Case o' The Week: BOA, FDIC, and J/x: Bennett and "Financial Institutions" for Bank Fraud Cases

Mortgage fraud is rife, the viability of lending institutions is put in jeopardy, investors may end up losing their entire stake -- who is the only person on earth delighted that a lender is not insured by the FDIC?

James Davis Bennett.

United States v. Bennett, 2010 WL 3516438 (9th Cir. Sept. 10, 2010), decision available here.

Players: Decision by Judge Wardlaw (right), joined by Judge Kleinfeld; dissent by Judge Callahan.

Facts: Bennett ran a scheme to artificially inflate the value of Southern California property using relatives and straw borrowers, by “flipping” the real estate, and then pocketing the money from the inflated mortgage – leaving the lenders holding the bag. Id. at *1-*2. One lender victimized by this scheme was Equicredit. Id. at *2. Because it was not FDIC insured, Equicredit was not a “financial institution” within the meaning of the federal bank fraud statute, 18 USC § 1344. Id. Instead, it was a wholly-owned subsidiary of Bank of America (“BOA”) – which is a Section 1344 “financial institution.” Id. at *2. Bennett was convicted at trial of a number of counts; he appealed only his convictions from those counts involving fraud against Equicredit. Id. at *3.

Issue(s): “The sole issue raised on appeal is whether the government presented sufficient evidence from which any rational juror could find beyond a reasonable doubt that the ‘financial institution’ element of the bank fraud statute was satisfied in circumstances where the fraudulently obtained mortgages were loaned by Equicredit, a wholly-owned subsidiary of a ‘financial institution.’” Id. at *3.

Held: “Here, the government presented evidence that Bennett fraudulently procured funds from Equicredit; that Equicredit was a wholly-owned subsidiary of BOA; and that BOA was a ‘financial institution’ because it was FDIC insured. We hold that, based on these facts and the governing law at the time of the offense, no rational trier of fact could have found that Bennett procured assets ‘owned by’ a financial institution.” Id. at *6.

Of Note: This holding of this criminal case hinges on corporate law: Judge Wardlaw carefully works through decades of corporate decisions for the (now-familiar) principle that a parent corporation down not “own” the assets of a wholly-owned subsidiary company. Id. at *3-*6. The Court resolves the appeal on a Rule 29, “insufficiency of proof” analysis – but its interesting to wonder if the district court even had jurisdiction to preside over these charges? See United States v. Harris, 108 F.3d 1108 (9th Cir. 1997) (discussing federal jurisdiction conferred by FDIC insurance).

The beauty of jurisdictional challenges is that they can be raised anytime – including in a pretrial motion, or for the first time on appeal. See generally United States v. Moll, 988 F.2d 124 (9th Cir. 1993) (discussing jurisdictional challenges after a guilty plea). The downside of pretrial jurisdictional challenges? They invite the government to simply cure the problem by superceding or introducing facts at trial – without triggering the double jeopardy protections now enjoyed by Bennett from his appellate victory (see warnings in “How to Use” below).

How to Use: Is Bennett that elusive defense that we’ve been hunting in the recent deluge of mortgage fraud cases? Not so much. First, Judge Wardlaw observes that if Bennett was tried today, he would have been nailed by the newly amended statute which expands the definition of “financial” institution to include mortgage lending businesses. See id. at *6.

Moreover, even the old statute included the phrase “property in the custody and control.” If the government had bothered to prove that BOA actually had “custody and control” of Equicredit’s assets in the Bennett trial, the conviction might have survived. Id. at *7. Bennett is a good case for an intellectually-honest analysis of a sufficiency-of-evidence challenge, but the specific legal issue of wholly-owned subsidiaries may not give us much milage.

For Further Reading: The amendment referenced by Judge Wardlaw in Bennett was part of the Fraud Enforcement and Recovery Act of 2009 (“FERA.”) If you’re currently defending a federal white collar case, there’s a fair chance that FERA is playing some role in the prosecution. For a thoughtful and accessible summary of this new law, see the article here.


Image of the Honorable Judge Kim Wardlaw from http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN00386:@@@L&summ2=m&



Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org

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