United States v. Sher

• Decision Date: 09 January 1981
• Docket Number: Crim. A. No. 80-147.
• Citation: 505 F. Supp. 858
• Parties: UNITED STATES of America v. Michael SHER.
• Court: U.S. District Court — Eastern District of Pennsylvania

505 F. Supp. 858

UNITED STATES of America v. Michael SHER.

Crim. A. No. 80-147.

United States District Court, W. D. Pennsylvania.

January 9, 1981.

Edward J. Schwabenland, Asst. U. S. Atty., Pittsburgh, Pa., for plaintiff.

Michael W. Zurat, Pittsburgh, Pa., for defendant.

MEMORANDUM

McCUNE, District Judge.

We consider defendant's motion to dismiss the indictment against him, on the ground that the statute which he is accused of violating does not proscribe his alleged conduct. Briefs have been filed and the motion is ready for adjudication.

The defendant was charged in a 49-count indictment with participating in a check-kiting scheme which defrauded a bank insured by the Federal Deposit Insurance Corporation of over $1,855,000.00, in violation of 18 U.S.C. §§ 1014 and 2. The Government alleges that on or about August 29, 1978, the defendant opened a checking account at Equibank in Pittsburgh in the name of M.S. Insurance Replacement, Inc., which defendant owned and operated. A few months later, defendant expanded his business to the Philadelphia area, and on January 4, 1979, opened a checking account at Philadelphia National Bank, also in the name of M.S. Insurance Replacement, Inc. Both banks granted defendant immediate credit on all deposits made.

The indictment charges that the check kiting scheme operated between January 11, 1979, and April 12, 1979. The Government alleges that defendant took checks payable to M.S. Insurance Replacement, Inc., drawn on the account of M.S. Insurance Replacement, Inc., at the Philadelphia bank, and deposited them in the Equibank office in Pittsburgh. At about the same time, defendant had checks for the same amount, drawn on his corporation's account in Pittsburgh and made payable to his corporation, deposited in the Philadelphia bank. The Government says that defendant obtained immediate credit for the amounts of the checks even though there were insufficient funds in the checking accounts. By covering worthless checks written on one account with worthless checks written on another account and taking advantage of the time lag necessary for clearance, see United States v. Lea, 618 F.2d 426, 430 n.4 (7th Cir. 1980), North Carolina National Bank v. South Carolina National Bank, 449 F.Supp. 616, 617 n.3 (D.S.C.1976), the Government alleges that defendant was able to keep the kite aloft.

The defendant has filed a motion to dismiss the indictment. He contends that § 1014 of Title 18 of the United States Code does not include check-kiting within its proscription. He therefore argues that he cannot be prosecuted under § 1014.

Section 1014 reads, in relevant part, as follows:

"Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of ... any bank the deposits of which are insured by the Federal Deposit Insurance Corporation, ... upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, ... shall be fined not more than $5000 or imprisoned not more than two years, or both."¹

This section is a consolidation of 13 predecessor sections containing similar provisions relating to false statements and representations or overvaluations of security. The terms "application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan" were added to represent a composite of the terms and transactions mentioned in the 13 predecessor sections.

Section 1014 does not explicitly mention checks, and there is nothing in the brief legislative history of the statute indicating whether a check-kiting scheme is contemplated by its terms. Two opinions address this question, but they contradict one another.

United States v. Edwards, 455 F.Supp. 1354 (M.D.Pa.1978), holds that § 1014 does not proscribe check-kiting. The district court based its holding on the fact that presenting a check is not a "statement" which can be rendered false by the fact that the drawer of the check does not possess sufficient funds to cover it. Id. at 1356. Rather, it is an order to the drawee bank to pay the check according to its terms, with the drawer promising to pay a sum certain. If a check is no more than a promise to pay, the court observed, then it can be neither true nor false. Id. at 1356-57.

Second, the court in Edwards doubted that presenting a check for deposit is an "application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan." It did not believe that the corporations and entities originally enumerated in § 1014 ever engaged in the sort of banking practices performed by Federal Savings and Loan Insurance Corporation and Federal Deposit Insurance Corporation banks, which were added to § 1014 in 1970. Id. at 1357-58. The court also questioned whether the withdrawal of funds from a checking account prior to the payment of deposited checks constituted an "advance" of money. Id. at 1358.

Finally, the court believed that § 1014 was ambiguous with respect to whether it included check-kiting schemes, absent any evidence of statements made by a defendant concerning his ability to cover the checks. Id. at 1356. The court said that if Congress had intended to outlaw the passing of worthless checks, it could easily have done so in terms more certain than those found in § 1014. Id. at 1357.

The second case, United States v. Payne, 602 F.2d 1215 (5th Cir. 1979), cert. denied, 445 U.S. 903, 100 S.Ct. 1079, 63 L.Ed.2d 319 (1980), however, holds that § 1014 does encompass check-kiting. In so holding, the Court of Appeals for the Fifth Circuit criticized the reasoning of Edwards. It disagreed with the Edwards court's premise that the presentation of a check is not a statement, but rather an order to pay, finding this to be an oversimplified view of the transaction. In actuality, the Court of Appeals said, a check is an implied representation by the drawer that he has on deposit with the drawee bank, funds equivalent to the face amount of the check. Id. at 1218, quoting F. Whitney, The Law of Modern Commercial Practices § 341 (1965). From this, it followed that "the necessary implications which a check carries ... are the legal equivalent of a representation or statement as to the value of the checks." Id. at 1218.

The Court of Appeals cleared other statutory language hurdles which the Edwards court said precluded prosecution for check-kiting under § 1014. It looked to the Uniform Commercial Code and other federal criminal statutes and concluded that a check is a "security" within the meaning of § 1014. Id. Hence, the presentation of a worthless check could stand for the overvaluation of a security as well. Furthermore, the court found this presentation to be "for the purpose of influencing in any way the action of ... any bank ... upon any advance ... or loan." It cited many cases characterizing a bank's act in extending credit to a customer before the check clears, or permitting him to draw against an uncollected item, as a transaction in the nature of a loan. This, the court said, is the essence of check-kiting. Id. Therefore, § 1014 could properly be interpreted to cover check-kiting.

The Fifth Circuit also found support for its holding in the legislative history. Section 1014, as mentioned earlier, represents a consolidation of 13 other sections with similar provisions, which occurred in 1948. The court observed that most of these sections involved federal agencies making loans for farming or home construction, but two did not: those protecting Federal Reserve banks and the Reconstruction Finance Corporation. Id. at 1219. From 1949 through 1970, other entities were added, the most notable being the Federal Deposit Insurance Corporation, FDIC-insured banks, the Federal Savings and Loan Insurance Corporation, FSLIC-insured institutions, members of the Home Loan Bank System, and the Administrator for the National Credit Union Administration.

The court noted that

"thus, by 1970 the codified section was not devoted exclusively to criminal coverage for false applications in the farming and home construction field....

This

...