White v. Keely

• Decision Date: 29 February 2016
• Docket Number: No. 15–1922.,15–1922.
• Citation: 814 F.3d 883
• Parties: Christopher Paul WHITE and Reffco II, L.P., Plaintiffs–Appellants, v. George KEELY, Joyce Morris, Tricia Rake, Terry Scott, and Michael Maurer, Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

814 F.3d 883

Christopher Paul WHITE and Reffco II, L.P., Plaintiffs–Appellants,

v.George KEELY, Joyce Morris, Tricia Rake, Terry Scott, and Michael Maurer, Defendants–Appellees.

No. 15–1922.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 6, 2016.

Decided Feb. 29, 2016.

Christopher Hagenow, Attorney, Blackwell, Burke & Ramsey, P.C., Indianapolis, IN, for Plaintiffs–Appellants.

R. Brock Jordan, Attorney, Densborn Blachly LLP, Indianapolis, IN, for Defendants–Appellees.

Before POSNER and WILLIAMS, Circuit Judges, and PALLMEYER, District Judge.^*

PALLMEYER, District Judge.

Plaintiffs-appellants Christopher White and his company Reffco II, L.P. (collectively, "White")¹ filed suit against several current and former officers of the National Bank of Indianapolis ("NBI Employees") pursuant to the Federal Reserve Act, 12 U.S.C. § 503

. That statute establishes civil liability for bank officers and directors who violate certain substantive provisions of the Federal Reserve Act and the False Entry Statute. White's complaint alleges that the NBI Employees violated the False Entry Statute, 18 U.S.C. § 1005

, by falsifying official bank reports in order to cover up unauthorized transfers made from White's business accounts at the National Bank of Indianapolis ("NBI"). White claims these § 1005 violations caused him to suffer harm and that the NBI Employees are liable to him pursuant to 12 U.S.C. § 503. The district court dismissed White's complaint for failure to allege that he relied on the false statements, and White timely appeals that decision. The NBI Employees contend the appeal is frivolous and have asked for an award of sanctions pursuant to Federal Rule of Appellate Procedure 38. Because White has not pleaded that he was harmed as a consequence of the alleged § 1005 violations, we affirm the district court's dismissal of White's complaint. We further agree with defendants-appellees that White's appeal is frivolous, and therefore grant their motion for sanctions.

I

At all relevant times, White was the sole shareholder and president of Reffco II, LLP. White was also a principal of HPT, LLC ("HPT"), a Nevada limited liability company, and a general partner and president of Premier Properties USA, Inc. ("Premier"), an Indiana corporation. White maintained accounts for all three companies at NBI, a member bank of the Federal Deposit Insurance Corporation ("FDIC"). Premier's NBI account had the sole purpose of paying the company's employee payroll; all of Premier's other expenses were paid from Reffco's account at NBI.

In addition to the accounts at NBI, White maintained a checking account for HPT at J.P. Morgan Chase Bank ("Chase Bank"). On January 30, 2008, White signed a check from HPT's account at Chase Bank payable to Premier in the amount of $500,000. Later that day, Premier endorsed the check to Reffco, and White deposited the check into Reffco's account at NBI. NBI credited Reffco's account for this amount.

That same morning, ADP, the payroll provider for Premier, presented NBI with three automated clearinghouse ("ACH") drafts—essentially, checks—totaling $182,897.59, against Premier's payroll account. ADP also sent a "reverse wire demand" to NBI, directing that NBI wire-transfer an additional $237,476.23 from Premier's payroll account. At the time that ADP requested this money, Premier's payroll account had a balance of just $259.39, far less than necessary to cover the ACH drafts or reverse wire demand. NBI employee Loaren Muehl accordingly transferred $425,000 to Premier's payroll account from the Reffco account, which held more than $500,000 as a result of the HPT check deposited earlier that day. NBI then paid $420,373.82 to ADP by withdrawing money from the Premier account.

The HPT check for $500,000 was subsequently returned due to insufficient funds in HPT's account at Chase Bank. Because NBI had already honored the HPT check and used it to pay ADP, the bounced check resulted in an overdraft of Premier's payroll account in excess of $382,000.

There is a bit more to the story than what appears in White's complaint.² First, unable to recover the $382,000 from White, NBI closed all of his accounts and sued White in Indiana state court for check deception, check fraud, criminal mischief, and defrauding a financial institution. See In re White, 444 B.R. 887, 891 (S.D.Ind.Bankr.2010)

. After White failed to respond to NBI's motion for summary judgment, on June 25, 2008, the state court granted summary judgment in favor of NBI. White, 444 B.R. at 891.

Around the same time that the state court entered its judgment, the state filed a criminal action against White, charging White with one count of fraud on a financial institution, one count of check fraud, and one count of theft. See White v. State, No. 49A04–1203–PC–102, 2012 WL 6709644, at *4 (Ind.App.Ct. Dec. 26, 2012)

. On August 18, 2009, a jury convicted White of all three counts. At sentencing, the court "merged"³ the check fraud and theft counts into the fraud on a financial institution count, and sentenced White to one year of home detention and three years' suspended probation. Id. The court also ordered White to pay restitution in the amount of $382,486 to NBI. Id.

White appealed his criminal conviction, asserting that: (1) there was insufficient evidence to support his conviction for fraud on a financial institution, and (2) he received ineffective assistance of counsel. Id. at *1. The Indiana Court of Appeals rejected those arguments, observing:

The evidence presented at trial established that White ordered the preparation of a check for $500,000 from the [HPT] Chase Bank account, which [he] ... knew had a balance of only $1,000.00 at the time of execution of the check.... White was aware that if he did not have the money in his payroll account by 3:30 p.m. that day, his employees would not be paid. Since White had insufficient funds in his accounts to authorize a transfer between accounts to make payroll, he instructed [his business comptroller] to prepare the check written on the Chase bank account.

Morris, NBI's vice-president, authorized the release of funds based upon the representation that a deposit would be made to NBI. White waited until the funds had been released to ADP for payroll through a wire transfer prior to informing [an NBI representative] that the check was not good and would be returned. Based upon this evidence, it is reasonable for a jury to have concluded that White acted in such a manner as to induce NBI to cover his payroll by ordering the preparation and deposit of a check he knew would not be honored.... [and] that White knowingly executed a scheme or artifice to defraud NBI.

Id. at *4–5.

Shortly after entry of the state court civil judgment against White on June 25, 2008, White filed for bankruptcy protection. NBI initiated an adversary proceeding in bankruptcy court, seeking a declaration that the state court civil judgment constituted a "nondischargeable obligation" under §§ 523(a)(2)(A)

and 523(a)(6) of the Bankruptcy Code. White, 444 B.R. at 890. The bankruptcy court granted summary judgment in favor of NBI, holding that White was estopped from re-litigating whether he committed fraud against NBI, and on November 9, 2011, entered judgment in favor of NBI and against White in the amount of $378,486.17.⁴

Id.;White, 2011 WL 5509406, at *8.

Thus, in three legal proceedings, courts have found that White committed fraud. Undeterred by these determinations, White filed this civil complaint on March 26, 2014 against defendants-appellees, alleging violations of 18 U.S.C. § 1005

and 12 U.S.C. § 503. The complaint alleges that on January 30, 2008, NBI transferred $425,000 from the Reffco account to Premier's payroll account, without first obtaining authorization from Reffco or White. White claims that because he did not consent to these transfers, they were unauthorized transfers in violation of § 903 of the Electronic Fund Transfer Act. White further alleges that NBI unilaterally decided to pay the $425,000 to ADP from Premier's payroll account, without consulting White or Premier, before it had knowledge that a $500,000 check would be coming from HPT, leaving Premier's payroll account with a negative balance.⁵ White alleges that NBI official reports relating to these January 30, 2008 transfers omit material information about the timing of NBI's decision to pay ADP and the decision to transfer the $425,000 from the Reffco account to Premier's payroll account, and "give the appearance that it was White who ordered the transfer of the funds," when it was in fact NBI's unilateral decision to do so. These allegedly false reports, moreover, "were done with the intent to deceive other officers of NBI as well as any other person who might be reviewing the records of NBI, ... because to admit that NBI had unilaterally made an unauthorized transfer of funds from one legal entity to another would be a clear violation of the law," White alleges.

According to White, these false reports were then provided to the state prosecutor, who, after receiving them, "prosecuted White for check fraud and other crimes," including "a check kiting scheme." As a consequence of NBI's false reports, White alleges, he "sustained damages in an as yet undetermined amount."

The NBI Employees moved to dismiss White's complaint, arguing that White failed to allege any facts that: (1) he detrimentally relied on NBI's allegedly false reports, or (2) the allegedly false reports proximately caused White's damages. The district court found that White did adequately allege proximate causation, but agreed with defendants that White failed to plead detrimental reliance. The court then granted the motion to dismiss, relying on Brown Leasing Co. v. Cosmopolitan Bancorp, Inc., 42 F.3d 1112, 1116 (7th Cir.1994)

, where we held that a plaintiff must show detrimental reliance in order to establish a violation of the Federal Reserve Act, 12 U.S.C. § 503, and the False Entry Statute, 18...