United States v. Peter J. Castiglia, Jack Liffiton and Anthony Santiago

894 F.2d 533

• Court: Court of Appeals for the Second Circuit
• Decided: March 20, 1990
• Docket: 327, 328 and 558, Dockets 89-1207, 89-1209 and 89-1216
• Status: Published

Opinions

IRVING R. KAUFMAN, Circuit Judge:

This case requires us to decide whether a bank officer abused his control of the bank’s money — through a series of allegedly sham loans that appellants portray as innocent creative financing — to the point of violating the law.

Peter Castiglia, the bank officer, Jack Liffiton, and Anthony Santiago appeal from judgments of conviction entered in the United States District Court for the Western District of New York after a jury trial before Judge Elfvin. Appellants’ primary contention is that the Government has stretched the statute prohibiting “misapplication” of bank funds by a bank officer, 18 U.S.C. § 656, beyond its legitimate contours, thereby criminalizing perfectly proper business transactions. We are asked to rule that no “misapplication” occurred and that this prosecution represents an overzealous use of a criminal statute in an inappropriate situation. We decline to do so, since persuasive proof at trial established that the defendants carried out a complex and audacious scheme to obtain bank funds in a manner long recognized as misapplication. Because we also reject appellants’ other challenges, we affirm the convictions.

The jury found that Castiglia, as Senior Commercial Lending Officer at the Buffalo branch of the Bank of New York (“BONY”), orchestrated a duet of sham loans with the assistance of named borrowers Santiago and Tocha, both of whom were assured that they would not be responsible for repayment of the loans. The real beneficiaries of the loan proceeds were Castiglia, his corporate alter ego (Geneva Lands, Inc.), and a friend (Liffiton) — none of whom were eligible to receive these loans directly without special authorization from Castiglia’s superiors. Since appellants challenge the sufficiency of the evidence supporting their convictions, we begin with an abbreviated summary of what the jury could have found, viewing the evidence in the light most favorable to the Government, as we are required. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 86 L.Ed. 680 (1942).

In September 1981, as we already noted, Castiglia was Senior Commercial Lending Officer at BONY, an FDIC-insured institution. BONY’s internal regulations restricted Castiglia’s authority. He could not make personal or commercial loans to himself without bank approval,¹ nor could he authorize more than one million dollars in aggregate unsecured loans to any one borrower. He was required to disclose any outside business or partnership relationships, particularly any such relationships with bank customers.

Despite these rules, Castiglia failed to report to BONY his exclusive ownership of Geneva Lands, a real estate holding company. Castiglia and Geneva Lands were as one. He borrowed money from other banks in the corporate name for personal purposes, and listed himself as the sole shareholder on the corporate tax returns.

In September 1981, Castiglia arranged for a $580,000 BONY loan to be issued in Anthony Santiago’s name. Utilizing an attorney escrow account, Castiglia directed the funnelling of these funds through a series of circuitous transactions. By mid-November $505,000 had been laundered into various accounts belonging to Castig-lia, Geneva Lands, and Liffiton.² Liffiton, whose unsecured BONY loans already exceeded BONY’s one million dollar limit, received four checks totalling $188,000. Although Castiglia subsequently completed several bank Code of Conduct Questionnaires, he failed to disclose his interest in Geneva Lands and the $580,000 loan that had benefitted him, his company, and Liffi-ton.

Appellants claim that Santiago recognized his obligation to repay the $580,000 and simply reloaned the principal. Santiago, however, did not enter the loan on his books. He merely instructed his bookkeeper to put a copy of the loan note in Castig-lia’s file. As a precaution against Castig-lia’s inability to repay the loan in the event of death, Santiago expected to be named beneficiary of a $580,000 insurance policy on Castiglia’s life. Even though his substantial interest payment entitled him to a large tax deduction, Santiago’s accountants were not informed of the loan. Nor did he repay the loan when it became due in June 1982. Instead, Castiglia arranged for it to be renewed.

Upon learning that Geneva Lands was under federal investigation, Castiglia immediately arranged to pay off the $580,000 debt. Within 48 hours, he convinced his friend Richard Tocha to borrow $400,000 from BONY, and applied this sum to the outstanding loan. The remaining $180,000 balance was exchanged for a demand note in Santiago’s name. Castiglia then arranged with Santiago to retire the $180,000 loan by selling stock that BONY held as collateral on another debt, putting the bank at risk.

When Santiago’s accountant learned of the original loan, after Castiglia’s resignation from the bank, Santiago explained that he borrowed the money for Castiglia, who handled all the transactions and was responsible for repayment of the loan. Concerned about the lack of loan documentation and Castiglia’s imminent surgery, Santiago’s accountant obtained from Castiglia a personal promissory note for $180,000. Following surgery, however, Castiglia substituted Geneva Lands as the obligor on this note and conveyed an explanation to Santiago’s attorney and accountant which concealed his personal interest in the loan. Santiago adopted this characterization.

In an interview with the FBI, Tocha echoed Santiago, claiming that he was assured upon signing the $400,000 note that he would not be called upon to pay the principal or interest.³ Both Santiago and Tocha looked to Castiglia for the interest payments. Santiago instructed his bookkeeper to call Castiglia if interest payments were late on the $180,000 loan. Tocha added the interest due on the $400,000 loan to bills sent to Castiglia for construction work performed by Tocha.

Despite a frantic effort to conceal the convoluted transactions — including the alteration of records and an attempt by Liffi-ton to induce Santiago to shield Castiglia with false testimony — Castiglia, Liffiton, and Santiago were convicted of conspiracy, 18 U.S.C. § 371, and a variety of substantive offenses linked to the misapplication of funds.⁴ Only Tocha was acquitted of all charges. While appellants raise a multitude of contentions, we shall discuss in some detail their central claim that no “misapplication” occurred.

An officer of a federally-insured bank who “embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds, or credits” of the bank with the intent to injure, defraud or deceive that bank commits a criminal misapplication. 18 U.S.C. § 656; United States v. Docherty, 468 F.2d 989 (2d Cir.1972). Castiglia was an officer of BONY, a federally-insured institution. Thus, the only issue before us is whether Castiglia’s conduct amounts to willful misapplication.

Appellants contend that we are precluded from finding misapplication because Tocha and Santiago were financially able to repay their loans and recognized their legal obligations to do so. Their argument purportedly rests on our decision in United States v. Docherty and finds support in the First Circuit's opinion in United States v. Gens, 493 F.2d 216 (1st Cir.1974). In Docherty we held that there was no misapplication where the borrower had ample resources and "knew he was putting his own credit on the line." 468 F.2d at 995. Gens held that "where the named debtor is both financially capable and fully understands that it is his responsibility to repay, a loan to him cannot-absent other circumstances-properly be characterized as sham or dummy. . ." 493 F.2d at 222.

It appears that both Santiago and Tocha had the resources to pay the loans and had executed all the relevant documents. Accordingly, Appellants assert that this settles the issue. However, this contention ignores one long recognized category of misapplication:

cases in which 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: in other words where the debtor allowed only his name to be used,' enabling the bank officials to grant a de facto loan to a third party to whom the bank was unwilling to grant a formal loan.

Id.; see also United States v. Cleary, 565 F.2d 43, 47 (2d Cir.1977) (misapplication occurs where bank official assures named debtor he would not be called upon to repay), cert. denied, 435 U.S. 915, 98 S.Ct. 1469, 55 L.Ed.2d 506 (1978). Such a formally executed loan “could be characterized as ‘sham’ or ‘dummy’ ..., because there was little likelihood or expectation that the named debtor would repay.” Gens, 493 F.2d at 222.

The key issue is whether the named borrowers fully understood and recognized their obligations to repay. “[LJoans of this character are improper only if the lending officer had no reason to expect that the named debtor would repay them; e.g., where the officer knew that the named debtor was fictitious, had not authorized the use of his name, or was incapable of repaying the loan, or where the bank official assured the named debtor that he would not be called upon to repay." Cleary, 565 F.2d at 47 (citing Gens, 493 F.2d at 221-23). Since Gens accurately defines misapplication to include situations where the bank official assured the named borrower that he would not be responsible for repayment-as all appellants concede-it necessarily follows that a signature on loan documents does not conclusively establish an intent to repay. Intent must be interpreted in light of the evidence that the bank official assured the named borrower that he would not be looked to for repayment because the officer would repay. Where such evidence is persuasive, misapplication has been established.

For example, in 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.” 493 F.2d at 220, 223. See also United States v. King, 484 F.2d 924, 926-27 (10th Cir.1973) (nominee borrower signed note with the understanding that bank official would actually repay loan), cert. denied, 416 U.S. 904, 94 S.Ct. 1607, 40 L.Ed.2d 108 (1974); United States v. Moraites, 456 F.2d 435, 438 (3d Cir.) (nominee borrower signed notes after bank officer assured it it would not have any obligation to repay), cert. denied, 409 U.S. 891, 93 S.Ct. 109, 34 L.Ed.2d 148 (1972). Nothing in Docherty suggests that such assurances were extended to the nominee borrower. The bank officer only “requested that Docherty borrow [money] and reloan it to him,” apparently without making the additional representation that he would not be looked to for repayment. 468 F.2d at 991.

In the instant case, the record amply supports the conclusion that Castiglia assured each named debtor that “he would not be called upon to repay” the loan. Cleary, 565 F.2d at 47. Santiago admitted this to his accountant; Tocha stated so to the FBI. Other evidence — Santiago’s unusual bookkeeping, Tocha’s method of billing Castiglia for interest, Liffiton’s attempt to influence Santiago’s testimony- — indicates a conscious effort to conceal the sham nature of the loans.

The dissent reads into precedent a nonexistent distinction between “assurances by a bank officer that the [named] borrower will not be looked to for repayment because the officer will repay and a similar [situation in which an officer] gives assurances that the bank will not look to the borrower [were] the loan [] not repaid.” However, knowing participation in a sham loan which could have the natural tendency to harm the bank is sufficient to find a principal liable for misapplication, see Gens, 493 F.2d at 222, even though mere knowledge of a nominal borrower that a transaction violates a bank rule would not support a conviction for aiding and abetting. Docherty, 468 F.2d at 993.

By assuring the named borrowers that they would not have to repay the loans, Castiglia manifested the criminal intent to enter into sham transactions at the risk of the bank. While the dissent believes that Castiglia’s statement to Santiago that he would not be looked to for repayment “could as well describe the borrower in Docherty,” it is significant that these words were not ascribed to the bank official in that case. This is the distinction that makes all the difference.

In Docherty, the bank official convinced a nominal borrower to obtain a loan for the benefit of the former at no risk to the bank. In contrast, Castiglia persuaded Santiago to lend his name to a similar transaction, adding the assurance that Cas-tiglia was responsible for repayment. The natural effect of such an assurance would be to cause the named borrower to believe that he would not have to repay the loan and that, one way or another, the bank officer would discharge the obligation. This amounts to willful misapplication of bank funds.

The fact that Santiago may have believed that he would be ultimately liable in the event the note was not repaid does not absolve Castiglia of his wrongful intent when entering into the loan. Moreover, Santiago’s behavior with regard to the life insurance policy and Castiglia’s execution of a formal note do not suggest that Santiago intended to repay the loan. The life insurance policy hedged against one eventuality that would prevent Castiglia from repaying the debt — his death. The issuance of the promissory note, following Castiglia’s resignation from the bank, was Santiago’s similar attempt to bind Castiglia to his assurance of repayment. Both suggest only that Santiago sought to hold Cas-tiglia to his promise to repay. We note that Castiglia persuaded Santiago to change his books to conceal any personal interest of Castiglia in the series of loans.

In sum, the evidence in this case demonstrates that the borrowers had been assured that Castiglia was responsible for repaying the loans.⁵ The question remains whether there was an intent to injure, defraud, or deceive the bank, the requisite mens rea under Section 656. See Docherty, 468 F.2d at 994-95. If the “natural effect” of Castiglia’s conduct put BONY in jeopardy of loss, there was an intent to injure or defraud. Whether BONY suffered any actual loss is of little importance. United States v. Clark, 765 F.2d 297, 303-05 (2d Cir.1985); Cleary, 565 F.2d at 47-48.

The bank rules that Castiglia violated were designed to protect BONY from exposure to increased pecuniary risk. Liffiton already had exceeded BONY’s unsecured loan limit, yet Castiglia funnelled almost $200,000 to him. In addition, Castiglia breached bank rules and federal regulatory statutes designed to prevent bank officers from granting loans to themselves. His flouting of the safeguards necessary for BONY’s security is also demonstrated by the sale of collateral pledged to another loan to pay off the $180,000 note. Evidence abounded that the natural consequence of Castiglia’s deceitful and dishonest handling of bank funds was to put BONY in jeopardy of loss.

We have carefully considered appellants’ other arguments and find them without merit. Accordingly, the judgments of conviction are affirmed.

1 . 12 U.S.C. § 375a limits the instances in which a bank may extend credit to its officers and requires prompt reporting to the board of directors of any such loan.

2 . $71,443.29 in prepaid interest was held by the bank. Santiago retained over $3,500.

3 . Tocha recanted at trial, denying he made such a statement.

4 . Specifically, Castiglia was convicted on two counts of misapplication of bank funds. 18 U.S.C. § 656. Liffiton and Santiago were convicted of aiding and abetting the 1580,000 misapplication. 18 U.S.C. § 2. Castiglia was convicted of making, and Santiago with aiding and abetting the making of, false entries in bank records for the $580,000 loan. 18 U.S.C. §§ 1005, 2. Castiglia was convicted of the same offense with respect to the $400,000 loan, and for false entries on the bank Code of Conduct Questionnaires. Liffiton was also convicted of perjury before the grand jury. 18 U.S.C. § 1623. Judgments of conviction were entered for Cas-tiglia and Liffiton on April 17, 1989, and for Santiago on May 1, 1989.

Castiglia was sentenced to 4 concurrent one year terms of imprisonment for conspiracy, two false entries, and the $580,000 misapplication. He also was sentenced to two concurrent one year terms for the $400,000 misapplication and false entry. Liffiton was sentenced to concurrent one year terms for conspiracy and misapplication with a consecutive year for perjury. Santiago was sentenced to three years probation and a $7,500 fine. Execution of all sentences was stayed during appeal.

5 . Moreover, we have 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." United States v. Fortunato, 402 F.2d 79, 81 (2d Cir.1968), cert. denied, 394 U.S. 933, 89 S.Ct. 1205, 22 L.Ed.2d 463 (1969); United States v. Woods, 877 F.2d 477, 479 (6th Cir.1989); United States v. Shively, 715 F.2d 260, 265-66 (7th Cir.1983), cert. denied, 465 U.S. 1007, 104 S.Ct. 1001, 79 L.Ed.2d 233 (1984); United States v. Steffen, 641 F.2d 591, 597 (8th Cir.), cert. denied, 452 U.S. 943, 101 S.Ct. 3091, 69 L.Ed.2d 959 (1981); United States v. Krepps, 605 F.2d 101, 106-07 (3d Cir.1979); United States v. Twiford, 600 F.2d 1339 (10th Cir.1979); United States v. Kennedy, 564 F.2d 1329, 1338-39 (9th Cir.1977), cert. denied, 435 U.S. 944, 98 S.Ct. 1526, 55 L.Ed.2d 541 (1978). The holdings in Gens and Docherty appear contrary to this line of authority. We simply note that the Third Circuit has queried whether Gens (and, by implication, Docherty) would be decided in the same way today, since in 1978 Congress severely limited the circumstances under which a bank may make loans to its officers. Krepps, 605 F.2d at 107 n. 21; 12 U.S.C. § 375b.