U.S. v. Bates

• Decision Date: 20 September 1996
• Docket Number: No. 95-2203,95-2203
• Citation: 96 F.3d 964
• Parties: 112 Ed. Law Rep. 674 UNITED STATES of America, Plaintiff-Appellant, v. Garrit BATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 964

96 F.3d 964

112 Ed. Law Rep. 674

UNITED STATES of America, Plaintiff-Appellant, v. Garrit BATES, Defendant-Appellee.

No. 95-2203.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 12, 1996.

Decided Sept. 20, 1996.

Ruth Hennage (argued), Office of the U.S. Attorney, South Bend, IN, for Plaintiff-Appellant.

C. Richard Oren (argued), Rochester, IN, for Defendant-Appellee.

Before CUDAHY, FLAUM, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

After Garrit Bates was charged with twelve counts of willfully misapplying federally guaranteed Title IV student aid funds, he filed a pretrial motion to dismiss the indictment as insufficient. Specifically, he argued that both conversion and intent to injure or defraud the federal government are elements of the offense of willfully misapplying financial aid monies and that the indictment had failed to adequately allege either one. The district court granted his motion to dismiss after determining that the indictment failed to allege intent to injure or defraud the United States, and the government appeals to this court. Because we find that a conviction for willful misapplication of Title IV funds does not require proof of the defendant's intent to injure or defraud the United States, and that the indictment is otherwise sufficient, we vacate the judgment of the district court and reinstate the prosecution.

I. HISTORY

Given that the district court determined that the indictment was insufficient on its face, for this appeal we take the facts as they are alleged in the indictment, which are set out below. James and Laurenda Jackson are the owners and operators of Education America, Inc., a for-profit consulting and management firm for various technical and vocational schools. In December 1986, the Jacksons acquired ownership of the Acme Institute of Technology, a not-for-profit technical school located in South Bend, Indiana. After the acquisition, the Jacksons appointed Bates, who was vice president of Education America at the time, to act as Acme's chief financial officer and treasurer of the Acme board of trustees.

On April 30, 1987, Mr. Jackson, acting as president of Acme, signed a program participation agreement with the Department of Education. Under the agreement, Acme became authorized to receive student loan checks through the Title IV federal Guaranteed Student Loan ("GSL") program, but participation in the program was contingent upon (1) Acme's continued accreditation by an approved accrediting association, and (2) Jackson's promise to comply with all statutes and regulations governing the GSL program. Around the same time, Bates signed a similar participation agreement for a different school owned by Education America, and he therefore presumably understood the responsibilities imposed by the Acme participation agreement.

Through the GSL program, banks and other private financial institutions would lend money to Acme students for tuition and other educational expenses. The federal government's role was to administer the loan program and guarantee payment of the loans in the event any of the student borrowers defaulted. Loan checks were mailed directly to Acme and, once endorsed, were credited against the student's tuition debt. However, if a student with a GSL withdrew from Acme prior to completion of a term, federal regulations required Acme to refund a portion of the loan proceeds to the lender within 30 or 60 days from withdrawal (depending on the date of the loan application), which was then to be deducted from the amount owed. Of course, if loan refunds were not made, the student--and, in the event of default, the government--would nonetheless remain liable to the lender for the full amount of the loan.

On April 14, 1988, Mr. Jackson sent a letter to the director of Acme instructing him (1) to remit 10 percent of Acme's gross receipts from the previous month to Education America as a management fee, and (2) to arrange for a specified monthly salary to be paid by Acme to the Jacksons. The letter explained that if these required payments caused Acme to experience a cash shortfall, Education America would loan money back to Acme in order to cover the discrepancy. As chief financial officer of Acme, Bates had the authority to determine which of Acme's bills would be paid as they came due, and he repeatedly gave these fee and salary payments to Education America and the Jacksons priority over refunds to lenders of student loan monies for withdrawn students. In doing this, Bates would specifically direct Acme employees not to make required student loan refunds. By the end of September 1988, Acme had amassed a GSL refund debt of approximately $55,000.

In late 1988 or very early 1989, Education America officials directed Acme to discontinue using a special bank account that was designed to segregate unearned student loan monies (those that should have been earmarked for refunds) from the school's general funds account. When Acme's refund arrearage had grown to around $68,000 by January 1989, Acme's financial aid director sent a letter to Mr. Jackson frustratedly pointing out the seriousness of failing to pay refunds of Title IV monies. In March 1989, Acme's unpaid student loan refunds totaled $85,000. That month, Bates notified Acme's financial aid director, at her request, that she was absolved of all legal responsibility concerning refunds on GSLs and that such refunds would be "solely the responsibility and decision of the corporate office."

In April 1989, the National Association of Trade and Technical Schools ("NATTS"), a national accrediting association, performed an on-site audit of Acme for the purpose of determining whether it should continue to accredit the school. In its May 1990 report to the Department of Education, NATTS found that Acme had "inadequately demonstrated its ability to make appropriate and timely refunds," and that it had "loaned substantial amounts of money" and engaged in the "upstreaming" of management fees to Education America and its owner, Mr. Jackson, who also happened to be Acme's president and chairman of the board of trustees.

After losing its accreditation, Acme received notice from the Department of Education that effective March 8, 1990, Acme was no longer eligible to participate in the GSL program. On June 5, 1990, Acme closed its doors, having accrued a total student loan refund debt of $139,649, not including interest and certain special allowances.

On September 8, 1994, a federal grand jury handed down a twelve-count indictment against Bates. Following a recitation of the facts set out above, the indictment charges that on twelve separate occasions between January 15 and June 15, 1990, Bates knowingly and willfully misapplied specified amounts of federally guaranteed student loan funds, in violation of 20 U.S.C. § 1097 and 18 U.S.C. § 2. At the time of Bates's alleged wrongdoing in 1990, § 1097(a) declared guilty of a crime "[a]ny person who knowingly and willfully embezzles, misapplies, steals, or obtains by fraud, false statement, or forgery any funds, assets, or property provided or insured under [Title IV of the Higher Education Act of 1965]...." 20 U.S.C. § 1097(a).

On February 7, 1995, Bates filed a motion to dismiss the indictment. The memorandum in support of his motion argued first that conviction under § 1097(a) for willful misapplication of student aid funds requires proof of both conversion and the defendant's intent to injure or defraud the United States, and second, that the indictment failed to allege sufficient facts to constitute conversion and neglected to allege intent to injure or defraud the United States at all. The district court agreed that § 1097(a) requires proof of the intent to injure or defraud the government and that the indictment had failed to allege such intent, and it therefore granted the motion and dismissed the indictment.

II. ANALYSIS

The government appeals from the judgment of dismissal, arguing (1) that a conviction for willful misapplication of Title IV funds does not require that the government demonstrate the defendant's intent to injure or defraud the United States, and (2) that regardless of whether § 1097(a) requires a showing of such intent, the indictment was facially sufficient. We address these separate arguments in turn. Our review of a district court's determination concerning the facial sufficiency of an indictment is de novo. Frank v. United States, 914 F.2d 828, 830 (7th Cir.1990) (citing United States v. Bucey, 876 F.2d 1297, 1301-02 (7th Cir.), cert. denied, 493 U.S. 1004, 110 S.Ct. 565, 107 L.Ed.2d 560 (1989)). We likewise engage in plenary review of a district court's statutory interpretation. United States v. Shriver, 989 F.2d 898, 901 (7th Cir.1992).

A. Intent to Injure or Defraud the United States

A basic tenet of criminal law provides that actus non facit reum nisi mens sit rea, meaning an act does not make one guilty unless his mind is guilty. Thus, at common law, nearly all crimes required proof that the defendant not only committed a wrongful act, but that he did so with the requisite mens rea, or culpable mental state. As history has witnessed the statutory codification of criminal offenses, enacting legislatures have employed such words as "intentionally," "willfully," or "purposefully" to signify the common law requirement of mental culpability. See Morissette v. United States, 342 U.S. 246, 251-52, 72 S.Ct. 240, 244, 96 L.Ed. 288 (1952).

But criminal intent (even when differentiated from such other, lesser mental states as objective knowledge, recklessness, or negligence) is an elusive concept--some crimes may demand proof of only the defendant's general intent to engage consciously and voluntarily in the proscribed conduct, while other crimes may additionally require proof of the defendant's specific intent to effectuate a particular result. 1 WAYNE R. LAFAVE & AUSTIN W. SCOTT, JR., SUBSTANTIVE CRIMINAL LAW...