April 16, 2013

The Sixth Circuit On Why A False Statement Charge In A Real Estate Scheme Requires More Than Just A Misleading Check

Bernard Kurlemann may have done many things - he borrowed millions to build a pair of houses in Mason, Ohio, for example - but he did not make a false statement to a bank.

And the Sixth Circuit, in United States v. Kurlemann, held that the district court was wrong to instruct the jury that it could convict him for anything less.

1418355_flag_blowing_in_the_breeze.jpgThe Costs of Owning Expensive Real Estate

If you believe the government's evidence against Mr. Kurlemann at trial, he worked with a realtor - Eric Duke - to arrange for two straw purchasers to buy his two million dollar homes.

It's expensive to carry such homes, you see. He really wanted out from under the mortgage payments.

The trouble is that the banks who were lending the money to the purchasers were uncomfortable with a down payment that came from the seller, Mr. Kurelmann.

And the straw purchasers were uncomfortable using their own money, because, well, they were straw purchasers.

So, Mr. Kurlemann created documents which were true enough, but that created an impression of something that was not true.

For example, one of the homes was described as having a $280,000 down payment, paid to Mr. Kurelmann. It was true that the buyer had made a $280,000 payment to Mr. Kurelmann - the buyer took a $280,000 cashier's check given to him from an entity controlled by Mr. Kurelmann and swapped it for another $280,000 cashier's check payable to another entity controlled by Mr. Kurlemann. Mr. Kurlemann accepted the second cashier's check as a down payment, and a copy of the check was sent along as proof of payment of the down payment.

So, no false statements were made, but what was provided was intentionally misleading.

As the Sixth Circuit (in an opinion written by Judge Jeffery Sutton, who is a fun writer, whatever else is true of him) summarized what happened next:

The predictable, perhaps inevitable, happened. Both buyers defaulted on their loans. The bank investigated, and federal prosecutors filed a raft of charges against Duke and Kurlemann. Duke pled guilty to seven counts, including loan fraud and making false statements to a lending institution, and agreed to testify at Kurlemann's trial. A jury convicted Kurlemann of six counts, including making false statements to a lending institution, see 18 U.S.C. § 1014; and committing bankruptcy fraud, 18 U.S.C. § 157. The district court sentenced Kurlemann to concurrent 24-month sentences, one for the false-statement convictions and one for the bankruptcy-fraud convictions, and ordered him to pay $1.1 million in restitution.

The False Statement Jury Instruction That Was So Much More

Mr. Kurlemann's jury was instructed that, for purposes of a false statement charge,

[a] "statement may be false," according to one of the jury instructions in Kurlemann's case, "when it contains a half-truth or when it conceals a material fact."

That is not the law.

The opinion quotes the lengthy text of 18 U.S.C. § 1014 - which, seriously, is long - and summarizes it with:

That is a long way of saying that making a "false statement or report" to a bank in order to get a loan is prohibited. And that is a long way of not saying that the statute prohibits "half-truths," "material omissions" or "concealments," which takes us to the nub of the matter. Whether made orally or offered through a written report, a "false statement" must be that--a statement, a "factual assertion" capable of confirmation or contradiction.

Here, because, for example, the check was merely misleading, not actually false, it wasn't a false statement.

An omission, concealment or the silent part of a half-truth, is not an assertion. Quite the opposite. Omissions are failures to speak. Half-truths, in which the speaker makes truthful assertions but conceals unfavorable facts, amount to one type of omission. Concealment, in which the speaker says nothing at all but has a duty to speak, amount to another. No doubt, both types of omissions hold the potential to mislead and deceive. But § 1014 covers "false statements." It does not generally cover misleading statements, false pretenses, omissions, schemes, trickery, fraud or other types of deception.

Because of the error in the jury instruction, Mr. Kurlemann's false statement conviction was vacated and the case was remanded.

And, seriously, this post doesn't do justice to how much fun this opinion is to read. It's nice to see judicial snark doled out for a win for a guy who is accused of a crime.

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