U.S. v. Bailie, 96-30047

Decision Date08 October 1996
Docket Number96-30048,No. 96-30047,96-30049,96-30047
Citation99 F.3d 1147
PartiesNOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. UNITED STATES of America, Plaintiff-Appellee, v. Ronald L. BAILIE, d/b/a Bailie School of Broadcast, Terri Bailie, Nada B. Bailie, d/b/a Bailie School of Broadcast, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Before: REAVLEY, * REINHARDT and WIGGINS, Circuit Judges.

MEMORANDUM **

The convictions and sentences of Ron, Nada, and Terri Bailie (collectively the Bailies) for conspiracy, making false statements and the misapplication or embezzlement of federal funds are affirmed.

1. Criminal Misapplication of Perkins Loan funds

The Bailies were charged in counts 8 through 10 with "knowingly and willfully misapplying or embezzling Perkins Loan Funds in violation of 20 U.S.C. § 1097(a) of Title 20 of the United States Code." 1 The Bailies contend that the government should be required to prove as an element of the criminal misapplication charge that they possessed the "intent to defraud" the government. The judge instructed the jury contrary to that position. The judge instructed the jury that it is not a defense that "the defendants may have intended to repay the funds at the time they were taken." Nor was it a defense if the defendants "believed they eventually would be entitled to the funds, if at the time funds were taken defendants acted knowingly and with the intent to appropriate the funds to a use inconsistent with the rights of the Department of Education." We believe this instruction was correct and meets the critical issue here.

A district court's formulation of jury instructions is reviewed for an abuse of discretion. United States v. Joetzki, 952 F.2d 1090, 1095 (9th Cir.1991). The inquiry is "whether the jury instructions as a whole are misleading or inadequate to guide the jury's deliberations." Id. Whether a jury instruction misstates elements of a statutory crime, however, is a question of law subject to de novo review. United States v. Mann, 811 F.2d 495, 496-97 (9th Cir.1987). 2

We begin with the simple premise that the definitions of federal crimes are entrusted to the legislature. Liparota v. United States, 471 U.S. 419 (1985); United States v. Nguyen, 73 F.3d 887, 890 (9th Cir.1995). Our interpretation of those crimes begins with the language of the statute. 20 U.S.C. § 1097(a) provides:

Any person who knowingly and willfully embezzles, misapplies, steals, obtains by fraud, false statement or forgery, or fails to refund any funds, assets or property provided or insured under this subchapter and part C of subchapter I of chapter 34 of Title 42....

The statute itself does not contain the language or requirement of "intent to defraud." Had Congress intended to require such a showing they clearly knew how to do so. 3 This is demonstrated by Congress's language in subsection (d) of the same statute which provides,

Any person who knowingly and willfully destroys or conceals any record relating to the provision of assistance.... or attempts to so destroy or conceal with intent to defraud the United States or to prevent the United States from enforcing any right obtained in subrogation under this part, shall upon conviction thereof, be fined not more than $20,000 or imprisoned not more than 5 years, or both.

20 U.S.C. § 1097(d) (emphasis added).

On the face of the statute, the language of § 1097(a) does not require an "intent to defraud or injure." This statute is similar to the phrase "knowing conversion" considered by the Supreme Court in Morissette v. United States, 342 U.S. 246 (1952). In Morissette, the Court defined "knowing conversion" as "requir[ing] more than knowledge that defendant was taking the property into his possession. He must have knowledge of the facts, though not necessarily the law, that made the taking a conversion." Id. at 271. As with conversion, we believe that misapplication may be consummated without "any intent to keep and without any wrongful taking, where the initial possession by the converter was entirely lawful." Id. at 272.

In support of their position, the Bailies cite to the Eleventh Circuit's decision in United States v. Kammer, 1 F.3d 1161, 1165 (11th Cir.1993). There the court determined that in order to prove criminal misapplication, the government must show "(1) a conversion of the property to the use of the defendant or a third party, and (2) fraudulent intent." In Kammer, the court determined that there was no proof of a conversion or of fraudulent intent.

We are not persuaded by Kammer. First, we believe that the facts in the instant case differ significantly from those in Kammer. Kammer owned and operated a vocational training school in Mobile, Alabama. When the students were awarded Pell Grants through the Department of Education, the school held those funds in trust for the student. See 34 C.F.R. § 668.16. When the students enrolled, the school would withdraw the funds from the trust account and deposit the funds into their operating account. If, however, the student withdrew from the school, the regulations required that the school refund the unearned portion to the federal trust fund within 30 days. See 34 C.F.R. § 668.22(e)(5).

The government sought to prove that Kammer had misapplied Department of Education funds because the school had failed to refund the moneys in a timely manner. The Eleventh circuit noted that the regulations permitted an institution to commingle federal financial aid funds with other money. 34 C.F.R. § 690.81(b). In the face of the government's contention that Congress intended to criminalize the failure to refund any money, the court noted that because the school was permitted to commingle funds it was probable that the school may not be able to promptly make a refund.

In the instant case, while the Bailies apparently also failed to make numerous refunds, the government did not pursue that theory at trial. Rather the government focused upon the Bailies acts in taking money from the Perkins Loan Program and using these funds for the general operation of this school or for placing those funds in their personal accounts. This is not a case where the Bailies legitimately removed funds from the account and failed to replace the funds.

Second, the court in Kammer relied in part upon interpretations of 18 U.S.C. § 656 concerning the misapplication of bank funds where courts have required the government to prove the additional element of intent to defraud or injure the bank. That interpretation, however, rests upon the peculiar statutory history of section 656, which revised former section 12 U.S.C. § 592. See Ramirez v. United States, 318 F.2d 155, 157 (9th Cir.1963). While the words "intent to injure or defraud" were not contained in the revision, they did exist in the original. Id. The reviser's notes state that the revision was not intended to change in any way the "meaning or substance of existing law." Id. at 158. Therefore, courts have read the additional element into section 656.

On the facts of Kammer, it may be desirable to make "intent to defraud" an element of the crime to prevent criminalizing innocent conduct. However, where the criminal conduct is not the failure to refund funds, but is instead the misapplication or embezzlement of those funds, we do not interpret the language of the statute to include "intent to defraud." This is especially true where, as here, Congress included the very language at issue in another portion of the statute.

2. Deliberate Ignorance Instruction

In counts 2-7, the Bailies were charged with making false statements on the Fiscal Operations Report and Application to Participate (FISAP) of each of the schools. The FISAPs included a line identifying the "cash on hand and in depository" in the Perkins Loan account. For example the FISAP filed for the San Francisco school indicated a cash on hand in the school's bank account in the amount of $52,446. The actual amount was $11.47. Overall, the FISAPs for the six schools indicated a total cash on hand of $162,418. The accounts had $94.82. The FISAPs were filed on a computer disk accompanied by a certification by the school that "the information contained in this form is in compliance with governing legislation and regulation and is true and accurate to the best of our knowledge." All three defendants signed the accompanying certification for each of the six FISAPs filed with the Department of Education. Once the disks were sent to the Department of Education, the Department would return hard copies of the document to the school for "edits."

There was a dispute at trial as to whether the Bailies had knowledge of the "cash on hand" amount represented in the FISAP. Ronald Bailie testified that he signed the "cover sheet" without knowledge of the "cash on hand" figures and without knowledge of the misrepresentation. Betty Sabo, the school's accountant in charge of preparing the FISAPs, testified that in September of 1989, she and the Bailies met and discussed the problem that the cash on hand figures did not match the actual amounts in the bank accounts. At the meeting Nada told Ms. Sabo that "it appeared that their funding was coming through really soon and that the FISAPs would be able to go out before the edits came back, that the money would be in the account." In October of 1989, Ms. Sabo delivered a memo to the Bailies concerning the shortages in the accounts. She wrote:

Since I very much doubt that in the near future the funds will be available to make the final required adjustments and disbursements to complete the transactions for the 88/89 fiscal year, I gladly offer any necessary assistance in explaining any of the information...

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