United States v. Fred M. Kellerman

MURNAGHAN, Circuit Judge,

concurring in part, dissenting in part:

I join the majority’s opinion to the extent of its holding that our consideration of the *286 government’s appeal does not offend the double jeopardy clause.

As to the merits of the appeal, however, I dissent. It is worth recalling that the trial court found that Kellerman intended to defraud the Bank, 1 and also that Keller-man insisted and the Board of Directors believed that the check was good, and represented valid funds of the bank.

The majority nonetheless concludes that “[bjecause the Bank was not a holder in due course, the check was worthless paper” to the Bank. At 285. It therefore reasons that the check was not monies or funds of the Bank, and holds that Keller-man could not be convicted of violating the portion of 18 U.S.C. § 656 under which he was indicted.

There is, I submit, an unjustified leap to the conclusion that the government’s failure to prove that the Bank was a holder in due course rendered the paper worthless to the bank. I believe instead that the government established that the Bank was a holder, which is sufficient for the government’s purposes here, and that it belies the fundamental doctrines of the law of negotiable instruments to conclude that a check, whether or not it is held in due course, is by definition worthless paper to a holder of that check.

As the Uniform Commercial Code, as adopted by Virginia, makes clear, one may be a holder without being a holder in due course. Va.Code § 8.1-201(20) defines a “holder” as one “who is in possession of a document of title or an instrument or an investment security drawn, issued or endorsed to him or his order or to bearer in blank.” Va.Code § 8.3-302(1) then defines certain holders as holders in due course. 2 The fatal error of the majority is to assume that an instrument can only be held in due course. The sections of the. Code discussed above,, however, state unequivocably that an instrument can be held notwithstanding the existence of potential defenses, which may or may not prevail.

For the purposes of Kellerman’s case, the only impediment to a conclusion that the Bank was a holder concerned the proof at trial as to whether the Bank was a payee of the check. Since the check had mysteriously disappeared by the time of trial, the government’s proof at trial as to the payee depended on the language of the “escrow letter,” which stated that the check was “payable to Southwest Virginia National Bank escrow for [Cowan].” 3

*287 Appellees seek to demonstrate that the language in the “escrow letter” is so ambiguous, that the letter does not constitute proof that the Bank was the payee of the check. To illustrate its point, Appellees list six possible ways the check could have been made out based on the escrow letter:

(1) to “Southwest Virginia National Bank Escrow for Cowan Mining”;

(2) to “Southwest Virginia National Bank, Escrow Agent for Cowan Mining”;

(8) to “Southest Virginia National Bank” with the notation, “for Cowan Mining Escrow Account”;

(4) to “Southwest Virginia National Bank and Cowan Mining”;

(5) to “Cowan Mining Escrow Account”;

(6) to “Cowan Mining” with the notation, “for deposit in Southwest Virginia National Bank Escrow Account.”

Based on the language of the escrow letter, it is patently indefensible to argue that the Fifth and Sixth choices are possibilities. No reasonable person would infer that a check made out solely to “Cowan Mining Escrow Account” or “Cowan Mining” would be referred to as a check payable to Southwest Virginia National Bank. 4

We are therefore left with the first four choices. While a case for selecting any of those four is not implausible, it is not fatal to the government’s case that the ambiguity remains unclarified. The choices share the common feature that in each instance the Bank is a holder. 5

The government, therefore, did not prove the exact language employed on the check. It did, however, prove that the Bank was a holder. 6 The only remaining inquiry is whether despite Bank’s status as a holder, the check was somehow worthless to the Bank.

At the outset of the inquiry is the rather obvious general proposition that the very status of a holder confers upon a party rights and benefits not available to one who is not a holder. 7 For example, Va.Code § 8.3-307 8 confers procedural rights in establishing the burdens on the parties in an action to enforce the obligation.

*288 Since, in general, an instrument is not inherently worthless to its holder, there only remains the specific question of whether this particular instrument was worthless to its holder. The only argument offered by the trial court on this point is that the N-S Corporation lacked sufficient funds to cover the check. In the same opinion, however, the court provided the appropriate rejoinder:

The mere fact that there were not funds to cover the check does not necessarily mean that the check was valueless. Had the bank attempted to cash the check and discovered that it was drawn on insufficient funds, perhaps it could have obtained a judgment on the underlying obligation, and perhaps the judgment could have been collected.

Mem.Op. p. 6.

It is of utmost importance to distinguish between a mere insufficiency of funds and insolvency. 9 The trial court relied heavily on a proposition from the seminal case of Batchelor v. United States, 156 U.S. 426 , 15 S.Ct. 446 , 39 L.Ed. 478 (1895) that the misapplication of worthless notes cannot constitute a misapplication of bank funds. Yet Batchelor concerned a bank president’s scheme of cancelling the indebtedness of an insolvent debtor of the bank. Here, there was no allegation that the N-S Corporation was insolvent, but merely that there were insufficient funds to cover the check. Furthermore, the evidence indicated that both the Board of Directors and Kellerman believed that there were sufficient funds to cover the check.

The district court was in error, therefore, when it concluded that the check was worthless to the Bank at the time Keller-man returned the check to Childers without the Board’s authorization or knowledge. The check provided the Bank with all the rights and privileges conferred upon a holder. The Bank was free to demand fulfillment of the underlying obligation, or, in the stead of a refusal by N-S Corporation to perform, the Bank was free to initiate proceedings for a favorable judgment based on the check. 10

This view of the evidence leads to the conclusion that Kellerman’s conviction should not have been disturbed. The district court found that Kellerman intended to defraud the Bank. Both the Board of Directors and Kellerman insisted that the check was good and valid funds of the Bank. The foregoing arguments have demonstrated that the check was not worthless to the bank. 11

*289 Accordingly, I would reverse the judgment of acquittal and reinstate Kellerman’s conviction.

. In its memorandum on the grant of defendant’s motion for acquittal, the trial court stated:

The court adheres to its original opinion that the entire events surrounding the matter of the check and the granting of the loan to Cowan Mining Company showed an intention upon the part of the defendant to deceive the members of the Board of Directors. The court is of the opinion that the defendant Kellerman misrepresented to the Board of Directors the situation regarding the lease of Cowan Mining Company and that it was assigned to the Bank as security for the loan; the defendant misrepresented to the Bank that he had a good check as security; the defendant misrepresented to the bank the situation insofar as whether or not Childers was going to buy out Cowan and under what circumstances; there was a misrepresentation about the terms of the socalled [sic] "escrow” letter; there was a misrepresentation or a failure to tell the members of the Board of Directors about returning the check and in concealing that the check had been returned and there was misrepresentation to the Board about the production which was going on at the Cowan Mining Company and there were misleading status reports given to the Board from time to time over a period of approximately a year. Therefore, the court is of the opinion that the evidence is sufficient in this case overall to show an intent to defraud on the part of the defendant.

Mem.Op., n. 1.

. § 8.3-302. Holder in due course. — (1) A holder in due course is a holder who takes the instrument

(a) for value; and

(b) in good faith; and

(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

. At trial, no witness refuted the contents of the escrow letter when the letter was introduced as an exhibit. Walter Childers acknowledged that he had written the letter and that he delivered the check and the letter to Jim Dudley, an attorney for the Bank. Kellerman himself acknowledged that he had received the check; he stated "we had a $165,000 check" which "I was to hold.”

. I do not question Appellee’s claim that in addition to the six proffered choices, more possibilities "could be imagined.” Assuming, however, that Appellee has provided us with his best offerings, it seems clear that "imaginable” diverges from "plausible” in this context.

. As noted above, a holder is one "who is in possession of a document of title or an instrument or an investment security drawn, issued or indorsed to him or to his order or to bearer in blank.” Va.Code § 8.1-201(20). Each of the four choices fits the definition of a holder, since in each case the Bank is in possession of an instrument issued to it.

. Our standard of review is that the judge’s initial ruling finding Kellerman guilty, which acts like a jury verdict in a bench trial, "must be sustained if there is substantial evidence, taking the view most favorable to the Government, to support it.” United States v. Steed, 674 F.2d 284, 286 (4th Cir.1982) (en banc), cert. denied, 459 U.S. 829 , 103 S.Ct. 67 , 74 L.Ed.2d 68 (1982), quoting Glasser v. United States, 315 U.S. 60, 80 , 62 S.Ct. 457, 469 , 86 L.Ed. 680 (1942).

. A negotiable instrument is the property of the holder. It is a mercantile specialty which embodies rights against other parties, and a thing of value.

Va.Code § 8.3-419, Official Comments, Note 2. Cf. Va.Code § 8.3-102(1)(e), which defines an "instrument” as a "negotiable instrument,” and Va.Code § 8.1-201(20), which defines a holder as "a person who is in possession of ... an instrument____”

. § 8.3-307. Burden of establishing signatures, defenses and due course. — (1) Unless specifically denied in the pleadings each signature on an instrument is admitted. When the effectiveness of a signature is put in issue

(a) the burden of establishing it is on the party claiming under the signature; but

(b) the signature is presumed to be genuine or authorized except where the action is to enforce the obligation of a purported signer who has died or become incompetent before proof is required.

(2) When signatures are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense.

(3) After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course. (Code 1950, § 6-411; 1964, c. 219).

. A fortiori, we must distinguish a case in which the debtor has filed for bankruptcy. In such a case, the filing of a bankruptcy petition "effectively stops any further action in proceedings involving the debtor pending in other courts.” In re Critical Fork Coal Corporation, 18 B.R. 425 (Bkrtcy.W.D.Va.1982). Cf. Mueller v. Nugent, 184 U.S. 1, 15 , 22 S.Ct. 269, 275 , 46 L.Ed. 405 (1902). Absent such a filing, therefore, the creditor may seek to obtain a judgment. Furthermore, even in the case of bankruptcy of the payor, a check would in many cases still have value since its holder would ultimately share in a pro rata distribution to general creditors.

. For these reasons, it is irrelevant that the N-S Corporation possessed potential defenses to the action. The question here is an open one as to whether the status of the Bank rose to the level of holder in due course. That depends on what would be the outcome in civil litigation between payee (the Bank) and payor (N-S Corporation).

Nonetheless, a proven status of valueless has not been established. First, the existence of a holder's rights, .not all of which operate solely with respect to the maker of the instrument, are enough to refute a claim of worthlessness. Second, those potential defenses are just that: potential defenses. As against the N-S Corporation, the Bank possessed at least a colorable claim, and a prima facie case, which at the very least had settlement value. Even a partial defense would not strip the check of value as to the residue.

While uncertainty continues, the check has value. Virtually every lawsuit, before it has concluded, has some value in the plaintiff's hands up until a final and complete judgment in the defendant's favor has been rendered. At the time Kellerman returned the check, there remained the possibility that the N-S Corporation might fail to assert its defenses at a later date, or that the trier of fact might remain unpersuaded by those defenses. The Bank would thus be entitled to a judgment as well.

. Any claim that the loss to the Bank was merely temporary, of course, affords no assistance to the defendant.

*289 [Ultimate financial loss to the bank is not required for, nor will subsequent restitution exonerate from, a finding of statutory misapplication. The gist of this critical element of the offense is the withdrawal of funds, however temporarily, from the possession, control, or use of the bank.

United States v. Duncan, 598 F.2d 839, 860 (4th Cir.1979), cert. denied, 444 U.S. 871 , 100 S.Ct. 148 , 62 L.Ed.2d 96 (1979).