The full U.S. Court of Appeals for the Seventh Circuit has agreed to rehear a case on the issue of whether mortgage loan applicants facing federal charges for misstating their income can introduce testimony that their mortgage broker said it wasn’t illegal to do so.
On December 7, the appeals court issued a one-paragraph order granting en banc review of U.S. v. Phillips. The order vacated a 2-1 August 2 panel ruling, which affirmed rulings by Judge Barbara Crabb of the Western District of Wisconsin. Crabb barred testimony about what mortgage broker Brian Bowling said to the two defendants about reporting their income on loan documents. The defendants claimed Bowling urged them to lie about their “stated income.”
Judge Frank Easterbrook, joined by Judge William Bauer, wrote the now-vacated panel opinion. Judge Richard Posner penned a dissent.
Easterbrook’s opinion stated that the statute on which the defendants were convicted, concerning false statement on a residential loan application, “does not require proof of materiality.”
“What Phillips and Hall thought or believed about other matters, such as materiality, is no more relevant than whether Phillips and Hall thought that the loan would contribute to tax evasion, air pollution, or any other element of some other statute. The district court’s order limiting the subjects on which Bowling could testify therefore was proper,” Easterbrook wrote.
In his dissent, Posner wrote that the “defendants are entitled to a new trial and that “the judge’s misunderstanding of the statute led her to exclude evidence that might have exonerated the defendants.”
Posner observed: “What is true is that if a defendant makes a knowingly false statement intending to influence a bank, it is no defense that he didn’t succeed in influencing it or even that he couldn’t have succeeded. Materiality is not an element of the offense punished by section 1014. United States v. Wells, 519 U.S. 482, 484 (1997). Materiality is relevant, however, because if the defendant is under the impression that his falsehood would not influence the bank, it would be unlikely that his purpose in making it had been to influence the bank; what is the point of making an effort to attain what one knows is unattainable?”
A date for an en banc oral argument has not been set.
Lacey Phillips is a hairdresser, and Erin Hall is a barber. They were convicted for making false statements on a residential loan application for the purpose of influencing a federally insured bank and conspiring with Bowling to submit the false application.
According to the panel ruling, the application Bowling prepared in Phillips’s name only because of Hall’s bad credit. It also attributed double their combined income to Phillips and falsely claimed that she was a sales manager at a satellite TV business.
In December 2011, Phillips and Hall were each sentenced to two months’ in prison plus three years’ of supervised release.
Phillips, Hall and Bowling were also sentenced to pay a total of $87,972.00 in restitution.
According to Phillips’ and Hall’s documents, pretrial rulings barred their counsel from cross-examining Bowling about what he told defendants about their income statements on the documents. The rulings also excluded testimony from Hall about what Bowling said on this issue.
The defendants argued in their joint petition for rehearing or rehearing en banc that the panel opinion “allows the federal government to convict countless borrowers used as pawns in the subprime mortgage crisis without presenting evidence that the borrowers intended to influence lenders with a false statement.” That intent is a “critical element” of the statute the defendants were convicted under, according to the defendants’ petition.
That defendants also claimed that the panel opinion runs counter to the Supreme Court’s 1997 ruling the Wells case.
The defendants stated in their petition that they were told that information about their income would not influence the lender, which makes it “trivial.” The panel ruling to exclude evidence about what the defendants were told, they argue, “permits the government to criminalize conduct” that Wells said should not be criminalized.
The borrowers had no previous criminal records and had never purchased a home. They were steered to a high-interest mortgage with an “unsavory subprime lender” according to the petition.
Their petition notes that the broker lied about “almost every aspect of the transaction” and filled out the paperwork himself.
The U.S. Attorney’s Office for the Western District of Wisconsin, it its response to the defendants’ petition, argued that the panel correctly stated that the statute the defendants were convicted under requires the government to prove three elements. These are a knowing false statement, that it’s made to a financial institution and that it’s made to influence that institution.
“The decision correctly holds that intent to influence does not mean the government has to prove that the defendant knew his acts were unlawful,” stated the U.S. Attorney’s Office in its response.
The government also claimed that Wells supports the panel decision and that the defendants have not cited any case law to support their novel interpretation of Wells.
The Western District of Wisconsin U.S. Attorney’s Office did not respond to a request for comment. Assistant United States Attorney Daniel Graber argued for the government before the Seventh Circuit panel
The defendants’ lawyers at Milwaukee’s Godfrey & Kahn declined to comment. Bryan Cahill, a litigation associate in the firm’s Madison office, argued for the defendants before the panel.
Peter A. Bartelt, a solo practitioner in Stoughton, Wis. who also represented the defendants, also declined to comment.
Sheri Qualters can be contacted at email@example.com.