Criminal Bank Fraud As A Collection Tool?
May 21, 2012
Secured lenders caught up in loan defaults typically pursue the contract-based remedies of damages and foreclosure designed to make lenders whole for their actual losses (unpaid principle balance, interest and attorney fees). In Klinker v. First Merchants Bank, 964 N.E.2d 190 (Ind. 2012), a lender sought statutory-based treble damages for alleged criminal acts of fraud by a guarantor. It was an aggressive strategy, but was it worth it?
Default. Klinker involved a used car dealership that borrowed money from a lender to purchase cars under a floor-plan agreement. The terms of the loan, which the dealership’s principle guaranteed, required the borrower to pay money to the lender whenever it sold a car. Also, the borrower could not transfer title without the lender’s consent. When the lender audited the dealership, it learned that thirty-one cars for which the lender had loaned money were gone. The borrower had failed to turn over any sale proceeds for the thirty-one cars.
CVCA. What was unique about Klinker was the lender’s claims under Ind. Code § 34-24-3-1, known as the Indiana Crime Victims’ Compensation Act (“CVCA”). The CVCA permits one who suffers a pecuniary (monetary) loss as a result of certain property crimes to bring a civil action against the person who caused such loss. The victim can recover up to three times its actual damages. Although a criminal conviction is not required, the plaintiff must prove each element of the underlying crime, including criminal intent.
Claim 1. The lender’s CVCA action asserted two fraud claims based on I.C. §§ 35-43-5-4 and 8, which are criminal statutes. Under the first, the lender could obtain summary judgment only if undisputed facts showed (1) the guarantor (2) concealed, encumbered or transferred property (3) with the specific intent to defraud the lender. The guarantor transferred financed vehicles without the lender’s knowledge and thus concealed them from his creditor. This constituted a breach of contract, but did “not lead inescapably to a finding of criminal fraud.” This is because the lender also must demonstrate undisputed facts showing that the guarantor acted with the requisite “mens rea – the specific intent to defraud.” There must have been undisputed facts to establish that, when the guarantor made the challenged transfers, “his conscience objective was to cause injury or loss” to the lender by deceit.
Mens rea. When judgment creditors bring proceedings supplemental to set aside fraudulent conveyances, fraudulent intent may be inferred from the “8 badges of fraud,” about which I have written previously. In Klinker, the lender designated evidence that established three badges of fraud, but summary judgment was inappropriate due to the absence of the mens rea element:
summary judgment is almost never appropriate where the claim requires a showing that the defendant acted with criminal intent or fraudulent intent. . . . This is particularly so for CVCA claims. The CVCA provides a punitive remedy if the claimant can prove that the defendant violated a penal statute, and, as a punitive measure, it should be strictly construed and applied only where the challenged conduct is clearly proscribed. Moreover, because CVCA claims combine criminal and civil law, they implicate the state constitutional policy favoring jury intervention in both criminal trials and civil trials.
The Court concluded that “drawing all reasonable inferences in favor of the non-moving party, it is possible that the trier of fact could find a simple breach of contract here instead of criminal fraud, regardless of how strong the badges of fraud may be.”
Claim 2. As to the second claim, to be entitled to summary judgment the lender must show undisputed facts establishing that (1) the guarantor (2) knowingly (3) executed or attempted to execute (4) a scheme or artifice (5) to obtain the lender’s money or other property (6) by means of false or fraudulent pretenses, representations, or promises, and (7) that the lender is a state or federally chartered or federally insured financial institution. In Indiana, “a person engages in conduct ‘knowingly’ if, when he engages in the conduct, he is aware of a high probability that he is doing so.” I.C. § 35-41-2-2(b). “The fraudulent-conveyance badges of fraud (circumstantial evidence) are not relevant in this context – other circumstantial evidence must be presented.” In addition to the “knowingly” problem, the lender in Klinkler had a fatal timing issue with this particular claim. The alleged misrepresentations occurred after the guarantor had obtained the loans. The fraudulent activity must have been done at the time of execution.
No summary judgment. The Indiana Supreme Court reversed the trial court’s summary judgment for the lender. The result reveals at least one drawback of the lender’s aggressive loan enforcement approach - CVCA cases virtually guarantee a trial. This means that the case will be lengthier and more expensive. As illustrated by Klinker, although CVCA claims are available to lenders in Indiana, the pursuit of such claims almost certainly will slow down the collection process.