U.S. v. Hilliard

• Decision Date: 03 August 1994
• Docket Number: No. 93-1282,93-1282
• Citation: 31 F.3d 1509
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. John J. HILLIARD, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1509

31 F.3d 1509

UNITED STATES of America, Plaintiff-Appellee, v. John J. HILLIARD, Defendant-Appellant.

No. 93-1282.

United States Court of Appeals Tenth Circuit.

Aug. 3, 1994.

James R. Hobbs (Marilyn B. Keeler with him, on the brief), Wyrsch, Atwell, Mirakian Lee & Hobbs, Kansas City, MO, for defendant-appellant.

Robert E. Mydans, Asst. U.S. Atty. (James R. Allison, Acting U.S. Atty.), Denver, CO, for plaintiff-appellee.

Before MOORE and KELLY, Circuit Judges, and BRIMMER, District Judge. ^d

PAUL KELLY, Jr., Circuit Judge.

Mr. Hilliard was convicted by jury of (1) bank fraud, 18 U.S.C. Secs. 1344, 2 (Counts 1 & 16); (2) misapplication of funds, 18 U.S.C. Secs. 657, 2 (Counts 2-11 and Counts 19, 20); (3) making false entries in bank records, 18 U.S.C. Secs. 1006, 2 (Counts 17, 18); (4) money laundering, 18 U.S.C. Secs. 1957, 2 (Counts 12-15 and 21-24); and a derivative forfeiture count in the amount of $215,774.38, 18 U.S.C. Sec. 982 (Count 25). He was sentenced to seventy-two months imprisonment on Counts 1 and 9-24, and sixty-three months imprisonment on Count 2-8 (pre Sentencing Guidelines offenses), to be served concurrently, with three years of supervised release thereafter. In addition, the district court ordered restitution to the Resolution Trust Corporation (RTC) of $1,172,990.90, and also ordered Mr. Hilliard to pay the forfeiture amount in Count 25 directly to the RTC. On appeal, Mr. Hilliard contends that the district court erred in (1) giving a deliberate ignorance instruction, (2) defining willfullness in the instructions, and (3) imposing a two-level upward adjustment under U.S.S.G. Sec. 3C1.1, for obstruction of justice based on what the district court considered perjurious testimony. Our jurisdiction arises under 28 U.S.C. Sec. 1291 and 18 U.S.C. Sec. 3742. We reverse.

Background

A. Deferred Tax Payments

Mr. Hilliard was a director, shareholder and president of National Savings Bancorporation of Colorado (NSB), the bank holding company for First American Savings Bank (FASB). As part of the required three-million dollar capitalization required by regulators to start FASB, NSB obtained large loans from a bank and NSB shareholders including Mr. Hilliard. Mr. Hilliard had borrowed the money that he lent to NSB. Mr. Hilliard also guaranteed NSB's debt. As president of FASB, Mr. Hilliard directed the controller to fund amounts associated with deferred tax liability and transfer the funds to NSB or NSB's creditors. See Aplt.App. 49-50.

Deferred tax liability became an issue when FASB's auditors instructed FASB to set up an income tax expense account and a deferred tax liability account for financial accounting purposes. Both FASB's former controller, a CPA, and a supervisory analyst from the Federal Home Loan Bank Board (FHLBB), ¹ testified that calculating income tax expense for financial accounting purposes and tax purposes differs. The objective of financial accounting is to determine financial condition (including net income) in conformity with generally accepted accounting principles, while the objective with respect to tax accounting is to calculate taxable income. The recognition of revenues and expenses may be different under the two methods due to permanent differences between financial accounting and tax accounting as well as timing differences resulting from different methods of depreciation or amortization used for financial accounting and tax accounting. In this case, the bank's auditor indicated that while FASB would soon be profitable from a financial statement standpoint, it might not have any taxable income. The difference between a larger income tax expense based on accounting net income and a usually smaller amount of actual taxes paid (based on net income computed under the Internal Revenue Code) is booked as deferred tax liability in the financial accounting records. At some point, when income for tax purposes exceeds income for financial statement purposes, the deferred tax liability may have to be paid. Accounting for deferred tax liability is in accordance with generally accepted accounting principles.

Periodically, Mr. Hilliard directed that an amount equal to FASB's deferred tax liability be paid to the holding company, NSB. According to the controller, the "theoretical" rationale for transferring the money from FASB to NSB was because NSB at some point would pay the taxes, but the practical rationale was to infuse NSB with cash to pay NSB's debt to Mr. Hilliard and another director. Aplt.App. 49.

To place this in context, absent this procedure, FASB could provide money to the holding company by only two means: management fees and dividends, both of which required regulatory approval and, with respect to both, the amounts which could be paid were restricted. II R. 14-15, 40; III R. 87-88. The controller testified that this method of funding the deferred tax liability and then transferring the funds "upstream" to the holding company was not familiar to him and he was concerned that the regulators should be informed because the bank was under a supervisory agreement at the time. III R. 42, 52. Accordingly, the controller then sought assurances from the tax department of the firm which audited the bank's financial statements, and was told that such treatment would not be a problem. III R. 53. The controller also requested an opinion on the practice from the FHLBB.

The Federal Home Loan Bank Board responded with a letter. Aplt.App. 45-46. Relying upon two Office of General Counsel (OGC) opinions, ² and a statute then in effect, 12 U.S.C. Sec. 1730a(d)(4), the letter explained that advance payments to a holding company of a subsidiary financial institution's deferred tax liability were viewed as a loan to the holding company prohibited by the statute. ³ See also 12 C.F.R. Sec. 584.3(a)(4) (1987); Central Sav. Assn. v. Central Plaza Bank & Trust Co., 223 So.2d 50, 51 (Fla.Dist.Ct.App.1969) (construing Sec. 1730a(d)(4)). The letter concluded: "Based on the OGC opinion[s] and regulatory cites detailed above First America may not discharge the deferred tax liability to NSB."

The FHLBB supervisory analyst testified that no rational or theoretical reason supported the payment of an insured institution's deferred taxes to its parent holding company. II R. 16. It was not a legitimate use of funds from the insured institution because by definition deferred taxes do not involve current tax liability (payments to IRS). Id. To allow such payments "just allows the holding company to have use of the funds [to] the detriment of the institution." Such payments would deprive the financial institution not only of an asset, but also the earning power associated with the asset. Id. at 16-18. Such a practice confers no benefit on the financial institution, reduces its liquidity and is in contravention of dividend limitations. Id. at 18, 59-60. See also II R. 235-38 (former bank examiner and bank president testimony as to adverse effect). The supervisory analyst estimated that FASB was deprived of $900,000 based on this practice. Id. at 59-60. Moreover, when FASB had a small amount of tax owing, Mr. Hilliard requested a check payable to the IRS from FASB, not NSB. VI R. 226.

The controller brought the directive to the attention of Mr. Hilliard who indicated that it should be brought up at the next board meeting. At that meeting, the directive was not presented to the board, but it was discussed. The controller indicated that the Board turned to its outside board member who said words to the effect that the FHLBB's position was "no big deal." III R. 66.

After six transfers had been made over the course of several months, and in anticipation of an FHLBB audit, the controller, concerned about the propriety of these transfers given the FHLBB's directive, sought an opinion from the bank's regulatory counsel, Kirkland & Ellis, on July 19, 1987. The August 11, 1987, opinion disagreed with the FHLBB, on the reasoning "that an advance payment from a subsidiary insured institution to a parent holding company ... does not constitute a 'loan.' " Aplt.App. 53. Because the law firm did not view the payments as loans, it felt that the FHLBB decisions did not apply, III R. 217, and it advised that "the payments should be permitted if First America chooses, in the prudent exercise of its business judgment, to make these payments." Aplt.App. 54-55. No formal request was made for approval of the transactions. See 12 C.F.R. Sec. 584.3(f) (1987).

Each month that deferred tax liability was computed, Mr. Hilliard directed bank personnel to transfer an identical amount of cash to the holding company. III R. 83. At the close of the 1988 fiscal year, it became necessary for FASB to recognize $1,000,000 in loan losses. This effectively eliminated any deferred tax liability of FASB which had been transferred to NSB; as a result these entries were reversed in FASB's books, thereby creating a receivable for FASB from NSB in the amount which had been paid to NSB. IV R. 210-11, 228. FHLBB insisted that the amount be repaid immediately. Although FASB agreed to repayment eventually, the amount was never repaid. Id. at 228.

In 1988, FHLBB regulatory personnel discovered that FASB had funded deferred tax liability and upstreamed almost $1,000,000 in cash to NSB, in clear contravention of the FHLBB's earlier letter directive. The matter had come up in March 1987, but the controller told the FHLBB regulator that the tax had been paid as a current liability (not a deferred liability), which would have been permissible. III R. 92-93.

Mr. Hilliard testified that the FHLBB letter "wasn't a big shock." VI R. 136. He discussed the deferred tax liability issue with counsel, and stated he thought that the payment of the deferred tax liability amounts to the holding company would strengthen both companies because it would allow the holding company to pay off its debt and raise more capital for infusion into the...