701 F.2d 1104 (4th Cir. 1983), United States v. Luke

Citation:701 F.2d 1104
Party Name:UNITED STATES of America, Appellee, v. Kenneth Glen LUKE, Appellant. UNITED STATES of America, Appellee, v. W. Michael LOVERN, Appellant.
Case Date:March 03, 1983
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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Page 1104

701 F.2d 1104 (4th Cir. 1983)

UNITED STATES of America, Appellee,

v.

Kenneth Glen LUKE, Appellant.

UNITED STATES of America, Appellee,

v.

W. Michael LOVERN, Appellant.

United States Court of Appeals, Fourth Circuit

March 3, 1983

Argued Dec. 9, 1982.

Rehearing and Rehearing En Banc Denied April 12, 1983.

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William B. Disney, Patrick M. McSweeney, Richmond, Va. (James F. Stutts, McSweeney, Stutts & Burtch, Richmond, Va., on brief), for appellants.

William G. Otis, Sp. Asst. U.S. Atty., Alexandria, Va. (Elsie L. Munsell, U.S. Atty., Alexandria, Va., Patricia A. Kerwin, David P. Baugh, Asst. U.S. Attys., Richmond, Va., on brief), for appellee.

Before HALL, MURNAGHAN and SPROUSE, Circuit Judges.

MURNAGHAN, Circuit Judge:

Kenneth G. Luke and W. Michael Lovern were convicted by a jury on all three counts of an indictment charging: (1) conspiracy to misapply bank funds and to make a false entry in bank records in violation of 18 U.S.C. Secs. 2, 656, and 1005; (2) aiding, abetting and causing the making of a false entry in bank records, a violation of 18 U.S.C. Secs. 2 and 1005; and (3) aiding, abetting and causing a misapplication of bank funds in contravention of 18 U.S.C. Secs. 2 and 656. They appeal, arguing that the facts adduced at trial do not present the misapplication of bank funds or the making of a false entry necessary to sustain their aiding and abetting and conspiracy convictions.

The affair which concerns us began in mid-1979, by which time Peter Sheehy, 1 an assistant vice president of Central National Bank in Richmond, Virginia, 2 in his capacity as a lending officer, had authorized loans amounting to approximately $275,000 to

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Mastertrax, Inc., a music recording company owned by Rodney Seagream, and its surrogates. Mastertrax was in its infancy and, in the opinion of Sheehy's superiors at the bank, constituted a very risky borrower. The bank's management became distressed when it learned that Sheehy had lent $75,000 of the bank's money to Mastertrax. Compounding management's chagrin was the fact that Sheehy, in the view of his superiors, had exceeded his $50,000 lending limit on the Mastertrax account. Management was unaware of the additional $200,000 lent to Mastertrax. Had management known, "distress" and "chagrin" would presumably not be adequate terms to describe management's feelings. Sheehy, understandably concerned about his prospects for continued employment at the bank were the full extent of the Mastertrax borrowings revealed, purposely refrained from disclosing the complete $275,000 figure. Sheehy did succeed in temporarily allaying management's fears, however, by assuring his superiors that Mastertrax would be prepared to repay some $30,000 of its debt within a two to four week period.

Sheehy turned to Luke and Lovern for assistance. Appellants knew Sheehy well, for Sheehy already had lent approximately $122,000 to Luke and Lovern, a sum also apparently well in excess of Sheehy's lending authority. The loans were made either to Luke or Lovern personally, or to one of various carpet companies which the appellants owned. Sheehy asked Luke and Lovern, and they agreed, to speak to Seagream about the need for a quick repayment from Mastertrax.

Appellants met with Seagream, 3 stressing to him that "it was important that Mr. Sheehy be kept whole in his position at the bank." Seagream was also informed by the appellants that he should not be "a bit surprised if you should wake up one morning and your loans have been liquidated .... You won't know who or why they were liquidated, but you may find a receipt in the mail indicating that they have been paid in full."

On the day following their meeting with Seagream, Luke and Lovern paid a visit to Sheehy. They asked Sheehy if there was anything they could do to help him out of his Mastertrax predicament. Sheehy answered affirmatively: the two men could "assume the debt of Mastertrax." The plan was then sketched out. Rather than structuring a conventional assumption of liability, the three agreed that it would be preferable to get the bank's money to do their work for them. They agreed that $31,000 would be lent to one of the appellants' carpet companies; at the suggestion of one of the appellants, Sun Carpet was denominated the recipient. The proceeds of the loan would be deposited in Luke's personal savings account, which promptly would be debited to make the $30,000 repayment which Sheehy had assured the bank's management was forthcoming from Mastertrax.

The plan was executed accordingly. Luke signed a note from Sun Carpet, a note which made no mention whatsoever of Mastertrax. The money was, as planned, credited to Luke's savings account, and Sheehy made out a debit slip recording the fact that Mastertrax's liability was being paid with funds coming from Luke's account. Sheehy stayed on with the bank for another two and one-half months, authorizing an additional $74,000 in loans to appellants during that period.

I

The Government's contention here is that the loan to Sun Carpet constitutes a misapplication of bank funds because, in purpose, effect, and reality, it was a "sham" transaction whereby Sun Carpet stood as a "strawman" for the ultimate and real borrower, Mastertrax. The appellants, by contrast, take the position that the transaction at issue involves, in actuality, two legitimate steps--the first, a bona fide loan made by the bank to Sun Carpet; the

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second, an equally bona fide loan or a gift made by Sun Carpet to Mastertrax. From our perspective, the question is whether the facts support a finding of "willful misapplication" of the bank's funds by Sheehy 4 under 18 U.S.C. Sec. 656, which, in pertinent part, provides:

Whoever, being an officer ... of ... any Federal Reserve Bank, member bank, national bank or insured bank ... willfully misapplies any of the moneys, funds or credits of such bank ... shall be fined not more than $5,000 or imprisoned not more than five years, or both ....

We do not write on a clean slate. "[S]everal cases have involved situations roughly...

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