Amicus Curiae Brief — Bates v. United States

No. 96-7185

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

GARRIT BATES,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF OF AMICUS CURIAE

THE NATIONAL ASSOCIATION OF CRIMINAL DEFENSE

LAWYERS IN SUPPORT OF PETITIONER

ELLEN YANKIVER SUNI LisA B. KEMLER

Professor of Law (Counsel of Record)

University of Missouri- ZWERLING & KEMLER, P.C.

Kansas City School of Law 108 N. Alfred St.

5100 Rockhill Road P.O. Box 20900

Kansas City, MO 64110 Alexandria, VA 22313

(816) 235-2372 (703) 684-8000

W. BRIAN GADDY Counsel for Amicus Curiae

WYRSCH HOBBS MIRAKIAN National Association of

& Lge, P.C. Criminal Defense Lawyers

1101 Walnut St. 13th FI.

Kansas City, MO 64106

$16) 221-0080

4 ee

i

QUESTION PRESENTED

DID THE INDICTMENT IN THIS CASE PROPERLY

CHARGE A WILLFUL MISAPPLICATION OF FUNDS IN

VIOLATION OF 20 U.S.C. § 1097(a) WHERE IT FAILED

TO ALLEGE THE ESSENTIAL ELEMENT OF INTENT TO

DEFRAUD?

ABLE OF CONTENTS

: TABLE OF AUTHORITIES

QUESTION PRESENTED ......---- +2050 se500 000

TABLE OF AUTHORITIES .........-+5::s000000° iii FEDERAL CASES

INTEREST OF AMICUS CURIAE ......-+++++*+0**° 1 Albernaz v. United States,

a a ne

SUMMARY OF ARGUMENT .........5555s5508 55

Cannon v. University of Chicago,

ARGUMENT: a

ICTMENT CASE PROPERLY

Coe e eee a ee APPLICATION OF FUNDS IN Goodyear Atomic Corp. v. Miller,

VIOLATION OF 20 U.S.C. § 1097(2) IN THAT IT FAILED EE Ee a a

TO ALLEGE THE ESSENTIAL OF INTENT TO i

DEFRAUD. ......cccccccecceecseseneceeeeeseees Liparota v. United S

sAS SETTLED ie euee 10, 11

WHERE, HERE, A TERM

MEANING, CONGRESS IS PRESUMED TO ADOPT betinatetialt

THAT MEANING WHEN IT USES THE TERM: - SINE F350. dvi Jedeleveewwes 9, 10

TO Seals v. United States,

221 F.2d 243 (8th Cir. 1955)

United States v. Britton,

IO,

c.

United States v. Christo,

Y 614 F.2d 486 (Sth Cir. 1980) ................ 11, 12

MISSTEPS. ee cedeeeseeeeesesesoeeovoores 10 United States Vv. Garcia,

3 751 F.2d 1033 (9th Cir. 1985) ..................

CONCLUSION ......---c cece eereeeereereteeees

United States v. Kammer,

1 F.3d 1161 (11th Cir. 1993)

iv

United States v. Logsdon,

132 F. Supp. 3 (W_D. Ky. 1955), affd, 253 F.2d 12

GRRE BE Ba BN bc cc cdcesccccdccesoccccees 7

United States v. Matot,

146 F.2d 197 (2d Cir. 1944)... 0... cee eens s

United States v. Ratzlaf,

SO a vere il

United States v. Schnitzer,

942 F. Supp. 323 (S.D. Tex. 1976) ............. 12

United States v. Vannatia,

189 F. Supp. 937 (D. Haw. 1960) ............... 7

United States v. Wells,

117 S. Ct. 921 (1997), quoting

Nationwide Mutual Insurance Co. v. Darden,

SER ED Nhaee 6.600% 6c ceWee msc ccccc: 5

United States v. X-Citement Video,

Sr eee eee 10

STATE CASES

Louis Pizitz Dry Goods Co. v. Fidelity & Deposit Co. of Ma.,

136 So. 800 (Ala. 1931) .. 2.2... cece e eee ee eeee 9

Maryland Casualty Co. v. Farmers State Bank & Trust Co..,

258 S.W. 584 (Tex. Ct. App. 1924) .............. 9

Roseville Trust Co. v. American Surety Co. of N.Y,

OTST TIT TITT Oe 9

Vv

FEDERAL STATUTES

I 7

| Tae i ii 3, 6,7, 11

Ch. 106, § 55, 13 Stat. 116(1864) ................. 6

ee 1, 2, 5,6,7

Appleman, INSURANCE LAW AND PRACTICE, § 5670 (1981) 8

COUCH ON INSURANCE, § 46:67 (2d ed. 1982) ......... 8

Thomas Morse, Bank Insiders and the Willful Misapplication

Statute: Toward a More Effective Protection

Dealing, 92 Banking L.J. 715, 722 n.19 — = @

No. 96-7185

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

GARRIT BATES,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.

a

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF OF AMICUS CURIAE

THE NATIONAL ASSOCIATION OF CRIMINAL

DEFENSE LAWYERS IN SUPPORT OF PETITIONER

INTEREST OF AMICUS CURIAE'

The National Association of Criminal Defense Lawyers

(“NACDL”) of the District of Columbia is a non-profit

' The parties have consented to the filing of this Brief by the

National Association of Criminal Defense Lawyers. Their letters of consent

have been separately filed with the Clerk of the Court concurrently with the

filing of this Brief.

2

corporation with a membership of more than 8,700 attorneys

and 28,000 affiliate members, including representatives from all

50 states. The American Bar Association recognizes NACDL

as an affiliate organization and awards it full representation in

the House of Delegates.

NACDL was founded in 1958 to promote study and

research in the field of criminal defense law, to disseminate and

advance knowledge of the law in the area of criminal practice;

and to encourage integrity, independence, and expertise of

defense lawyers. Among NACDL’s stated objectives is the

promotion of the proper administration of justice. Thus, the

members of NACDL have a vital interest in insuring that the

integrity of the federal and state systems of criminal justice are

protected.

NACDL’s interests necessarily include cases dealing

with the construction of federal criminal statutes, issues

regarding mens rea, and the effect of these issues on future

prosecutions. Its interests in this case extend to insuring that

the proper scienter requirement in prosecutions pursuant to 20

U.S.C. § 1097(a) is alleged and proved when the government

elects to proceed under that statute.

SUMMARY OF ARGUMENT

NACDL supports the petitioner’s arguments and the

decision of the district court below that dismissed the indictment

for failing to allege intent to defraud as a requisite element of

the offense charged. One of the arguments advanced by the

petitioner in his opening brief is that Congress’s use of the terms

“knowingly” and “willfully” in § 1097 would seemingly require

the greatest degree of mental culpability, which would be intent

to defraud in the context of this particular statute. In addition

to the petitioner’s arguments, NACDL respectfully offers an

3

independent but related reason to show why intent to defraud

is indeed a requisite element of § 1097.

, willful

insurance

in scittion, the intent to defraud element of § 1097 also

awe important purpose of distinguishing

maladministration, accounting errors, or mere technical

For these reasons, intent to defraud is an essential

element of § 1097, and serves the important purpose of

preventing convictions for innocent or unwary conduct. The

4

district court’s determination that the indictment in this matter

fails to allege intent to defraud as a requisite element of the

offense was proper.

5

ARGUMENT

THE INDICTMENT IN THIS CASE DID

NOT PROPERLY CHARGE A WILLFUL

MISAPPLICATION OF FUNDS _IN

VIOLATION OF 20 U.S.C. § 1097(a) IN

THAT IT FAILED TO ALLEGE THE

ESSENTIAL ELEMENT OF INTENT TO

DEFRAUD.

It is well settled that an indictment must allege all

essential elements of the crime charged. Intent to defraud is an

essential element of the offense of willful misapplication, the

offense charged in the instant case. The indictment in this case

wholly failed to allege that Defendant Garrit Bates acted with

intent to defraud. That failure rendered the indictment

insufficient as a matter of law. The district court’s decision to

dismiss the indictment on this ground was proper.

A. WHERE, AS HERE, A TERM HAS SETTLED

MEANING, CONGRESS IS PRESUMED TO

ADOPT THAT MEANING WHEN IT USES

THE TERM.

It is axiomatic that where Congress uses a term that “has

accumulated settled meaning under . . . the common law,” this

Court will “presume that Congress incorporate[d] the common-

law meaning of the term” unless the statute otherwise dictates.

United States v. Wells, 117 S. Ct. 921, 927 (1997), quoting

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992).

In enacting 20 U.S.C. § 1097(a), Congress criminalized the

willful misapplication of higher education assistance funds.

Although Congress did not, in express words, include a

requirement that such misapplication be accompanied by an

intent to defraud, such a requirement is clearly found in the

6

settled meaning of the term “willful misapplication” that is used

in § 1097. Accordingly, this element must be charged, and

failure of the Government to include the “intent to defraud”

element in the indictment in this case mandates reversal.

B. WILLFUL MISAPPLICATION HAS

HISTORICALLY REQUIRED AN INTENT TO

DEFRAUD, WHETHER OR NOT SUCH

INTENT IS EXPRESSLY SPECIFIED ON THE

FACE OF THE STATUTE.

When Congress chose to criminalize willful

misapplication of higher education assistance funds in 20 U.S.C.

§ 1097, it was not writing on a clean slate. Willful

misapplication has been the subject of criminal sanctions since

at least 1864, when the term first appeared in the Act of June 3,

1864 as part of the National Bank Act, which provided criminal

penalties for embezzlement or willful misapplication of banking

association finds. See Ch. 106, § 55, 13 Stat. 116 (1864). See

also Thomas Morse, Bank Insiders and the Willful

Misapplication Statute: Toward a More Effective Protection

from Self Dealing, 92 BANKING L.J. 715, 722 n.19 (1975). At

that time, the statute contained an explicit requirement of an

intent to defraud.

While the presence of such an explicit requirement in the

1864 statute might be viewed as an indication that intent to

defraud is not subsumed or embedded in willful misapplication

itself, any thought along those lines was clearly dispelled by the

revision of the statute in 1948. Pursuant to a major revision of

federal criminal law that year, the statute, previously codified at

12 U.S.C. § 592, was rewritten and moved to its current

location in 18 U.S.C. § 656. At that time, the explicit

requirement of intent to defraud was dropped from the statutory

terms. Any contention that this change in statutory language

7 “i Wi

a

was inadvertent or unintentional is belied by the Revisor’s Not

accompanying the revision, which explicitly indicate the

“revised section, without changing in any way the meaning or

substance of existing law, clarifies, condenses, and combines

related provisions largely rewritten in matters of style.”

eaniniaindioniaisinaieenamiaoens In this

revision, Congress retained the offense of willful misapplication

of bank funds, but removed any explicit reference to intent to

defraud in the text of the statute. Courts interpreting this

Congressional revision shortly after it occurred uniformly

concluded that the Revisor’s Notes meant what they said - - -

that proof of willful misapplication still requires a showing of

intent to defraud, despite the absence of such language in the

statute itself. See, e.g., Seals v. United States, 221 F.2d 243,

245 (8th Cir. 1955); United States v. Vannatia, 189 F. Supp.

937, 939 (D. Haw. 1960). As expressed by the judge in United

States v. Logsdon, 132 F. Supp. 3, 5 (W.D. Ky. 1955), aff'd

253 F.2d 12 (6th Cir. 1958), “the words ‘with intent . . . to

injure or defraud’ were undoubtedly omitted from the revised

section as being redundant. Their omission does not change or

detract from the former meaning of the statute.”

? The Revisor’s Notes indicate that the original section contained

more than 500 words and was “verbose, diffuse, redundant, and complicated.”

The changes were designed to maintain the same meaning while doing away

with excess words. It is clear that “intent to defraud” was viewed as such an

excess.

> See also United States v. Garcia, 751 F.2d 1033, 1036 (9th Cir.

1985), reaching the same conclusion, that willful misapplication requires an

intent to defraud, with regard to a statute that criminalizes a willful

misapplication of CETA funds. The court there stated: “The only reason

Congress could have considered the explicit requirement of a purpose to injure

or defraud redundant was that Congress understood the term ‘willful

misapplication’ to include such an intent by implication.” Jd.

This after-the-fact judicial interpretation is not only

consistent with the contemporaneous Revisor’s Notes, it also

reflects the teaching of one of the best judicial minds of the time

shortly prior to the legislative change. Notable is the opinion of

Judge Learned Hand, writing for the Second Circuit in United

States v. Matot, 146 F.2d 197 (2d Cir. 1944), just four years

before the statutory change from § 592 to § 656. In Matot,

Judge Hand, in commenting on the presence of the “intent to

defraud” language in § 592, stated his belief that “that

construction is unnecessary, for ‘willful misapplication’ of

money presupposes a fraudulent intent... .” Jd. at 198.

Not only do prior and contemporaneous interpretations

of § 656 strongly suggest that intent to defraud is an essential

component of willful misapplication, subsequent judicial

interpretation does so as well. As noted by the author of a

comprehensive article on § 656 written in 1975, five years

before the enactment of the criminal penalties at issue in this

case, “further cases appear to have particularized the intent

contemplated by the term [willful misapplication] so that today

the required willfulness has become exclusively an intent to

injure or defraud .. ..” Morse, 92 BANKING L.J., supra, at 726

and cases cited (footnote omitted).

This consistent interpretation of “willful misapplication”

in criminal statutes to include the element of intent to defraud

mirrors a long line of authority in the area of insurance guaranty

contracts, the other significant area where the term “willful

misapplication” is found. As recognized by both major treatises

in insurance law, it is generally held that willful misapplication

requires that the acts of conversion “be done with a dishonest

or fraudulent intent.” Appleman, INSURANCE LAW AND

PRACTICE, § 5670 (1981); COUCH ON INSURANCE, § 46:67 (2d

ed. 1982). The cases relied on by these treatises to support the

implication of an intent to defraud within the meaning of willful

9

misapplication date from shortly after the turn of the century

through the late 1930's. See, e.g., Louis Pizitz Dry Goods Co.

v. Fidelity & Deposit Co. of Md., 136 So. 800, 801-02 (Ala.

1931); Roseville Trust Co. v. American Sur. Co. of N.Y., 103 A.

182, 183 (N_J. 1918); Maryland Casualty Co. v. Farmers’ State

Bank & Trust Co., 258 S.W. 584, 586 (Tex. Ct. App. 1924).

These cases were presumptively known to Congress at the time

of both its revision of § 656 and its subsequent enactment of

§ 1097. See Goodyear Atomic Corp. v. Miller, 486 U.S. 174,

184-85 (1988); Cannon v. University of Chicago, 441 U.S.

677, 698-99 (1979).

The conclusion is thus inescapable that, in using the term

“willful misapplication” to criminalize improper use of higher

education assistance funds in § 1097, Congress was

misapplication must be accompanied by an intent to defraud. It

is inconceivable that Congress would have used a term with

such a long, consistent history of interpretation unless it

intended that interpretation to be followed with regard to

§ 1097. As this Court said in Morissette v. United States, 342

U.S. 246, 250 (1952):

[W]here Congress borrows terms of

art in which are accumulated the

legal tradition and meaning of

centuries of practice, it presumably

knows and adopts the cluster of

ideas that were attached to each

borrowed word in the body of

learning from which it was taken and

the meaning its use will convey to

the judicial mind unless otherwise

instructed. In such case, absence of

contrary direction may be taken as

10

definitions, not as a departure from

them.

Morissette was decided before the enactment of § 1097, and

Congress is presumed to have been aware of that decision at the

time it enacted this statute. Albernaz v. United States, 450 U.S.

333, 341-42 (1981).

Congress’ use of the term “willful . . . misapplication”

in § 1097 inchides within its clearly understood meaning and

interpretation the requirement of an intent to defraud. Such

intent was not alleged in the indictment in this case.

Accordingly, that indictment was defective and should property

be dismissed.

C. USING THE SETTLED MEANING OF

WILLFUL MISAPPLICATION IN § 1097

SERVES THE IMPORTANT PURPOSE,

FREQUENTLY RECOGNIZED BY

CONGRESS AND THIS COURT, OF

PREVENTING CONVICTION FOR

INNOCENT MISSTEPS.

It is a basic and well accepted principle that “an injury

can amount to a crime only when inflicted by intention.”

Morissette, 342 U.S. at 250. The requirement of mens rea in

criminal statutes serves to assure that a “broad range of

apparently innocent conduct” is not subjected to criminal

sanction. Liparota v. United States, 471 U.S. 419, 426 (1985).

Just as courts will apply a mens rea term where necessary to

ensure the appropriate level of scienter consistent with

ional intent, Morissette, 342 U.S. at 250; United States

v. X-Citement Video, 115 S. Ct. 464, 468 (1994), so too must

scienter requirements be taken seriously where spelled out in the

11

statute itself. This is especially true where statutes such as

§ 1097 are involved. As this Court noted in addressing willful

misapplication under § 656, where maladministration rather than

true misapplication is involved, no criminal sanctions are

appropriate. United States v. Britton, 107 U.S. 655, 666-67

(1883). In statutes where the risk of prosecuting innocent

missteps is great, Liparosa, 471 U.S. at 426; where the conduct

involved is, as here, not so “obviously ‘evil’ or inherently

‘bad,”” United States v. Ratzlaf, 510 U.S. 135, 146 (1994),

where, as here, failure to rigorously apply the stated mental

element can lead to felony sanctions for simple business

misjudgment, courts must take special care to ensure that a

stated mens rea requirement is given full effect.

That concern is particularly acute with regard to § 1097,

as illustrated by both United States v. Kammer, | F.3d 1161

(11th Cir. 1993), and the indictment in this case. In both

Kammer and here, much of what was alleged against the

defendant relates to an alleged failure to adequately comply with

civil regulations. Unless willful misapplication is understood to

require an intent to defraud, there will be substantial risk that

defendants will be criminally sanctioned for mere violations of

technical regulations.

The use by the government of a violation of a civil

regulation to obtain or “bootstrap” a conviction under a criminal

courts of appeals. Most notably, the Fifth Circuit has held that

the introduction of evidence involving a violation of a civil

banking statute in a criminal prosecution under 18 U.S.C. § 656

was wholly improper and impermissibly infected the very

purpose of the criminal trial, which was to determine the

elements of criminal misapplication under § 656. United States

v. Christo, 614 F.2d 486, 492 (Sth Cir. 1980). The Fifth Circuit

noted that evidence of the civil violation improperly shifted the

12

jury’s focus away from the elements of the criminal statute and

may have invited it not only to infer criminal intent, but to

convict the defendant based solely on the violation of civil law.

Id. It is well established that violations of civil regulations alone

cannot amount to a criminal offense. United States v. Schnitzer,

942 F. Supp. 323, 329 (S.D. Tex. 1976).

The grave concerns raised when there is an interplay

between civil regulations and a criminal offense are heightened

if intent to defraud is not a requisite element of the criminal

offense. Without requiring intent to defraud, the chances that

a jury may convict an innocent person for maladministration,

accounting errors, or the mere violation of civil regulations are

enhanced. These concerns are present in this case due to the

fact that the indictment refers to the civil regulations governing

refunds of student loans. The only way to avoid the untoward

result of obtaining a conviction based on a violation of a civil

regulation or for poor business judgment is recognition of the

requirement of intent to defraud within the meaning of willful

misapplication. Intent to defraud serves the purpose of

separating purely innocent conduct, such as maladministration

or the violation of technical civil regulations, from conduct that

is appropriately considered criminal.

13

CONCLUSION

For the foregoing reasons, the decision of the Seventh

Circuit Court of Appeals should be vacated and reversed and

the district court’s decision that dismissed the indictment for

failure to allege a requisite element should be affirmed.

Respectfully submitted,

Lisa KEMLER

(Counsel of Record)

ZWERLING & KEMLER, P.C.

108 N. Alfred St.

P.O. Box 20900

Alexandria, VA 22314

(703) 684-8000

PROFESSOR ELLEN YANKIVER SUNI

University of Missouri- Kansas City

School of Law

$100 Rockhill Rd.

Kansas City, MO 64110

(816) 235-2372

W. BRIAN GADDY

WYRSCH HOBBS MIRAKIAN

& LEE, P.C.

1101 Walnut St., 13th FI.

Kansas City, MO 64106

(816) 221-0080

Counsel for Amicus Curiae

National Association of

Criminal Defense Lawyers

April 24, 1997