Opposition Brief — Castiglia v. United States

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—

Supreme Court, U.S.

FILED

JUN 4 1990

ee. ee Le JR.

In the Supreme Court of the Untks States a

OCTOBER TERM, 1989

PETER J. CASTIGLIA, PETITIONER

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

KENNETH W. STARR

Solicitor General

_ EDWARD S.G. DENNIS, JR.

Assistant Attorney General

SEAN CONNELLY

Attorney

Department of Justice

Washington, D.C. 20530

(202) 514-2217

BEST AVAILABLE COPY

QUESTIONS PRESENTED

1. Whether a bank officer who authorized loans, the

proceeds of which went to the officer rather than to the

nominal borrowers, and who assured the nominal

borrowers that they would not be looked to for

repayment, was validly convicted of willful

misapplication of bank funds under 18 U.S.C. 656.

2. Whether 18 U.S.C. 656 is impermissibly vague.

(I)

TABLE OF CONTENTS

ESERIES Se A ee OO

a cnalenaiibaalanibedl

TABLE OF AUTHORITIES

Cases:

Colautti v. Franklin, 439 U.S. 379 (1979) ..............

Screws v. United States, 325 U.S. 91 (1945)..........

United States v. Britton, 107 U.S. 655 (1882).........

United States v. Cooper, 464 F.2d 648 (10th Cir.

1972), cert. denied, 409 U.S. 1107 (1978)...............

United States v. Docherty, 468 F.2d 989 (2d Cir.

NI Tir Uiiiliel i dRE aa aclicaasdubuceeaaeeabaesimnnnanineninticvdetindvirneceste

United States v. Fortunato, 402 F.2d 79 (2d Cir.

1968), cert. denied, 394 U.S. 933 (1969).................

United States v. Gens, 493 F.2d 216 (1st Cir.

United States v. Kennedy, 564 F.2d 1329 (9th Cir.

1977), cert. denied, 435 U.S. 944 (1978).................

United States v. Krepps, 605 F.2d 101 (3d Cir.

a atnnembones

United States v. Mann, 517 F.2d 259 (5th Cir.

1975), cert. denied, 423 U.S. 1087 (1976)...............

United States v. Shively, 715 F.2d 260 (7th Cir.

1983), cert. denied, 465 U.S. 1007 (1984)...............

United States v. Steffen, 641 F.2d 591 (8th Cir.),

cert. denied, 452 U.S. 943 (1981)...

(IIT)

IV

Cases—Continued:

United States v. Twiford, 600 F.2d 1339 (10th Cir.

GI cninrecctsianiinicameantnnadinniaiemsaliiianinhammuamenanentnes 7

United States v. Woods, 877 F.2d 477 (6th Cir.

SII. cossissibseninsineinvinisticseeainceretetinnseaciommnmmeatiineernnnees 7

Village of Hoffman Estates v. The Flipside,

Hoffman Estates, Inc., 455 U.S. 489 (1982)......... 8

Statutes:

ES I i oiinecincsstcsioninncnicvientesscensisiconenthimanientanencnininne 5,7

Te BB ech ictsincnccinencneveniosenintatenanindenmtaniatonmneiaiien 2

BB GI icrecicstsecsciecncecssisievatonensnninienennessonainenntiess 2,

| 4, 6,

7,8

BE, WI isecerensiccccvctssinsnencsesinctncesditinaniommnennncneiasts 2

Bs I ecsesccnscnescceesinccenincepensiiensienesstnonennenssiincsniin’ 2

In the Supreme Court of the United States

OCTOBER TERM, 1989

NO. 89-1660

PETER J. CASTIGLIA, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

OPINION BELOW

The opinion of the court of appeals, Pet. App. 1a-18a,

is reported at 894 F.2d 533.

JURISDICTION

The judgment of the court of appeals was entered on

January 17, 1990. A petition for rehearing was denied

on March 20, 1990, Pet. App. 19a-20a, and a suggestion

for rehearing en banc was denied on March 23, 1990,

Pet. App. 2la-22a. The petition for a writ of certiorari

(1)

2

was filed on April 20, 1990. The jurisdiction of this

Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

After a jury trial in the United States District Court

for the Western District of New York, petitioner was

convicted on one count of conspiracy to misapply the

funds of a federally insured bank, in violation of 18

U.S.C. 371, and two substantive counts of willfully

misapplying the funds of a federally insured bank, in

violation of 18 U.S.C. 656. Petitioner also was convicted

on four counts of making false entries in bank reports,

in violation of 18 U.S.C. 1005.1 Petitioner was sentenced

to an aggregate term of two years’ imprisonment. The

court of appeals affirmed. Pet. App. la-18a.

1. Petitioner was Vice President and Senior

Commercial Lending Officer at the Bank of New York,

which has its headquarters in Buffalo. Déspite

internal regulations prohibiting petitioner from

making personal or commercial loans to himself

without bank approval, petitioner on behalf of the bank

made two loans to co-defendants Anthony Santiago

and Richard Tocha. The evidence at trial

demonstrated that Santiago and Tocha were nominal

borrowers, and that the loan proceeds actually went to

petitioner and his co-defendant Jack Liffiton.

In September 1981, petitioner arranged a $580,000

loan (less prepaid interest) to Santiago. The proceeds

1 Three co-defendants stood trial with petitioner. Co-

defendant Jack Liffiton was convicted on one count of

conspiracy (18 U.S.C. 371), one count of misapplication of bank

funds (18 U.S.C. 656), and one count of perjury (18 U.S.C. 1623)

arising out of his false grand jury testimony concealing

petitioner’s status as a beneficiary of the loan. Co-defendant

Anthony Santiago likewise was convicted on the conspiracy and

misapplication counts, and was also convicted on a third count

of making false bank entries (18 U.S.C. 1005). Finally, co-

defendant Richard Tocha was acquitted on all counts. The

court of appeals affirmed Liffiton’s and Santiago’s convictions

in the same opinion that disposed of petitioner’s claims.

3

of that loan were immediately transferred to an

attorney escrow account established by petitioner’s

friend Dmitri Tzetzo. Tzetzo in turn directed those .

funds through a series of circuitous transactions to

petitioner, to Geneva Lands (petitioner’s wholly owned

real estate holding company), and to Liffiton.2

Santiago, the nominal borrower, received only about

$3,500 of the proceeds, and he treated petitioner as the

real borrower. For example, Santiago failed to deduct

the substantial prepaid interest on his income tax

return, he did not enter the loan on his books as was

his practice with his own obligations, and he explained

the omission to his accountant as reflecting that

petitioner was responsible for #epayment since the

loan was for petitioner’s benefit. In fact, Santiago did

not repay the loan when it became due in June 1982.

Instead, petitioner arranged for its renewal. Pet. App.

4a-5a; Gov't C.A. Br. 4-9.

Later, when petitioner became aware of a federal

investigation of Geneva Lands, he quickly arranged for

the $580,000 loan to be repaid. Within 48 hours

petitioner convinced Tocha to borrow $400,000. That

$400,000 loan was made to an entity controlled by

Tocha, and the proceeds were used to repay all but

$180,000 of the $580,000 loan. The $180,000 difference

came from Santiago, who paid the money in return for

a demand note signed by petitioner. Pet. App. 5a.

Tocha invoiced petitioner for the interest payments by

adding those charges to bills for construction work that

Tocha performed for petitioner. Tocha also admitted in

an FBI interview (although he recanted at trial) that

he had been assured upon signing the $400,000 bank

note that he would not be called upon to repay the

2 Bank rules also prohibited petitioner from authorizing

more than one million dollars in aggregate unsecured loans to

any one borrower. Liffiton received a total of $188,000 from the

$580,000 loan despite the fact that his unsecured loans at the

bank already exceeded the bank’s million dollar ceiling. Pet.

App. 4a.

4

principal or interest on that loan. Pet. App. 6a; Gov't

C.A. Br. 8-11.

When Santiago’s accountant learned of the original

loan, Santiago said he had borrowed the money for

petitioner, who had handled all the transactions and

was responsible for repayment of the loan. Because the

accountant was concerned about the lack of

documentation on the loan, he obtained a promissory

note from petitioner for $180,000. Later, petitioner

substituted his holding company as the obligor on the

note, giving an explanation to Santiago’s lawyer and

accountant that served to conceal petitioner’s personal

interest in the loan. Pet. App. 5a-6a.

2. The district court instructed the jury that each of

the alleged crimes required proof beyond a reasonable

doubt of specific intent, which the court defined as an

“intentional violation of a known legal duty.” 23 Tr. 30-

31. The court further instructed the jury that “to

misapply a bank’s funds [in violation of 18 U.S.C. 656]

means the unlawful taking or conversion” of bank

funds by an officer for the benefit of himself or another

“done willfully and with a specific intent to injure or to

defraud the banks.” 23 Tr. 43. Finally, the court

explained that if the “loan was made to a person who

[petitioner] expected could and would repay it, there

was no misapplication of the bank’s funds,” 23 Tr. 46,

but that there would be misapplication if petitioner

made the loan to someone he knew did not intend to

repay it regardless of that person’s financial ability to

repay. 23 Tr. 45.

3. The court of appeals affirmed. Pet. App. la-18a.

The court upheld petitioner’s willful misapplication

convictions, because in the court’s view there was

ample evidence that petitioner assured Santiago and

Tocha that they would not be called upon for

repayment and that there had been “a conscious effort

to conceal the sham nature of the loans.” Pet. App. 9a.

In so ruling, the court held that a nominal borrower’s

creditworthiness does not preclude a_ willful

misapplication conviction if the bank officer assures

5

the nominal borrow that he will not be required to

repay the loan. Pet. App. 7a-9a. In the alternative, the

court noted that its own precedent “suggested, and

other Circuits have held squarely, that misapplication

occurs whenever a bank officer knowingly causes a

loan to be made to his own benefit, concealing his

interest from the bank.” Pet. App. 1la n.5.

Judge Winter dissented, citing as his “sole reason”

an “inability to reconcile the present decision” with the .

Second Circuit’s prior decision in United States v.

Docherty, 468 F.2d 989 (1972). Pet. App. 13a. Judge

Winter “confess[ed] some uneasiness with the

Docherty holding,” and indicated he might have agreed

with his panel colleagues “on the merits” had they

overruled that case either en banc or by circulating the

opinion informally to the full court prior to publication.

Pet. App. 17a-18a. Since the majority instead “chose[]

to leave Docherty in place, with the confusion that will

surely follow,” Judge Winter explained that he felt he

had “no choice but to dissent.” Pet. App. 18a.

The panel subsequently denied rehearing. The one-

paragraph per curiam opinion, which was circulated

to all active Second Circuit judges prior to filing, stated

that “[c]ongressional action to restrict the

circumstances under which a bank may make loans to

its officers, see 12 U.S.C. § 375b (1988), has cast

substantial doubt on whether [Docherty] would be

decided the same way today.” Pet. App. 20a.3 The court

further clarified that “[t]o whatever extent language in

Docherty might appear to be in conflict with our

decision in Castiglia, our current views, informed by

Congressional action, control.” Ibid.

3 Apparently as a result of the court’s citation to the 1988

version of the United States Code, petitioner mistakenly asserts

that the enactment of 12 U.S.C. 375b “pest-dates the conduct in

this case by seven years and the indictment by three years.”

Pet. 7 n.*. In fact, Congress enacted the statute in 1978, three

years before the conduct and seven years prior to the return of

the indictment in this case.

6

ARGUMENT

1. Petitioner contends that the courts of appeals are

divided on what conduct constitutes “willful

misapplication” of bank funds in violation of 18 U.S.C.

656. Pet. 8-11. Contrary to that claim, it is clear that

the result reached by the court of appeals in this case

would be approved in all other circuits. Further review

is therefore not warranted.

a. The Second Circuit held that bank funds are

willfully misapplied when the defendant bank officer

secretly receives the loan proceeds and assures the

nominees that they will not be looked to for repayment,

even if the nominal borrowers are creditworthy.

Petitioner claims that United States v. Gens, 493 F.2d

216 (1st Cir. 1974), and United States v. Docherty, 468

F.2d 989 (2d Cir. 1972), support a contrary theory. In

fact, neither case holds that the creditworthiness of a

nominal borrower is an absolute shield to liability

under 18 U.S.C. 656.

In Gens, the First Circuit expressly recognized that

criminal misapplication may occur where “bank

officials assured the named debtor, regardless of his

financial capabilities, that they would look for

repayment only to the third party who actually received

the loan proceeds.” 493 F.2d at 222. Indeed, as the

court below observed: “[I]n Gens the First Circuit

reversed the convictions of nominee borrowers who

recognized their repayment obligations, but remanded

the one count involving a wealthy individual who

signed his note with the understanding that he

personally would not have to repay the loan, barring

some ‘catastrophe.’” Pet. App. 9a (quoting 493 F.2d at

220, 223). Hence, there is no conflict between the

instant case and Gens.

Similarly, in the Second Circuit’s earlier decision in

Docherty, the defendant named debtor “knew he was

putting his own credit on the line.” 468 F.2d at 995.

Accord Gens, 493 F.2d at 223 & n.15 (“[T]Jhe key point

made by [Docherty is] that there can be no harm to the

7

bank, and thus no misapplication, where the named

debtor is both financially capable and fully intends to

repay the loan.” (Emphasis added)). Again, there is no

conflict between Docherty and the result here because

petitioner assured the nominal borrowers in this case

that they would not be looked to for repayment.

b. In the alternative, the Second Circuit held that a

bank officer’s approval of a loan for his own benefit,

while concealing his personal interest in the proceeds,

constitutes willful misapplication within the meaning

of 18 U.S.C. 656. It is true that, prior to this case, the

Second Circuit’s Docherty rule seemed out of step with

an otherwise unbroken line of federal circuit court

authority finding misapplication whenever a bank

officer knowingly caused a “loan to be made to his own

benefit, concealing his interest from the bank.” United

States v. Fortunato, 402 F.2d 79, 81 (2d Cir. 1968), cert.

denied, 394 U.S. 933 (1969).4 The Second Circuit in this

case, however, has disavowed that aspect.of Docherty.

Pet. App. 20a. In addition, it is questionable whether

the First Circuit would adhere to the position it adopted

in Gens with respect to a bank officer’s concealment of

his interest in a loan in light of the 1978 enactment of

12 U.S.C. 375b, which restricts the circumstances in

which a federally insured bank may make loans to its

officers. See United States v. Krepps, 605 F.2d 101, 106-

107 n.21 (3d Cir. 1979).

2. Nor is there ary merit to petitioner’s claim that 18

U.S.C. 656 is unconstitutionally vague. Pet. 8-9. Every

court that has considered this argument has rejected

it. See, e.g., United States v. Krepps, 605 F.2d 101, 104

4 See also United States v. Woods, 877 F.2d 477, 479 (6th Cir.

1989); United States v. Shively, 715 F.2d 260, 265-266 (7th Cir.

1983), cert. denied, 465 U.S. 1007 (1984); United States v. Steffen,

641 F.2d 591, 597 (8th Cir.), cert. denied, 452 U.S. 943 (1981);

United States v. Krepps, 605 F.2d 101, 106-107 (3d-Cir. 1979);

United States v. Twiford, 600 F.2d 1339 (10th Cir. 1979); United

States v. Kennedy, 564 F.2d 1329, 1338-1339 (9th Cir. 1977), cert.

denied, 435 U.S. 944 (1978).

8

n.13 (3d Cir. 1979); United States v. Mann, 517 F.2d 25S,

268 (5th Cir. 1975), cert. denied, 423 U.S. 1087 (1976);

United States v. Cooper, 464 F.2d 648, 651 (10th Cir.

1972), cert. denied, 409 U.S. 1107 (1973); United States v.

Fortunato, 402 F.2d at 82.

Notwithstanding the consensus of the courts of

appeals, petitioner relies upon United States v. Britton,

107 U.S. 655 (1882), for the proposition that the term

“willfully misapplied” as used in an earlier version of

the statute had no settled meaning. Pet. 8. In that

case, however, the Court clarified that “the wilful

misapplication made an offence by this statute means

a misapplication for the use, benefit, or gain of the

party charged, or of some company or person other

than the association.” Jd. at 666. Accordingly, the

Court held that the criminal sanction did not reach

mere “acts of maladministration of the affairs of [a

bank] by its officers,” but instead was limited to

misapplication benefiting the officer or some third

party. Id. at 668. Consistent with Britton, the jury here

was instructed that a “mere act of maladministration

is insufficient to constitute a violation of the section.”

23 Tr. 47. There was ample evidence, including the

indisputable facts that petitioner personally benefited

from the loans and took affirmative steps to hide his

status from the bank, upon which the jury could base

its verdict that petitioner acted with the necessary

criminal intent.

Finally, to the extent petitioner seeks to raise a facial

attack upon 18 U.S.C. 656, his claim must fail because

he cannot “demonstrate that the law is impermissibly

vague in all of its applications.” Village of Hoffman

Estates v. The Flipside, Hoffman Estates, Inc., 455 U.S.

489, 497 (1982). Given the district court’s detailed

instructions that the jury could not convict petitioner

under the statute unless he acted with specific

criminal intent, see 23 Tr. 30-32, 46-47, petitioner

cannot raise any colorable claim that the statute was

impermissibly vague as applied to him. Cf. Colautti v.

Franklin, 439 U.S. 379, 395 n.13 (1979) (“requirement of

——_ eevee

9

a specific intent to do a prohibited act may avoid those

consequences to the accused which may otherwise

render a vague or indefinite statute invalid,” quoting

Screws v. United States, 325 U.S. 91, 101-102 (1945)

(plurality opinion)).

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

EDWARD S.G. DENNIS, JR.

Assistant Attorney General

SEAN CONNELLY

Attorney

JUNE 1990