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United States v. Krepps

decided as amended october 22 1979.: August 24, 1979.

UNITED STATES OF AMERICA
v.
JAY ELLSWORTH KREPPS, APPELLANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

Before Adams, Rosenn and Higginbotham, Circuit Judges.

Author: Adams

Opinion OF THE COURT

By virtue of 18 U.S.C. § 656, officers of national as well as of other federally insured banks are prohibited from willfully misapplying bank funds that is, converting such funds to their own or to someone else's use. In United States v. Gallagher, 576 F.2d 1028 (3d Cir. 1978), this Court held that when a bank officer grants a loan to a named debtor with knowledge that the proceeds will be turned over to a third person, the bank officer has not violated § 656 unless he also knows that the named debtor lacks either the ability or the intent to repay the loan. The major issue presented by this appeal is whether the bank officer in order to violate § 656 must know that the named debtor lacks ability or intent to repay when the bank officer himself is the intended beneficiary of the funds. We conclude that, under these circumstances, such knowledge is not required, because the element of willful misapplication is established by the defendant's dual status as loan officer and loan beneficiary.

Appellant's convictions will be affirmed in all respects.

I.

During 1975 and 1976, Jay Ellsworth Krepps was executive vice president, cashier, and a loan officer of what was then the Reedsville National Bank. The bank's rules in conformity with the dictates of 12 U.S.C. § 375a*fn1 prohibited bank officers from borrowing for themselves more than $5000 from the bank, and required that all loans to officers be approved by the bank's board of directors. In addition, loan officers were required to seek and obtain the board's approval before authorizing any loans in excess of $10,000.

In February 1975, Krepps authorized a loan of $16,000 to Frank and Betty Houser of Milroy, Pennsylvania, and in October of the same year, Krepps approved a loan of $2,500 for Ronald McKinnon of Reedsville, Pennsylvania. Krepps had previously arranged with these borrowers to have the proceeds of each of these loans immediately transferred to himself for his own use. The Housers testified at trial that they signed a note signifying their obligation to the bank as a personal favor to Krepps, who was a friend of theirs, so that he could buy some stock and a jeep. They also testified that they did not endorse the cashier's check for $16,000 that was made out to them, and indeed never saw the check. When they received a notice from the bank that a payment was overdue, Mr. Houser contacted Krepps, who told him he would take care of it.*fn2

McKinnon testified that he signed the note representing his obligations to the bank and endorsed the cashier's check while sitting in Krepps' office, and that the check was cashed immediately, with the proceeds transferred to Krepps at that time. He further testified: "(T)he agreement was that I sign the note, and he would keep the payment book. I would have no papers, no payment book, and he would take care of it, and in turn, he signed a promissory note which I don't know whether it's legal or wasn't, but in case anything happened to him, that I would be covered." As with the Housers, when McKinnon received notices for payment from the bank, he gave them to Krepps, who assured him they would be paid.*fn3 There is no evidence, however, that either the Housers or McKinnon were capable of repaying the loans and understood that they were legally obligated to do so.

Also, in January 1976, Krepps issued a letter of credit to the Pennsylvania Industrial Realty Corporation, in the amount of $70,000. He did so without first obtaining the requisite authorization from the bank's board of directors, notwithstanding the fact that the Reedsville National Bank had never before issued any letters of credit. Finally, over the course of several months in 1976, Krepps prevented the processing by the Reedsville National Bank, in its usual fashion, of a large number of so-called NSF checks i. e., checks with "no sufficient funds" to cover them.

For authorizing the loans to the Housers and to McKinnon, Krepps was convicted, after a jury trial, on two counts of willful misapplication of bank funds in violation of 18 U.S.C. § 656, as well as on two counts of making false entries in the bank's records in violation of 18 U.S.C. § 1005. He was also convicted of issuing the letter of credit without authorization in violation of 18 U.S.C. § 1005. And, as a result of preventing the processing of the NSF checks, he was convicted of 132 counts of abstracting bank monies in violation of 18 U.S.C. § 656.

On this appeal, Krepps argues primarily that his convictions on willful misapplication and false entry charges were improper because no evidence was introduced to show that the Housers and McKinnon were other than bona fide borrowers who made a subsequent transfer of the loan proceeds to Krepps in independent transactions that are of no concern to the bank. Krepps maintains that absent such evidence neither willful misapplication nor the making of a false entry can be established.

II.

In pertinent part, 18 U.S.C. § 656 imposes criminal sanctions on anyone who, "being an officer, director, agent or employee of . . . a national bank or insured bank . . . embezzles, abstracts, purloins or willfully misapplies ...


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