Developer Convicted of Fraud Despite Lender’s Supportive Trial Testimony

Christmas was not so good for James Sandlin. On December 22, 2009, the Court of Appeals for the Fifth Circuit affirmed his bank fraud conviction in what seems to me a highly unusual case. U.S. v. Sandlin, No. 08-41277 (5th Cir.) (Op. filed December 22, 2009).

Sandlin was a developer who applied for a loan to a bank in Sherman, Texas. In his loan packet, he acknowledged having more debt than he disclosed, but failed to list the additional debt. In fact, Sandlin had a near $1 million undisclosed loan outstanding on a piece of property he pledged as collateral to the bank. But wait, at trial, bank representatives testified the bank suffered no loss, they considered their loan to be fully collateralized (despite the undisclosed $1 million debt); in their view Sandlin was not required to list the $1 million debt; and besides, no one in the bank ever reviewed the alleged “false” document in question. Nonetheless, the jury convicted Sandlin of two counts of fraud.

In affirming the conviction, the Fifth Circuit noted that it was Sandlin’s intent, not that of the bank that mattered, so even if the bank was not concerned with the omission, Sandlin still knew the application was false and that was enough to prove fraud. Sandlin’s trial defense appears from the opinion to have been that he had “forgotten” about the $1 million debt at the time of application. That defense failed when the government proved that Sandlin was making monthly interest payments on this loan and had paid nearly $100,000 in interest on that loan the previous year.

It seems to me that a better defense would have been to concentrate more on the bank’s conduct and less on Sandlin’s faulty memory. Everyone is aware of the “winks and nods” that sometimes accompany the lending process. Sandlin could have defended on what the bankers told him and what he understood their expectations to be. That testimony would have mirrored the bankers’ own testimony that they did not care about the extra debt. There simply can be no fraud without deception or an intent to deceive by the borrower.

The bottom line here is that Sandlin’s “I forgot” defense missed the mark. Defending these cases requires an understanding of the system, expectations of the players (stated and unstated), and the ability to exploit that information to the client’s advantage.

Until next time,

Todd

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