U.S. v. Berman

• Decision Date: 12 April 1994
• Docket Number: 93-2637,Nos. 93-2590,s. 93-2590
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Irwin BERMAN and Joseph E. Gussen, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 753

21 F.3d 753

UNITED STATES of America, Plaintiff-Appellee, v. Irwin BERMAN and Joseph E. Gussen, Defendants-Appellants.

Nos. 93-2590, 93-2637.

United States Court of Appeals Seventh Circuit.

Argued Feb. 23, 1994.

Decided April 12, 1994.

Matthew L. Jacobs, Asst. U.S. Atty. (argued), Milwaukee, WI, for U.S.

Thomas G. Halloran, Annice Kelly (argued), Fox & Fox, Madison, WI, for Irwin Berman.

David P. Lowe, Jacquart & Lowe, Milwaukee, WI, Robert B. Schulman, Joshua R. Treem (argued), Harry Levy, Schulman, Treem, Kaminkow & Gilden, Baltimore, MD, for Joseph E. Gussen.

Before POSNER, Chief Judge, and COFFEY and KANNE, Circuit Judges.

POSNER, Chief Judge.

The defendants were convicted of violating 18 U.S.C. Sec. 658, which punishes anyone who, with intent to defraud, knowingly converts any property "mortgaged or pledged to" a federal or federally supported farm credit agency, such as the Farmers Home Administration. They were given prison sentences of 16 and 18 months, respectively, and ordered to make restitution of almost $500,000 to the unsecured creditors of D.C. Equipment, Inc. That firm had obtained a secured loan from Peshtigo National Bank, and the FmHA had guaranteed 90 percent of it. Peshtigo had then sold the guaranteed portion of the loan to Merrill Lynch, which in turn had resold it to Bradford Government Loan Services. D.C. Equipment defaulted, and Bradford invoked the FmHA's guaranty. The FmHA paid off Bradford, obtaining in exchange Bradford's interest in the loan. D.C. Equipment filed for protection under Chapter 11 of the Bankruptcy Code, and was authorized to auction off its surplus inventory. The defendants, who headed a nationwide auction firm, conducted the auction and siphoned off $500,000 of the proceeds. As a result, the FmHA was unable to obtain reimbursement, out of the proceeds of the auction, for the money it had paid Bradford under the guaranty.

The principal question is whether the defendants could be guilty of defrauding the FmHA when so far as appears they did not know that the latter had, by virtue of the transactions outlined above, a security interest in the auction proceeds. The Fifth Circuit held in United States v. Grissom, 645 F.2d 461 (5th Cir.1981), that this knowledge is required. Several cases, including one in this circuit, remark the defendant's intent to defraud the governmental entity, United States v. Studley, 892 F.2d 518, 526-27 (7th Cir.1989); United States v. Lott, 751 F.2d 717, 720 (4th Cir.1985); United States v. Lisko, 747 F.2d 1234, 1237 n. 3 (8th Cir.1984), but without holding that the defendant's knowledge of the governmental character of his victim is an element of the crime. United States v. Porter, 842 F.2d 1021, 1026 (8th Cir.1988), says that one element of the offense under section 658 is "that the defendant acted with intent to defraud the [federal entity]," but it is unclear from this formulation (or anything else in the opinion) whether this means more than that the defendant intended to defraud his victim, whoever the victim might be. Only Grissom holds that the defendant must know that his victim was federal, and we respectfully disagree with its holding.

The language of the statute, while consistent with the Fifth Circuit's interpretation, certainly does not compel it, and the Supreme Court's decision in United States v. Feola, 420 U.S. 671, 95 S.Ct. 1255, 43 L.Ed.2d 541 (1975), and many other decisions as well, are inconsistent with it. Feola had assaulted a federal officer. The Court held that Feola did not have to know that his victim was a federal officer. Id. at 684, 95 S.Ct. at 1263-64. The same principle has been applied by this and other circuits to a variety of property offenses against the federal government. United States v. Harris, 729 F.2d 441, 445 (7th Cir.1984) (18 U.S.C. Sec. 657: theft from certain credit institutions); United States v. Smith, 489 F.2d 1330, 1334 (7th Cir.1973) (18 U.S.C. Sec. 641: stealing federal property); United States v. Hamilton, 726 F.2d 317, 319-20 (7th Cir.1984) (18 U.S.C. Sec. 665: theft of federal grant funds); United States v. Sivils, 960 F.2d 587, 595-96 (6th Cir.1992) (18 U.S.C. Sec. 641: conversion of anything of value belonging to the United States); United States v. Baker, 693 F.2d 183, 185-86 (D.C.Cir.1982) (same); Baker v. United States, 429 F.2d 1278 (9th Cir.1970) (per curiam) (same). We cannot see why it should stop short at section 658. Section 658 is just another one of the myriad of statutes punishing such offenses, and it lacks any special language or history suggestive of an exceptional meaning.

Grissom is an outlier; it is also, we think, wrong. A statutory requirement that the victim of a federal crime be a federal agency or officer or recipient of a federal grant or otherwise affected with a federal interest identifies the federal interest in punishment; it is not intended to allow a person who commits a crime against the federal government or its officers or wards to escape punishment by pleading ignorance of his victim's identity. The deterrent effect of federal criminal punishment is enhanced by giving the assailant or the defrauder an incentive to find out whether his potential victims are federal, United States v. Harris, supra, 729 F.2d at 446, and, because federal criminal penalties are usually heavier than state ones and more effectively enforced, to steer clear of them. A requirement that the defendant know that his victims are federal would impair this incentive by allowing him to commit some crimes against federal victims without paying the federal penalty--perhaps many crimes, because proof of knowledge of the victim's federal identity would be difficult in many cases. The effect of this escape hatch would be to lower the expected cost of punishment to this type of offender.

It would be different if the only thing that marked the defendant's act as wrongful was the invasion of a federal interest. United States v. Gregg, 612 F.2d 43, 50 (2d Cir.1979). Then without knowledge of that interest the defendant would not have a guilty intent, which is required for most crimes. It was on this basis that Morissette v. United States, 342 U.S. 246, 270-71, 72 S.Ct. 240, 253-54, 96 L.Ed. 288 (1952), held that to be guilty of violating 18 U.S.C. Sec. 641 (conversion of anything of value belonging to the United States) the defendant had to know that the property in question had not been abandoned. But everyone knows that fraud is a crime, just as everyone knows that assault is a crime (Feola ). The identity of the victim is irrelevant to the offender's culpability. There is no hint in Morissette that the Court thought it important whether the defendant knew whom the thing converted belonged to; only that it had not been abandoned and hence could be converted. United States v. Feola, supra, 420 U.S. at 685, 95 S.Ct. at 1264.

The next issue is whether the proceeds of the auction can fairly be considered to have been "pledged to" the FmHA, as charged in the indictment. There was no literal pledge. A literal pledge is a figurative hostage, requiring that the FmHA have had a possessory interest in the assets of D.C. Equipment, 1 Grant Gilmore, Security Interests in Personal Property Sec. 1.1, at p. 5 (1965), which it did not. The statutory phrase "mortgaged or pledged to" is a clumsily archaic way of identifying all security interests held by the federal agencies that the statute seeks to protect. United States v. Archambault, 767 F.2d 402 (8th Cir.1985). Neither term is defined, but the intent to embrace all security interests can reasonably be inferred when we recall that the statute dates from the 1930s, when the terms "mortgage" and "chattel mortgage," which have since been superseded by "security interest," UCC 9-102(2), were used interchangeably to refer to nonpossessory security interests in personal property, and when the verb "mortgage" (the statute uses the verb, not the noun) was commonly used to refer to the granting of any such interest. In re German Publication Society, 289 Fed. 509 (S.D.N.Y.1922) (L. Hand, J.).

So if the indictment had read "mortgaged or pledged to," as it should have, the defendants would have no leg to stand on. But it just says "pledged to." Yet "pledge," like "mortgage," has long been used loosely as well as tightly, to cover security interests in personal property that like the FmHA's in this case are not possessory interests, literal pledges. See, e.g., Richmond Mortgage & Loan Corp. v. Wachovia Bank & Trust Co., 300 U.S. 124, 129, 57 S.Ct 338, 339-40, 81 L.Ed. 552 (1937); Buckeye Coal & Ry. v. Hocking Valley Ry., 269 U.S. 42, 46 S.Ct. 61, 70 L.Ed. 155 (1925); McCandless v. Furlaud, 296 U.S. 140, 174, 56 S.Ct. 41, 53, 80 L.Ed. 121 (1935) (dissenting opinion); United States v. Chevalier, 1 F.3d 581, 582 (7th Cir.1993); Buck v. U.S. Dept. of Agriculture, 960 F.2d 603, 610 (6th Cir.1992); Uransky v. First Federal Savings & Loan Association, 684 F.2d 750, 757 n. 7 (11th Cir.1982); Rosenberg v. Son, Inc., 491 N.W.2d 71, 73 (N.Dak.1992). We think it fairly clear that the draftsmen of the original of section 658 (the Farm Credit Act, ch. 98, Sec. 64(d), 48 Stat. 257, 268 (1933)) meant the term to be used broadly, that the average person who troubled to read the statute would interpret it broadly, and that the defendants therefore committed an offense within the scope of the indictment--provided the FmHA actually had a security interest in the proceeds of the auction. It did not if, as only defendant Gussen contends, what Peshtigo National Bank sold was not 90 percent of the loan to D.C. but a 90 percent participation in the loan. A sale or assignment of the loan itself or of any part of it would carry with it a proportionate assignment of the lender's security interest, while the sale of a participation would merely give the purchaser a claim to a proportionate share of the principal of and interest on the loan. Singletary v....