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UNITED STATES v. PAVLICK

December 16, 1980

UNITED STATES of America, Plaintiff,
v.
Andrew D. PAVLICK, Defendant



The opinion of the court was delivered by: NEALON

MEMORANDUM AND ORDER

I. INTRODUCTION

 This case comes before the court on a motion by the defendant to dismiss the indictment. *fn1" The underlying action arose from a "check-kiting" scheme that Pavlick allegedly carried out at the expense of the Susquehanna Savings Association ("Susquehanna") and the First Eastern Bank ("Eastern"). According to the Government, the defendant opened various accounts in each institution and then managed his money in an illegal manner.

 The factual background as developed from the indictment and discussions during two pretrial conferences reveals that over a seven-day period in September 1979, Pavlick allegedly presented to Susquehanna twenty-two checks drawn on his accounts in Eastern. The Government contends that the defendant knew all these checks to be "overvalued," because he did not have sufficient deposits in Eastern to cover them. Indeed, the "funds" that had ostensibly been deposited in Eastern to pay for the twenty-two checks consisted of an earlier set of worthless checks issued by Susquehanna. *fn2" Significantly, the indictment alleges that Pavlick's goal was to receive from Susquehanna "funds" in the face amount of each check. *fn3"

 The charges against the defendant consist of twenty-six separate counts. The Government feels that each of the "overvalued" checks presented to Susquehanna constituted a violation of 18 U.S.C. § 1014, which protects designated institutions from specific types of fraud. *fn4" The initial twenty-two counts of the indictment each cite one of the checks as a transgression of § 1014. The remaining four accusations concern 18 U.S.C. § 2113(a), a statute which makes it a crime to enter certain financial entities with the intent to commit a felony. *fn5" Pavlick did not present the twenty-two "overvalued" checks to Susquehanna in one transaction. Rather, the Government maintains that the defendant submitted a number of the checks on four different occasions. *fn6" Counts 23-26 each label one of these instances as a separate violation of § 2113(a).

 Pavlick argues that the "check-kiting" scheme portrayed by the indictment does not controvert § 1014. If this contention is correct, the entire action must be terminated. Acceptance of the defendant's theory would invalidate the twenty-two counts which explicitly allege transgressions of § 1014 and nullify the remaining allegations, since there would be no underlying felony necessary for a prosecution under § 2113(a). *fn7" An analysis of the situation indicates that Pavlick's construction of the two statutes at issue is correct. Consequently, the court shall dismiss the indictment.

 In essence, the Government's case against the defendant involves two different contentions. First, the indictment asserts that every time Pavlick presented one of the twenty-two fraudulent checks to Susquehanna, he "overvalue(d) a security, said security in each instance being the individual check." *fn8" As previously noted, the charge that these checks were "overvalued" rests on the assertion that whenever the defendant submitted one of the bogus checks, he falsely represented to Susquehanna that the check in question was fully backed by cash in the relevant Eastern account. Second, the Government insists that the purpose of the scheme was to induce Susquehanna to give Pavlick "funds in the face amount of each check," and that such a grant of funds may be considered as an "advance" of money or a "loan" as those terms are defined by § 1014. On this basis, the indictment concludes that the defendant violated the latter statute which, in pertinent part, provides that: *fn8"

 
Whoever ... willfully overvalues any ... security, for the purpose of influencing in any way ... any institution the accounts of which are insured by the Federal Savings and Loan Corporation ... (or) any member of the Federal Home Loan Bank system ... upon any advance ... or loan shall be fined not more than $ 5,000 or imprisoned not more than two years, or both. *fn9"

 Pavlick, conversely, places heavy emphasis on United States v. Edwards, 455 F. Supp. 1354 (M.D.Pa.1978) (Muir, J.). The facts of that precedent closely resemble those of the current litigation. In Edwards, the defendant deposited in The First National Bank of Carbondale fifty checks which were worthless in that the account on which they were drawn did not contain sufficient cash. The Government's theory differed somewhat from that against Pavlick, since the Edwards defendant was accused of making a "false statement" (rather than "overvaluing a security") in order to effect a proscribed transaction. *fn10" For that reason, certain portions of the opinion are inapposite to the current situation, because they key on a question which does not concern this case, viz., whether a bogus check can be a "false statement" within the meaning of § 1014. See id. at 1356-57. Nevertheless, the overall logic of Edwards clearly supports Pavlick. A fair reading of the opinion indicates that after a thorough review of "the language of the statute and its history," Judge Muir concluded that check-kiting, per se, does not violate federal law. The crux of the Edwards holding is explained in the following statement: "(H)ad Congress intended to outlaw the passing of worthless checks to ... banks, it could easily have said so in terms far more certain than those contained in § 1014." Id. at 1357.

 In an attempt to discredit the defendant's rationale, the Government cites United States v. Payne, 602 F.2d 1215 (5th Cir. 1979), cert. denied, 445 U.S. 903, 100 S. Ct. 1079, 63 L. Ed. 2d 319 (1980). That case concerned a defendant who aided a co-conspirator in defrauding a bank by depositing worthless checks in a business account. The bank then extended the co-conspirator "credit" which the defendant used to operate his business. The exact facts of Payne are somewhat obscure since the Court of Appeals did not clearly explain if by "credit" it meant that the schemers received loans or simply credit for cash deposits. *fn11" The decision, nonetheless, was definite in its rejection of Edwards. Initially, the Payne panel endorsed one of the contentions that the Government employs against Pavlick, i. e., that the presentation of a worthless check amounts to the overvaluation of a security. Id. at 1218. Furthermore, the opinion contained language suggesting that any consideration the bank gave upon acceptance of the bogus checks would be "sufficiently in the nature of an advance or loan to come within the scope of 18 U.S.C. § 1014." Id. at 1218-19. The Payne decision, therefore, decided that check-kiting, by itself, amounts to a transgression of federal law.

 After reviewing the relevant authorities, this court concludes that the requirements for a violation of the statute turn not on the method of the scheme, but on its purpose. For reasons that shall be explained, a check-kite may well flout § 1014 if the kiter's goal is the receipt of consumer or commercial credit from a protected institution. Yet the court is also convinced that Judge Muir was correct when he stated in Edwards that Congress has not passed a blanket prohibition against check-kiting. Pavlick stands accused of passing worthless checks to Susquehanna in order to receive funds "in the face amount of each check." Even if the defendant did in fact commit this fraud, he did not violate § 1014.

 III. ANALYSIS OF THE STATUTE

 Section 1014 does not outlaw all attempts to swindle the various entities that the provision was framed to safeguard. The enactment only criminalizes misrepresentations which attempt "to influence action by the financial institution concerning a loan or other transaction listed in the statute." United States v. Erskine, 588 F.2d 721, 722 (9th Cir. 1978) (emphasis added). Three factors demonstrate that check-kiting, without more, does not fall within a category of ...


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