A Mortgage Company Not Being a Bank the Sixth Circuit Reverses Bank Fraud Convictions

“In this case the government charged the defendants with the wrong crimes,” begins the Sixth Circuit’s opinion in United States v. Banyan, where it reverses the defendants’ bank fraud convictions. The reason: the government didn’t show the defendants got any money from a bank.

The defendants were a homebuilder and a mortgage broker. The builder fell into financial distress, and the two submitted a number of fraudulent mortgage applications to two different mortgage companies, which were wholly-owned subsidiaries of two different banks, Sun Trust and Fifth Third. After things fell apart, the defendants were charged with bank fraud in violation of 18 U.S.C. § 1344 and conspiracy to commit bank fraud in violation of 18 U.S.C. § 1349. A jury found them guilty; the government did prove the defendants got money by way of fraud.

The problem with the government’s case was that neither of the mortgage companies had deposits that were federally insured, and, therefore, neither was a “financial institution,” which is the type of entity to which sections 1344 and 1349 apply. The court labeled as “nearly frivolous” the government’s argument that the mortgage companies should be considered banks “because each of them is a wholly owned subsidiary of a bank” for two reasons. One being “a basic tenet of American corporate law” that a corporation (the mortgage companies) and their shareholders (the banks) are “distinct entities.” The second reason was Congress' pains to define “precisely” the term “financial institutions” as “institutions that hold federally insured deposits – which the defrauded mortgage companies undisputedly did not.”

The court found no evidence supporting a peek beyond or behind the corporate structure distinguishing the parent banks and their subsidiary mortgage companies. First, “the government offered no evidence that the banks here in fact had ‘some duty’ or power or authority to ‘guide or manage’ the mortgage companies’ funds.” Second, the court rejected the argument that the loss would be ultimately the parent banks, as an “economic” argument inconsistent with statutory text. Third, there was no evidence either of the banks funded any of the loans or that any agent or employee of either considered the fraudulent mortgage applications.