Sunday, September 12, 2010

The Ninth Circuit Rejects Reach of 18 USC 1344 in Case

Guest Blogger - Linda Friedman Ramirez -

The Ninth Circuit rejects reach of 18 USC 1344 to Bank of America’s mortgage subsidiary, Equicredit Corporation, in a case brought prior to the amendment of 18 USC 20.       

USA v Bennett, (9th Cir. 2010) -

Federal law provides that  it is a federal crime knowingly to execute, or attempt to execute, a scheme or artifice “(1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1344. 

According to the Court, the defendant James Bennett operated a sophisticated property flipping scheme in Southern California. He provided cash to straw purchasers, improperly appraised the properties at inflated prices, provided false information about the buyers and falsified documents for closing.  

One of the defendant’s victims was Equicredit, a subsidiary of Bank of America. The Government conceded that in this case, Equicredit did not meet the statutory definition of “Financial institution.”  The definition of “financial institution” was later expanded in May 2009. See Fraud Enforcement and Recovery Act of 2009, Pub.L. No. 111-21, § 2(a)(3) (2009).1

In order to try and save the convictions the Government argued that Bennett fraudulently obtained funds “owned by” a financial institution for purposes of § 1344(2).

The government argued that, as a matter of law, a parent corporation “owns” the assets of its wholly-owned subsidiary, and therefore that Bennett fraudulently obtained assets “owned by” BOA, a financial institution, when he obtained mortgages from Equicredit..

 The Court rejected this argument. ”More than a century of corporate law says otherwise.” The Court reviewed jurisprudence in this area. “As early as 1926, the Supreme Court recognized that “[t]he owner of the shares of stock in a company is not the owner of the corporation’s property.” R.I. Hosp. Trust Co. v. Doughton, 270 U.S. 69, 81 (1926). While the shareholder has a right to share in corporate dividends, “he does not own the corporate property.’”   “Today, it almost goes without saying that a parent corporation does not own the assets of its wholly-owned subsidiary by virtue of that relationship alone.”  The Ninth Circuit thereafter vacated conviction of the relevant counts.


1“Financial institution” now encompasses “a mortgage lending business ... or any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974.” 18 U.S.C.A. § 20(10)  A “mortgage lending business” is in turn defined as “an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.” 18 U.S.C.A. § 27



Fraud, Judicial Opinions, Mortgage Fraud | Permalink

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