United States v. Osborne

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. ILEANA OSBORNE, et al., Defendant-Appellant.

No. 17-4045

No. 17-4047

No. 19-3182

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

April 2, 2020

NOT RECOMMENDED FOR PUBLICATION

File Name: 20a0191n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO

BEFORE: ROGERS, KETHLEDGE, and LARSEN, Circuit Judges.

ROGERS, Circuit Judge. Following an August 2015 conviction for bank fraud and a $29 million restitution sentence, Ileana Osborne conveyed her one-half interest in a Florida home to her ex-husband, Samuel Osborne, for $100. In a 2012 divorce decree, Ileana also transferred to Samuel her interest in a lawsuit involving the Florida home. The Government alleged that these transfers were fraudulent under the Federal Debt Collection Procedures Act ("FDCPA"). The district court granted summary judgment in favor of the Government. Because a genuine issue of material fact remains as to whether the Florida home lacked a net positive value at the time of the conveyance—and thus whether it did not constitute an "asset" within the reach of the FDCPA—defendants are entitled to a trial on that claim. The same cannot be said, however, of Ileana's right to recover in the Florida lawsuit, which is indisputably an "asset" under the FDCPA, and which Ileana transferred with actual intent to defraud. The district court therefore properly granted summary judgment for the Government on that claim. The district court also correctly dismissed Samuel's equitable contribution claims on the basis of the unclean hands doctrine. Finally, defendants' request to reassign this case to a different district judge on remand is without merit.

I.

In the early 2000s, Ileana Osborne began developing real estate in the panhandle region of Florida. She partnered with investor and real estate developer Jack Coppenger to recruit clients from Ohio who were interested in buying Florida property. Starting in 2004, Ileana and Coppenger began a scheme to commit bank fraud. The scheme involved the use of straw buyers to obtain inflated mortgage loans that would fund real estate purchases at an amount vastly exceeding the asking price. After paying closing costs and a kickback to the straw buyer, Ileana and Coppenger would pocket the difference. Ileana and Coppenger would make payments on the mortgages for a short period and then allow the loans to default. This went on for two years and led to more than $29 million in losses for the banks. Things were going well for Ileana, who, with her then-husband Samuel Osborne, purchased a $1.5 million home on Driftwood Point Road in Santa Rosa Beach, Florida ("the Driftwood property").

In 2006, however, one of the straw buyers sued Ileana and Coppenger in Ohio state court, alleging mortgage fraud. The Ohio court entered judgment against Ileana for nearly $1.7 million in December 2009. By then, Ileana was on the FBI's radar. FBI agents interviewed Ileana and Samuel in April 2009 and advised them that they were persons of interest in the investigation of a large-scale mortgage fraud scheme perpetrated by Coppenger. Federal agents interviewed Ileana again in 2011 at the U.S. Attorney's Office in Cleveland, Ohio, this time under the terms of a proffer agreement.

In January 2012, the Osbornes filed for divorce in Okaloosa County, Florida. The final divorce decree was entered less than two months later in March 2012. The Osbornes agreed to share parental rights and responsibilities and split custody of their children 50/50. The divorce decree also divided up the marital estate. Ileana received a minivan, a one-half interest in the Driftwood property, and two bank accounts worth a total of $129,500. Samuel received four vehicles, a boat worth $200,000, Ileana's consulting company, a $4.3 million civil judgment the Osbornes had obtained against Coppenger, and $141,700 in cash. Samuel also received a $2.7 million judgment against Ileana for the debt she had incurred as a result of her scheme with Coppenger. Samuel assumed responsibility for mortgage payments, utilities, and maintenance associated with the Driftwood property.

The divorce decree also transferred to Samuel Ileana's interest in a civil lawsuit (hereinafter the "Florida lawsuit") filed in Florida state court against Walton County, Florida, as well as several engineering firms and developers. The Florida lawsuit, originally brought by Samuel along with three of his neighbors, alleged that a recently built subdivision nearby was causing substantial flooding, reducing the value of the properties in the Driftwood Estates subdivision. Ileana was later added to the lawsuit in 2010. The divorce decree stated that "the parties have pending litigation against developer for damages to their home. The Husband is solely entitled to collection of damages should the outcome be favorable. The Wife waives any interest she may have now or in the future to any portion of same."

Federal prosecutors indicted Ileana in December 2013, charging her with 45 counts of bank fraud and conspiracy to commit bank fraud. Ileana signed a plea agreement in June 2014. On August 27, 2015, Ileana was sentenced to 38 months' imprisonment and ordered to pay restitution of over $29 million. Four days after she was sentenced, Ileana executed a quitclaim deed,transferring her interest in the Driftwood property to Samuel for $100. On September 8, 2015, the district court entered a final judgment in Ileana's criminal case, amending her sentence to 32 months' imprisonment and reincorporating the $29 million restitution amount.¹

In June 2016, the United States sued Ileana and Samuel Osborne under the Federal Debt Collection Procedures Act ("FDCPA"), alleging both actual and constructive fraudulent transfer of the Driftwood property in violation of 28 U.S.C. § 3304. The Government later amended its complaint, adding a second claim relating to Ileana's transfer of her interest in the Florida lawsuit in 2012. By this time, the Florida lawsuit had settled against the county defendant, resulting in a $1 million settlement. Had she not transferred her interest in the lawsuit, Ileana's portion of the settlement would have been $120,000. Samuel filed counterclaims, arguing that if the Government wins, it should also have to share in the costs of maintaining the Driftwood property and prosecuting the Florida lawsuit.

Following discovery, the United States moved for summary judgment on its affirmative claims and on Samuel's counterclaims. The Osbornes opposed the motions in separate responses, and each filed cross motions for summary judgment as to the Driftwood property claim (count one). In their cross motions, the Osbornes argued that Ileana did not fraudulently convey the Driftwood property because it had a negative net worth and thus its conveyance was not a "transfer" under the FDCPA. "Transfer" is defined in the FDCPA as "disposing of or parting with an asset or an interest in an asset." 28 U.S.C. § 3301(6) (emphasis added). In turn, "asset" is defined as "property of a debtor," but expressly does not include "property to the extent it is encumbered by a valid lien." Id. § 3301(2). As of August 2015, the Driftwood property had amortgage balance of approximately $939,000.² The parties appeared to agree on this much but put forth competing calculations of the property's worth. The Osbornes claimed the property was worth only $875,000, as demonstrated by an appraisal the Osbornes conducted one month prior to Ileana's conveyance. The appraisal was done for purposes of the Florida lawsuit. There was also evidence in the record showing that the Osbornes, who had listed the property for sale, rejected a purchase offer of $906,000. There is no indication of when the offer was made other than that it was before June 2016. On the other hand, the Government argued that the Driftwood property was worth $1.55 million, which was the property's listing price at the time of Ileana's conveyance.³ In the alternative, the Government pointed to the fact that the house was appraised for $1 million one year later in August 2016.⁴

Before the conclusion of summary judgment briefing, the defendants filed a joint motion to disqualify the presiding district judge under 28 U.S.C. §§ 144 and 455. Defendants asserted that, prior to seeing any evidence, the district judge "formed a belief that he was deceived at Ms. Osborne's sentencing hearing by her, her counsel and Mr. Heath, her attorney in a Florida lawsuit." Defendants drew the court's attention to a scheduling conference early in the case during whichthey allege the district judge appeared upset that he had not been notified of Ileana's transfer or otherwise been given an explanation. Defendants claimed that during the conference, the district judge requested extraneous information about who orchestrated the conveyance and who had deceived him. For instance, the judge asked for the names of the notary, witnesses, or preparer of the deed that Ileana had created. Also at the hearing, the district judge referred to the Osbornes' defense as "very interesting" and mentioned that it will be a "difficult case" for the defendants to prove.

According to defendants, the district judge continued to express dismay about what he saw as a lack of candor by Ileana and her counsel during the sentencing hearing in the criminal case. At a later status conference in the civil case, the district judge addressed defendants' counsel as follows:

Did anyone give notice to the government and suggest to the government that "We are going to be making certain transfers and we're doing so not in an attempt to evade restitution here, but we are doing so for the following reasons, and we want you to know this. We're telling you up front, so that we don't have potential problems either before sentencing or after sentencing."

. . . .

Wait a minute. Sorry, sir. You can't have it both ways. You knew that she was pending sentencing here. We've

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