The Banking Law Connection

The Banking Law Connection

Trends and topics related to banking law and litigation

United States Supreme Court Adds Teeth to Bank Fraud Statute

Resolving a split between Federal Circuits regarding the applicability of the federal bank fraud statute, 18 U.S.C. § 1344(2), the United States Supreme Court in Loughrin v. United States has added significant teeth to the statute by ruling that the Government need not prove that a defendant had actual intent to defraud a financial institution in order to secure a conviction thereunder.

Section 1344 of the United States Code provides as follows:

Whoever knowingly executes, or attempts to execute, a scheme or artifice -

(1) to defraud a financial institution; or

(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.

The Defendant in Loughrin was convicted of bank fraud under § 1344(2) after forging stolen checks to purchase goods at Target retail stores, only to return such purchases for cash refunds.  The Defendant did not dispute that § 1344(2) required the Government to prove (1) intent to obtain bank property, (2) “by means of false or fraudulent pretenses, representations, or promises.”  However, the Defendant asserted that he only intended to defraud Target and further argued that the Government was required to prove that he had a specific intent to defraud a bank in order to secure a conviction under § 1344(2).  Rejecting the Defendant’s position, the Court held that:

(1) While an intent to defraud a financial institution constitutes a requirement under the first clause of § 1344, such a requirement is not contained in the second clause of the statute, which is separated from the first clause by a disjunctive “or” and, thus, sets forth an independent basis for conviction.  The Court further noted that interpreting the second clause to include the element of specific intent to defraud a bank would subsume it into the first clause, thus rendering the second clause superfluous in violation of the well-established rule of statutory construction that “courts ‘must give effect, if possible, to every clause and word of a statute.’ ”

(2) The Court’s interpretation of § 1344(2) did not violate principles of federalism by subsuming traditional state jurisdiction over all “garden-variety cons” involving payment by check rather than cash. Rather, the Court noted that the “by means of” language of §1344(2) requires that false or fraudulent conduct “have some real connection to a federal bank” and constitute the actual mechanism inducing a bank to part with its funds or assets.  Thus, the Court held that “garden-variety cons” involving merely a fraud upon a consumer, who in turn pays the con artist with a valid check, would fall outside § 1344(2) because the fraud would not directly cause the bank to part with funds or property.  However, false representations made via a forged or altered check submitted by a con artist to a merchant do fall within § 1344(2) because the fraudulent instrument itself would naturally induce a bank to part with funds.

Despite the Court’s attempt to distinguish between the types of fraudulent acts falling within the scope of § 1344(2), the Court nevertheless acknowledged in a footnote that the determination of whether a fraudulent act has a real connection to a bank so as to induce the bank to part with property constitutes a facts and circumstances test which “will depend almost entirely on context.”

Former FDIC Chief Answers The Question I Asked Bob Corker

Nearly a year ago, I had the opportunity to have breakfast with Senate Banking Committee Ranking Minority Member, Sen. Bob Corker [R-TN]. OK . . . the imperative of full disclosure requires that I admit that I was merely one of about 150 people attending an industry group event in Nashville. Sen. Corker, home for the August recess, was making a number of appearances across the state of Tennessee and the event to which I was invited was merely the first of three stops he made that day.

He spoke on a number of topics, but the one to which he devoted the most attention was the conceptual legislation he and Virginia’s Democratic Senator, Mark Warner, were proposing in order to “reform” Fannie Mae and Freddie Mac. Sen. Corker explained his concept of replacing the two government-sponsored entities that facilitate the bulk of mortgage lending in America, with a single new government agency that would function somewhat like the FDIC. As he described it, this new mortgage insurance company would “protect the taxpayers” by having a layer of private capital that would account for the first 10% of the entities’ total capital, and would be the first layer exposed to the risk of default. The federal mortgage “insurance” would not kick in until this private equity layer was exhausted.

When he opened the floor to Q&A, I happened to be the first person called on. I was curious about this Corker-Warner legislation. In particular, I wanted to know whether it would respect the property rights of investors, many of whom are Sen. Corker’s constituents, like for example the Tennessee State Employees Retirement System, which holds a position in Fannie Mae and Freddie Mac preferred shares valued in the tens of millions of dollars. Sen. Corker had a very quick answer: “No,” he said, “I’m going to protect the tax-payers not the investors.” Again, he explained how private capital was going to be the first dollars at risk for covering defaults on bad mortgages. This prompted me to ask a follow-up:

I pointed out that since 2012 the Treasury Department has been sweeping every dollar of earnings out of Fannie and Freddie. And although the GSE’s have made enough money to fully redeem the federal government’s super preferred shares, the Treasury has unilaterally refused to credit the money it has siphoned out of Fannie and Freddie against this obligation. “What confidence”, I asked Sen. Corker, “do you have that private capital will be invested in your new mortgage insurance entity, when the investors’ experience with Fannie and Freddie shows that doing business with the federal government is like having Tony Soprano as a silent partner?”

After first claiming that private capital would not be needed for the 10% equity layer contemplated by Corker-Warner, Sen. Corker brushed off my question with the blanket assertion that “private investors are lining up” to put their capital into the yet-to-be-created mortgage insurance entity envisioned by his legislation. He then dismissed the option for further follow-up with the classic dodge that other guests had questions they wanted to ask.

It has now been almost a year, and I have yet to read or hear a substantive answer to my question from Sen. Corker. In the July 7, 2014 edition of The Wall Street Journal, however, my question was answered; not by Corker, but by William Isaac, former Chairman of the FDIC in the Reagan Administration.

He succinctly lays out the relevant history behind the federal government’s unilateral confiscation of private property from preferred shareholders, and the Treasury Department’s unprecedented redefinition of the role and responsibility of a conservator over the GSEs. He then posits the same question I raised with Sen. Corker:

“Given the government’s dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any ‘reform’ of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?”

He then provides the answer that Sen. Corker refused to give: “Capital follows the rule of law,” he writes, “and if investors can’t count on that in the U.S. and in the housing markets, they will put their money elsewhere.” It seems to me that Mr. Isaac has it exactly right.

In the legislative process, perhaps law makers, like Bob Corker and Mark Warner, and their colleagues Mike Crapo [R. Idaho] and Tim Johnson [D. S.D.], should draw on the expertise of people like Chairman Isaac, who was responsible for cleaning up the wreckage from failed banks, rather than the likes of former Countrywide Financial trader, Michael Bright http://nlpc.org/stories/2014/04/10/former-countrywide-trader-behind-fanniefreddie-reform-bill who before becoming an influential Senate staffer, worked for a company that helped create the sub-prime mortgage crisis.

Makes sense to me. Let me know what you think.

Protection Against Ancient Claims

Put on your law school exam hats, ladies and gentlemen.  It’s time for a hypothetical.

On August 17, 1981, at a time when CDs were paying 15.55%, Woody Clark deposited $10,000 in a three-year Certificate of Deposit at the Bank of Bug Tussle. A few years later, the Bank of Bug Tussle merged into another bank which eventually was acquired by Your Bank. Mr. Clark showed up at Your Bank’s branch in 2014 with his original Certificate and said he was ready to withdraw his money. By his calculations, even without compounding Mr. Clark believes Your Bank owes him $51,315 in interest, in addition to his original $10,000 deposit.

Your Bank has no record that Mr. Clark has ever been its customer. The records of the Bank of Bug Tussle, all of which were paper, were discarded several mergers ago, and Your Bank’s branch in Bug Tussle has been closed for many years.

What happened to Mr. Clark’s deposit? Did his late wife (a co-owner on the CD) manage to withdraw the money without Woody’s knowledge? Did the funds escheat to the State? Did the Bank of Bug Tussle or its merger partner continue to show the CD as a liability on their long-closed books?

If you are in Alabama, the answer might be easier than you think. In obtaining an order dismissing Mr. Clark’s lawsuit against Your Bank for failure to state a claim, we never had to answer those mysteries of history. Alabama has a 20-year common law rule of repose that bars all claims of every kind or character after 20 years of dormancy.

The Common Law Rule of Repose. The rule of repose “bars actions that have not been commenced within 20 years from the time they could have been commenced.” Tierce v. Ellis, 624 So. 2d 553, 554 (Ala. 1993). “[T]he only element of the rule of repose is time. It is not affected by the circumstances of the situation, by personal disabilities, or by whether prejudice has resulted or evidence obscured.” Boshell v. Keith, 418 So. 2d 89, 91 (Ala. 1982). “Lack of notice is not sufficient to avert the application of the [rule of repose].” Am. Gen. Life and Accident Ins. Co v. Underwood, 886 So. 2d 807, 812 (Ala. 2004) (quoting Ballenger v. Liberty Nat’l Life Ins. Co., 123 So. 2d 166, 169 (Ala. 1960)).

“The rule of repose begins running on a claim as soon as all of the essential elements of that claim coexist so that the plaintiff could validly file suit.” Id. “In some instances, . . . [the point in time when the rule beings to run] may be the same as the date of ‘accrual’ of a claim.” Id. (quoting Ex parte Liberty Nat’l Life Ins. Co., 825 So. 2d 758, 764 n.2 (Ala. 2002)). But “repose does not depend on ‘accrual’ because the concept of accrual sometimes incorporates other factors, such as notice, knowledge, or discovery.” Id.

Limitations of Limitations Defenses. In the absence of a rule of repose, ancient claims have to be analyzed under applicable statutes of limitations, which sometimes require evidence of notice or demand. For example, Section 4-111 of the Uniform Commercial Code provides a clumsy, multi-faceted standard for accrual of a cause of action for payment on a time deposit:

A cause of action accrues for payment of a time deposit upon the earlier of: (1) the date demand for payment is made to the bank, but if the time deposit has a due date and the bank is not required to pay before that date, the cause of action accrues when a demand for payment is in effect and the due date has passed; (2) the latter of: (a) the due date of the time deposit established in the bank’s last written notice of renewal sent pursuant to section 5-5A-36; or b. four years after the last written communication from the bank recognizing the bank’s obligation under the time deposit; or (3) the last day of the taxable year for which the owner of the time deposit last reported interest income earned on the time deposit on either a federal or state tax return.

ALA. CODE-1975 § 7-4-111. In most cases, a limitations defense under section 4-111 can be decided from the face of the complaint; so, in the absence of a rule of repose, an ancient claim probably will not be subject to a viable motion to dismiss. In Mr. Clark’s case, he alleged that he had not made a demand for payment prior to 2014 and had never reported interest income on his time deposit.

Solving the Problem. Many states, including Tennessee, do not have a general rule of repose that applies to suits against financial institutions. Drafters of Article 4 of the UCC would be well advised to add a rule of repose for time deposits in the next revision to eliminate the problems that ancient accounts create for banks. Ten years after the expiration of the initial term of a time deposit would be a reasonable outer limit, after which all claims on the account would expire. Banks cannot be expected to retain records in perpetuity, and ten years provides more than a reasonable outer limit for all deposit claims to expire.

Supreme Court to Review DOL’s Position on Mortgage Loan Officer’s OT Status

The United States Supreme Court will determine whether a 2010 opinion letter from the Department of Labor, which held that mortgage loan officers are entitled to overtime pay under the Fair Labor Standards Act, was properly issued.  Although the Court is not expected to make a decision either way on the merits, it decisions in Nikols v. Mortgage Bankers Association and Perez v. Mortgage Bankers Association  will affect the amount of deference that Courts must give to the DOL’s most recent interpretation.

The underlying issue is whether the loan officers qualify for the administrative exemption under the FLSA because they exercise discretion on “matters of significance.”  In 2006, the Department of Labor found that loan officers were exempt  (and therefore are not required to be paid overtime pay) because they analyzed customers’ financial information and advised on loan programs.  In 2010, however, the Department of Labor (under a different administration) found the loan officers were not exempt (and therefore must be paid overtime) because they primarily engaged in sales.  There have been several court challenges that focus on whether the DOL’s opinion was properly issued in accordance with the Administrative Procedure Act.

It is important to note that the Supreme Court’s decision will not result in a final resolution to this ongoing issue.  Courts will continue to review, on a case by case basis, whether the loan officers in question are exercising independent discretion on matters of significance.  Further, the DOL may respond by reissuing its decision using the proper procedures, although that is uncertain in a different political landscape.  What it does mean is employers may be able to argue that the 2006 interpretation is still valid and should be followed, or at a minimum that the 2010 opinion has no binding effect.

Uptick in Bank IPOs

Interesting uptick in the number of bank IPOs this year according to an article in the Wall Street Journal.

According to the May 2014 M&A Monitor put out by investment banking firm Olsen Palmer, there have been 28 banks that have announced an IPO since the beginning of 2013.  The markets have warmed up considerably to bank deals, and banks are taking advantage of them for their growth strategies.  This should help fuel the continued wave of bank M&A activity we have been seeing recently.