United States District Court, Southern District of Illinois, Benton Division
December 1, 1982
UNITED STATES OF AMERICA, PLAINTIFF,
LLOYD M. EPPERSON, DEFENDANT.
The opinion of the court was delivered by: Foreman, Chief Judge:
Before the Court is defendant's Motion to Dismiss
Indictment. It is submitted that the three count indictment
fails to charge any criminal violation. Count I charges
defendant with conspiracy to make false statements to banks
(in violation of 18 U.S.C. § 1014) and to misapply bank
funds (in violation of 18 U.S.C. § 656), all in
violation of 18 U.S.C. § 371. Counts II and III charge
defendant with violating 18 U.S.C. §§ 656 and 2 by
willfully misapplying money, funds and credits of the First
National Bank of Woodlawn and the Peoples National Bank of
The underlying scheme, as set out in the indictment, can be
described as follows: In 1977, defendant was the chairman of
Board of Directors of the Woodlawn Bank and a member of the
Board of Directors of the McLeansboro Bank; both banks were
insured by the Federal Deposit Insurance Corporation.
Defendant and his co-conspirators allegedly caused loans from
the banks to be made to Dr. Max Ahlers, who in turn gave the
loan proceeds to DEW Mortgage Company, which in turn gave the
proceeds to Southern Gardens, Inc. At all times, defendant and
his co-conspirators allegedly knew that the loan proceeds
would go to Southern Gardens, Inc. Defendant allegedly
received 23% of the stock in Southern Gardens for arranging
Defendant argues that the indictment is insufficient as a
matter of law. He makes the following points: (1) Count I
fails to allege that he had knowledge of the conspiracy's
illicit purpose; (2) elements of the conspiracy's objectives
are not set out sufficiently; (3) Count I is barred by the
statute of limitations; (4) Count I is duplicitous; and (5)
Counts II and III do not allege that the nominee borrower was
financially incapable of repaying the loans. The Court rejects
First, the Court disagrees that Count I fails to allege that
defendant had knowledge of the conspiracy's illicit purpose.
The indictment clearly states that defendant "did willfully
and knowingly combine, conspire, confederate and agree
together with Dale E. Witsman, Sr., James A. Nigg, Donald R.
Parrish . . ." to make false statements,
to misapply funds, and to defraud the United States.
Defendant's second point is similarly meritless.
Specifically, he argues that the elements of the substantive
crimes constituting the objects of the conspiracy are not
enumerated in Count I. If such a strict pleading standard was
required, defendant's argument would have merit. Rather, the
Seventh Circuit has recognized that the substantive criminal
objectives of a conspiracy need not be alleged as if charging
the substantive offense itself:
Wilful misapplication was charged as one of
several illegal objects of the conspiracy. As
part of the conspiracy charge, it need not be
alleged as precisely as would be necessary in a
United States v. Grizaffi, 471 F.2d 69, 73 (7th Cir. 1972).
Clearly, alleging all the elements is not necessary:
It is not necessary in a conspiracy indictment to
allege with precision all the elements essential
to the offense which is the object of a
conspiracy; allegations clearly identifying the
offense defendants conspired to commit are
United States v. Kahn, 381 F.2d 824
, 829 (7th Cir. 1967). It
cannot be argued seriously that Count I fails to identify
clearly that defendant conspired to violate 18 U.S.C. §§
1014 and 656.
Count I is not barred by the statute of limitations.
Defendant argues that Count I fails to show any agreement or
act which occurred within five years of the filing of the
indictment, and that 18 U.S.C. § 3282 bars the charge of
conspiracy. This assertion is simply untrue. As the Government
indicates, nine of the fourteen overt acts alleged were
committed within five years of the filing of the indictment.
The statute of limitations starts to run on the date of the
last overt act alleged. United States v. Walker, 653 F.2d 1343
(9th Cir. 1981); United States v. Charnay, 537 F.2d 341, 354
(9th Cir.), cert. denied, 429 U.S. 1000, 97 S.Ct. 527, 50
L.Ed.2d 610 (1976). In Grunewald v. United States,
353 U.S. 391, 77 S.Ct. 963, 1 L.Ed.2d 931 (1957), the Supreme Court
focused on the character of alleged overt acts to determine
whether they can be part of the conspiracy for purposes of the
statute of limitations:
[T]he crucial question in determining whether the
statute of limitations has run is the scope of
the conspiratorial agreement, for it is that
which determines both the duration of the
conspiracy, and whether the act relied on as an
overt act may properly be regarded as in
furtherance of the conspiracy.
Id. at 397, 77 S.Ct. at 970. Nowhere in his motion does
defendant argue that the overt acts allegedly committed within
five years of the filing of the indictment do not constitute
acts "in furtherance of the conspiracy." Any such argument
would be fruitless. Many of those alleged acts involve the
actual money transactions underlying the alleged scheme.
Defendant's fourth point is that the phrase "money, funds,
and credits," renders the indictment impermissibly
duplicitous. Defendant relies on United States v. Smith, 152 F.
542 (D.Ky. 1907) which held that a charge of misapplying "funds
and credits" was fatally duplicitous. The Court declines to
dismiss the indictment on this ground. First, Smith is
distinguishable. That Court emphasized that the indictment
failed to set forth any description of either "funds or
credits." The same could not be said about the indictment in
this case. That which was allegedly misapplied is set forth in
detail. Second, it has been held more recently that the phrase
"money, funds, and credits" does not render an indictment
duplicitous. 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, rehearing denied, 410 U.S. 959, 93 S.Ct. 1416, 35 L.Ed.2d
695 (1973); Mulloney v. United States, 79 F.2d 566 (1st Cir.),
cert. denied, 296 U.S. 658, 56 S.Ct. 383, 80 L.Ed. 468 (1935).
Defendant's final point challenges the sufficiency of Counts
II and III, which charge violations of 18 U.S.C. §§ 656
and 2. Section 656 provides in part:
Whoever, being an officer, director, agent or
employee of, or connected in any capacity
with any Federal Reserve bank, member bank,
national bank, or any agent or employee of the
receiver, or a Federal Reserve Agent, or an agent
or employee of a Federal Reserve System,
embezzles, abstracts, purloins or willfully
misapplies any of the moneys, funds or credits of
such bank or any moneys, funds, assets or
securities intrusted to the custody or care of
such bank, or to the custody or care of any such
agent, officer, director, employee or receiver,
shall be fined not more than $5,000 or imprisoned
not more than five years, or both; but if the
amount embezzled, abstracted, purloined or
misapplied does not exceed $100, he shall be
fined not more than $1,000 or imprisoned not more
than one year, or both.
Relying primarily on United States v. Gens, 493 F.2d 216
Cir. 1974), defendant argues that before he can be found
liable, under Section 656, the government must prove that one
of three possible situations occurred: (1) the named borrower
is fictitious or unaware that his name is being used in
connection with the loan application; (2) the bank officials
knew at the time of making the loan that the named borrower was
financially incapable of repaying the loan; or (3) the named
borrower knew at the time of making the application that the
bank would not look at him for repayment of the loan. Id. at
221-22. Defendant submits that the indictment fails to allege
any of these situations and that it should be dismissed.
Further, it is argued that no reported decision defines the
facts of this case as misapplication; if this Court holds as a
matter of law that Counts II and III sufficiently charge
misapplication, then Section 656 is unconstitutionally vague.
The Court disagrees with all these points.
Some support can be marshalled in favor of defendant's
position. In Gens, bank officials authorized loans to named
debtors who turned over the proceeds to Gens for use in his
nursing home business. It was clear from the evidence that the
named borrowers considered themselves liable on the loans and
were financially responsible for repayment. The Gens Court
found that a bank official could not be found guilty of
misapplication for merely granting a loan to financially
responsible nominee borrowers while knowing that the proceeds
would be turned over to a third party. The Court stated:
[W]here the named debtor is both financially
capable and fully understands that it is his
responsibility to repay, a loan to him cannot
— absent other circumstances — properly be
characterized as sham or dummy, even if bank
officials know he will turn over the proceeds to a
third party. Instead, what we really have in such a
situation are two loans: one from the bank to the
named debtor, the other from the named debtor to
the third party. The bank looks to the named debtor
to the third party for repayment of his loan. If
for some reason the third party fails to make the
repayment to the named debtor, the latter
nonetheless recognizes that this failure does not
end his own obligations to repay the bank. In this
situation, the bank official has simply granted a
loan to a financially capable party, which is
precisely what a bank official should do. There is
no natural tendency to injure or defraud the bank,
and the official cannot be said to have willfully
misapplied funds in violation of Section 656.
Id. at 222. This reasoning was relied upon in United States v.
Gallagher, 576 F.2d 1028
(3rd Cir. 1978). The underlying
rationale of the Gens result is that the bank involved cannot
be injured or defrauded if the loan is made to a financially
responsible nominee borrower. This Court and several others
disagree with this perceived purpose of Section 656.
Clearly, Section 656 was enacted to protect banks insured by
F.D.I.C. The type of injury contemplated occurs when funds are
distributed under a record which misrepresents the true state
of the record with the intent that bank officials, bank
examiners, and F.D.I.C. will be deceived. United States v.
Dreitzler, 577 F.2d 539, 546 (9th Cir. 1978); United States v.
Kennedy, 564 F.2d 1329, 1339 (9th Cir. 1977); Hargreaves v.
United States, 75 F.2d 68, 72 (9th Cir.),
cert. denied, 295 U.S. 759, 55 S.Ct. 920, 79 L.Ed. 1701 (1935)
(interpreting Section 592, the predecessor of Section 656). The
Dreitzler Court succinctly stated that Section 656 protects a
bank's right to know where its money, funds, and credits are
The cases are clear that misapplication may be
found where it is shown that a bank is deprived
of its right to have custody of its funds, that
is, its right to make its own decision as to how
the funds are used. Golden v. United States,
318 F.2d 357, 360-361 (1st Cir. 1963); See also United
States v. Kennedy, 564 F.2d 1329, 1339 (9th Cir.
1977). The government need not prove that the bank
suffered any immediate loss, See Golden, supra at
360, but only that the bank's funds were disbursed
under a false record. Kennedy, supra at 1339;
United States v. Fortunato, 402 F.2d 79, 81 (2d
Cir. 1968), cert. denied, 394 U.S. 933, 89 S.Ct.
1205, 22 L.Ed.2d 463 (1969).
Dreitzler, supra at 546. Given this purpose, the financial
capability of the nominee borrower becomes irrelevant.
Defendant would have this Court hold categorically that if a
bank official has no personal stake in making the loan, any
loan made to a financially responsible nominee borrower could
never be misapplication, regardless of whether the officer knew
the ultimate beneficiary was a third-party. Such a holding,
however, would ignore the right of a bank to be party to a
decision affecting its funds.
Defendant's argument that no reported decision defines his
conduct as misapplication is wrong. The Court in
Kennedy, recognizing the purpose behind Section 656, defined as
misapplication a situation similar to those charged in Counts
II and III:
The evidence supports a finding that Kramer
delivered $15,000 of the bank's funds to
appellant well knowing that the money was
actually to be channeled to Adair. Kramer was
able to so misapply the funds through the fiction
of appellant's false statement of purpose. . . .
[Such] a sham arrangement violates 18 U.S.C.
Section 656, as interpreted under Hargreaves v.
United States, supra.
Kennedy, supra, 564 F.2d at 1341. Although that Court was
considering the appeal of the nominee borrower, its reasoning
undeniably implies that a bank official violates Section 656 by
making a loan, fully aware that the proceeds would be funneled
to a third party. In such a case, the bank, through deception,
is deprived of its right to its funds. See Dreitzler, supra;
The Court in United States v. Krepps, 605 F.2d 101 (3rd Cir.
1979) considered a situation where the bank official made a
loan to himself through a nominee borrower. The Court defined
such conduct as misapplication. The Court attempted to
harmonize its result with those of Gens and Gallagher by
distinguishing between two factual situations: (1) a bank
officer misapplying funds for his own use; and (2) a bank
officer making a loan to a nominee borrower, knowing the
proceeds would go to another. In the latter situation, the
Krepps Court opined that the bank is not injured. Gallagher,
supra; Gens, supra. However, in the former situation, the bank
officer is guilty of misapplication, regardless of the
financial capability of the nominee borrower. The sole basis
for this apparent distinction is that the official misapplying
funds for his own use is not doing "precisely what a bank
official should do." Krepps, supra, 605 F.2d at 106, quoting,
Gens, supra, 493 F.2d at 222. In support of this apparent
distinction, the Krepps Court opined that misapplying funds for
one's own use somehow involves more deceit and fraud,
especially in light of civil limitations on loans to bank
officials. Krepps, 605 F.2d at 106-08. See also United States
v. Steffen, 641 F.2d 591, 597 (8th Cir. 1981).
This Court views as irreconcilable the result in
Krepps and the results in Gens and Gallagher. First, when a
nominee borrower is financially responsible, under the analysis
of Gens and Gallagher, the bank cannot be injured. This
reasoning strongly implies that one who uses a financially
responsible nominee borrower to misapply funds for his own use
is not guilty of misapplication. In both situations, the bank,
the beneficiary of Section 656, stands in the same posture —
is looking to a financially responsible party for repayment.
Second, the alleged distinction recognized in Krepps elevates
the circumvention of civil limitations on insider loans to the
stature of a federal felony. As noted, Krepps reasoned that one
who misapplies for his own use is more deceitful because such
conduct violates civil limitations of insider loans. If this
truly distinguishes the Krepps facts from those in Gens, then
Section 656 violations would become tantamount to violations of
the civil limitations. The Court in United States v. Christo,
614 F.2d 486 (5th Cir. 1980) condemned such a result. That
Court specifically found as error the district court's
instruction that arguable violations of a civil restriction
could serve as a factual basis for a criminal misapplication
conviction. Id. at 490-492. The alleged distinction between
Krepps and Gens does not withstand analysis. Finally, the
alleged distinction between Krepps and Gens ignores the purpose
behind Section 656. As noted, Section 656 protects a banker's
right to know where its funds are disbursed. Given this
purpose, the financial capability of the nominee borrower as
well as the ultimate beneficiary of the loan became irrelevant.
Even if this Court's perception of the purpose behind
Section 656 is erroneous, the indictment still states
violations. As noted, defendant allegedly received 23% of
Southern Gardens, Inc.'s stock as consideration for arranging
the sham loan. The Court views this alleged arrangement as
substantially the same as that in United States v. Foster,
566 F.2d 1045 (6th Cir. 1977). In Foster, the defendants approved
loans destined to certain business parties. The defendants then
received kickbacks out of the loan proceeds. The Foster Court
described the situation as follows:
Unlike Barr and Murrey in this case, the
defendants in Gens were not recipients of kickbacks
from loans which they had approved in accordance
with a previous arrangement. What Barr and Murrey
did was to approve loans which they knew they would
receive a portion in return. It was necessary
therefore that the loans be made for a greater
amount than was required for the purpose of the
loan. This we consider as evidence of
misapplication of bank funds.
566 F.2d at 1050. This Court sees little difference between
receiving a cash kickback or a stock kickback. Either would
operate as an inducement to arrange financing, thus
constituting the loan officer's personal stake in the loan,
and would affect the amount actually loaned. Employing the
reasoning of Foster, the Court finds that when a bank officer
who approves a loan knowing that the proceeds will be
transferred to a third party, and that third party gives the
bank officer stock in consideration for the arrangement,
Section 656 is violated.
Accordingly, defendant's Motion to Dismiss Indictment is
IT IS SO ORDERED.
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