There is no published data I’m aware of to support this, but it generally seems that prosecutors decline to charge a white-collar case when an aggrieved company has the resources to pursue a civil action against the fraudster to recover its losses. One factor may be that a business is in a better position to detect and prevent fraud than individual victims whose last dollar may very well have been spent on the fraudulent scheme. This is especially true for companies that are highly regulated, e.g., banks. Also, in Indiana, a plaintiff can plead a fraud case under the Crime Victim’s Relief Act to recover treble damages and attorney fees. This is an added incentive for private lawyers to accept these cases and another reason businesses should assume responsibility for remedying all but the most egregious fraud. In other words, when a corporation gets the wool pulled over its eyes, maybe it should expend its own resources in righting the wrong. A recent decision out of the 7th Circuit is calling this logic into question.
In 2002, Larry Freed (through one of his LLCs) was awarded a grant from the city of Chicago to build commercial real estate in an underdeveloped part of the city. As part of the city’s grant, Freed’s LLC was required to annually certify that it was not in default on any loans. At the same time, Freed obtained traditional financing through the Cole Taylor Bank (the 2002 loan), which was secured in part by the city’s grant. In 2006, two other Freed entities entered into a line of credit, and Freed again pledged the city’s grant as collateral. This constituted an event of default under the 2002 loan with Cole Taylor Bank, which in turn discharged the city’s grant obligations. Nevertheless, Freed continued to certify to the city as part of his grant obligation that he was not in default.
Like many real estate developers during the economic downtown, Freed found himself under water on multiple projects. He made a pitch to Bank of America for a much-needed loan modification to stay afloat. During the pitch, he failed to fully disclose the dire straits of his real estate portfolio, including by again pledging the city’s grant as collateral. Apparently, Bank of America did not investigate this further; Freed got the loan modification. However, one of the terms of the loan modification was that Freed could not withdraw capital from one of his more “successful” ventures in excess of his ability to meet ongoing tax obligations. In reality, that venture was far behind on its taxes. As soon as Bank of America deposited the funds, Freed withdrew more than $1 million. Again, this apparently went unnoticed by Bank of America. But the Cole Taylor Bank, which held the 2002 bank loan, discovered the city’s grant was double pledged and demanded that Freed obtain a release from Bank of America. Freed promised to do so but did not.
This all reads like the intro to a crim law essay question, and you probably are not surprised to learn that Freed was convicted on multiple counts of bank fraud. But consider the final representation that Freed made to the Cole Taylor Bank, specifically, that he would obtain a release from Bank of America for the city’s grant. At the time Freed made that statement, it could have been true. Bank of America was asleep at the switch on the loan modification. It had already taken Freed’s word as gospel twice. Who’s to say whether Freed could have successfully obtained from Bank of America a release of the city’s grant in exchange for the promise of some other bogus collateral? Still, the 7th Circuit upheld Freed’s conviction on this count, holding that a false promise of future performance is actionable as bank fraud.
In Freed, the 7th Circuit expanded criminal liability beyond what is actionable in a civil suit in Indiana. U.S. v. Freed, 921 F.3d 716 (7th Cir. 2019). Contrary to the holding in Freed, the Indiana Court of Appeals has long held that a civil fraud action cannot be based on a broken promise of future conduct. See, e.g., Comfax v. North American Van Lines, 587 N.E.2d 118, 125 (Ind. Ct. App. 1992). Freed sets up a bizarre situation in Indiana in which someone could be convicted of a federal crime based on the same facts that would not support a civil fraud claim. This may result in an uptick of criminal fraud prosecutions (or, at the very least, investigations) where conventional thinking would question whether the dispute is best left to the civil justice system.•
• Jonathan Bont practices in the areas of criminal defense, business litigation and government compliance at Paganelli Law Group. Opinions expressed are those of the author.