United States v. Petters

857 F.Supp.2d 841

UNITED STATES of America, Plaintiff,

v.Thomas Joseph PETTERS, Defendant.

Crim. No. 08–364 (RHK).

United States District Court, D. Minnesota.

April 24, 2012.

James S. Alexander, Assistant United States Attorney, Minneapolis, MN, for Plaintiff.

Christine L. Nessa, David B. Galle, Marie L. van Uitert, Rebecca G. Sluss, Michelle R. Schjodt, Oppenheimer Wolff & Donnelly LLP, Minneapolis, MN, for Petitioner Crown Bank.

MEMORANDUM OPINION AND ORDER

RICHARD H. KYLE, District Judge.

INTRODUCTION

Petitioner Crown Bank (“Crown”) has filed three Verified Petitions (Doc. Nos. 503, 505, 506) under 21 U.S.C. § 853(n), asserting interests in certain property previously owned by Defendant and forfeited to the United States. The Government now moves to dismiss the Verified Petitions. For the reasons that follow, its Motion will be granted in part and denied in part. ¹

BACKGROUND

Defendant was charged with wire fraud, mail fraud, money laundering, and conspiracy in connection with a large Ponzi scheme he orchestrated over more than a decade. Following a lengthy trial, Defendant was found guilty in December 2009 on all 20 counts in the Superseding Indictment. He then waived his right to a jury determination whether forfeiture of certain property sought by the Government in the Superseding Indictment was appropriate.

On March 26, 2010, the Court issued a Preliminary Order forfeiting to the Government, inter alia, “the net proceeds from the sale of the real property located at 320 Elk Circle, Dillon, Colorado” (the “Keystone Property”); “the real property located at 15823 50th Avenue North, Plymouth, Minnesota” (the “Plymouth Property”); and “the net proceeds from the sale of the Tam O'Shanter Lodge, located at 89405 Jack Pine Drive, Cornucopia, Wisconsin” (the “Wisconsin Lodge”). (Doc. No. 395, ¶¶ 1(b), 1(d), 1(g), 2(b), 2(d), 2(g).) The Court determined that such property “constitutes or is derived from proceeds traceable to” wire and mail fraud and had been “involved in” money laundering, as each was acquired using tainted funds. ( Id. (citing 18 U.S.C. §§ 981–82).)

On October 20, 2011, Crown filed three Verified Petitions with this Court, asserting an interest in the Keystone Property, the Plymouth Property, and the Wisconsin Lodge, respectively. (Doc. Nos. 503, 505, 506.) With respect to the Keystone and Plymouth Properties, Crown alleged that it had loaned money to Defendant from 2002 to 2008 pursuant to a promissory note. (Doc. No. 503, ¶ 2(a)-(b); Doc. No. 505, ¶ 2(a)-(b).) On September 25, 2008, “for value received and in consideration of existing debt and contemplated forbearance on” its right under that note, Defendant executed a mortgage on the Plymouth Property, and a Deed of Trust for the Keystone Property, in favor of Crown. (Doc. No. 503, ¶ 2(c); Doc. No. 505, ¶ 2(c).) With respect to the Wisconsin Lodge, Crown alleged that it had loaned money to Defendant in 2008, pursuant to two different promissory notes. (Doc. No. 506, ¶ 2(a)-(b).) “In order to secure payment of” those notes, Defendant “duly made, executed and delivered to Crown ... a Security Agreement ... providing a 100% Membership Interest in Tam O'Shanter Lodge, LLC to Crown,” which LLC is “the sole owner of the [Wisconsin] Lodge.” ( Id. ¶ 2(c), (e).) As a result of the foregoing, Crown alleged that it had interests in the Keystone and Plymouth Properties and the Wisconsin Lodge superior to that of the Government or, alternatively, that it was a bona fide purchaser for value of those interests. Accordingly, it asserted that the Court's Preliminary Order of Forfeiture should be amended to reflect its property interests.

The Government now moves to dismiss these Verified Petitions.

STANDARD OF REVIEW

Title 21 U.S.C. § 853 “articulates procedures by which third parties may assert their interest in forfeited property.” United States v. Timley, 507 F.3d 1125, 1129 (8th Cir.2007); accord, e.g., United States v. Puig, 419 F.3d 700, 703 (8th Cir.2005). The statute provides, in pertinent part, that “any person, other than the defendant, asserting a legal interest in property which has been ordered forfeited to the United States may ... petition the court for a hearing to adjudicate the validity of his alleged interest in the property.” 21 U.S.C. § 853(n)(2). Such an “ancillary proceeding” is governed by Federal Rule of Criminal Procedure 32.2(c), see Timley, 507 F.3d at 1129, and “closely resembles a civil action,” Pacheco v. Serendensky, 393 F.3d 348, 352 (2d Cir.2004); accordFed.R.Crim.P. 32.2 advisory committee's note to subdivision (c).

As in a civil action, the Government may file a motion to dismiss a third-party petition “for lack of standing, for failure to state a claim, or for any other lawful reason.” Fed.R.Crim.P. 32.2(c)(1)(A). When such a motion has been filed, it is treated like a motion under Federal Rule of Civil Procedure 12(b). In particular, the Court must accept the allegations in the petition as true, seeFed.R.Crim.P. 32.2(c)(1)(A); United States v. White, 675 F.3d 1073, 1076–77 (8th Cir.2012), and dismiss the petition if the Government shows that the claimant is not entitled to relief as a matter of law, that is, where the petition fails to “contain sufficient factual matter ... to state a claim to relief that is plausible on its face,” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). See, e.g., United States v. Salti, 579 F.3d 656, 667 (6th Cir.2009) (citation omitted); United States v. Marion, 562 F.3d 1330, 1342 (11th Cir.2009) ( per curiam ) (citation omitted); Pacheco, 393 F.3d at 352.

ANALYSIS

I. The Wisconsin Lodge

A. Crown cannot challenge forfeiture of the property itself

At the outset, the Court will quickly dispose of Crown's assertion that the Court erred in forfeiting the Wisconsin Lodge, which was owned by Tam O'Shanter Lodge LLC and not Defendant. (Mem. in Opp'n at 8 n. 5.) The claimant in an ancillary proceeding may challenge the forfeiture of its interest in certain property, but “there is no provision in § 853(n) to relitigate the outcome of [the] proceedings [against the defendant].” United States v. Porchay, 533 F.3d 704, 710 (8th Cir.2008). This is because the earlier proceedings “relate to the tracing of property as proceeds of criminal activity,” while “the issues ... address[ed] within § 853(n) proceedings are claims of ownership and priorities of interest vis-à-vis the government and the petitioners.” United States v. Moser, 586 F.3d 1089, 1095 (8th Cir.2009). Accordingly, whatever “error” the Court may have made when forfeiting the Wisconsin Lodge (and the proceeds of its sale) rather than Defendant's interest in the LLC that owned it, that error cannot be litigated by Crown here. See White, 675 F.3d at 1077–78;United States v. Andrews, 530 F.3d 1232, 1236–37 (10th Cir.2008) (“[A] third party has no right to challenge the preliminary order's finding of forfeitability; rather the third party is given an opportunity during the ancillary proceeding to assert any ownership interest that would require amendment of the order.”). ²

B. Crown lacks standing vis-à-vis the Wisconsin Lodge

The Government argues that Crown lacks standing to assert an interest in the Wisconsin Lodge. (Gov't Mem. at 9–14.) To have standing under Section 853(n), a claimant must have a “legal interest” in forfeited property. 21 U.S.C. § 853(n)(2). Yet, Section 853 does not define the term “legal interest.” Accordingly, a court must “look to the law of the jurisdiction that created the [claimant's alleged] property right to determine whether the claimant has a valid interest.” Timley, 507 F.3d at 1129–30.

Crown argues that the Security Agreement by which Defendant pledged all of his ownership interest in Tam O'Shanter Lodge, LLC gives it a legal interest in the Wisconsin Lodge. (Mem. in Opp'n at 11.) This argument misses the mark. As the Government correctly notes, “[t]he United States did not forfeit [Defendant's] membership interests in the Tam O'Shanter Lodge LLC. Instead, the government directly forfeited the lodge itself, the real property.” (Reply at 2.) To have standing, therefore, Crown must establish a legal interest in the Wisconsin Lodge—the property that was subject to forfeiture—rather than an interest in the LLC that, in turn, owned it.³ The Verified Petition alleges only that Crown held an interest in the LLC, which is simply one level too far removed from the forfeited property to have an assertable legal interest here. See United States v. All Funds in Account of Prop. Futures, Inc., 820 F.Supp.2d 1305, 1325–29 (S.D.Fla.2011) (analogizing members of an LLC to stockholders in a corporation and agreeing with the government that, “just as shareholders lack standing to contest the forfeiture of corporate assets, LLC members lack standing to contest the forfeiture of assets owned by an LLC”). Accordingly, Crown lacks standing to assert a claim with respect to the Wisconsin Lodge, and its Verified Petition as to that property will be dismissed.

II. The Keystone and Plymouth Properties

By virtue of the Mortgage and Deed of Trust, the Government recognizes that Crown has a “legal interest” in the Keystone and Plymouth Properties. But having a legal interest in forfeited property is only half the battle. In order to prevail in an ancillary proceeding, a claimant “must either demonstrate priority of ownership at the time of the offense ... or that [it] subsequently acquired the property ... as a bona fide purchaser for value.” Timley, 507 F.3d at 1130 (citing 21 U.S.C. § 853(n)(6)(A)-(B)). Insofar as Defendant used fraud proceeds to purchase the Keystone and Plymouth Properties, Crown cannot establish priority of ownership, and it makes no attempt to do so. See id. (“A third party can never have a successful claim under § 853(n)(6)(A) if the property was the proceeds of an offense.”). Rather, it takes the other tack, arguing that it obtained its interest in the properties as a bona...