United States v. Dilliard, 46.

• Decision Date: 21 November 1938
• Docket Number: No. 46.,46.
• Citation: 101 F.2d 829
• Parties: UNITED STATES v. DILLIARD et al.
• Court: U.S. Court of Appeals — Second Circuit

101 F.2d 829 (1938)

UNITED STATES v. DILLIARD et al.

No. 46.

Circuit Court of Appeals, Second Circuit.

November 21, 1938.

John J. Burns, of New York City (Samuel Becker and Nathan David, of counsel) for Dilliard.

Edmund J. Donegan, of New York City, pro se.

Miller, Owen, Otis & Bailly (Nathan L. Miller, of New York City, Edward J. Bennett, and Nathan Probst, Jr., of counsel), for Koven.

Walter Brower, Special Assistant to the Attorney General, of New York City (Bernard Tompkins, of New York City, and C. Agnes McHugh, and Charles J. Wagner, Sp. Attys., Department of Justice, of counsel), for the United States.

Before L. HAND, SWAN, and AUGUSTUS, N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

The defendants appeal from judgments of conviction under an indictment charging them among other counts with a conspiracy to use the mails to defraud: they complain (1) that the evidence was not sufficient to sustain the verdict; (2) that they were unfairly denied a bill of particulars in advance of the trial; (3) that the judge erred in various ways in his summing up to the jury, and in the admission of evidence; (4) that their cross-examination was improperly curtailed; (5) that the court should have granted a mistrial, and (6) that the prosecution's speeches to the jury were unfair. The first ground requires a statement of the evidence. Dilliard was president of the State Title & Mortgage Co. and its chief executive; Koven was a vice-president, concerned chiefly with the appraisal of real property; Donegan was also a vice-president, in charge of advertisements and publicity, and later of the "default department". A fourth defendant, one Skiffington, was acquitted. The company was organized in the year 1927 for the purpose of selling guaranteed mortgages: sometimes it sold these outright; sometimes it sold "participation certificates" in a single mortgage, which it held in trust for certificate holders; sometimes it set up as security a pool of mortgages, which it either assigned to a trustee, or itself held in trust. On June 1, 1929, it was merged with two other companies doing a similar business, and took over their assets and obligations; its capital was then $8,300,000. It continued in business until March 3d, 1933, when it suspended operation, and it was taken over by the state insurance department in the summer of that year. The chief irregularities relied upon by the prosecution were in the management of the mortgage pools, the appraisals of the real property, and the accumulation of back taxes and interest. With these were coupled false entries in two financial statements issued at the end of 1931 and 1932. The indictment contained, besides the conspiracy count, a number of others, each laying against all the defendants severally, the posting of a letter in pursuance of a scheme to defraud. § 338, Title 18, U.S.Code, 18 U.S.C.A. § 338.

The important series of pool certificates for the purposes of this appeal were called "C", "E", "H" and "K". All these required the mortgages to be first liens upon the property and of an appraised value of one and two-thirds, or one and a half, times the advances against them: the company in all cases reserved power to withdraw any mortgage and substitute others in its place. On July 24, 1931, the certificates in Series "C" amounting to about $1,500,000, were secured by 131 mortgages, assigned to a trustee. (The security for this series was required to be one and two-thirds of the debt). The company wished to sell or pledge these separately, as they were readily disposable and it was in need of funds; and, acting under the power we have just mentioned, it withdrew them all from the trust and substituted a single mortgage upon an annex to the Hotel Victoria in New York City. The face of the substituted mortgage was $1,473,000, which we assume was equal to the certificates outstanding; and the trust deed did not in terms forbid the substitution of a single mortgage for a pool, though some of the pamphlets and leaflets issued by the company had spoken of the added security given to a pool series by the diversity of its security. This Victoria mortgage had originally been a building loan, and had then been refunded into a $1,500,000 mortgage, with an amortization provision for payments at $3,000 a month. It had been reduced by $27,000 through such payments, but three of these were already in default on July 24, 1931, though one was later paid; and there were $19,000 of unpaid taxes upon it, which of course were prior to the mortgage. Moreover, the company had tried unsuccessfully to collect it, and had indeed begun the foreclosure of a junior mortgage which it also owned. When the loan was first made in 1929 Koven had appraised the property for $2,250,000; at the time of the substitution he appraised it at $2,500,000 and the bona fides of this valuation was the subject of sharp controversy at the trial. The prosecution's witnesses went as low as $1,750,000, and on the company's own books the original figure of $2,250,000 continued to appear for the years 1932 and 1933. At some time, not definitely fixed, Koven had learned of an appraisal of Cruikshank & Company, a well known firm, as of July, 1930, for $1,925,000 and he had noted it upon his own appraisal. The prosecution's theory was that he had dishonestly raised his original appraisal of $2,250,000, so as to give the property the necessary equity for a loan of $1,500,000. After the substitution, more than $300,000 of Series "C" certificates were either renewed by holders after they became due, or "reinvested", which meant paid in part, and continued for the balance. Moreover by the end of March, 1933, about $560,000 of Series "C" certificates had been transferred to Series "E" as part of its collateral.

The company itself was the trustee for Series "E", of which there were more than $2,000,000 outstanding at the end of 1931. Between April 30, and July 31, 1932 the collateral behind this series was as follows: about $100,000 participation certificates in single mortgages; about $540,000 in equities behind separate first mortgages, themselves pledged as collateral for bank loans; $1,500,000 in equities behind mortgages pledged as collateral for a loan of $5,000,000 by the Reconstruction Finance Corporation; about $540,000 in "Carlton Notes", so-called. In July, 1932, on demand of the Insurance Department of New York and the Reconstruction Finance Corporation, the company took out the equities — which were wholly unauthorized — and substituted mortgages which, together with certificates from other series, varied between about $1,200,000 and $1,400,000 until the company stopped business; but the "Carlton Notes" always remained in the pool and without them the collateral never amounted to $1,500,000. These notes were obligations of the Carlton Land Sales Company, secured by purchase money mortgages upon unimproved land in the East Bronx, of whose value there is no evidence on June 30, 1931, when they were substituted in Series "E" for mortgages withdrawn. A letter of Donegan's on June 22, 1932, declared that at that time those of the lots which were left were worth about $455,000, and those sold were worth $321,500. These last had never been released though there were negotiations in progress which resulted in releases for less than that amount. We shall however assume that the total was then about $776,500, from which must be deducted however tax encumbrances of $100,000. This left an equity of $676,500 to which we may add for reasons not necessary to state $34,000, making $710,000 in all. This was enough to secure only $425,000 of the $531,000 outstanding notes and even then only as junior to the tax liens. All this property was, moreover, unimproved as we have said.

Series "H" and "K" were much smaller than "C" and "E": about $500,000 certificates had been issued in "H", and $460,000 in "K". The objection to the security for these was that in many instances the original mortgage pledged had been foreclosed by one or two or three dummy companies which bought in the property at sale and executed new mortgages upon it. Sometimes the old appraisal was used; sometimes Koven would make a new appraisal, the bona fides of which the prosecution challenged; sometimes the property was again appraised shortly after his appraisal at a much lower figure; sometimes the appraisal itself bore a code reference which signified a lower value. These last were explained as appraisals at forced sale, "hammer values", and not as intended to represent the real value; but the jury was justified in reading them otherwise. In some instances the past due interest and costs of foreclosure were added to the mortgage, though it was well known in 1932 that the general trend of realty values was downward. When these properties were remortgaged the dummy executed the bond; it had no assets and the bond was worthless, though the company had at times represented the mortgagor's bond as a substantial part of the security. Series "E" as well as "H" and "K" contained some of these mortgages.

As we have said, the company repeatedly asserted and spread broadcast that all the realty mortgages were first liens. This was not true. Taxes and interest were allowed to fall into arrears in substantial quantity. The mortgage securing Series "C" was, as we have said, already in default when substituted, and further taxes fell in arrears during 1931; and although these were secured by the delivery of a cheque to the trustee in July, 1932, new taxes again accrued which were not so defrayed. On December 31, 1932, there were arrears of taxes and interest of more than one year's standing upon nearly 70% of the mortgages in Series "E"; upon about 29% of those in Series "F"; upon 25% in Series "H" and about upon 20% in Series "K". The defendants argue that the sum of these was very small, compared with the total value of the collateral itself, but that misses the point....