U.S. v. Frankel, 83-1161

• Decision Date: 22 November 1983
• Docket Number: No. 83-1161,83-1161
• Citation: 721 F.2d 917
• Parties: UNITED STATES of America, Appellant, v. Eugene FRANKEL, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 917

721 F.2d 917

UNITED STATES of America, Appellant, v. Eugene FRANKEL, Appellee.

No. 83-1161.

United States Court of Appeals Third Circuit.

Argued Sept. 14, 1983.

Decided Nov. 22, 1983.

Peter F. Vaira, U.S. Atty., Walter S. Batty, Jr., Asst. U.S. Atty., Robert E. Welsh, Jr. (argued), Asst. U.S. Atty., Philadelphia, Pa., for appellant.

Richard A. Sprague, William R. Herman (argued), Sprague & Rubenstone, Philadelphia, Pa., for appellee.

Before WEIS, HIGGINBOTHAM, and SLOVITER, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

The district court concluded that an indictment charging mail fraud in a check kiting operation was faulty because it relied on an implied representation in the presentation of an N.S.F. check. We affirm in the circumstances here, but caution that the mail fraud statute may be violated even in the absence of active misrepresentations.

Defendant Eugene Frankel was charged with nine counts of mail fraud and one count of wire fraud for operating a check kiting scheme. The district court dismissed the indictment on the ground that presentation of a check not secured by adequate funds does not constitute a misrepresentation. The dismissal was without prejudice to the government's right to obtain a superseding indictment.

Paragraph 6 of the indictment charges that defendant devised a scheme to defraud two banks of "money and interest on the use of money by means of false and fraudulent pretenses, representations and promises." Defendant was the president of Linens Unlimited which had corporate checking accounts at the Continental Bank in Fort Washington, Pennsylvania, and the Commerce Bank of New Jersey in Marlton, New Jersey. He also maintained a personal account at the New Jersey bank under the name of "Gene F. Estates."

Subsequent paragraphs of the indictment alleged that defendant wrote checks on the Linens and the Estates accounts in the New Jersey bank when neither contained sufficient funds to cover the checks. The checks were deposited in the Continental Bank in Pennsylvania creating an artificial balance against which additional checks were then drawn to pay Linens' creditors.

As part of the alleged scheme, defendant made telephone calls to the New Jersey bank to determine the balance in his accounts and to ask that bank employees delay returning the N.S.F. checks to the Continental Bank in Pennsylvania. Meanwhile, N.S.F. checks were written on Continental Bank and deposited in the New Jersey bank to inflate the account balances and cause the N.S.F. checks to be paid by the New Jersey bank.

The mail fraud statute was invoked because defendant caused the N.S.F. checks to be mailed, and the wire fraud statute was triggered by his use of the telephone to delay return of the checks.

At a hearing on a motion for a bill of particulars, defense counsel requested that the government identify the false pretenses referred to in the indictment. The government responded that the "false and fraudulent pretenses, representations and promises" listed in the indictment were:

1. The deposit of checks in the bank when the defendant knew that at the time of processing for payment there would be "insufficient funds to support the checks, thus constituting a false pretense that the checks were and would be supported by sufficient funds."

2. The use of various means to delay processing of the checks for payment by causing the New Jersey bank employees to violate the bank's policies and by improperly endorsing the checks to prevent expeditious processing. These tactics were alleged as constituting a breach of defendant's duty, as well as his implicit representation as an account holder, "not to manipulate the banking channels."

The district court concluded that the government had chosen to charge a "scheme or artifice" under the mail fraud statute, 18 U.S.C. Sec. 1341 (1976), "to be accomplished by false and fraudulent pretenses, representations, and promises." The district judge observed that in United States v. Pearlstein, 576 F.2d 531 (3d Cir.1978), this court apparently viewed a fraudulent representation as an integral part of a section 1341 unlawful scheme. Since the checks, under the rationale of Williams v. United States, 458 U.S. 279, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982), could not constitute the misrepresentations Pearlstein apparently required, the district court felt compelled to dismiss the indictment. The district judge concluded his opinion by saying, "This of course is not to say that an indictment under section 1341 can never be returned in a check kiting scheme of some sort."

The mail fraud statute proscribes a broad range of activity, Durland v. United States, 161 U.S. 306, 313, 16 S.Ct. 508, 511, 40 L.Ed. 709 (1896), and permits federal prosecution when the mails are used to further the purpose of the activity, United States v. Maze, 414 U.S. 395, 405, 94 S.Ct. 645, 651, 38 L.Ed.2d 603 (1974). In pertinent part, the statute reads: "Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ... [and] for the purpose of executing such scheme ... places in any post office ... any matter ... to be sent or delivered by the Postal Service ... shall be fined ... or imprisoned ... or both." 18 U.S.C. Sec. 1341 (1976).

As the district court determined and the government recognizes, the indictment in this case is based on allegations of obtaining money or property--here interest free loans--by means of false or fraudulent pretenses. The purported representations are the existence of adequate funds in the accounts to cover each check written. But, defendant did not explicitly make the representations; rather, they are alleged to be implicit in the presentation of the checks.

In Williams v. United States, the Supreme Court rejected the notion that a false statement is made by presenting for deposit a check not backed by sufficient funds. The Court said that "technically speaking, a check is not a factual assertion at all, and therefore cannot be characterized as 'true or false.' " 458 U.S. at 284, 102 S.Ct. at 3092. It follows, therefore, that the indictment here has not set forth statements constituting misrepresentations.

In the district court the government also identified the defendant's telephone statements as false representations intended to induce bank employees to delay transmission of the checks. This activity allegedly breached his duty to not manipulate banking channels. The prosecution repeats that argument on appeal and contends that a scheme to defraud using the defendant's tactics comes within the meaning of "pretenses, representations, and promises." The government cites no authority for its proposition that manipulation of the banking channels is per se a criminal offense. Moreover, the indictment does not describe how the defendant's statements are false or fraudulent representations. Although this portion of the prosecution's case was not discussed in the bench opinion, the court obviously placed the challenged activity in the same category as presentation of the checks.

We find no error in the dismissal of the indictment as drawn, because it relies on a misrepresentation theory unsupported by the allegations. Although Williams involved prosecution under a different statute, the Supreme Court's holding--that the presentation of a check is not a representation or statement of any kind--is fatal to the government's theory here.

Williams is the obvious hurdle that the government is unable to overcome, but dictum in our earlier case of United States v. Pearlstein, 576 F.2d 531 (3d Cir.1978), underlies the prosecution's difficulty. The government's and the district court's reading of that case forced the prosecution into a position it probably would not have taken otherwise.

Pearlstein involved a fraudulent scheme to sell distributorships for a direct-mail-marketing firm. The evidence demonstrated the defendant's deliberate use of false and misleading statements, aliases, fictitious names, forged signatures, fabricated excuses and "lulling" letters. On that record, this court found ample evidence of a fraudulent scheme. Observing that the statutory "scheme to defraud ... is not defined according to any technical standards," we said that "[t]he scheme need not be fraudulent on its face ... but must involve some sort of fraudulent misrepresentations or omissions reasonably calculated to deceive persons of ordinary prudence and comprehension." 576 F.2d at 535. The district court recognized the misrepresentation requirement as dictum but felt obligated to follow it, particularly since the prosecution had cast the indictment in terms designed to track the Pearlstein language.

Pearlstein, however, should not be read so narrowly. In that case, the record established a scheme to defraud by means of false representations. No need arose to distinguish situations where the fraudulent scheme might be implemented by means other than a misrepresentation. The basic question presented here, which was not at issue in Pearlstein, is whether the statute should be read so that "by means of false or fraudulent pretenses, representations or promises"--the wording following "obtaining money by false pretenses"--also limits the "scheme or artifice to defraud" language set out in the first clause. Specifically, the question is whether a fraudulent scheme executed without a misrepresentation is within the scope of the statute.

As originally enacted, the mail fraud statute did not contain the reference to "obtaining money ... by ... fraudulent pretenses ..." and spoke only to schemes or artifices to defraud. The second clause referring to obtaining money by false pretenses was added in 1909 as a result of the Supreme Court holding in Durland v. United States, 161 U.S. 306, 16 S.Ct. 508, 40 L.Ed. 709 (1896). There, the Court rejected the...