United States v. Kernodle

• Decision Date: 12 October 1973
• Docket Number: No. Cr.-279-G-73 to Cr.-281-G-73.,Cr.-279-G-73 to Cr.-281-G-73.
• Citation: 367 F. Supp. 844
• Court: U.S. District Court — Middle District of North Carolina
• Parties: UNITED STATES of America v. John Robert KERNODLE and Norman Graham Smith. UNITED STATES of America v. John Robert KERNODLE et al. UNITED STATES of America v. Houston P. SHARPE et al.

367 F. Supp. 844

UNITED STATES of America v. John Robert KERNODLE and Norman Graham Smith.

UNITED STATES of America v. John Robert KERNODLE et al.

UNITED STATES of America v. Houston P. SHARPE et al.

Nos. Cr.-279-G-73 to Cr.-281-G-73.

United States District Court, M. D. North Carolina, Greensboro Division.

October 12, 1973.

COPYRIGHT MATERIAL OMITTED

William L. Osteen, U. S. Atty., Greensboro, N. C., for plaintiff.

Jack W. Floyd, Smith, Moore, Smith, Schell & Hunter, Greensboro, N. C., for H. Calloway Pollard, Jr.

John R. Jordan, Jr., Jordan, Morris & Hoke, Raleigh, N. C., and Allen A. Bailey, Charlotte, N. C., for John Robert Kernodle.

Fred Darlington, III, Graham, N. C., for Norman Graham Smith.

David W. Long, Raleigh, N. C., for Marshall Stewart, Jr.

Louis C. Allen, Jr., Allen, Allen & Bateman, Burlington, N. C., for Houston P. Sharpe and Charles M. McMillan.

MEMORANDUM ORDER

HIRAM H. WARD, District Judge.

The three above-entitled cases charge various officers and directors of the North State Bank of Burlington, North Carolina, and defendant McMillan with willfully misapplying bank monies, funds, and credits. Each indictment charges defendants in Count One of their respective indictments with conspiracy. The remaining counts charge a violation of 18 U.S.C. § 656 and 18 U.S. C. § 2. In addition, the indictment in Cr-281-G-73 charges those defendants with making a false financial statement in violation of 18 U.S.C. § 1014. All defendants are charged in each count of their respective indictments.

Prior to arraignment on October 5, 1973, these defendants filed various motions attacking the indictments and requesting severance. The Court initially denied those motions for reasons as set out in this memorandum order.

Due to the similarity of some of the contentions raised in these three cases, the Court has decided to deal with all of the motions in this order. Generally, all defendants attack the sufficiency of both the conspiracy and substantive counts of the indictments. They also challenge the grand jury proceedings which issued the indictments. Some defendants have also moved for a severance.

I Sufficiency of the Indictment Relating to the Counts Charging a Violation of 18 U.S.C. § 656

Each of the indictments charges the defendants with violation of 18 U.S.C. § 656 in that they allegedly willfully misapplied bank funds. In Cr-279-G-73 Counts Two through Eleven contain those charges.¹

In Cr-280-G-73, Counts Two through Nineteen allege violation of 18 U.S.C. § 656. Counts Two through Ten of that indictment charge defendants with causing checks to be paid from an insufficient funds account.² Counts Eleven through Nineteen allege a misapplication by the making of loans.³ In Cr-281-G-73 the allegations as to 18 U.S.C. § 656 appear in Counts Two through Twenty-Four. Counts Two through Twenty-One charge a misapplication by writing checks on an insufficient funds account, using the same format as Counts Two through Ten in Cr-280-G-73 as set out in footnote 2. Counts Twenty-Two through Twenty-Four of Cr-281-G-73 charge misapplications by the making of loans, using the format of Counts Eleven through Nineteen in Cr-280-G-73 as set out in footnote 3.

Defendants contend that the counts charging a misapplication of bank monies, funds, or credits do not conform to the requirements of Rule 7(c), Federal Rules of Criminal Procedure. As to the counts alleging misapplication through the payment of checks drawn on insufficient funds accounts, they claim that the indictment fails to show that the company on whose account the checks were drawn was insolvent and thus unable to repay the bank. They state that the company may have given security or had some arrangement with the bank for repaying the checks. They state that the indictment must show that the company did not have other accounts in the bank which contained funds. They also say that regulations contained in 12 C.F.R. § 7.1161 permits banks to extend credit through use of overdrafts. In regard to the misapplication charges through use of loans, they claim that the indictment must allege that the loans would and could not be repaid. They say that the defendants' interest and purpose in the loans must be more specifically stated and the indictment must detail the defendants' involvement in making the loans. They state that the contention of the indictments that they concealed their purpose and interest in the loans does not cure the defect of insufficiency. To summarize, the defendants claim that in an indictment charging misapplication under 18 U.S.C. § 656, the government must detail the facts behind the charge, give particulars as to the involvement of the defendants and explain why the transaction was illegal. They claim that the three indictments merely allege garden variety banking transactions and that the charges that defendants acted with intent to defraud, to conceal their interest, or to convert bank funds and monies merely states a conclusion but does not inform them of the nature of the charges against them.

In support of their contentions, defendants rely upon United States v. Britton, 107 U.S. 655, 2 S.Ct. 512, 27 L. Ed. 520 (1883), for the proposition that the term `willfully misapplied' has no set meaning and, therefore, the indictments must particularize the means whereby the alleged misapplications were accomplished in order to sufficiently inform them of the charges which they face. In addition, they place heavy reliance upon Johnson v. United States, 95 F.2d 813 (4th Cir. 1938), for their contention that an indictment under 18 U.S.C. § 656 must negate any possibility that the banking transaction might be legitimate or that the monies taken or paid out might be repaid at a future date.

In Johnson v. United States, supra, the court held that an indictment under what is now 18 U.S.C. § 656 did not charge an offense. The indictment charged in the language of the statute and then went on to explain defendant's actions in detail. The indictment charged that defendant took a note from another individual, discounted it, and credited the funds to his personal checking account which had been overdrawn. The court noted that allegations failed to show a fraud on the bank,⁴ or a conversion of bank funds, since the funds were never withdrawn. In effect, the court found that the allegations particularizing the crime merely recounted routine banking transactions.

The Court finds significant differences between the indictments here and those in Johnson v. United States, supra. Here, the counts as to checks drawn on insufficient funds accounts in addition claim that the funds were converted. In Johnson there was no claim that the note was bad or that the defendant converted the funds. In the present indictments the counts relating to the loans also claim that the defendants concealed the purpose of the loans and their interest in them. In Johnson there was no concealment, and in fact there the defendant was quite candid about what he did. The Court also finds significant that here the indictments charge many different misapplications involving large sums of money, whereas in Johnson, the alleged misapplication occurred once, and only involved $600.⁵ The Court finds that the present indictments sufficiently inform defendants of how the alleged misapplication took place and indicate why it was unlawful. The Court cannot read these indictments and come to the conclusion that only an ordinary banking transaction is charged. These indictments allege conversion and concealment as essential ingredients of the transactions.

While the Court holds that the present indictments sufficiently explain the means whereby the misapplications arose, it also holds the indictments sufficient because they follow the language of the statute in charging a crime.⁶ The prevailing view today appears to be that it is sufficient to set out an offense under 18 U.S.C. § 656 (for misapplication) by using the language of the statute, and the omission of detailing the means by which the offense was committed does not make the indictment insufficient. United States v. Archambault, 441 F.2d 281, 283 (10th Cir. 1971), cert. denied, 404 U.S. 843, 92 S.Ct. 140, 30 L. Ed.2d 78 (1971); United States v. Bearden, 423 F.2d 805, 810-811 (5th Cir. 1970), cert. denied, 400 U.S. 836, 91 S. Ct. 73, 27 L.Ed.2d 68 (1970); United States v. Fortunato, 402 F.2d 79, 81-82 (2nd Cir. 1968), cert. denied, 394 U.S. 933, 89 S.Ct. 1205, 22 L.Ed.2d 463 (1969); and see also United States v. Moraites, 456 F.2d 435, 440-441 (3rd Cir. 1972), cert. denied. Those cases either implicitly or explicity hold that the term `willfully misapplied' as used in 18 U.S.C. § 656 is not so vague and indefinite a word so as to necessitate further explanation. (See United States v. Moraites, supra, at 441 n. 9 for citation of authorities that this term as used in 18 U.S.C. § 656 has gained a technical meaning since the decision in United States v. Britton, supra, which was decided in 1883.)

Since the decisions in Britton (1883) and Johnson (1938), Congress has adopted new rules of criminal procedure to replace the old common law rules of pleading. Rule 7(c), Federal Rules of Criminal Procedure, became effective in 1946. As stated in Wright, Federal Practice and Procedure, Vol. 1, § 123 at 219-21 (1969):

Rule 7(c) put an end to "the rules of technical and formalized pleading which had characterized an earlier era." The complex requirements of common law criminal pleading and of some state practices are now obsolete. The precision and detail formerly demanded are no longer required, imperfections of form that are not prejudicial are disregarded, and common sense and reason prevail over technicalities.

The fundamental functions and requirements of an indictment have not been modified, and it is still essential that every element of an offense be stated and that the defendant be given fair notice of the charge against him,

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