any of the moneys, funds or credits of such bank" is guilty of a crime.
Counts 6, 7, and 17-25 are challenged because the defendant argues that these counts charge that the proceeds of the loans alleged to be misapplications were used to pay principal and interest of prior fraudulent loans from the bank, and thus the allegedly misapplied loan proceeds never left the bank but were, instead, credited toward a pre-existing indebtedness to the bank.
(The remaining thirteen misapplication counts are not challenged.) The defendant argues that these counts merely allege in substance that the bank officer approved a loan that he knew to be worthless in order to apply the proceeds to pre-existing worthless loans, and that this cannot be a "misapplication" because there has been no conversion of bank funds.
The sole issue before us is whether it is a criminal misapplication under section 656 to knowingly grant a loan to a sham or dummy corporation having no capability of repaying the loan where the proceeds are used to pay principal and interest on a prior fraudulent loan in an effort to conceal from the bank the existence and fraudulent nature of the prior loan.
In deciding this issue, the court is scarcely writing on a clean slate. The predecessor statutes of section 656 regarding willful misapplication of bank funds date from 1864, in Act of June 3, 1864, § 55, 13 Stat. 116. The substance of the earlier statutes was largely recodified by Congress in 1948 in the current section 656, derived from the former 12 U.S.C. § 592 (1940), Inter alia, without relevant change. See 18 U.S.C.A. § 656 (1976), Reviser's Note.
The law of misapplication of bank funds was largely shaped by a series of Supreme Court decisions in the last two decades of the nineteenth century commencing with United States v. Britton (Britton I ), 107 U.S. 655, 2 S. Ct. 512, 27 L. Ed. 520 (1883), and including Evans v. United States, 153 U.S. 584, 14 S. Ct. 934, 38 L. Ed. 830 (1894); Batchelor v. United States, 156 U.S. 426, 15 S. Ct. 446, 39 L. Ed. 478 (1895); Coffin v. United States, (Coffin I ), 156 U.S. 432, 15 S. Ct. 394, 39 L. Ed. 481 (1895); and Coffin v. United States (Coffin II ), 162 U.S. 664, 16 S. Ct. 943, 40 L. Ed. 1109 (1896).
The general rule announced in Britton I, supra, 107 U.S. at 666, 2 S. Ct. at 522, is that "to constitute the offense of willful misapplication, there must be a conversion to (the bank officer's) own use or (to) the use of some one else of the moneys and funds of the (bank) by the party charged." The criminality of a misapplication "depends upon the question whether there was, at the time of the discount, a deliberate purpose on the part of the defendant to defraud the bank of the amount." Evans v. United States, supra, 153 U.S. at 592, 14 S. Ct. at 938. The Third Circuit has recognized the continuing vitality of these precepts in United States v. Matsinger, 191 F.2d 1014 (3d Cir. 1951) (Biggs, J.), and it has approvingly discussed at length modern cases ( E. g., United States v. Gens, 493 F.2d 216, 221-222 (1st Cir. 1974), and United States v. Docherty, 468 F.2d 989, 993-994 (2d Cir. 1972)) applying Britton I and its progeny in the recent opinion in United States v. Gallagher, 576 F.2d 1028, 1044-46 (3d Cir. 1978) (Biggs, J.).
Furthermore, "intent to injure or defraud" the bank remains an essential element of the crime of willful misapplication notwithstanding the unexplained deletion of those words in the 1948 recodification. United States v. Docherty, supra, 468 F.2d at 994-995 (and cases cited therein); See United States v. Schmidt, 471 F.2d 385, 386 (3d Cir. 1972).
In Batchellor v. United States, supra, 156 U.S. at 431, 15 S. Ct. (446), at 448, the Supreme Court examined an indictment which alleged in relevant part that the defendant bank president fraudulently cancelled the indebtedness of one John Batchellor, known to be insolvent, by substituting other unsecured notes to the bank endorsed by himself or other insolvent third parties without ability to repay. This pretense of paying off the prior uncollectible indebtedness was held to not constitute misapplication; it "amounts only to the substitution of worthless notes for other notes equally worthless without, so far as the indictment shows, the payment of any money or other consideration whatever." Id.
The Batchellor principle was repeated in Coffin II, supra, 162 U.S. at 677, 16 S. Ct. at 948, wherein the Court held:
If the money of a bank be misapplied by paying it out on worthless paper, it is obvious that a subsequent renewal of such paper upon which nothing was actually obtained could not have misapplied the money of the bank.