United States v. Daugerdas , 892 F.3d 545 ( 2018 )

17-898-cv
U.S. v. Daugerdas
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2017
(Argued: February 5, 2018 Decided: June 13, 2018)
Docket No. 17-898-cv
UNITED STATES,
Appellee,
— v. —
PAUL M. DAUGERDAS, ERWIN MAYER, DONNA GUERIN, DENIS FIELD, ROBERT
GREISMAN, RAYMOND CRAIG BRUBAKER, DAVID PARSE, BDO USA, LLP,
Defendants,
ELEANOR DAUGERDAS,
Petitioner-Appellant.
B e f o r e:
WALKER, LYNCH, and CHIN, Circuit Judges.
Petitioner-appellant Eleanor Daugerdas appeals from an order of the
United States District Court for the Southern District of New York (William H.
Pauley III, J.), dismissing her petition asserting a third-party interest in certain
accounts (the “Accounts”) preliminarily forfeited in the underlying criminal
proceedings against her husband, Paul M. Daugerdas. The parties agree that Paul
initially funded the Accounts, at least in part, with money he was paid by the law
firm through which he conducted his fraudulent activities, and that he
gratuitously transferred ownership of the Accounts to his wife over a period of
years. Eleanor contends that the law firm irreversibly commingled the income it
received from Paul’s fraudulent-tax-shelter clients with untainted money before
it paid Paul, and accordingly the funds in the Accounts cannot easily be traced to
her husband’s fraud. Eleanor therefore asserts that the Accounts cannot now be
taken from her to satisfy her husband’s forfeiture obligations; instead, she argues,
equivalent amounts must be collected from her husband’s own assets in the same
manner that a judgment creditor would enforce any personal money judgment.
We conclude that Eleanor’s petition does not currently contain sufficient
plausible allegations to sustain her position; however, at oral argument, she
claimed to be able to plead additional facts, and such repleading would not
necessarily be futile. Because denying Eleanor the ability to assert the argument
she raises here could potentially permit the government to deprive her of her
own property without due process of law, we VACATE the district court’s order
and REMAND the case for proceedings consistent with this opinion.
ANDREW C. ADAMS (Anna M. Skotko, on the brief), Assistant
United States Attorneys, for Geoffrey S. Berman, United States
Attorney for the Southern District of New York, New York,
NY, for Appellee.
JAMES R. DEVITA, Doar Rieck DeVita Kaley & Mack, New
York, NY, for Petitioner-Appellant.
2
GERARD E. LYNCH, Circuit Judge:
Petitioner-appellant Eleanor Daugerdas appeals from an order of the
United States District Court for the Southern District of New York (William H.
Pauley III, J.), dismissing her petition asserting a third-party interest in certain
accounts (the “Accounts”) preliminarily forfeited in the underlying criminal
proceedings against her husband, Paul M. Daugerdas.1 The parties agree that
Paul initially funded the Accounts, at least in part, with money he was paid by
the law firm through which he conducted his fraudulent activities, and that he
gratuitously transferred ownership of the Accounts to his wife over a period of
years. Eleanor contends that the law firm irreversibly commingled the income it
received from Paul’s fraudulent-tax-shelter clients with untainted money before
it paid Paul, and that the funds in the Accounts therefore cannot easily be traced
to her husband’s fraud. Eleanor therefore asserts that the Accounts cannot now
be taken from her to satisfy her husband’s forfeiture obligations; instead, she
argues, equivalent amounts must be collected from her husband’s own assets in
the same manner as a judgment creditor would enforce any personal money
judgment.
1
For simplicity and to avoid confusion, we refer henceforth to Mr. and Ms.
Daugerdas by their first names.
3
We conclude that Eleanor’s petition does not currently contain sufficient
plausible allegations to sustain her position; however, at oral argument, she
claimed to be able to plead additional facts demonstrating that the funds in the
Accounts were irreversibly commingled. Because Eleanor did not have an
opportunity to participate in the criminal proceedings against her husband, we
conclude that if such facts exist, denying Eleanor the ability to assert the
argument she raises here could potentially permit the government to deprive her
of her own property without due process of law. Accordingly, we VACATE the
district court’s order and REMAND the case for further proceedings consistent
with this opinion.
DISCUSSION
Eleanor’s argument turns on the complex structure of criminal forfeiture
proceedings. For her position to be understood, it is necessary to clarify certain
aspects of forfeiture law before discussing the facts at issue in this appeal.
I. Legal Framework of Criminal Forfeiture
The government sought forfeiture of Paul’s property pursuant to 18 U.S.C.
§ 981(a)(1)(C) (civil forfeiture)2 and § 982(a)(2)(A) (criminal forfeiture). Forfeiture
2
Pursuant to 28 U.S.C. § 2461(c), any property that is subject to civil forfeiture as
a result of a violation of federal law may also be subject to forfeiture in a federal
4
proceedings under those statutes are governed by 21 U.S.C. § 853 and Rule 32.2
of the Federal Rules of Criminal Procedure. See 18 U.S.C. § 982(b)(1); 28 U.S.C.
§ 2461(c).
Unlike civil forfeiture, which is an in rem action, “criminal forfeiture is an
in personam action in which only the defendant’s interest in the property may be
forfeited.” Fed. R. Crim. P. 32.2(b) advisory comm. notes (2000); see also United
States v. Lester, 85 F.3d 1409, 1413 (9th Cir. 1996) (“[A] criminal forfeiture is an in
personam judgment against a person convicted of a crime.”) (emphasis in original).
Section 853 nevertheless incorporates into criminal forfeiture proceedings aspects
of an in rem proceeding against property tainted by the defendant’s criminal
conduct — including, as relevant here, against the proceeds of that offense — in
order to effectuate Congress’s intent that forfeiture proceedings be used “to
recover all of the [defendant’s] ill-gotten gains but not to seize legitimately
acquired property.” United States v. Porcelli, 865 F.2d 1352, 1365 (2d Cir. 1989).
Under the “relation-back” doctrine of § 853(c), the government’s interest in the
proceeds of a fraud vests as soon as those proceeds come into existence, and is
therefore superior to that of any subsequent third-party recipient of those funds
criminal proceeding. See United States v. Capoccia, 503 F.3d 103, 115 (2d Cir. 2007).
5
(unless the third party is a bona fide purchaser for value).3 See United States v.
Kramer, No. 1:06-cr-200, 2006 WL 3545026, at *4 (E.D.N.Y. Dec. 8, 2006) (observing
that § 853’s relation-back doctrine is consistent with the “long-recognized
common law ‘taint theory’”), citing Caplin & Drysdale, Chartered v. United States,
491 U.S. 617, 627 (1989), and United States v. Stowell, 133 U.S. 1, 16–17 (1890). As a
result, a third-party claimant must assert an interest in the proceeds of an offense
that is superior to the defendant’s at the moment that offense was committed in
order to assert, in a subsequent forfeiture proceeding, an interest in those
proceeds that is superior to that of the government.
But where proceeds are unavailable because, as relevant here, they have
become “commingled with other property which cannot be divided without
3
21 U.S.C. § 853(c) (2016) provides:
All right, title, and interest in property described in
subsection (a) [defining criminal proceeds] vests in the
United States upon the commission of the act giving rise
to forfeiture under this section. Any such property that
is subsequently transferred to a person other than the
defendant may be the subject of a special verdict of
forfeiture and thereafter shall be ordered forfeited to the
United States, unless the transferee establishes in a
hearing pursuant to subsection (n) that he is a bona fide
purchaser for value of such property who at the time of
purchase was reasonably without cause to believe that
the property was subject to forfeiture under this section.
6
difficulty,” § 853(p)(1)(E), “the court shall order the forfeiture of any other
property of the defendant,” § 853(p)(2) (emphasis added), up to the value of the
missing proceeds. This so-called “substitute assets” provision thus “gives the
government the ability to receive, in essence, a general judgment against the
defendant.” United States v. Voigt, 89 F.3d 1050, 1086 n.21 (3d Cir. 1996), quoting
Arthur W. Leach & John G. Malcolm, Criminal Forfeiture: An Appropriate Solution
to the Civil Forfeiture Debate, 10 Ga. St. U. L. Rev. 241, 295 n.164 (1994).
Whether property is forfeited as proceeds or as substitute assets is of
particular import here because § 853(c)’s relation-back doctrine does not apply to
substitute assets. The text of § 853(c) explicitly references § 853(a), which defines
proceeds, but makes no mention of § 853(p), which defines substitute assets. Cf.
United States v. Gotti, 155 F.3d 144, 149 (2d Cir. 1998) (holding that the materially
similar RICO forfeiture provision did not permit pretrial restraint of substitute
assets because the relevant provision included a specific reference to the
subsection defining proceeds and not the one defining substitute assets). In the
same vein, the Supreme Court recently observed in Honeycutt v. United States,
that “§ 853(c) applies to tainted property only.” – U.S. –, 137 S. Ct. 1626, 1633
(2017). And in the absence of the relation-back doctrine, the statute is less than
7
clear about when the government’s interest in substitute property vests.4 The
result is that, if the property is forfeited as a substitute for offense proceeds, there
could be a gap between the moment of the offense conduct and the vesting of the
government’s interest in the property. A third party’s interest could potentially
attach during that interval.
The two-step procedure for completing a forfeiture created by § 853 and
Rule 32.2, however, fails to recognize that possibility. At stage one of that
procedural framework, before entering a preliminary order of forfeiture, the
court is directed to adjudicate the government’s interest vis-à-vis the defendant
“without regard to any third party’s interest in the property.” Rule 32.2(b)(2)(A);
see also 21 U.S.C. § 853(k) (prohibiting third parties from intervening in the initial
forfeiture proceedings of a criminal case). And at stage two, before entering a
4
District courts in our Circuit have come to different conclusions on that issue.
Compare United States v. Peterson, 820 F. Supp. 2d 576, 585 (S.D.N.Y. 2011) (vests
upon return of grand jury indictment noticing forfeiture), with Kramer, 2006 WL
3545026, at *6–8 (vests, at the earliest, when defendant is convicted), and United
States v. Jennings, No. 5:98–cr–418, 2007 WL 1834651, at *4 (N.D.N.Y. June 25,
2007) (vests upon entry of the order granting the motion to forfeit substitute
assets); see also United States v. Egan, 654 F. App’x 520, 521 & n.1 (2d Cir. 2016)
(assuming that the government’s interest vests, “at the very latest, upon entry of
[a preliminary] order of forfeiture concerning that property” but declining to
decide precisely when vesting occurs).
8
final order of forfeiture, the court resolves any third-party petitioner’s interests
vis-à-vis the defendant. See 21 U.S.C. § 853(n)(6)(A) (discussing whether the
petitioner’s interests are superior to any interests “of the defendant”). Frequently,
the government will be seeking to forfeit offense proceeds, and, accordingly, by
operation of the relation-back doctrine, the government’s interest in the contested
property will be identical to that held by the defendant at the time of the offense,
such that those two steps will also conclusively determine the third-party’s
interests vis-à-vis both the government and the defendant. But in the case of
substitute property, where the government’s interest could have vested after the
time of the offense, there is no procedure for determining whether a third-party
petitioner’s interest, which may have been inferior to the defendant’s (or
nonexistent) at the moment of the offense conduct, could nevertheless be
superior to the government’s later-attaching interest. This appeal concerns the
consequences of that glitch in § 853’s procedural structure.
II. Factual and Procedural History
Between 1994 and 2004, Eleanor Daugerdas’s husband, Paul Daugerdas,
was engaged in a massive conspiracy to commit tax fraud and tax evasion. Paul
used his positions first as a tax partner at Altheimer & Gray and subsequently as
9
the managing shareholder and head of the tax practice at the Chicago office of
Jenkens & Gilchrist (“J&G”), to design, market, and implement elaborate but
fraudulent tax shelters intended to help his clients evade their tax obligations.
His scheme generated more than $164 million in criminal proceeds.5 Paul was
indicted in June 2009 and ultimately convicted by a jury in 2013 for his role in the
scheme.
Paul funded the Accounts at issue here using money J&G paid him for his
work at the firm, all of which was implicated in the scheme. Eleanor apparently
does not contest that the funds in the Accounts are traceable to the payments
Paul received from J&G, nor does she contend that the Accounts contained funds
derived from any independent source. Instead, as described below, both husband
and wife have claimed that income from Paul’s tax-fraud clients was untraceably
commingled with other non-tainted funds of the law firm while still in the law
5
In its brief, the government asserts that Paul’s scheme generated “at least $180
million in criminal proceeds.” Appellee’s Br. at 2. It appears to draw that number
from the sixth superseding indictment filed against Paul on July 1, 2013. See id.,
citing No. 1:09-cr-581, Dkt. No. 644. However, in the preliminary order of
forfeiture, the district court found that the government had only established
$164,737,500 worth of proceeds by a preponderance of the evidence at trial. App.
at 103–04. We assume the latter sum is the correct one for the purposes of this
appeal.
10
firm’s accounts, before money was disbursed to him, and that such commingling
severs the traceable link between Paul’s offense conduct and the Accounts.
A. Paul’s Challenges to the Forfeiture
Throughout his criminal proceedings, Paul contested the forfeiture of the
Accounts. Paul raised his initial challenge in response to the government’s
attempt to restrain some of his assets, including the Accounts, following a
mistrial caused by juror misconduct. Paul moved to vacate those restraints so that
he could use the funds to obtain counsel. He asserted that J&G had commingled
the fees collected from his fraudulent clients with non-tainted income from other
sources before disbursing the money to him, and accordingly, in order to forfeit
the Accounts, the government would have to trace the funds therein to those
tainted fees. The district court denied Paul’s motion on two alternative grounds:
First, it held that Paul had failed to demonstrate that he would be unable to pay
his legal fees without access to the Accounts. Second, it held that the government
had carried its burden to show that, because all of the tax shelter fees paid to J&G
“were generated through the criminal acts of Daugerdas and his coconspirators,”
“none of [the funds at issue] would have been obtained but for the fraudulent
11
scheme, . . . and they are subject to seizure as ‘proceeds’ of the fraudulent
scheme.” Gov’t Addendum at 5.
In his sentencing proceedings, Paul reiterated his commingling argument.
The district court again rejected that argument, concluding that the Accounts
were forfeited as “proceeds of the fraudulent scheme.” Gov’t Addendum at 18.
The day after Paul’s sentencing hearing, the court entered a preliminary order of
forfeiture in the amount of $164,737,500 that included, among the enumerated
property to be forfeited, the Accounts.
In September 2016, we affirmed the entry of that order. See United States v.
Daugerdas (“Daugerdas I”), 837 F.3d 212, 218 (2d Cir. 2016). Paul once again made
his commingling argument, which we rejected as follows:
The J&G account from which Daugerdas was paid held
only the funds received by the Chicago office. The trial
evidence established that the entirety of the tax-shelter
fee income received by J&G’s Chicago office — the pool
of money from which Daugerdas was paid — was
generated by Daugerdas’s criminal acts. Based on this
evidence, the district court did not clearly err in
concluding that the funds located in Daugerdas’s
various accounts were the proceeds of his frauds.
Id. (internal citations omitted).
12
At no point during his criminal proceedings or on appeal did Paul argue
that the Accounts were not forfeitable because they no longer belonged to him,
and neither court addressed whether the Accounts would be forfeitable as
substitute property under those circumstances.
B. Eleanor’s Petition
As noted above, Eleanor was barred from directly intervening in Paul’s
criminal proceedings to assert a claim to the forfeited property. See 21 U.S.C.
§ 853(k)(1). Accordingly, in August 2014, while Paul’s direct appeal was pending,
Eleanor filed a petition for a determination of her third-party claims to the
Accounts pursuant to 21 U.S.C. § 853(n). Like her husband, Eleanor asserted that
in order to forfeit the Accounts as offense proceeds, the government was
required to — and did not — trace the money in the Accounts all the way back to
the income J&G received from her husband’s tax-fraud clients before those funds
were commingled with non-tainted funds in J&G’s accounts. Eleanor did not,
however, allege that commingling had actually occurred in the law firm’s
accounts; instead, she merely claimed that the government’s proof that such
commingling had not occurred was incomplete. See App. at 121–22, ¶ 14
(asserting that “[t]he government has failed to sufficiently allege that [the Accounts]
13
had a nexus to the crime” because its supporting affidavit “does not analyze any of
the deposits into Jenkens & Gilchrist accounts or other disbursements from these
accounts”) (emphasis added). Eleanor contended that, in the absence of such an
analysis, the Accounts were forfeitable only as substitute property. Accordingly,
Eleanor argued, because the government is limited to recovering substitute
property from the defendant’s assets, although Eleanor’s interest in the Accounts
was not superior to her husband’s when he committed his fraud, her interest in
them was nevertheless superior to that of the government at the time of the
forfeiture proceedings.
The government moved to dismiss Eleanor’s petition. The district court
granted the government’s motion and dismissed the petition for lack of statutory
standing and failure to state a claim. It observed that Eleanor’s petition sought to
assert that the Accounts were substitute property rather than the proceeds of
Paul’s offense. It determined, however, that the previous rulings in Paul’s
underlying criminal proceedings had established that the Accounts were
forfeited as proceeds, and § 853(n) did not permit third-party petitioners such as
Eleanor to relitigate that issue. Once the funds in the Accounts were deemed to
be proceeds, pursuant to § 853(c), the government’s interest vested at the
14
moment those proceeds came into being. Because Eleanor did not assert any
interest in the funds in the Accounts at that moment, the district court concluded
that her petition failed to state a claim.
Eleanor timely appealed.
III. Analysis
We review a district court’s legal conclusions regarding forfeiture de novo
and its factual determinations for clear error. Daugerdas I, 837 F.3d at 231.
As a preliminary matter, we agree with the district court that Eleanor’s
current § 853(n) petition must be dismissed, although we arrive at that conclusion
by a different route. Section 853(n) directs third parties to file a sworn petition
asserting the nature and extent of their interest. Rule 32.2(c) provides for the
validity of that petition to be adjudicated in a manner similar to a civil case: the
government may respond with a motion to dismiss, Rule 32.2(c)(1)(A), and the
court may either grant that motion and dismiss the petition, or permit the parties
to engage in discovery before holding a hearing on the merits of the petition,
Rule 32.2(c)(1)(B). On a motion to dismiss, a § 853(n) petition is evaluated on the
same standard as a civil complaint on a motion under Rule 12(b)(6) of the Federal
Rules of Civil Procedure. See United States v. Watts, 786 F.3d 152, 161 (2d Cir.
15
2015). Thus, we take all factual allegations alleged in the petition to be true, Rule
32.2(c)(1)(A), but we need not do the same for legal conclusions, Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
In order to prevail on her petition, Eleanor must establish that the
Accounts are forfeited only as substitute property pursuant to § 853(p)(2), rather
than as proceeds of crime, because they contain proceeds that have been
irrevocably commingled with untainted property, as described in § 853(p)(1)(E).
But Eleanor’s petition does not include any facts indicating that commingling
actually occurred. Instead, she alleges only that the government has not
adequately established that the funds in the account are properly traceable to
fraud proceeds. That is a legal argument, not a factual one, and therefore is not
required to be accepted as correct. The petition is thus devoid of any plausible
factual allegations that the forfeited property was, in fact, substitute property
rather than criminal proceeds.
When presented with that point at oral argument, however, counsel
responded that Eleanor should be entitled to try to cure the defect by pleading
16
additional facts about the commingling of funds that she contends occurred.6 We
agree, because, contrary to the district court’s assertion that Eleanor’s claim
would be barred for lack of standing even if it were adequately pleaded, we
conclude that if such facts exist, denying Eleanor the opportunity to present a
viable petition would raise significant due process concerns.7 To make clear why
6
The district court did not consider whether any such commingling by the firm
would, as a matter of law, actually defeat a finding that Paul’s law firm income
constituted the proceeds of his crimes (although, in Paul’s case, it found as a
factual matter that such commingling had not occurred, and we affirmed). The
parties did not raise or brief that issue here. Accordingly, like the parties, we
assume without deciding that if Paul’s fraudulently earned legal fees were
deposited into a firm account that also contained other, legitimately earned
income before all or part of those fees were passed through to Paul, the sojourn
of the fraudulently obtained fees in the firm account would constitute sufficiently
irreversible commingling to vitiate traceability, as described in § 853(p)(1)(E). We
merely note that it is not self-evident why, if Paul’s partnership compensation
was entirely derived from such fees, his income could not itself be considered the
proceeds of fraud. We leave that issue to be addressed by the district court if the
factual predicate for commingling is adequately alleged in Eleanor’s anticipated
amended pleading, and the question is properly raised by the government.
7
Eleanor did not seek leave to replead from the district court, and so ordinarily
we would have discretion to treat that issue as forfeited. But neither the
defendants nor the district court relied on the pleading deficiencies identified by
this Court as a basis for dismissal. Instead, the district court considered itself
bound by its conclusion in Paul’s criminal case that the funds in the Accounts
were proceeds of his crime. On that understanding, no amended factual pleading
could have permitted Eleanor to assert her claim. Eleanor thus had no reason to
seek to leave to amend her petition along the lines discussed above. For that
reason, and because of the significant constitutional rights potentially at stake
17
re-pleading would not be futile, it is necessary to understand the procedural
interests at stake.
A. Statutory Standing under § 853(n)
“It is . . . well settled that section 853(n) provides the exclusive means by
which a third party may lay claim to forfeited assets.” DSI Assocs. LLC v. United
States, 496 F.3d 175, 183 (2d Cir. 2007). Accordingly, we must determine whether
Eleanor could assert her argument in a § 853(n) proceeding. The district court
determined that she could not, and we agree that, in the absence of any
constitutional concerns, the statute would not provide an avenue for her claims,
even if they were adequately pled.
To the extent that the Accounts constitute proceeds of Paul’s offense, or
property traceably derived from such proceeds, the government’s claim to them
would clearly be superior to Eleanor’s interest. As discussed above, § 853(c)’s
relation-back doctrine causes the government’s interest in offense proceeds to
vest as soon as they come into existence, and that vested interest will trump the
here, we exercise our discretion to permit Eleanor an opportunity to replead. See,
e.g., Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 89–90 (2d Cir. 2018) (in
analogous circumstances, permitting plaintiffs to replead who had not sought
leave to replead below).
18
claim of every subsequent gratuitous transferee (such as Eleanor) thereafter. In
other words, the government’s interest in the offense property “relates back” to
the time of the offense.
The question of whether Eleanor can assert her interest in a § 853(n)
proceeding becomes more complicated if she can show that the Accounts are not
themselves proceeds, but are forfeitable only as substitute property. As discussed
above, § 853(p)(2) directs that to be forfeited, substitute property must be the
property “of the defendant.” See Lester, 85 F.3d at 1412 (highlighting that “only
the substitute ‘property of the defendant’ may be forfeited to the Government”)
(emphasis in original); see also United States v. Surgent, No. 04-cr-364, 2009 WL
2525137, at *22 (E.D.N.Y. Aug. 17, 2009), abrogated on other grounds by United
States v. Awad, 598 F.3d 76, 79 (2d Cir. 2010) (“[T]he government must show that
any alleged substitute property is property ‘of the defendant’ before an order
forfeiting that property may be entered.”). But because the relation-back doctrine
of § 853(c) does not apply to substitute property as defined in § 853(p), there is
ambiguity as to when the government’s interest in a defendant’s non-tainted
substitute assets vests and thereby cuts off that defendant’s ability to transfer
those assets gratuitously to third parties.
19
Eleanor contends that she took ownership of the Accounts largely before
any event that would have even arguably caused the government’s interest in
them to attach,8 and therefore they cannot be taken from her to satisfy what
amounts to a personal judgment against her husband. Eleanor’s argument that
recovery should be limited to the defendant’s own untainted assets is wholly
consistent with the principles that would be applied in ordinary civil litigation.
Outside of a bankruptcy proceeding, it is generally not permissible to satisfy an
8
Eleanor states that the bulk of the transfers took place before Paul was indicted;
however, at least three of the relevant transactions occurred after the government
filed a superseding indictment including the forfeiture count. The parties have
not addressed whether all or part of the funds in the Accounts should be deemed
to be Paul’s property rather than Eleanor’s, either because of some defect in the
conveyance to her or because of the timing of those transfers, and none of the
previous opinions in this case have addressed the issue. We note, however, that
the legislative history of the materially similar RICO forfeiture statute evinces a
clear intent that the forfeiture provisions “should be construed to deny relief to
third parties acting as nominees of the defendant or who knowingly engage in
sham or fraudulent transactions.” United States v. Morgan, 224 F.3d 339, 343 (4th
Cir. 2000), quoting S. Rep. No. 98-225, at 3392 n.47 (1984). Courts have
accordingly refused to recognize property interests in similar situations if the
transferee never exercised “dominion and control” over the property, see United
States v. Coffman (“Coffman II”), 612 F. App’x 278, 287 (6th Cir. 2015); Morgan, 224
F.3d at 343, or if the transfer was otherwise invalid as fraudulent, see Surgent,
2009 WL 2525137, at *28; cf. United States v. Carrell, 252 F.3d 1193, 1204 (11th Cir.
2001) (discussing the “innocent owner” doctrine in the context of a civil forfeiture
of property). That issue, too, is left to the district court to consider in the first
instance if properly raised.
20
in personam judgment against one person by seizing property owned by another,
nor can a judgment creditor claw back property that a solvent judgment debtor
previously gave to third parties, even gratuitously, to satisfy the judgment.
But although the relation-back doctrine may not apply to substitute
property as a general matter, § 853(n) (perhaps as a result of Congressional
oversight) effectively imposes the temporal limitations of the relation-back
doctrine even on third-party claims to substitute assets. That provision does not
distinguish between contested property initially forfeited as offense proceeds and
property forfeited as substitute assets; instead, § 853(n)(6)(A) requires that the
third party’s interest in any forfeited property must have been superior to the
defendant’s “at the time of the commission of the acts which gave rise to the
forfeiture.”9
9
Section 853(n)(6)(A) provides that a third-party petitioner can show a superior
right to property subject to forfeiture by establishing that her interest in the
property
[1] was vested in the petitioner rather than the
defendant or [2] was superior to any right, title, or
interest of the defendant at the time of the commission
of the acts which gave rise to the forfeiture of the
property[.]
(bracketed numbers supplied).
21
Although the statute does not define the relevant “acts,” we have
interpreted that language in the context of offense proceeds to refer to the
defendant’s offense conduct because it is that conduct that generates the
forfeiture obligation. See, e.g., Watts, 786 F.3d at 166 (explaining that “a third
party may prevail under § 853(n)(6)(A) only by establishing that he had a legal
interest in the forfeited property before the underlying crime was committed”)
(emphasis in original, internal quotation marks omitted). There has been some
We reject Eleanor’s argument that the temporal limitation in § 853(n)(6)(A)
does not apply to both of its clauses because of the absence of commas setting off
the second clause (which would have made clearer that the qualifying temporal
limitation governs both of the alternative verbs). Section 853(n)(6)(A) describes
the emergence of both kinds of property interests with which it is concerned in
the past tense — a right that “was vested” or an interest that “was superior.” The
use of the past tense verb “was vested” requires specification of some point in the
past at which the vesting occurred, and the only time period referenced in the
provision is “the time of the commission of the acts which gave rise to the
forfeiture.” Accordingly, as the Ninth Circuit pointed out in United States v.
Hooper, “[t]o make sense of [§ 853(n)(6)(A)], it is necessary to read the temporal
requirement — ‘at the time of the commission of the acts which gave rise to the
forfeiture’ — as applying to both ‘vested in the petitioner rather than the
defendant’ and the alternative ‘or was superior to any right, title, or interest of
the defendant.’” 229 F.3d 818, 821 (9th Cir. 2000) (drawing on both textual
analysis and legislative history). We ourselves have said as much in United States
v. Watts, where we explained that “[t]he requirement that the petitioner’s interest
be evaluated ‘at the time of the commission of the acts’ governs our analyses of
both when the property became ‘vested in the petitioner’ and when the
petitioner's interest became ‘superior to any . . . interest of the defendant.’” 786
F.3d at 166 (emphasis added).
22
quiet disagreement over whether the same definition of the relevant “acts”
applies in the context of substitute property. Some have assumed that the term
“acts” in § 853(n)(6)(A) refers to the defendant’s criminal conduct, as it does in
the context of proceeds, while others have argued that it refers to various acts of
the government, for example, when the government first tried and failed to
collect tainted assets from the defendant. See, e.g., United States v. Erpenbeck, 682
F.3d 472, 478 (6th Cir. 2012). Courts coming down on both sides of the question
have assumed that the answer turns on when the government’s interest vests,
and accordingly, those courts holding that the relation-back doctrine applied to
substitute property under § 853(n)(6)(A) have generally concluded that the
relevant “act” is the offense conduct,10 whereas courts holding that the doctrine
does not apply have identified subsequent acts that might cause the
government’s interest to vest.11
10
See, e.g., In re Bryson, 406 F.3d 284, 291 (4th Cir. 2005) (holding that “[b]ecause a
forfeiture is effective at the time of the commission of the act giving rise to the
forfeiture,” the claimant was required to prove that he had a legal interest in the
substitute assets when the offense conduct began) (internal quotation marks and
alteration omitted).
11
See, e.g., Erpenbeck, 682 F.3d at 478 (holding that a third party asserted a
plausible claim to substitute property where its interest attached before the
property became subject to forfeiture, which the court determined was not “until
23
But § 853(n)(6)(A) discusses the rights of a third party vis-à-vis the
defendant, and makes no mention of the government. Reading the provision to
turn on when the government’s interest vests requires an assumption that the
government’s interest is identical to the defendant’s. In the context of substitute
assets, that is not the case, precisely because the § 853(c) relation-back doctrine
does not apply. See Erpenbeck, 682 F.3d at 478; cf. Luis v. United States, – U.S. –, 136
S. Ct. 1083, 1090–93 (2016) (plurality opinion) (holding that the government could
not obtain a pretrial restraint on defendant’s untainted assets because those
assets still belonged to the defendant, regardless of whether they might
subsequently be subject to forfeiture as substitute property).12 We therefore see
the tainted assets exceeded the government’s grasp”); Jennings, 2007 WL 1834651,
at *3 (holding that to determine whether a third party was entitled to a portion of
forfeited substitute assets under § 853(n)(6)(A), “it is necessary to analyze when
the assets vested in the U.S. Government”). We note, however, that a prior
unpublished 6th Circuit opinion apparently determined that the relevant act is,
indeed, the offense conduct, regardless of the theory under which the property is
forfeited. See United States v. O’Brien, 181 F.3d 105 (table), 1999 WL 357755, *2 (6th
Cir. 1999).
12
In Luis, a plurality of the Supreme Court also suggested that § 853(n)(6)(A) is,
in fact, concerned with the government’s interests insofar as it stated that the
provision “exempts certain property from forfeiture when a third party can show
a vested interest in the property that is ‘superior’ to that of the Government.” 136
S. Ct. at 1091 (emphasis added). As discussed above, Luis did not concern third-
party petitions brought under § 853(n) and we therefore do not believe ourselves
24
no basis to conclude that the requirements of § 853(n)(6)(A) are to be evaluated as
of the vesting of a later-attaching interest in the government. Instead, applying
standard tools of statutory interpretation to the plain text of the statute provides
ample support for our conclusion that, in either the context of offense proceeds or
substitute property, the relevant “act” under § 853(n)(6)(A) is the underlying
criminal conduct that triggers the forfeiture obligation.
First, there is no indication in the statutory text that we should be looking
for a different act in the context of substitute assets. Section 853(n)(6)(A) does not
distinguish between third-party claims against proceeds and such claims against
substitute assets. The phrase “acts which gave rise to the forfeiture” is written
broadly and seems to contemplate a fairly attenuated chain of causation: one
could easily conclude that the defendant’s offense conduct is the act giving rise to
the forfeiture of his untainted substitute assets because it is that act that generates
bound by dicta concerning the claims that can be raised in those proceedings.
Similarly, in United States v. Watts, in the course of explaining the effect of
§ 853(c)’s relation-back doctrine on third-party claims to proceeds, we stated that
“a third party may prevail under § 853(n)(6)(A) only by establishing that he had a
legal interest in the forfeited property . . . before the government’s interest
vested.” 786 F.3d at 166 (internal quotation marks omitted). Because substitute
assets were not at issue in that appeal, however, that assertion does not bind us
in the present case.
25
the forfeiture obligation, notwithstanding that additional intervening steps
would need to occur before some specific untainted property was ultimately
forfeited. And, further bolstering the inference that the same definition applies in
both contexts, the statute provides no possible alternative definition of “acts” that
might apply to claims against substitute assets.
Second, and in the same vein, the statute uses substantially similar
language in § 853(c), which provides that the government’s interest in proceeds
vests “upon the commission of the act giving rise to forfeiture under this
section.” There is no real dispute that, in the context of § 853(c)’s relation-back
doctrine, the relevant act is the offense conduct. See Watts, 786 F.3d at 166
(observing that, under § 853(c), the government’s interest vests “upon the
commission of the [offense]”) (alteration in original, internal quotation marks
omitted). And although that doctrine does not itself apply to substitute assets, the
in pari materia canon of statutory interpretation teaches that “language used in
one portion of a statute . . . should be deemed to have the same meaning as the
same language used elsewhere in the statute.” Mertens v. Hewitt Assocs., 508 U.S.
248, 260 (1993).
26
Accordingly, we conclude that § 853(n)(6)(A) treats third-party claims
against property forfeited the same, regardless of whether the property was
forfeited as offense proceeds or as substitute assets. Put another way, even if it is
unclear when, exactly, the government’s interest in substitute property vests,
§ 853(n)(6)(A) permits a third-party claim against a defendant’s untainted
property (out of which an in personam-like forfeiture claim might be satisfied)
only if that interest arose before the offense took place. Thus, the statute does not
appear to authorize Eleanor to present her claim, because her interest concededly
arose after Paul’s offense conduct began. If Eleanor’s interest in Paul’s untainted
property nevertheless vested before, and is therefore superior to, the
government’s interest, however, our inquiry cannot end there: as we discuss
below, depriving her of a hearing in those circumstances would be inconsistent
with the requirements of due process.
B. Constitutional Due Process
In addition to determining that Eleanor lacked statutory standing under
§ 853(n), the district court declared that Eleanor “has no constitutional right to
stand in her husband’s shoes at this juncture and re-assert the due process claims
that he has already litigated here and in the Second Circuit.” App. at 200. We
27
disagree. “It is a violation of due process for a judgment to be binding on a
litigant who was not a party or a privy and therefore has never had an
opportunity to be heard.” Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n.7
(1979). The Due Process Clause does not permit us to hold that a third party is
precluded from asserting, in her own right, her entitlement to property she
claims is hers, on the ground that she is bound by a determination that the
property belonged to someone else, when that determination was made in a
separate proceeding in which she was not permitted to participate. Accordingly,
we conclude that if Eleanor can make a plausible claim that the Accounts were
forfeitable as substitute assets, rather than as offense proceeds, and that the
Accounts were actually under her independent ownership and control before the
government’s interest in them vested,13 then the Due Process Clause entitles her
to do so, and it was error for the district court to suggest otherwise.
13
Resolving Eleanor’s due process claim may well require a determination of
whether her interest in the property is superior to the government’s, which
would in turn require an inquiry into when the government’s interest vested in
the property. But because Eleanor must overcome several hurdles before that
question is reached, we leave it to the district court to take up that inquiry in due
course.
28
That conclusion is based not merely on a theoretical concern for an abstract
right to an opportunity to be heard. There are several reasons to think the prior
proceedings — from which Eleanor was statutorily excluded — might in fact
have been inadequate to fairly determine her interest in the Accounts. A criminal
defendant generally will not have the same incentive as a third-party claimant to
argue that property subject to forfeiture is not his. The defendant will not end up
with the property either way, and he might actually get a windfall if the money
he owes is paid off with someone else’s property. Indeed, it is notable that, in the
present case, Paul never argued that the property should not be forfeited because
it belonged to Eleanor, not to him.14
We also reject the government’s suggestion that a due process problem will
not arise until Eleanor has sought and been refused relief pursuant to § 853(i).
That provision grants the Attorney General discretion to “take any . . . action to
protect the rights of innocent persons which is in the interest of justice and which
14
Moreover, there may be a colorable argument that Rule 32.2’s bar on
considering third-party interests at the preliminary forfeiture stage would have
precluded Paul from arguing that the Accounts could not be forfeited as
substitute assets because they belonged to someone else. See, e.g., United States v.
Coffman (“Coffman I”), 574 F. App’x 541, 563 (6th Cir. 2014) (declining to consider
the defendant’s argument to that effect).
29
is not inconsistent with the provisions of this section.” 21 U.S.C. § 853(i). In DSI
Associates LLC v. United States, however, we observed that a party facing an
imminent deprivation of property in which she claimed an interest “might be
able to argue persuasively that the availability of a remedy through the executive
branch under section 853(i) . . . [is] insufficient to satisfy the Due Process clause.”
496 F.3d at 187. The third-party petitioner in DSI was not at that stage: that
petitioner was determined to be only a general creditor of the defendant, and
thus the extent of its loss, if any — that is, whether it would be able to collect its
debt from the defendant’s assets — was not yet known. In particular, we
observed that DSI had not established that the defendant had no assets outside of
the forfeiture from which DSI’s interest might be satisfied. Id. at 187 n.18. In the
present case, by contrast, Eleanor contends that she will be deprived of a vested
property interest in the Accounts as soon as the forfeiture is permitted to
proceed. An opportunity to ask the Attorney General, acting in her sole
discretion, to return to you property that you contend was yours, and should
never have been taken from you in the first place, is not an adequate substitute
for an opportunity to prevent the taking by presenting your claim of ownership
in court before it occurs.
30
Accordingly, we conclude that Eleanor has a due process right to be heard
by the district court on her claim that the Accounts are her property and thus
may not be forfeited to the government as substitute assets of her husband Paul
in order to satisfy an in personam order of forfeiture against him. We emphasize,
however, that any such right to be heard is contingent on her filing an amended
petition plausibly alleging facts supporting the conclusion that the Accounts
were not forfeitable from Paul as the “proceeds” of his criminal conduct, but only
as accounts containing money that, although in part fraudulently obtained, was
then “commingled with other property which cannot be divided without
difficulty,” 21 U.S.C. § 853(p)(1)(E). The inability of Paul, who presumably had
inside access to the financial practices of the law firm, to demonstrate such
commingling, see note 5 supra, warrants some skepticism about whether Eleanor
can do so, but as we have held above, she is not bound by an adjudication of that
issue against him in a proceeding in which she was not permitted to participate.
CONCLUSION
For the reasons stated above, we VACATE the district court’s order
dismissing Eleanor’s petition and REMAND for further proceedings consistent
with this opinion.
31