United States v. Fox Lake State Bank

• Decision Date: 16 April 1965
• Docket Number: No. 61 C 1498.,61 C 1498.
• Citation: 240 F. Supp. 720
• Parties: UNITED STATES of America, Plaintiff, v. FOX LAKE STATE BANK and Donald Adams, Defendants.
• Court: U.S. District Court — Northern District of Illinois

240 F. Supp. 720

UNITED STATES of America, Plaintiff, v. FOX LAKE STATE BANK and Donald Adams, Defendants.

No. 61 C 1498.

United States District Court N. D. Illinois, E. D.

April 16, 1965.

Edward Hanrahan, U. S. Atty., Thomas James, Asst. U. S. Atty., for plaintiff.

Roscoe Nash, Chapman & Cutler, Chicago, Ill., for defendant.

MAROVITZ, District Judge.

Upon consideration of the trial transcript, all briefs filed herein and oral argument, we see the opinion that four thresh-old legal issues remain to be addressed:

There would appear to be four threshold legal issues to be addressed:

1) Are the knowledge and acts of an agent imputable to his principal, when the agent's interests are adverse to those of his principal?

2) Did the actions of defendant Fox Lake State Bank, pursuant to Sec. 201.5 (b) of the FHA Regulations, save the eligibility of the instant notes for insurance?

3) Does the False Claims Act require proof of "intent to defraud" as an element of recovery under Sec. 231, Title 31 U.S.C.?

4) What effect should be given defendant's communications with the FHA?

These questions each demand an answer favorable to the government.

1) It is uncontroverted that the Fox Lake Bank presented claims for payment which certified that the regulations had been complied with. It would seem equally clear from the evidence that such certification was untrue. Whatever the actual knowledge of the bank itself, the evidence demonstrates that an employee and agent of Fox Lake, Donald Adams, was placed in charge of making FHA Title I Loans, and that said Donald Adams approved loans, from the proceeds of which he received $200, knowing (1) that some of the proceeds of said loans were returned to the borrower for purposes other than home improvements, and (2) that the credit applications were false.

Basic agency principles require that a principal be charged with constructive knowledge of all material facts of which its agent receives notice while acting within the scope of his authority. The principal must further be held accountable for the activities of that agent. The theory behind such a principle is sound, for when it is the principal itself which clothes the agent with the authority to conduct such activities, and by such actions places the agent in such a position that others will rely on that apparent authority, such principal must bear the loss occasioned by its failure to more discreetly dispense authority.

As stated by Mr. Justice Stone in Gleason v. Seaboard Air Line Ry. Co., 278 U.S. 349, 356, 357, 49 S.Ct. 161, 162, 163, 73 L.Ed. 415 (1929):

"* * * few doctrines of the law are more firmly established or more in harmony with accepted notions of social policy than that of the liability of the principal without fault of his own."

"Granted the validity and general application of the rule itself, there would seem to be no more reason for creating an exception to it because of the agent's secret purpose to benefit himself by his breach of duty than in any other case where his default is activated by negligence or sinister motives. In either case, the injury to him who deals with the agent, his relationship and that of the principal to the agent's wrongful act, and the economic consequence of it to the principal in the conduct of whose business the wrong was committed, are the same."

Similarly, it has been stated generally by Circuit Judge Learned Hand in Ricketts v. Pennsylvania R. Co. (2d Cir., 1946), 153 F.2d 757, 164 A.L.R. 387:

"* * * it is now settled both in the federal system (citing Gleason, supra) and in England (citations) that an agent does not cease to be acting within the scope of his authority when he is engaged in a fraud on a third person."

"We can see no distinction in principle between that situation and one in which the agent deceives, not the third person, but his principal. The reason in each case for holding the principal is that the third person has no means of knowing that the agent is acting beyond his authority, and it is a matter of entire indifference whether the agent adds deception of his principal to deception of the third person."

See also Standard Surety & Casualty Co. of New York v. Plantsville Natl. Bank (2d Cir., 1946), 158 F.2d 422; New York Cent. & H. R. R. Co. v. United States, 212 U.S. 481, 29 S.Ct. 304, 53 L.Ed. 613 (1909); United States v. Armour & Co. (3rd Cir., 1948), 168 F.2d 342; Oddo v. Interstate Bakeries, Inc. (8th Cir., 1959), 271 F.2d 417.

Following this long line of decisions, it would seem proper to conclude that the fraudulent acts of an agent clothed with authority by a principal are imputable to said principal despite his alleged lack of consent.

2) Section 201.5(b) of the FHA Regulations reads in pertinent part:

"If after the loan is made, an insured who acted in good faith discovers any material misstatements or misuse of the proceeds of the loan by the borrower, dealer, or others, the eligibility of the note for

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