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October 9, 2013
  United States v. Peters
Headline: Second Circuit Holds Bank Fraud Forfeiture Provision Extends to Direct and Indirect Receipts Obtained in Fraudulent Scheme, Not Merely to "Profits," and Affirms Forfeiture Award Against Defendant for Proceeds that He Received Indirectly Through Companies that Defendant Largely Owned and Controlled.

Area of Law: Criminal; Forfeiture

Issues Presented: Whether the bank fraud forfeiture provision in 18 U.S.C. § 982(a)(2) requires forfeiture of all direct and indirect "receipts," rather than just "profits," of the fraud; and whether, and under what circumstances, an individual defendant may be personally liable to forfeit indirect proceeds received through a company the defendant owned and controlled?

Brief Summary: In 2007, defendant-Appellant Frank Peters ("Peters) was convicted by jury in the United States District Court for the Western District of New York of conspiracy to commit bank fraud and of committing bank fraud, wire fraud, and mail fraud. The charges and conviction arose out of fraudulent accounting and related practices engaged in by two auto parts companies primarily owned and operated by Peters and his wife in connection with a line of credit extended to one of the companies by Chase Manhattan Bank ("Chase"). Peters was sentenced to 108 months in prison, and ordered to pay restitution. The District Court subsequently ordered Peters to forfeit an additional $23,154,259 under the bank fraud forfeiture statute, 18 U.S.C. § 928(a)(2).

Peters argued on appeal that forfeiture fine was excessive because it included receipts, rather than just profits, of the bank fraud. He also argued that the district court erred in holding him personally liable, because any loan payments received as a result of the fraudulent scheme were received by his companies and not by him individually. The Second Circuit held that "proceeds" within Section 928(a)(2) should be broadly interpreted to include all receipts received in connection with bank fraud scheme, in accordance with the punitive intent of the provision. The Second Circuit also held that, under applicable federal law rather than the New York State law standards applied by the District Court, Peters was properly found personally liable for proceeds that he received indirectly through the two companies involved in the fraud that were primarily owned and extensively controlled by Peters and his wife.

To read the full opinion, please visit: http://www.ca2.uscourts.gov/de...a6c234d62768/2/hilite/

Extended Summary: In 1990, defendant-appellant Frank Peters ("Peters") and his wife acquired World Auto Parts, Inc. ("WAPI) an auto-parts company and, through WAPI, subsequently acquired a second company, renamed Bighorn Core, Ltd. ("Bighorn"). Peters's wife was the Chief Executive Officer and 85% owner of both companies. Peters as President owned 13%; his sister-in-law owned 1% and a fourth, unrelated individual, owned 1%. The combined companies entered into an asset-backed mortgage agreement with Chase Bank, enabling the companies to borrow against accounts receivable (up to 85%) and current inventory (up to 60%) to a maximum $10.5M. Pursuant to the loan agreement, customer payments to the companies were to be deposited into a Chase account to be used by Chase to service the companies' debt and pay off a portion of the principal. The companies practiced fraudulent accounting to embellish their cash-flow, and Peters also created ITEC, a company into which he spun off parts of WAPI and Bighorn. Using ITEC, Peters opened an account at M&T Bank and had ITEC customers (formerly WAPI and Bighorn customers) make payments to that account, depriving Chase of monies to which it was entitled under their pre-existing loan agreement.

Peters was tried by jury and convicted in the United States District Court for the Western District of New York of conspiracy to commit bank fraud and of committing bank fraud, wire fraud, and mail fraud. Peters was sentenced to 108 months in prison, and ordered to pay restitution. The District Court subsequently ordered Peters to forfeit an additional $23,154,259 under the bank fraud forfeiture statute, 18 U.S.C. § 928(a)(2). He appealed on several grounds and the Second Circuit's opinion addresses his appeal to the forfeiture portion of his sentence (the court addressed the other grounds for his appeal, and affirmed his convictions, in separate summary orders issued today).

The Federal Sentencing Guidelines require defendants convicted of defrauding financial institutions to forfeit to the United States "any property constituting, or derived from, proceeds the person obtained directly or indirectly, as the result of such violation." 28 U.S.C. § 928(a)(2).
On appeal, Peters argued that the statutory term "proceeds" should be read to require forfeiture of "profits," and not, more generally, receipts as interpreted by the District Court. The Second Circuit disagreed however, concluding that under the punitive bank fraud forfeiture provision at issue here, a broad reading of the term 'proceeds' to include receipts, and not merely profits, is appropriate.

Peters also argued that he was protected from liability because the benefits of the fraudulent activity accrued to his companies, rather than to him personally. In holding Peters personally liable to forfeit proceed received indirectly from WAPI and ITEC, the District Court had found that, under New York state common law, Peters' degree of ownership and control over these companies justified "piercing the corporate veil" to hold Peters personally liable for the fraudulent proceeds. By contrast, the Second Circuit concluded the issue should be under federal law, rather than New York law, but nevertheless determined evaluating similar factors, that Peters "so extensively control[led and] dominat[d]" WAPI and ITEC that the fraudulent monies paid to these corporations were effectively in his individual control and justified holding him personally liable. Specifically, the Second Circuit held that Peters's familial ownership interest of 99%, level of control exercised over the company, authority to direct the disposition of assets and the extensive degree to which he exercised his authority, as well as his use of corporate assets for personal expenses, all provided evidence that he had derived proceeds indirectly by defrauding a financial institution within the plain meaning of the statute.

To read the full opinion, please visit: http://www.ca2.uscourts.gov/de...6c234d62768/2/hilite/

Panel: Circuit Judges Sack and Lynch; Judge Guido Calabresi recused himself and the remaining panelists made their determination in accordance with Second Circuit Internal Operating Procedure E(b). See 28 U.S.C. § 46(d).

Argument Date: 12/21/2012

Date of Issued Opinion: 10/9/2013

Docket Nos.: 11-610-cr (L)

Decided: Affirmed

Case Alert Author: Laura Young

Counsel: James W. Grable, Jr., Connors & Vilardo for Peters-Appellant; and Joseph J. Karaszewski, Assistant U.S. Attorney, for Appellee.

Author of Opinion: Judge Sack

Case Alert Supervisor: Elyse Diamond Moskowitz

    Posted By: Elyse Diamond @ 10/09/2013 02:48 PM     2nd Circuit  

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