a sham rather than a necessary component of a value-for-value transaction. Cf. id. (holding that proof of the debtor's ability to repay the loan will not necessarily preclude a finding that the loan was a sham when there is additional evidence suggesting that the borrower is nevertheless unlikely to repay). 49 In conclusion, we hold that the evidence was insufficient to sustain the defendants' convictions for misapplying BancPLUS funds under either of the government's theories. We therefore affirm the district court's decision to acquit each defendant on the charges that he conspired to misapply BancPLUS funds and misapplied BancPLUS funds. Beuttenmuller, 29 F.3d at 980 (Because the government has failed to provide sufficient evidence that the object of the conspiracy was illegal, we reverse Beuttenmuller's conviction for conspiracy.).