U.S. v. Kwiat, s. 86-2209

• Decision Date: 28 April 1987
• Docket Number: 86-2210,Nos. 86-2209,s. 86-2209
• Citation: 817 F.2d 440
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Wayne E. KWIAT, Edward J. McKeown, and Kevin D. Kehoe, Defendants-Appellants. & 86-2288.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 440

817 F.2d 440

UNITED STATES of America, Plaintiff-Appellee, v. Wayne E. KWIAT, Edward J. McKeown, and Kevin D. Kehoe,

Defendants-Appellants.

Nos. 86-2209, 86-2210 & 86-2288.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 20, 1987.

Decided April 28, 1987.

George P. Lynch, Martin S. Argan, William J. Harte, Chicago, Ill., for defendants-appellants.

Bobbie McGee Gregg, Asst. U.S. Atty., Anton Valukus, U.S. Atty., U.S. Atty's. Office, Chicago, Ill., for plaintiff-appellee.

Before COFFEY, FLAUM, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Edward McKeown and a group of his friends bought 60% of the stock of the First Security Bank of Glendale Heights, Illinois, on December 31, 1981. First Security (the Bank) is chartered by Illinois, and its deposits are insured by the Federal Deposit Insurance Corp. (the FDIC). James R. Elliott, a successful real estate agent, and Kevin Kehoe, Elliott's business associate, were among the investors in the McKeown group. Elliott bought the largest single bloc. Elliott borrowed $700,000, partly to pay for his shares, and McKeown put up his own stock to secure the loan to Elliott. McKeown, Elliott, and Kehoe became directors of the Bank.

We describe the facts, as the jury might have found them, in the light most favorable to the prosecutor. McKeown, as the Bank's new President, had the authority to approve loans up to $100,000. Elliott and Kehoe lined up real estate loans for McKeown to approve. Many of the loans financed purchases of condominiums, in Orland Park, Illinois, that Harold F. McGrath owned. Elliott and Kehoe persuaded people to purchase units as tax shelters. The investors put no money down and obtained deductions for interest and depreciation; the Bank received a first mortgage; McGrath got cash from the Bank plus a second mortgage for the remainder of the price; the Elliott Financial Group (in which Elliott and Kehoe had interests) received $15,000 commission per unit. Each purchaser was told that the unit would be rented and that the rental income would be used to pay the note to the Bank. McKeown approved these transactions without obtaining appraisals of the condominium units or accurate credit information about the buyers. One effect of approving the loans was to ensure that Elliott could make payments on the $700,000 loan. As it turned out, the units were overpriced, and the Bank lent more than 100% of the market value of each. The rental income did not cover the payments on the notes, and the purchasers were unable to make up the difference. The Bank could not recoup by foreclosing on its mortgages; it lost more than $600,000 on the 20 Orland Park loans and 48 other, similar loans arranged through Elliott and Kehoe.

By May 1982 the Bank had made 18 loans on Orland units. The commissions received by Elliott and Kehoe violated the Bank's bylaws; no one told the other directors that the commissions were being paid. McKeown continued to approve these loans even after learning that the earlier loans were becoming delinquent and that Elliott and Kehoe were receiving commissions. During May 1982 a state bank examiner told McKeown that the Bank was seriously underdiversified. The condominium loans arranged through Elliott and Kehoe exceeded $3.3 million, more than half of the Bank's loan portfolio and about twice investors' equity. The state examiner asked McKeown to stop making these loans. McKeown said that he would make no more commitments, apparently reserving the right to fund two more loans on which commitments had been made. He kept the promise after closing these loans. Nonetheless, by September 1982 the loans were such a fiasco that McKeown was forced out of office.

Elliott pleaded guilty. Other defendants were acquitted on some counts by both judge and jury. After this winnowing, there remained convictions under three statutes. McKeown and Kehoe were convicted of mail fraud, in violation of 18 U.S.C. Sec. 1341. Kehoe was convicted of misapplying the funds of a federally insured bank, in violation of 18 U.S.C. Sec. 656. Wayne Kwiat, who served both as McGrath's lawyer and as the Bank's closing agent in the Orland transactions, was convicted of four counts of making false statements to a federal agency, in violation of 18 U.S.C. Sec. 1001. McKeown, Kehoe, and Kwiat all received concurrent terms of three years' probation, on condition that each perform 300 hours of community service per year.

The mail fraud convictions were based on the charge that McKeown, Elliott, and Kehoe perpetrated a scheme to defraud the Bank's depositors and stockholders (as well as the FDIC) of their honest services as directors of the Bank. The mailings were of mortgage instruments. After lending the money, the Bank had each mortgage recorded. The recorder of deeds mailed each instrument back to the Bank after recording it. Kehoe was convicted on seven counts, each one involving a mortgage on an Orland loan. McKeown was convicted on two of the same counts and acquitted by the jury on the rest; McKeown's two convictions arose out of the loans funded after the visit from the state bank examiner. We explain in Parts II and III the genesis of the misstatement and misapplication convictions.

I

The mail fraud convictions depend on the "intangible rights" theory that this court has embraced. United States v. George, 477 F.2d 508, 513 & n. 6 (7th Cir.1973); United States v. Dick, 744 F.2d 546, 550 (7th Cir.1984). Under this approach, the fraudulent scheme may consist in failing to supply the honest and diligent services that one's employer is entitled to receive. Using the mails in the course of the scheme--even as an expected by-product of the scheme--completes the offense. The Supreme Court may decide in two pending cases whether this approach to the definition of a "scheme" is appropriate. United States v. Carpenter, 791 F.2d 1024, 1034-35 (2d Cir.), cert. granted, --- U.S. ----, 107 S.Ct. 666, 93 L.Ed.2d 718 (1986); United States v. Gray, 790 F.2d 1290, 1294-96 (6th Cir.), cert. granted under the name McNally v. United States, --- U.S. ----, 107 S.Ct. 642, 93 L.Ed.2d 698 (1986). Meanwhile we will follow George and Dick.

No matter what the definition of the "scheme to defraud", there is no mail fraud unless the mailing is "for the purpose of executing such scheme" (as Sec. 1341 itself provides) and is causally linked to the scheme's success. United States v. Lane, 474 U.S. 438, 106 S.Ct. 725, 733-34, 88 L.Ed.2d 814 (1986); United States v. Maze, 414 U.S. 395, 94 S.Ct. 645, 38 L.Ed.2d 603 (1974); Parr v. United States, 363 U.S. 370, 80 S.Ct. 1171, 4 L.Ed.2d 1277 (1960). This is not to say that the mailing must itself be fraudulent. "We have held many times that 'innocent' mailings may offend the statute if they are integral parts of a scheme to defraud." United States v. Green, 786 F.2d 247, 249 (7th Cir.1986) (collecting authority). So the fact that the documents mailed to the Bank are truthful legal instruments is irrelevant. In every innocent-mailing case to date, however, there has been some link between the mailing and the success of the scheme. In Green, for example, the mailings reeled in the fish; in United States v. Bonansinga, 773 F.2d 166 (7th Cir.1985), the mailings on which the convictions were sustained paid for the goods the defendant then stole from his employer; in United States v. Murphy, 768 F.2d 1518, 1529-30 (7th Cir.1985), the mail reimbursed counsel for the money used to bribe the judge.

The mailings in this case--of documents from the recorder of deeds to the Bank--did not make the fraud possible or facilitate it. They did not help McKeown and Kehoe rake in money from the Bank; they did not reduce the quality of the intangible services McKeown and Kehoe supplied to the Bank; they did not help McKeown and Kehoe hide their delicts or postpone the day of reckoning. The mailings are offshoots of the loans, but honest services would have produced the same sort of mailings.

The cases most helpful to the government are United States v. Fallon, 776 F.2d 727 (7th Cir.1985), and United States v. Cina, 699 F.2d 853 (7th Cir.1983), in which the mails were used to carry automobile titles from the defendants to, or among, state officials. Cf. United States v. Galloway, 664 F.2d 161 (7th Cir.1981). The schemers rolled back the odometers of the cars, then used innocent state officials to obtain titles showing odometer readings at the altered rather than the actual number of miles. We held that the mailings of the title applications violated the statute because they facilitated the schemes to fleece the purchasers of the cars. In these cases, as in today's, the mailings of the title documents sometimes followed the fraudulent sale or loan. The difference is that conveying good title showing the altered reading was an essential part of the scheme. Had the defendants not been able to put good title papers in the hands of their purchasers, the purchasers would have gone howling to state officials and stopped the scheme quickly. The mailing on the first sale therefore was an essential ingredient of any further sales. In our case, by contrast, a failure by the recorder of deeds to mail the recorded mortgage would not have sent anyone scurrying to the police or tipped off other employees at the bank. Getting each mortgage recorded was unrelated to the directors' defrauding the Bank of their honest services. Had the recorder of deeds not mailed the mortgages, someone from the Bank would have picked them up. A clerk might have become riled, but not at McKeown or Kehoe; no amount of trouble with the recorder of deeds would have tipped off anyone to any part of the scheme or hindered it in the slightest.

If this "scheme" in conjunction with this sort of mailing is mail fraud, then any corporate officer's breach of fiduciary duties is mail fraud, for every corporation uses the mails in some way or another. The government has not cited...