U.S. v. Best, s. 87-2456

• Decision Date: 03 July 1990
• Docket Number: Nos. 87-2456,87-2457 and 87-2458,s. 87-2456
• Citation: 913 F.2d 1179
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. John C. BEST, Gregory J. Bewick, and Paul F. Conarty, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1179

913 F.2d 1179

UNITED STATES of America, Plaintiff-Appellee, v. John C. BEST, Gregory J. Bewick, and Paul F. Conarty,

Defendants-Appellants.

Nos. 87-2456, 87-2457 and 87-2458.

United States Court of Appeals, Seventh Circuit.

Argued April 5, 1990.

Decided July 3, 1990.

Anton R. Valukas, U.S. Atty., Jeanne M. Witherspoon, Asst. U.S. Atty., Office of the U.S. Atty., David J. Stetler, James R. Ferguson, Victoria J. Peters, Asst. U.S. Attys., Office of the U.S. Atty., Crim. Receiving, Appellate Div., Chicago, Ill., for plaintiff-appellee.

James S. Montana, Jr., Lydon & Griffin, George P. Lynch, M. Jacqueline Walther, Kielian & Walther, Mary Ellen Dienes, Chicago, Ill., for John C. Best.

James S. Montana, Jr., Susan G. Feibus, Lydon & Griffin, M. Jacqueline Walther, Kielian & Walther, Mary Ellen Dienes, Chicago, Ill., for Gregory J. Bewick.

Sidney Z. Karasik, Lydon & Griffin, M. Jacqueline Walther, Kielian & Walther, Mary Ellen Dienes, Chicago, Ill., for Paul F. Conarty.

Before CUMMINGS, POSNER, and RIPPLE, Circuit Judges.

POSNER, Circuit Judge.

The defendants were indicted on 35 counts of mail fraud, misapplication of bank funds, bank fraud, and related crimes committed in the course of the failure of the American Heritage Savings and Loan Association, a federally insured institution of which the defendants were officers. The trial lasted seven weeks, and the jury found the defendants guilty on most counts. The judge sentenced John Best to a year and a day in prison, Gregory Bewick to six months on work release, and Paul Conarty to probation.

American Heritage failed in 1983. Best was its chief executive officer, Bewick its second in command, and Conarty, a recent addition, its in-house counsel. The bank (as we shall call it, for though it was really a savings and loan association nothing in this case turns on the differences between the two types of banking institution) had been in a parlous state since 1981. It is the efforts of Best and Bewick, later joined by Conarty, to stave off the evil day that gave rise to this prosecution.

Through Landfinder's Realty Corporation and other wholly owned subsidiaries, the bank owned a great deal of unpromising commercial real estate, mainly undeveloped, on which the defendants' efforts to disguise the bank's deteriorating financial condition focused. Among many practices in which Best and Bewick engaged that violated the norms of the banking business, they would approve the making of loans that were conditioned on the borrower's agreeing to buy real estate from one of the bank's subsidiaries, and would then apply to the down payment for the purchase of the real estate so much of the loan as was necessary to cover the down payment completely. By this tactic, they were, in effect, selling the bank's real estate to the borrower--who typically was uncreditworthy, and known to Best and Bewick to be so--for no cash down. Selling it, moreover, at inflated prices, based on inflated appraisals, so that the bank could book a profit on the sales and thereby improve its balance sheet, even though it was extremely unlikely that the borrower-buyer would ever complete the payments for the property or that, if he did not, the property could be sold for a price equal to the purchase price, or for that matter equal to the loan. While engaging in these reckless transactions, which predictably flopped, and while the bank was losing money hand over fist, Best and Bewick were paying themselves large bonuses from the Landfinder's account.

The evidence was ample to convict Best and Bewick of the offenses with which they were charged, with the possible exception of the counts relating to the payment of bonuses from the Landfinder's account. The source of Landfinder's revenue, it is true, was not really the proceeds of the sale of real estate owned by Landfinder's and other nonbanking real estate subsidiaries of the bank, because the purchasers paid nothing for the real estate--the sales generated no proceeds. The actual source of the real estate subsidiaries' revenue, and hence of the bonuses, was the bank funds that Best and Bewick loaned to the purchasers of the real estate and then applied to the down payment on the sales. Bank funds thus trickled back to Best and Bewick from Landfinder's, having been, in effect, lightly laundered. It is a crime for an officer of a bank to receive money from a bank transaction with intent to defraud the bank, 18 U.S.C. Sec. 1006, and the officer must not be allowed to evade this prohibition by laundering the money. United States v. Payne, 750 F.2d 844, 858 (11th Cir.1985). Such receipt is also a violation of 18 U.S.C. Sec. 657, which forbids the willful misapplication of bank funds. United States v. Bailey, 859 F.2d 1265, 1278-82 (7th Cir.1988); United States v. Olson, 825 F.2d 121, 123 (7th Cir.1987); United States v. Bruun, 809 F.2d 397, 408 (7th Cir.1987); United States v. Angelos, 763 F.2d 859, 862 (7th Cir.1985). The defendants were convicted under both statutes, as well as for mail fraud.

But we have ignored an important background fact. Long before American Heritage got into financial trouble, its officers were paid their bonuses--with the full knowledge and acquiescence of the pertinent state and federal banking authorities--from the Landfinder's account rather than from bank funds directly. Landfinder's was in a higher tax bracket than the bank, so that, treating the bank and its subsidiaries as a single enterprise (which realistically they were, since the subsidiaries were wholly owned), the after-tax costs of the bonuses were minimized by having Landfinder's pay them and deduct the expense from its income. It is not bank fraud to pay a bank's officers salaries and bonuses, even though the ultimate source of these moneys is--of course--the bank's funds; and for the reason just given there was nothing fraudulent in the fact that in this case the bonuses were paid by an affiliated corporation rather than by the bank itself. It is true that during the period of the bank's decline, the bank stopped paying the bonuses from Landfinder's American Heritage bank account but instead opened an account for Landfinder's in another bank and paid the bonuses from that account. This is not necessarily fraudulent, however, in view of the defendants' testimony, contradicted by no other evidence, that this was done because employees of the bank resented the fact that the officers were drawing off large bonuses at a time when the bank was in financial trouble. Greed is not fraud.

What the government is left with is possible skepticism concerning the defendants' stated reason for taking the unusual step of opening a bank account for one of the bank's wholly owned subsidiaries in another and unrelated bank, plus understandable concern with the exorbitance of the defendants' bonuses in this period of decline, plus the color lent to the bonus arrangement by the abundant other evidence of fraud. We cannot say that no rational jury, confronted with this tapestry, could find Best and Bewick guilty beyond a reasonable doubt of defrauding the bank by paying themselves huge bonuses from Landfinder's new bank account.

Although Conarty had done some modest legal work for the bank while in private practice, he had no substantial involvement in the bank's affairs until he became its in-house counsel at the beginning of 1983. Six weeks later the Kings Point loan closed, the only transaction on which the charges against Conarty are founded. The loan was to be made to a partnership, but two of the three partners--Henning and Pernice--were ineligible to borrow from the bank, because they had reached their loan limit. Henning in addition was in bankruptcy; this much, at least, Conarty certainly knew, because he was one of Henning's creditors and had filed a claim in the bankruptcy proceeding. The third partner was Andreuccetti, and he too was uncreditworthy although there is no evidence that Conarty knew this. In a meeting of bank officers at which Conarty was present, held before the closing, someone remarked that the loan would have to be made to Andreuccetti, because the other two partners were ineligible. So far as appears, Conarty said nothing at the meeting; nor is it known whether he heard the remark about the ineligibility of the other partners. At the closing, which Conarty handled for the bank, the checks for the part of the loan not earmarked for the down payment on the Kings Point property were made out to Henning and Pernice rather than to Andreuccetti. Henning then "cut" checks to Conarty that paid Henning's full indebtedness to him, thereby giving him a preference (as Conarty well knew) over Henning's other creditors, while Pernice also cut a check to Conarty to pay off a pre-existing debt for legal services.

The circumstances in which Conarty received payment for pre-existing debts from the loan nominally to Andreuccetti permit, although they do not compel, the government's characterization of the receipt as a kickback from a borrower to a bank officer--a clear violation of sections 657 and 1006. The loan was to enable the partnership of Henning, Pernice, and Andreuccetti to purchase and develop real estate owned by the bank, yet the proceeds were going to two of the partners to enable them to pay off pre-existing debts unrelated to the real estate project. This was a misuse of bank funds, and the jury was entitled to find that Conarty, a lawyer and bank officer, knew it. Nor was this all. At the same closing, Pernice cut a check to Best to pay a debt he owed him. The inference that Best and Conarty were being compensated for making a loan to uncreditworthy borrowers is hard to resist. The inference is strengthened by the fact that, since Henning was in bankruptcy, he was under no legal obligation to pay the face amount of his debt to Conarty; quite the contrary. The payment was not the discharge of an obligation, but--a rational jury could...