By virtue of 18 U.S.C. § 656, officers of national as well as of other federally insured banks are prohibited from willfully misapplying bank funds that is, converting such funds to their own or to someone else's use. In United States v. Gallagher, 576 F.2d 1028 (3d Cir. 1978), this Court held that when a bank officer grants a loan to a named debtor with knowledge that the proceeds will be turned over to a third person, the bank officer has not violated § 656 unless he also knows that the named debtor lacks either the ability or the intent to repay the loan. The major issue presented by this appeal is whether the bank officer in order to violate § 656 must know that the named debtor lacks ability or intent to repay when the bank officer himself is the intended beneficiary of the funds. We conclude that, under these circumstances, such knowledge is not required, because the element of willful misapplication is established by the defendant's dual status as loan officer and loan beneficiary.

Appellant's convictions will be affirmed in all respects.

During 1975 and 1976, Jay Ellsworth Krepps was executive vice president, cashier, and a loan officer of what was then the Reedsville National Bank. The bank's rules in conformity with the dictates of 12 U.S.C. § 375a1 prohibited bank officers from borrowing for themselves more than $5000 from the bank, and required that all loans to officers be approved by the bank's board of directors. In addition, loan officers were required to seek and obtain the board's approval before authorizing any loans in excess of $10,000.

In February 1975, Krepps authorized a loan of $16,000 to Frank and Betty Houser of Milroy, Pennsylvania, and in October of the same year, Krepps approved a loan of $2,500 for Ronald McKinnon of Reedsville, Pennsylvania. Krepps had previously arranged with these borrowers to have the proceeds of each of these loans immediately transferred to himself for his own use. The Housers testified at trial that they signed a note signifying their obligation to the bank as a personal favor to Krepps, who was a friend of theirs, so that he could buy some stock and a jeep. They also testified that they did not endorse the cashier's check for $16,000 that was made out to them, and indeed never saw the check. When they received a notice from the bank that a payment was overdue, Mr. Houser contacted Krepps, who told him he would take care of it.2

McKinnon testified that he signed the note representing his obligations to the bank and endorsed the cashier's check while sitting in Krepps' office, and that the check was cashed immediately, with the proceeds transferred to Krepps at that time. He further testified: "(T)he agreement was that I sign the note, and he would keep the payment book. I would have no papers, no payment book, and he would take care of it, and in turn, he signed a promissory note which I don't know whether it's legal or wasn't, but in case anything happened to him, that I would be covered." As with the Housers, when McKinnon received notices for payment from the bank, he gave them to Krepps, who assured him they would be paid.3 There is no evidence, however, that either the Housers or McKinnon were capable of repaying the loans and understood that they were legally obligated to do so.

Also, in January 1976, Krepps issued a letter of credit to the Pennsylvania Industrial Realty Corporation, in the amount of $70,000. He did so without first obtaining the requisite authorization from the bank's board of directors, notwithstanding the fact that the Reedsville National Bank had never before issued any letters of credit. Finally, over the course of several months in 1976, Krepps prevented the processing by the Reedsville National Bank, in its usual fashion, of a large number of so-called NSF checks i. e., checks with "no sufficient funds" to cover them.

For authorizing the loans to the Housers and to McKinnon, Krepps was convicted, after a jury trial, on two counts of willful misapplication of bank funds in violation of 18 U.S.C. § 656, as well as on two counts of making false entries in the bank's records in violation of 18 U.S.C. § 1005. He was also convicted of issuing the letter of credit without authorization in violation of 18 U.S.C. § 1005. And, as a result of preventing the processing of the NSF checks, he was convicted of 132 counts of abstracting bank monies in violation of 18 U.S.C. § 656.

On this appeal, Krepps argues primarily that his convictions on willful misapplication and false entry charges were improper because no evidence was introduced to show that the Housers and McKinnon were other than bona fide borrowers who made a subsequent transfer of the loan proceeds to Krepps in independent transactions that are of no concern to the bank. Krepps maintains that absent such evidence neither willful misapplication nor the making of a false entry can be established.

In pertinent part, 18 U.S.C. § 656 imposes criminal sanctions on anyone who, "being an officer, director, agent or employee of . . . a national bank or insured bank . . . embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank . . . ."

Of the various substantive offenses named by the statute, willful misapplication is the most flexible in its meaning, inasmuch as it has no common law ancestry.4 This Court has previously surmised that the term "willfully misapplies" was incorporated in the statute as "an attempt to enlarge the common law definition of embezzlement,"5 and accordingly, the offense of willful misapplication has been described loosely as "a conversion by a bank employee even though he does not take the money for himself."6

In the statute's present codification, no mention is explicitly made of the requirement that the illegal conduct be undertaken with intent to defraud or injure the bank, or, in the alternative, to deceive an officer, agent, or examiner appointed to examine the affairs of the bank.7 Earlier versions of the enactment contained such an element, however, and the courts have uniformly continued to construe the criminal acts proscribed in the statute as requiring such intent.8 It is well settled that "(i)ntent to injure or defraud a bank * * * exists if a person acts knowingly and if the natural result of his conduct would be to injure or defraud the bank even though this may not have been his motive,"9 and that "(s)uch intent may be inferred from facts and circumstances shown at trial and is basically a fact question for the jury."10 Moreover, "(r)eckless disregard of the interests of the bank is equivalent to intent to injure or defraud,"11 and a conviction may be returned notwithstanding the fact that the bank has suffered no actual injury.12

Because "willfully misapplies" does not connote a precise or specific form of conduct, courts have subsumed within its ambit many types of schemes undertaken to convert bank funds improperly to private use.13 Nonetheless, when coupled with the intent requirement, and when read in the context of the other acts forbidden by the section, the outermost reach of the section takes on a definite shape: "(I)t is evident that the Mens rea for the crime is not fulfilled by mere indiscretion or even foolhardiness on the part of the bank officer. His conduct must amount to reckless disregard of the bank's interest or outright abstraction of funds."14 In short, misapplication, not maladministration, is the crime.15

The federal judiciary has devoted some attention to the task of drawing a line between bad judgment and bad conduct in those situations in which a bank officer is prosecuted for his role in securing a loan in the name of one party but intended for the use of another. In many such instances, the courts have readily concluded that willful misapplication has occurred. The First Circuit in United States v. Gens, 493 F.2d 216 (1st Cir. 1974), has identified three general categories in which convictions have consistently been upheld. This Court has summarized these categories as follows:

(1) cases in which the bank officer knew that the named debtor was fictitious or that the debtor was unaware of the use of his name for the debt; (2) cases in which the bank officer knew that the named debtor was financially unable to pay back the loan; and (3) cases in which the bank officer assured the named debtor that it would not be obligated to repay the loan in the event of a default and that the bank would look solely to the intended beneficiary of the loan for repayment.16

As explained in Gens, the result obtained in such circumstances is understandable, for

(i)n the three situations described above, the loans formally being made could be characterized as "sham" or "dummy" loans, because there was little likelihood or expectation that the named debtor would repay. The knowing participation of bank officials in such loans could consequently be found to have a "natural tendency" to injure or defraud their banks and thus constitute willful misapplication within the meaning of § 656.17

When, however, the bank officer grants a loan to a nonfictitious, named debtor who is both financially capable and fully understands that it is the responsibility of such debtor to repay it. Gens reasons,

a loan to him cannot absent other circumstances properly be characterized as sham or dummy, even if bank officials know he will turn over the proceeds to a third party. Instead, what we really have in such a situation are two loans: one from the bank to the named debtor, the other from the named debtor to the third party. The bank looks to the named debtor for repayment of its loan, while the named debtor looks to the third party for repayment of his loan. If for some reason the third party fails to make repayment to the named debtor, the latter nonetheless recognizes that this failure does not end his own obligation to repay the bank. In this situation, the bank official has simply granted a loan to a financially capable party, which is precisely what a bank official should do. There is no natural tendency to injure or defraud the bank, and the official can not be said to have willfully misapplied funds in violation of § 656.18

In United States v. Gallagher, supra, this Court adopted the approach charted in Gens and reversed the conviction of a bank officer who had authorized loans to named debtors but knew that they were intended for someone else. Reversal was held to be mandated because the trial judge neglected to instruct the jury that in order to convict it must find that the officer knew that the named debtors lacked the ability or intent to repay the loans. Without such an instruction, the panel noted, it was possible for the jury to convict solely on the basis of the fact that the bank officer was aware that the loan proceeds would be turned over to another person. Yet, as Gens demonstrates, under those circumstances there might well be no intent to defraud or injure the bank or to deceive its officers, and thus no willful misapplication. For, if the named debtor is creditworthy and understands that he is responsible to repay the loan, "the bank official has simply granted a loan to a financially capable party, which is precisely what a bank official should do." How this party chooses to dispose of the fund so obtained should, in the absence of misrepresentation on his part, be of no interest to the bank, and certainly not to the criminal law. The purpose of the applicable statute is to punish only willful misapplications of bank funds.

Moreover, the factual configuration presented by Gens and Gallagher namely, where a debtor in turn lends the proceeds of the bank loan to a third party with the bank official's knowledge and acquiescence is not far removed from the accepted practice whereby a noncreditworthy person persuades a financially responsible friend, relative, or business associate to assume with him, as an accommodation endorser, an obligation to the bank. Concededly, it may be preferable from the bank's point of view to have both persons borrow the money jointly. But the bank does not in fact suffer any injury, nor is it fraudulently induced to make the loan or its officers deceived, when, as in Gens or Gallagher, only the financially capable person assumes the debt. This is so because in any event the loan was made on the strength of His credit, not on the basis of the credit of the ultimate beneficiary.

It is quite a different matter, however, when a bank officer procures the assistance of another person in obtaining the desired funds for his Own use. In these circumstances, it cannot be said that the bank officer is doing "precisely what a bank official should do." To the contrary, a jury would be warranted in concluding that the loan transaction was undertaken with intent to defraud the bank or to deceive its officers or examiners, notwithstanding the fact that the intermediary may have been financially capable of repaying the loan and undertook to do so. A jury might plausibly deduce that the bank officer, by channeling the funds through another party, sought to conceal from the bank his own interest in the transaction and thereby to circumvent the barrier imposed by both the statute19 and the bank's own regulations to the bank's making the particular loan directly to him.

Given these severe restrictions on the ability of banks to make loans to their own officers, the officer has committed a fraud upon the bank since the loan might not have been approved had the artifice been disclosed on the face of the loan application. Moreover, by concealing the fact that he is the real beneficiary of the loan, the bank officer has deceived the other bank officers and agents who are appointed to examine the affairs of the bank and who are entitled to be kept informed of all loans to bank officers so that they may properly fulfill their duties.20 Further, the bank officer has in effect decided whether a loan should be extended to himself, without disclosing to the bank his own interest in the matter. Consequently, he may not have scrutinized the financial affairs of the named debtor as closely as he might have otherwise, and thus may have fraudulently breached his fiduciary duty to the bank.21

In light of the Inherently fraudulent nature of such transactions, it is understandable that various courts of appeals have upheld convictions for willful misapplication without examining the financial status of the intermediary or his intent to repay the loan.22 The courts have asserted, without explanation, that "(a)n officer who knowingly makes loans for his own private gain is guilty of misapplication."23

The discussion in Hargreaves v. United States, 75 F.2d 68 (9th Cir.) Cert. denied, 295 U.S. 759, 55 S. Ct. 920, 79 L. Ed. 1701 (1935), is instructive in this respect. There, the president of one bank obtained a loan through a series of transactions involving the vice president of a correspondent bank. The court found no error in the following charge to the jury regarding the requisite element of intent:

Take the Brown incident, for instance. There again upon the question of intent the inquiry arises in my mind: What was the necessity of borrowing that money from the Bank of America in the first place? Does it indicate that the defendant in this action did not want his own bank to know about it at the time? The money admittedly was for his use; why didn't he borrow the money from the bank and give his own note for it? If now, in illustrating the case given you a moment ago, if he could not have gotten that money out of his own bank, then the method used would be a misapplication of funds even though the Brown note was fully secured, because it would be taking the money when the right to take it did not exist.24

Though noting that at the time of the loan no inquiry had been made into the creditworthiness of the intermediary,25 the Hargreaves court chose to highlight other aspects of the arrangement:

The transaction was merely a subterfuge. This method was adopted so that the entries on the books and in the reports would not show the true facts that appellant was getting this money from the bank. On his record, the unlawful intent is as clear as the misapplication. By putting the transaction in a fictitious form and thus, in effect, representing to the directors and to the bank that he was making this loan to Brown upon the security of his note, when it was not true, he was deceiving the bank, and incidentally the bank records would not indicate the true nature of the transaction so that government officials would be misled and deceived. In all of this he was deceiving the bank and necessarily defrauding it because of the deceit.26

Essentially, then, it is our view that a willful misapplication in violation of § 656 is established when a bank officer secures a loan for himself by having the bank lend money to a named debtor who then transfers the funds to him, even when the named debtor is financially capable and (fully) understands that it is his legal responsibility to repay the loan. In these circumstances, the very existence of a mediated transaction demonstrates that the bank officer had the measure of criminal intent needed to establish a willful misapplication of bank funds. Because the evidence introduced at trial was sufficient to allow a jury to conclude that Krepps had arranged for the Reedsville National Bank to make loans to the Housers and to McKinnon so that he could then obtain the proceeds of the loans, his convictions under § 656 on the counts arising from those events will be affirmed.

Much of our discussion of the charges brought against Krepps under § 656 is relevant to the disposition of his contentions regarding his convictions for violating 18 U.S.C. § 1005. That section prohibits the making of "any false entry in any book, report, or statement of (any Federal Reserve Bank, member bank, national bank or insured bank) with intent to injure or defraud such bank . . . or to deceive any officer of such bank, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or any agent or examiner appointed to examine the affairs of such bank . . . ."The purpose of the statute proscribing false entries is "to give assurance that upon an inspection of a bank, public officers and others would discover in its books of account a picture of its true condition."27 Accordingly, the Supreme Court stated long ago that, "(t)he crime of making false entries by an officer of a national bank with intent to defraud . . . includes any entry on the books of the bank which is intentionally made to represent what is not true or does not exist, with the intent either to deceive its officers or to defraud the association."28 In addition, courts have held that in ascertaining whether an entry is false the factfinder may focus on whether the transaction is real and substantial as opposed to merely formal.29 And, an entry may be false by virtue of an omission of material information as much as by an actual misstatement.30

In the present case, the bank's books showed loans to the Housers and to McKinnon, but did not reflect Krepps' interest as the ultimate beneficiary of the loans. As discussed above,31 the fact that there is no evidence demonstrating that the named debtors are incapable of repaying the loans, or that they deny their legal obligation to do so, does not shield the true nature of the transactions; they were designed to facilitate Krepps' borrowing of funds by funnelling them through the named debtors. Because those who are charged by law with the examination of these records have a significant interest in obtaining a full picture of the bank's actual condition, including its relationship to its officers, the true nature of the transaction should have been entered in the bank's records. As we have already seen, a jury may plausibly have determined that Krepps intended to deceive the bank's officers or those appointed to examine its books when he omitted from the bank records any reference to his being the beneficiary of the loan.32 Thus, because the bank records indicated only the interest of the Housers and McKinnon in the loans, a jury could reasonably conclude that Krepps caused false entries to be made in violation of § 1005, notwithstanding the fact that the named debtors may have been financially capable of repaying the loan and recognized that they were legally obligated to do so.33IV.

Krepps raises several additional challenges to his convictions34 which after a careful review of the record we have determined to be without merit. Accordingly, the judgment of the district court will be affirmed.