What happened
Nancy Martin embezzled millions from her employers over several years. Her employers sued her in Kansas state court and won a default judgment of more than $11 million after she never appeared, apparently on her attorney's advice. The federal government then indicted her on one count of bank fraud and four counts of aiding or assisting in the filing of a false tax document, because she had not reported the stolen money as income.
On counsel's advice, she pleaded guilty to the bank fraud count and one tax count, and gave up her right to appeal. She was 78 at sentencing. The court varied downward and imposed 48 months on the fraud count and 36 months on the tax count, concurrently, plus $3.9 million in restitution — $3.2 million to her former employer and $700,000 to the IRS.
Her direct appeal was dismissed because of the appeal waiver. So she hired new counsel and attacked the convictions under 28 U.S.C. § 2255, arguing her trial lawyer had failed to tell her about two things that mattered enormously.
The tax problem: willfulness is the government's burden, not your defense
Section 7206(2) requires that the defendant act willfully. In tax cases, willfully is a term of art. Under Cheek v. United States, the government must prove the law imposed a duty on the defendant, that the defendant knew of that duty, and that she voluntarily and intentionally violated it. Congress set that bar high specifically so that a person is not made a criminal by a bona fide misunderstanding of the tax code.
At the change-of-plea hearing, Martin could not admit willfulness. She told the judge, in plain words, "at the time I did it, I didn't know it was illegal." That should have stopped the proceeding. Instead, the prosecutor suggested that intending to commit the acts was close enough, defense counsel agreed, and the plea was accepted.
Both the district court and the Tenth Circuit agreed that this was deficient performance. Where the district court went wrong was on prejudice. It framed the question as whether the government could have overcome Martin's asserted "good faith belief" — treating good faith as a defense she had to establish. That is backwards. Willfulness is an element, so the government must prove it beyond a reasonable doubt in its own case. Because the district court applied the wrong standard, the Tenth Circuit remanded for a fresh prejudice analysis.
The bank fraud problem: a check is not a statement
The second holding is the sleeper. Clause (2) of the bank fraud statute, 18 U.S.C. § 1344(2), reaches schemes to obtain bank property "by means of false or fraudulent pretenses, representations, or promises." In Loughrin v. United States, the Supreme Court called that means clause a significant textual limitation, satisfied only when the false statement is the mechanism that naturally induces the bank to part with money.
Martin never forged a check. The government's theory was that by presenting checks drawn on her employers' accounts, she implicitly represented that she had authority for those particular transfers. The Tenth Circuit was skeptical, pointing to Williams v. United States, where the Supreme Court held that "technically speaking, a check is not a factual assertion at all," and to the footnote in Loughrin endorsing the view that check kiting cannot be charged under clause (2) precisely because it involves no false representation. The government's best Tenth Circuit support was an unpublished 2006 decision that predates Loughrin and was never binding. A dissenting judge would have kept the implied-misrepresentation theory alive in the circuit.
Critically, the court did not have to decide whether Martin's reading of the statute wins. The question was whether a minimally competent defense lawyer should have found the argument and told her about it. The statute and Loughrin both predated her plea, and other defense lawyers were making the same argument at the same time. Counsel's affidavit never claimed a strategic reason for skipping it — and it mentioned reviewing "the applicable PIK instructions," the Kansas state pattern instructions, in a federal prosecution. The court found that telling.
The disposition
The Tenth Circuit reversed and remanded. The district court must hold an evidentiary hearing on whether counsel considered the Loughrin defense at all, whether she discussed it with Martin, and whether it would have changed Martin's decision to go to trial. It must also redo the prejudice analysis on the tax count under the correct standard. Because Martin was hoping for probation, the court noted she was unlikely to have gone to trial to fight only one of the two counts — so the two prejudice questions may rise and fall together.
Practical takeaways
Embezzled money is taxable income. That has been settled law for decades, and failing to report it converts a civil dispute with your employer into a federal criminal case.
In a criminal tax case, "I didn't understand the law" is not a weak excuse — it goes to an element the government must prove beyond a reasonable doubt. If you ever say that out loud in a plea colloquy, the plea should not go forward.
Ask your lawyer to walk you through each element of each count and explain, element by element, what evidence the government has. If that conversation never happens, something has gone wrong.
Writing checks you were generally authorized to sign is not automatically bank fraud. The government must identify a false statement that induced the bank to release funds, and courts are increasingly unwilling to treat a check itself as that statement.
A plea agreement that waives your right to appeal does not waive everything. A § 2255 motion for ineffective assistance remains available, but it is a harder, slower road than getting the plea right the first time.
Age, health, and a clean record can move a sentence below the guidelines, as they did here. They do not fix a plea to a crime the government could not prove.
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