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Opinion analysis: Court clarifies reach of federal bank fraud while leaving some questions for future

In Loughrin v. United States, a unanimous Court today clarified that the federal bank fraud statute, 18 U.S.C. § 1344, “requires neither intent to defraud a bank nor the creation of a risk of financial loss to a bank,” as Justice Alito summarized it in concurrence.  (The “no risk of loss” holding appears only in footnote 9 of the Court’s opinion.)  The Justices also agreed that federal bank fraud does not extend to “every fraud … happening to involve payment with a check,” invoking the principle against interpreting federal criminal laws that would permit “sweeping expansions” into state and local matters, most recently invoked in last week’s decision in Bond v. United States.

Within these boundaries, however, the Justices divided as to exactly what the limits on federal bank fraud prosecutions are and how they ought to be defined.  And Justice Kagan (the majority author) and Justice Scalia (concurring in part with Justice Thomas) once again spar, using creative hypotheticals to attempt to make their points.  Justice Scalia, long the Court’s dominant semanticist, increasingly appears to have met his match in Justice Kagan — both previously having honed their hypothetical skills in the law school classroom.  The semantic interplay between these two Justices can sometimes be more entertaining than the decisions themselves.  The results of their disagreement about limits will, however, have to be played out in future cases that apply today’s decision.

As previously described here, Loughrin engaged in a simple fraud, basically forging signatures on checks he stole and then using them to obtain merchandise, and sometimes cash, from retailers like Target.  Loughrin never went to a bank – but the checks, of course, would ultimately have been drawn on bank funds.  (Whether bank funds were ever actually drawn on here is unclear on the record and irrelevant under the statute’s “attempt” language.)  There is no doubt that a necessary objective of Loughrin’s fraud could be ultimately to draw funds from the bank accounts that the checks represented.

Meanwhile, the second clause of Section 1344 makes it a crime for anyone who “knowingly executes or attempts to execute a scheme or artifice … (2) to obtain [financial institution] moneys … by means of false or fraudulent pretenses.”   The problem is how to apply the broad language of clause (2) without extending federal prosecution to every “bad check” case that state and local authorities usually handle.

The Court’s solution is to stick close to the text:  no intent to defraud a bank is required, so long as an objective of the scheme is ultimately to obtain bank funds.  Clause (1) of Section 1344 requires such an intent; therefore Congress must have meant something different in clause (2).  (Legislative history confirms this reading, although Justices Scalia and Thomas do not join in that part.)

But why, then, would the broad reading of clause (2) not reach every fraud in which a check is used, even if the check is valid (but a false pretense, say a lie to the buyer about value, is used somewhere else in the transaction)?  The majority’s answer here again is to focus on text:  the statute’s limits must be found in the phrase “by means of.”  Only where “a defendant’s false statement is the mechanism naturally inducing a bank … to part with money” will this requirement be satisfied.  So where a fraudster lies to someone to get money or property, Section 1344(2) will apply only when the lie would naturally be transmitted to the financial institution.  The falsity, and not a check alone, must be the “means” by which federal bank funds are endangered; only “deceptions that have some real connection to a federally insured bank, and thus implicate the pertinent federal interest,” may be federally prosecuted.  Thus clause (2) does not apply just because a check, rather than cash, is involved, and it does not apply to “run-of-the-mill frauds” which are “properly of concern only to States.”

It is here that Justice Scalia (joined by Justice Thomas) parts ways with the majority, and even then only mildly.  Justice Scalia agrees with the majority’s two major holdings that limit the reach of Section 1344(2).  However, he says that this case “does not require us to identify” the precise limits that the phrase “by means of” embodies, and argues that the Court should leave that “for another day.”  He disputes what he sees as a “crabbed definition” of the word “means,” and offers his own hypotheticals, including one involving “little Bobby” and a cookie, to illustrate his view.

In response, and in addition to offering her own “Jane [takes] a bike trip cross-country” hypothetical, Justice Kagan notes that “’by means of’ is inherently elastic” and “does not mean one thing as to all fact patterns.”  Hypotheticals will “take us down an endless rabbit hole.”  The point is that federal bank frauds must have “some real connection to a federally insured bank.”  Thus Justices Kagan and Scalia effectively spar by hypotheticals to a draw:  future courts will have to develop the precise contours of the Court’s (and the statute’s) “by means of” limitation which the Court generally enshrines today.

One final note for federal criminal law devotees:  Justice Alito writes separately to concur in virtually all the Court says, but to re-engage in the “knowledge vs. purpose” mens rea battle that he and Justice Kagan fought earlier this Term in Rosemond v. United States.  Section 1344 expressly states a mens rea of “knowingly,” and readers ought not be misled (says Justice Alito) by suggestions in the Court’s opinion that “purpose” is required.  A “purpose” to obtain bank funds need not be shown under Section 1344, so long as a defendant “knowingly … attempts to execute a [fraudulent] scheme” that will necessarily implicate bank funds.  While the scheme may well have an objective or the effect of “obtaining bank funds,” a defendant need not have such a purpose in order to be convicted.   Yet, as the Rosemond decision itself made clear (Justice Alito does not mention his separate opinion there but he plainly has it in mind), the distinction between knowledge and purpose can be elusive in the criminal law.  It seems helpful and correct for Justice Alito to note the distinction, based on the statutory text, here.

[Disclosure:  The law firm of Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, served as counsel to the petitioner in this case.  However, the author of this post is not affiliated with the firm.]

Recommended Citation: Rory Little, Opinion analysis: Court clarifies reach of federal bank fraud while leaving some questions for future, SCOTUSblog (Jun. 23, 2014, 3:53 PM),