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UNITED STATES v. SHER

January 9, 1981

UNITED STATES OF AMERICA
v.
MICHAEL SHER



The opinion of the court was delivered by: MCCUNE

MEMORANDUM

BARRON P. McCUNE, District Judge

 We consider defendant's motion to dismiss the indictment against him, on the ground that the statute which he is accused of violating does not proscribe his alleged conduct. Briefs have been filed and the motion is ready for adjudication.

 The defendant was charged in a 49-count indictment with participating in a check-kiting scheme which defrauded a bank insured by the Federal Deposit Insurance Corporation of over $ 1,855,000.00, in violation of 18 U.S.C. §§ 1014 and 2. The Government alleges that on or about August 29, 1978, the defendant opened a checking account at Equibank in Pittsburgh in the name of M.S. Insurance Replacement, Inc., which defendant owned and operated. A few months later, defendant expanded his business to the Philadelphia area, and on January 4, 1979, opened a checking account at Philadelphia National Bank, also in the name of M.S Insurance Replacement, Inc. Both banks granted defendant immediate credit on all deposits made.

 The indictment charges that the check kiting scheme operated between January 11, 1979, and April 12, 1979. The Government alleges that defendant took checks payable to M.S. Insurance Replacement, Inc., drawn on the account of M.S. Insurance Replacement, Inc., at the Philadelphia bank, and deposited them in the Equibank office in Pittsburgh. At about the same time, defendant had checks for the same amount, drawn on his corporation's account in Pittsburgh and made payable to his corporation, deposited in the Philadelphia bank. The Government says that defendant obtained immediate credit for the amounts of the checks even though there were insufficient funds in the checking accounts. By covering worthless checks written on one account with worthless checks written on another account and taking advantage of the time lag necessary for clearance, see United States v. Lea, 618 F.2d 426, 430 n.4 (7th Cir. 1980), North Carolina National Bank v. South Carolina National Bank, 449 F. Supp. 616, 617 n.3 (D. S.C. 1976), the Government alleges that defendant was able to keep the kite aloft.

 The defendant has filed a motion to dismiss the indictment. He contends that § 1014 of Title 18 of the United States Code does not include check-kiting within its proscription. He therefore argues that he cannot be prosecuted under § 1014.

 Secton 1014 reads, in relevant part, as follows:

 "Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of... any bank the deposits of which are insured by the Federal Deposit Insurance Corporation,... upon any application, advance, discount, purchase, purchase argument, repurchase agreement, commitment, or loan,... shall be fined not more than $ 5000 or imprisoned not more than two years, or both." *fn1"

 This section is a consolidation of 13 predecessor sections containing similar provisions relating to false statements and representations or overvaluations of security. The terms "application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan" were added to represent a composite of the terms and transactions mentioned in the 13 predecessor sections.

 Section 1014 does not explicitly mention checks, and there is nothing in the brief legislative history of the statute indicating whether a check-kiting scheme is contemplated by its terms. Two opinions address this question, but they contradict one another.

 United States v. Edwards, 455 F. Supp. 1354 (M.D. Pa. 1978), holds that § 1014 does not proscribe check-kiting. The district court based its holding on the fact that presenting a check is not a "statement" which can be rendered false by the fact that the drawer of the check does not possess sufficient funds to cover it. Id. at 1356. Rather, it is an order to the drawee bank to pay the check according to its terms, with the drawer promising to pay a sum certain. If a check is no more than a promise to pay, the court observed, then it can be neither true nor false. Id. at 1356-57.

 Second, the court in Edwards doubted that presenting a check for deposit is an "application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan." It did not believe that the corporations and entities originally enumerated in § 1014 ever engaged in the sort of banking practices performed by Federal Savings and Loan Insurance Corporation and Federal Deposit Insurance Corporation banks, which were added to § 1014 in 1970. Id. at 1357-58. The court also questioned whether the withdrawal of funds from a checking account prior to the payment of deposited checks constituted an "advance" of money. Id. at 1358.

 Finally, the court believes that § 1014 was ambiguous with respect to whether it included check-kiting schemes, absent any evidence of statements made by a defendant concerning his ability to cover the checks. Id. at 1356. The court said that if Congress had intended to outlaw the passing of worthless checks, it could easily have done so in terms more certain than those found in § 1014. Id. at 1357.

 The second case, United States v. Payne, 602 F.2d 1215, (5th Cir. 1979), cert. denied, 445 U.S. 903 (1980), however, holds that § 1014 does encompass check-kiting. In so holding, the Court of Appeals for the Fifth Circuit criticized the reasoning of Edwards. It disagreed with the Edwards court's premise that the presentation of a check is not a statement, but rather an order to pay, finding this to be an oversimplified view of the transaction. In actuality, the Court of Appeals said, a check is an implied representation by the drawer that he has on deposit with the drawee bank, funds equivalent to the face amount of the check. Id. at 1218, quoting F. Whitney, The Law of Modern Commercial Practices, § 341 (1965). ...


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