U.S. v. Crabtree, s. 90-2165

• Citation: 979 F.2d 1261
• Decision Date: 21 January 1993
• Docket Number: Nos. 90-2165,s. 90-2165
• Parties: 37 Fed. R. Evid. Serv. 409 UNITED STATES of America, Plaintiff-Appellee, v. Douglas D. CRABTREE and Patrick H. Cray, Defendants-Appellants. & 90-2166.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1261

979 F.2d 1261

37 Fed. R. Evid. Serv. 409

UNITED STATES of America, Plaintiff-Appellee, v. Douglas D. CRABTREE and Patrick H. Cray, Defendants-Appellants.

Nos. 90-2165 & 90-2166.

United States Court of Appeals,

Seventh Circuit.

Argued April 29, 1992.

Decided Nov. 18, 1992.

Rehearing and Rehearing In Banc

Denied Jan. 21, 1993.

Patrick J. Chesley, Asst. U.S. Atty. (argued), Office of the U.S. Atty., Springfield, Ill., for U.S.

Gordon W. Gates (argued), James R. Potter, Londrigan, Potter & Randle, Springfield, Ill., for Crabtree.

John H. Long, W. Scott Hanken (argued), Long, Morris, Myers & Rabin, Springfield, Ill., for Cray.

Before FLAUM and KANNE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

KANNE, Circuit Judge.

Douglas D. Crabtree and Patrick H. Cray were convicted on three counts of misapplication of bank funds, one count of conspiracy to misapply bank funds, and two counts of interstate transportation of goods obtained by fraud. Each was subsequently sentenced to one ten-year prison term, two consecutive five-year prison terms which would run concurrent to the ten-year term, and three concurrent five-year probation terms. They were also ordered to "jointly and severally" pay restitution in the amount of $1,624,308. For the following reasons, we affirm the defendants' convictions but remand for resentencing.

I.

Right from its start, the Auburn Grain Company was wallowing in dire financial straits. Its checking account at the State Bank of Farmersville (Bank) was regularly overdrawn, oftentimes for sums exceeding $100,000. And although Auburn Grain had--at least for a short while--managed to postpone the inevitable by negotiating with the Bank to treat these overdrafts as "loans," by 1983 it had finally painted itself into a proverbial corner: its line of credit with Ralston Purina showed a past due balance of approximately $50,000; it had less grain inventory than it had sold; and its records revealed that all its assets were fully pledged and mortgaged to creditors. Auburn Grain was on the brink of financial collapse.

To protect their investment interests in Auburn Grain, Ralston Purina and the Bank agreed to form a new corporation, the Atwater Grain Company, to purchase Auburn's grain elevators and maintain its business. Crabtree, then a vice-president and loan officer at the Bank, was responsible for negotiating the buyout and was designated the acting president of Atwater Grain during the deal's preliminary stages. Pursuant to the terms of the buyout, Ralston Purina loaned defendant Cray--a personal friend of Crabtree, as well as a part owner of Auburn Grain--$187,000 to buy one-half of the issued stock of Atwater, while the other half was bought by the Bank. The remainder of the purchase price was covered by a Small Business Administration loan of $600,000, arranged by both the Bank and the First National Bank of Belleville, Illinois. Once the deal was finally closed, Crabtree resigned from his position at Atwater Grain, and Cray stepped in as president.

As it would turn out, the Atwater Grain Company proved no more profitable than its predecessor. However, it could no longer turn to the Bank for funds since its loan limit was tapped. Both Cray and Crabtree stood to lose a lot if Atwater Grain went under, so they concocted the following scheme to circumvent the Bank's loan limitations and acquire the much needed capital: they simply solicited other people--friends, relatives, and acquaintances from work--to take out additional loans from the Bank, with the verbal understanding that the proceeds would be diverted to the Company. Atwater Grain and/or the defendants personally guaranteed repayment of each of these "nominee" loans, and likewise agreed to pay each nominee any interest payments due the Bank. Needless to say, obtaining approval on these loans was an easy matter, for Crabtree had complete control over every loan application as loan officer for the Bank. And Crabtree could also use his position to keep the Bank in the dark as to the real purpose of each loan's proceeds.

The defendants executed a substantial number of these nominee loan transactions, but for the sake of brevity we only recount those which are relevant to this appeal: ¹

James Mathes. This transaction took place in September 1983, just before the Atwater Grain deal was fully negotiated. At the request of Cray, James Mathes--the bookkeeper/accountant of Auburn Grain--took out a loan of $45,320.53 from the Bank. Mathes had informed the defendants that he had no assets and a negative net worth, but they told him not to worry as they would pay any of the principal or interest on the loan. Naturally, Mathes was uneasy, so he and the defendants executed a formal indemnification agreement to protect him from his obligation to the bank. As promised, Mathes then applied the proceeds of the loan to Auburn's overdraft at the Bank, which had to be paid before the sale of the elevators to Atwater Grain could be completed. Mathes' loan was later extended by Crabtree twice--once in December, 1983 and again in July, 1984--with Atwater Grain paying the interest owed at that time. But no other payments followed. Atwater Grain and the defendants later defaulted on their agreement to cover the debt and Mathes was eventually forced to file for bankruptcy when he could not repay it.

Mike Cray. Mike Cray was defendant Cray's brother. The defendants talked him into borrowing $100,000 from the Bank for Atwater Grain's benefit, and in return for investing it in the company, he was issued $100,000 in Atwater stock. Defendant Patrick Cray paid the interest on this loan on one occasion and made a $10,000 payment towards the principal. But, as in Mathes' case, the balance of principal and interest on the loan was not forthcoming from either of the defendants or Atwater Grain, contrary to what both had promised. The Bank lost $9,335 in interest, and it was estimated that it would lose an additional $40,000 in principal, since Mike Cray had insufficient assets to pay off the loan.

Mike Schafer and Don Arnett. In March 1984, an $83,500 loan was taken out at the Bank in the name of Michael Schafer, an Atwater Grain employee. He was asked by the defendants to take out a loan in his name and to use the proceeds to purchase Atwater stock that was being held by the Bank. He, like the other nominees, was told that he would not have to repay the loan or any interest on it. Fortunately for Schafer, the defendants fulfilled half of their promise on this occasion--Atwater Grain did eventually repay the entire principal of the loan. However, $2,849.23 in interest remains unpaid.

Another $83,500 loan was taken out at the Bank in the name of Don Arnett, also an Atwater Grain employee. The facts with respect to this loan are the same as those for the Schafer loan except that the Bank was not repaid $47,000 in principal and $5,346.17 in interest. Arnett was later sued by the FDIC and settled the matter by paying $2,000.

Curry Ice and Coal, Inc. James Curry served on the Board of Directors of Atwater Grain, and was also the President and majority shareholder of Curry Ice and Coal, Inc. Knowing Curry to be a man of substantial means, Crabtree and Cray approached him regarding Atwater Grain's financial difficulties. They asked him to take out a loan of $140,000 from the Bank and to turn the proceeds over to Atwater, who would repay the loan from money received from Grain sales. Curry agreed and Crabtree gave his approval of the loan; once the note was executed, Atwater deposited $140,000 in Curry Ice's account, and simultaneously Curry issued a check for the same amount to Atwater. But in the ensuing months neither Curry or his company ever received any payments from Atwater or the defendants, so Curry Ice ended up paying over $200,000 in principal and interest.

Isabelle Harmon and James Ericksen. During October 1984, Atwater Grain was experiencing cash flow problems even though the volume of business was good. Worried about the health of the business, Cray answered an advertisement for a consulting service and was put in contact with James Ericksen, a CPA who worked in Arizona. Ericksen agreed to travel to Illinois to provide consulting services to Atwater, in return for transportation costs and a $5,000 consulting fee.

Ericksen visited the Atwater facilities four times. At the conclusion of his final visit, he prepared a consultant's report in which he recommended that Atwater Grain sell more stock and find a source for long-term funding. The defendants asked Ericksen to help them in their hunt for such a source, and after several months he suggested the name of his friend Isabelle Harmon, an income beneficiary of a trust left by her deceased husband, with the Mormon Church as the remainderman. Harmon and the Mormon Church had agreed to make Atwater Grain a $300,000 loan, based upon Ericksen's research concerning Atwater Grain. Unfortunately, the information that the defendants provided Ericksen in formulating his report was markedly lacking in one important respect: Atwater's audited financial statement--a statement which Ericksen heavily relied on when making his assessments--did not include a large number of the nominee loans. This missing information would have produced a debt to equity ratio of 3 to 1, an unacceptable ratio for investing--as opposed to the 1.5 to 1 ratio Ericksen had estimated based on his research.

With the $300,000 from the Harmon Trust, the defendants set out to repay some of the nominee loans that had become overdue. But they spent the money very rapidly, and within days they called Ericksen and told him that the company was out of money and needed more. Ericksen responded by asking for a breakdown showing how the money was spent, which indicated that $180,000 had been used for debt reduction and $120,000 for operating expenses. After considerable thought, Ericksen squeezed another $50,000 out of the Trust,...