U.S. v. Unruh

• Decision Date: 16 August 1988
• Docket Number: Nos. 84-5211,s. 84-5211
• Citation: 855 F.2d 1363
• Parties: 23 Fed. R. Evid. Serv. 893, 26 Fed. R. Evid. Serv. 860 UNITED STATES of America, Plaintiff-Appellee, v. Carol G. UNRUH, William L. Fowler, Robert Hopper, Stephen C. Forde, Defendants- Appellants. to 84-5213 and 84-5234.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1363

855 F.2d 1363

23 Fed. R. Evid. Serv. 893, 26 Fed. R. Evid.

Serv. 860

UNITED STATES of America, Plaintiff-Appellee, v. Carol G. UNRUH, William L. Fowler, Robert Hopper, Stephen C Forde, Defendants- Appellants.

Nos. 84-5211 to 84-5213 and 84-5234.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 7, 1986.

Decided Sept. 3, 1987.

As Amended on Denial of Rehearing Aug. 16, 1988.

Eve Bermingham, San Diego, Cal., for plaintiff-appellee.

Peter H.A. Wodinsky and James Duff, Los Angeles, Cal., H. Dean Steward, Honolulu, Hawaii, Barton Sheela, III, San Diego, Cal., Paul D. Wolf, Oakland, Cal., and Geoffrey Greenup, Sherman Oaks, Cal., for defendants-appellants.

Appeal from the United States District Court for the Southern District of California.

Before GOODWIN, WALLACE and KOZINSKI, Circuit Judges.

GOODWIN, Circuit Judge:

Stephen C. Forde and three of his associates in a bank fraud scheme appeal their respective convictions following a jury trial on various counts of a 72-count indictment.

Jon W. Schroeder, Edward Hart, Carol G. Unruh, William L. Fowler, and Robert Hopper were charged with Forde. The indictment charged one count of conspiracy, 18 U.S.C. Sec. 371 (1982); 61 counts of misapplication of bank funds, 18 U.S.C. Sec. 656 (1982), including a check-kiting scheme and 60 misapplied loans; three counts of false entries in bank records, 18 U.S.C. Sec. 1005 (1982); seven counts of mail fraud, 18 U.S.C. Sec. 1341 (1982); and numerous instances of aiding and abetting the commission of these crimes, 18 U.S.C. Sec. 2 (1982).

Schroeder and Hart pleaded guilty, and the remaining defendants were tried together. Forde was found guilty of 35 counts of misapplication of bank funds and three counts of making false entries, sentenced to 15 years in custody, and ordered to pay nearly $3 million in restitution. Fowler was found guilty of six counts of misapplication and sentenced to five years, and to make restitution of $175,000; Unruh, two counts of misapplication, 30 months, $75,000; and Hopper, one count of misapplication, two years, no restitution.

The evidence presented at trial, viewed in the light most favorable to the prosecution, revealed that:

In 1981, Forde, a lawyer who controlled the Bank of San Marino (BSM), was financially overextended. In December 1981, he, Schroeder and two associates took control of Pacific Coast Bank (PCB). Between December 1981 and March 1982 Forde engaged in a check-kiting scheme and caused PCB to make numerous questionable loans. Many of the loans were for amounts at or near PCB's lending limit and were made to persons who would not ordinarily qualify for such loans under prudent banking practices. A substantial portion of the proceeds of these loans benefited Forde and Schroeder.

Unruh was a law student. During this period she prepared for the bar examination and managed Forde's checking accounts. Fowler was an experienced loan broker. Hopper had experience in the banking business. Fowler and Hopper assisted Forde by soliciting individuals to obtain loans at PCB in order to invest in business ventures benefiting Forde and Schroeder.

Count one of the indictment charged the defendants with conspiring to commit the charged substantive crimes. This count was later dismissed on the government's motion.

Count two charged Forde and Unruh with kiting checks. Forde had checking accounts at a number of banks, including PCB and BSM. Each of these banks, as a matter of policy, would notify Forde of potential overdrafts and allow him to deposit a check to cover the deficiency. Forde would then write a check on another one of his accounts and deposit it to the deficient account. Because each new check would be credited to the deficient account before it would be charged to its own account, Forde could generate the appearance of a positive net balance in his accounts. Generally, the account on which his covering check was written would be without sufficient funds to pay the covering check. When the drawee bank for the covering check notified Forde of the deficiency, he would deposit an unfunded check from another account in which he had overdraft privileges but insufficient funds to cover the check. As a result of this scheme, Forde made temporary use of substantial amounts of bank funds. Unruh wrote most of these checks. Forde and Unruh were convicted on this count.

Counts three to eleven concern loans from PCB to various individuals, including Unruh (count seven), Hopper (count eight), and Fowler (count eleven). The prosecution argues that much of the loan proceeds was diverted to Forde and his associates. Forde was convicted on all but count eight. Unruh was convicted on count seven, and Hopper was convicted on count eight. The jury was unable to agree on Fowler's counts.

Counts 12 to 19 address eight loans, each for $75,000. In each case the borrower agreed to re-lend $35,000 to Charter Services Corporation, a shell corporation owned by Forde and Schroeder. Fowler solicited these borrowers and ran the Charter checking account that funneled funds to Forde and Schroeder. Counts 12 and 15 were withdrawn before deliberation. Fowler and Forde were convicted on the other counts in this group.

Counts 20 to 28 involve loans used to purchase stock of the Aloha National Bank, which Forde had founded. The loans were designed to help Forde gain control of the bank. The prosecution withdrew counts 21 to 23 and 25 to 26. The jury hung on the other counts. These counts will not be further considered.

Counts 29 to 62 concern transactions the parties refer to as "the partnership loans." Forde planned to raise money by selling some of his real estate. Fowler and Hopper solicited persons with clearly inadequate credit ratings to obtain loans from PCB and use the loan proceeds to become limited partners in one of a number of limited partnerships Forde established, and in which he served as general partner. Forde would then sell to the new partnership at an inflated price property he owned or controlled. All of the counts charged Forde and Unruh, and some of them charged the other defendants. The prosecution withdrew counts 30 to 35, 51, 54 to 55, and 61 to 62. The jury convicted Forde on counts 29, 36-39, 43-50, 52 to 53, and 56 to 60. The jury hung on the remaining charges.

Counts 63 to 65 charge Forde with making false entries in PCB's records. He was convicted on these counts.

Counts 66 to 72 charge all four defendants with participating in a scheme to deceive those who had previously invested in their investment schemes by leading them to believe that their investments were sound. Counts 67 and 70 were withdrawn; the jury hung on the remaining counts.

Sufficiency of the Evidence of Check-Kiting

Forde and Unruh challenge the sufficiency of the evidence to sustain their convictions of violating 18 U.S.C. Sec. 656 (1982) by kiting checks. Section 656 is violated if (1) the defendant was an executive officer of a bank, (2) which was connected in some capacity with the Federal Reserve System, who (3) willfully misapplied the funds of that bank and (4) acted with intent to injure and defraud that bank. See United States v. Christo, 614 F.2d 486, 490 (5th Cir.1980).

Like many banks, the Pacific Coast Bank and the Bank of San Marino, both of which Forde controlled, tried to avoid dishonoring checks written by their officers and certain valued depositors. See Christo, 614 F.2d at 493 (noting that the honoring of insider overdrafts is a general practice in the banking industry). If a check written by Forde on his PCB account was presented to that bank for payment at a time when that account did not contain sufficient funds to cover the check, the bank would inform Forde or Unruh and allow one of them to deposit a check on its face sufficient to cover the shortfall.

Forde argues that he was taking legitimate advantage of an open and accepted policy. If the bank's practice of honoring insider overdrafts was a service it provided, in the exercise of its business judgment, as an accommodation to its officers and special customers, it was supplemental compensation to the officers. And, Forde argues, even if his extensive use of the "no-bounce" policy exceeded the bank's consent, and so injured the bank, he did not violate Sec. 656 because he did not intend to harm or defraud the bank. In support of this argument, Forde points out that he did not attempt to conceal his activities from the banks involved. He controlled both banks.

The prosecution contends that Forde and Unruh's pattern of activities was proof of criminal intent. On 39 of the 56 days analyzed, the effective net balance in Forde's various checking accounts was negative, in an amount averaging $64,000. Forde was thus able to use for his own purposes an average of $64,000 of a bank's money without having to apply for a loan, provide security, or pay interest. Forde says this is a fringe benefit of owning a bank and therefore its enjoyment is not a felony.

Forde relies on Christo, which reversed a conviction for violating Sec. 656 and stated, "[T]he prosecution does not cite, nor is this Court aware of, even one case upholding a conviction for willful misapplication involving unconcealed checking account overdrafting by a bank officer or employee.... [A] case of insider overdrafting has never been held to constitute willful misapplication." 614 F.2d at 493. In most convictions under Sec. 656 for check-kiting, the defendants either departed from the bank's normal procedures or attempted to conceal their activities from other bank employees. See, e.g., United States v. Landof, 591 F.2d 36 (9th Cir.1978) (cashier's checks issued based on insufficiently funded checks); Benchwick v. United States, 297 F.2d 330 (9th Cir.1961) (checks kept in deferred items account to avoid creating overdrafts).

Christo is weak and ambiguous support for Forde's position. Christo, unlike Forde, was a bank officer taking...