Fifth Circuit Court Cases - Case Law and Opinions from the 5th Circuit Federal Court - Court of Appeals

	ROMINGER LEGAL
		Fifth Circuit Court of Appeals Opinions - 5th Circuit
					Need Legal Help?
					Need Legal Help?
LEGAL RESEARCH CENTER
LEGAL RESEARCH CENTER			LEGAL HEADLINES - CASE LAW - LEGAL FORMS	NOT FINDING WHAT YOU NEED? -CLICK HERE

This opinion or court case is from the Fifth Circuit Court or Appeals. Search our site for more cases - CLICK HERE

LEGAL RESEARCH

COURT REPORTERS

PRIVATE INVESTIGATORS

PROCESS SERVERS

DOCUMENT RETRIEVERS

EXPERT WITNESSES

Find a Private Investigator

Find an Expert Witness

Find a Process Server

Case Law - save on Lexis / WestLaw.

Legal News - Legal Headlines

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
___________________________
No. 93-1685
___________________________
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
VERSUS
GARY PALMER,
Defendant-Appellee.
____________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
____________________________________________________
(August 24, 1994)
Before KING, JOLLY and DAVIS, Circuit Judges.
DAVIS, Circuit Judge:
The United States appeals Gary Palmer's sentence following his
plea of guilty to one count of conspiracy to commit bank fraud in
violation of 18 U.S.C. § 371. Because the district court erred in
concluding that the bank suffered no loss, we vacate the sentence
and remand.
I.
Gary Palmer was the president of Liberty National Bank of
Dallas, Texas, and the principal shareholder of Liberty Bancshares,
Inc., the holding company that owned Liberty National Bank. Palmer
was also the sole shareholder of the Texas Acceptance Corporation

("TAC"), the affiliate of Liberty National Bank.1
In 1987, Liberty National Bank needed additional capital.
Palmer and the other officers used the bank's affiliate, TAC, to
purchase real estate loan notes at a discounted value of
$8,986,253. They then sold the notes to Liberty National Bank for
the full face value of $10,886,732. Liberty National Bank listed
the notes on its books and records at the face value. However, the
accounting regulations concerning affiliated transactions required
that the value of the notes be based on the actual cost to TAC, not
the cost to Liberty National Bank.
The difference between the price Liberty National Bank paid
for the notes and TAC's discounted price was ostensibly to be used
to make a capital injection into Liberty National Bank. Instead,
a substantial portion of the excess funds was used to pay debts of
Liberty Bancshares, Inc., and others.2
In 1993, Palmer pled guilty to one count of bank fraud. The
presentence report ("PSR") stated that Palmer's action had caused
1 See 12 U.S.C. § 221a(b)(2) which defines "affiliate" to
include a corporation owned by a majority shareholder of the
bank.
2 Palmer does not contest the Government's statements as to
the disposition of the $1.9 million profit: $536,623 was used to
pay principal and interest on the holding company's debt;
$185,518 was used to pay interest on debentures issued by the
holding company; $40,000 was used to pay off a loan from Liberty
National Bank for Palmer's friend, W.W. White; $45,781 was used
to pay off one loan and $102,994 to pay off another loan in the
name of Palmer's business associate, David Cox; and $52,470 was
used by TAC to purchase real estate from the bank. Approximately
$400,000 was returned to the bank's capital account. The
Government auditor was unable to determine precisely how the
remainder (in excess of $530,000) was spent, but he saw no
indication that it was returned to the bank.
2

a loss of $1,900,000. Therefore, the report recommended a nine-
level increase in Palmer's offense level for causing a loss of more
than $1,000,000 but less than $2,000,000.3 Palmer objected to the
increase and contended that the Bank suffered no loss because the
three entities -- Liberty National Bank, Liberty Bancshares, Inc.
and TAC -- were a single organization with aligned interests that
shared the $1.9 million.
The Government countered that the Bank and Liberty Bancshares
were separate entities and that a reduction of Liberty Bancshares'
indebtedness did not confer any benefit on the Bank. According to
the Government, the principal benefit was to the holding company
and the conspirators who owned the holding company.
At sentencing, the court heard extensive testimony from Jo
Waller, Esq., a former employee of the Texas Securities Board and
the Federal Reserve Bank of Dallas. Waller, relying on the fact
that Liberty National Bank and its holding company had aligned
interests, testified that there was no loss to Liberty National
Bank or to Liberty Bancshares, Inc. as a result of Palmer's
transactions.
The district court rejected the PSR's calculation of the
offense level and refused to assess any points for financial loss.
Instead, the court determined that the offense level was six and
sentenced Palmer to five years of probation. The Government filed
3 The 1987 Sentencing Guideline § 2F1.1(b)(1)(J) provided
for a nine-level increase in offense level for a fraud involving
between $1,000,000 and $2,000,000. The 1987 Sentencing Guideline
Manual was used in calculating Palmer's sentence because the 1993
loss table would have subjected him to increased punishment.
3

a timely notice of appeal.
II.
The Government argues that the district court clearly erred in
finding that the transaction resulted in no loss to the bank. The
Government contends that Palmer caused Liberty National Bank to pay
TAC $1.9 million more than the value of the notes, and that only
$400,000 of this excess was returned to the Bank's capital account.
Therefore, according to the Government, the Bank lost at least $1.5
million.
This court reviews a district court's application of the
sentencing guidelines de novo and the district court's findings of
fact for clear error. United States v. Sanders, 942 F.2d 894, 897
(5th Cir. 1991). The calculation of the amount of loss is a
factual finding. United States v. Wimbish, 980 F.2d 312, 313 (5th
Cir. 1992), cert. denied, 113 S. Ct. 2365 (1993).
The district court concluded that the insured bank sustained
no loss because it considered Liberty National Bank, Liberty
Bancshares, and TAC as one entity. This led the district court to
further conclude that the Bank suffered no loss even though the
holding company used some of the Bank's funds to extinguish
indebtedness of the holding company and for other purposes which
did not improve the financial health of the bank.
We agree with the Government that the district court started
from a faulty premise. A benefit to a holding company is not
necessarily a benefit to the subsidiary. A holding company can
manipulate property and credit of a controlled corporation to
4

benefit itself while damaging the subsidiary: "To deplete the
assets of a subsidiary without consideration for the sole benefit
of the holding company, with resulting loss to the existing general
creditors, is an abuse of corporate powers." Fletcher's Cyclopedia
of Corporations § 2822 (1st ed. 1989).
For example, in FDIC v. Sea Pines Co., 692 F.2d 973 (4th Cir.
1982), cert. denied, 461 U.S. 928 (1983), the parent company
mortgaged the property of the subsidiary in order to pay off loans
of the parent. The Fourth Circuit held that this transaction "was
in no way beneficial to the subsidiary" and justified piercing the
corporate veil in favor of creditors of the parent company. Id. at
977.
The situation here is similar to Sea Pines. A large part of
the bank's $1.9 million profit was used to pay off the holding
company's loans. Liberty National Bank had no liability for the
holding company's loans and thus paying off Liberty Bancshares'
indebtedness did not provide a benefit to the bank.4 If Liberty
Bancshares, Inc., the holding company, had defaulted on its loan
payments, creditors might have acquired its assets, including the
stock of Liberty National Bank. Had this occurred, however, the
Bank would have had new owners, but the Bank's own balance sheet
would not have been affected.
In sum, the Bank did not benefit from the use of these funds
4 A benefit to a subsidiary of a bank, on the other hand,
would benefit the parent bank. Generally, if profits are
funneled to a subsidiary, then the benefit to the subsidiary
increases the stock values held by the parent.
5

by Liberty Bancshares and others to reduce their indebtedness.
Rather, the holding company and its shareholders, such as Palmer,
enjoyed the benefit of these payments. Palmer and other Liberty
Bancshares shareholders also received a huge indirect benefit when
Liberty Bancshare's stock loan was paid because they were personal
guarantors of that loan.
The district court therefore clearly erred in determining that
the bank suffered no loss. The loss to Liberty National Bank
includes that part of the $1.9 million profit that did not benefit
the bank, including the funds used to pay indebtedness of Liberty
Bancshares, Inc., and the debts of Palmer's friends and business
associates, David Cox and W.W. White.
We therefore vacate Palmer's sentence and remand this case to
the district court to determine the amount of Liberty National
Bank's loss consistent with this opinion and for resentencing in
light of that loss.
VACATED and REMANDED.
6