The opinion of the court was delivered by: GERRY
Defendant Murray H. Michael has made a timely motion to dismiss certain counts of a superseding indictment which alleges that Michael conspired with, and aided and abetted, James Neveras, vice president of the Trust Company of New Jersey, in willfully misapplying the monies, funds and credits of the bank in violation of 18 U.S.C. §§ 371, 656 & 2. The defendant also challenges three counts which charge that he violated the Travel Act, 18 U.S.C. § 1952, by traveling from Florida to New Jersey on specified dates with intent to bribe Neveras in violation of N.J.S.A. § 2A:91-1 and 18 U.S.C. § 215 and thereafter paying a $ 10,000 fee to Neveras for the purpose of procuring each of three loans from the bank.
The various counts are attacked for failing to state an offense against the United States. The challenges to the willful misapplication conspiracy and Travel Act counts raise rather difficult issues regarding the scope of these criminal statutes, to which we now turn.
I. Substantive Misapplication Counts 6, 7, 17-25
Defendant Murray H. Michael is charged in Counts 2 through 25 of the superseding indictment with aiding and abetting a named officer of a federally insured bank in willfully misapplying bank monies, funds and credits with intent to injure and defraud the bank through unsecured loans to defendant and to dummy corporations in excess of $ 800,000, in violation of 18 U.S.C. §§ 656
Under section 656 any officer of a federally insured bank who "embezzles, abstracts, purloins or willfully misapplies 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.
The Court implied that there is no criminal misapplication if the transaction was "based upon the renewals of paper merely without in any way depleting the funds of the bank." Id. at 678, 16 S. Ct. at 949. In other words, a second loan procured by fraudulent means will not give rise to a criminal misapplication unless the natural tendency of the application of such funds is to injure or defraud the bank, because "the offense consists not in the use of fraudulent means, but in the discount of a note which both parties knew to be unsecured, with the intent thereby to defraud the bank." Evans v. United States, supra, 153 U.S. at 593, 14 S. Ct. at 938. It is the fraudulent application of such funds or credit in a manner tending to injure the bank, rather than their fraudulent procurement, which is the essence of this offense. Id.
A key case repeating these principles is Johnson v. United States, 95 F.2d 813 (4th Cir. 1938), cited by the Third Circuit in United States v. Matsinger, supra, 191 F.2d at 1018, for the proposition that a necessary element of criminal misapplication is "that there was more than a mere bookkeeping transfer or transfers within the bank." In Johnson, the defendant bank officer credited his personal checking account with the proceeds of a note of a third party (Stover) discounted by the bank, to eliminate defendant's checking overdraft. The court held that, even if Stover's note would not have been paid at maturity, there would be no misapplication under the statute absent some conversion of the bank's funds; that is, the fraudulent crediting "is not a crime unless some portion of the fund credited is withdrawn from the possession or control of the bank or a conversion thereof in some form is made so that the bank is deprived of the benefit thereof. Dow v. United States, 8 Cir., 82 F. 904; Adler v. United States, 5 Cir., 182 F. 464; Craig v. United States, 9 Cir., 5 F.2d 275." 95 F.2d at 817. It was significant to the Johnson court that none of the money credited to the defendant's account was alleged to have been withdrawn from the bank. Id.
In Matsinger, supra, the Third Circuit required the government to allege and prove that there were actual conversions of the bank's money and, as noted, that there was more than a mere bookkeeping transfer within the bank. 191 F.2d at 1017-18. Such a conversion was held to be shown by a momentary, nonpermanent loss of the bank's custody or control of the money when the bank cashed checks from a conspirator's account in another bank which was "kited," I. e., not backed by sufficient funds in fact due to the 3-4 day delay processing of checks deposited to that account to artificially inflate the balance. These fraudulent transactions were a misapplication of bank funds because the bank was called upon to pay out money in cashing checks not backed by sufficient funds. Even though the bank's loss might be only temporary if the cashed checks were subsequently backed by sufficient funds when presented for payment to the other bank, the fact of temporary loss of bank funds upon the cashing of the checks was held sufficient to support the misapplication charge. 191 F.2d at 1016-1018.
Beyond the bank's temporary loss of possession or control of its assets, an allegation of ultimate loss is not necessary to sustain a charge under section 656. Id.; United States v. Gallagher, supra, 576 F.2d at 1038, n. 5. See also United States v. Nystrom, 237 F.2d 218 (3d Cir. 1956) (bank's knowing payment of checks drawn against fictitious deposits amounted to requisite temporary loss to bank).
In short, an essential element of criminal misapplication is the conversion of the bank's moneys, funds or credits by either temporary withdrawal from the bank's control or possession or by temporary deprivation of the bank's use and benefit thereof amounting to more than the renewal of worthless paper or the substitution of worthless paper therefor. Batchellor v. United States, supra; Coffin II, supra; Johnson v. United States, supra; United States v. Matsinger, supra; Cooper v. United States, 13 F.2d 16, 19 (4th Cir. 1926); 7A Michie on Banks and Banking § 146a at 130, § 146b at 138-139 (1973).
With the lone exception of United States v. Rickert, 459 F.2d 352 (5th Cir. 1972), we are aware of no authority suggesting that such a transaction is encompassed within the doctrine of criminal misapplication. In each of the other cases there was held to be a misapplication because, at a minimum, the transfer caused the bank to (at least temporarily) relinquish control over the subject assets in a manner tending to cause financial injury to the bank, as discussed in the margin.
In the Rickert decision the Fifth Circuit affirmed a conviction for a bank president's willful misapplication of moneys "intrusted to the custody or care of such bank" pursuant to that clause of section 656 not charged in the instant case. Although the facts are sketchy, the defendant apparently switched money from accounts of solvent customers to cover the bad loans of other customers to prevent discovery of the bad loan losses. 459 F.2d at 354. The court pointed out that it is not necessary that cash actually leave the bank, nor that the funds be converted for the defendant's private use. Id. at 354-355. Quoting the Supreme Court's decision in United States v. Northway, 120 U.S. 327, 332, 7 S. Ct. 580, 30 L. Ed. 664 (1887), to the effect that the bank officer need not gain actual possession of the funds in order to misapply them, the Fifth Circuit noted in Rickert :
The majority of banking transactions consist of bookkeeping entries rather than the actual transfer of cash. The evidence adduced at trial concerning the many debit and credit machinations of defendant relative to numerous accounts was sufficient to bring ...