Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_04-cv-00204/USCOURTS-caed-2_04-cv-00204-0/pdf.json

Nature of Suit Code: 690
Nature of Suit: Other Forfeiture and Penalty Suits
Cause of Action: 49:781 Forfeiture

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA, 

Plaintiff,

v.

APPROXIMATELY $44,888.35 IN

U.S. CURRENCY, et al., 

Defendants. 

CIV-S-04-0204 DFL DAD

MEMORANDUM OF OPINION 

AND ORDER

This civil forfeiture action arises out of the criminal

investigation and prosecution of Scott Poll and his company, Red

Rock, LLC (“Red Rock”), for a scheme to defraud cable operators

by selling illegal cable descramblers. The United States seeks

forfeiture of approximately $44,888.35 in funds seized on

December 3, 2003 (“defendant funds”) from one of Red Rock’s bank

accounts. North American Bancard (“NAB”) filed a verified claim

to a portion of the defendant funds, which the government now

moves to dismiss. For the following reasons, the court GRANTS

the government’s motion to dismiss. 

I. 

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 1 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

2

The defendant funds were seized on December 3, 2003 pursuant

to a federal seizure warrant. (Mot. at 3.) The government

alleges that the defendant funds represent the proceeds of

specified unlawful activity and are, therefore, subject to civil

forfeiture under 18 U.S.C. § 981(a)(1)(C). (Id.) Specifically,

the government contends that the defendant funds are the proceeds

of the sale of cable descramblers, often purchased over the

internet by individuals using a credit card. (Id. at 2-3.) The

government also alleges that the funds were involved in, or

traceable to, violations of 18 U.S.C. § 1956(a)(1)(A)(I) (money

laundering) and are, therefore, subject to civil forfeiture under

18 U.S.C. § 981(a)(1)(A). 

NAB has filed a verified claim to $35,239.89 of the

defendant funds. NAB is a third-party intermediary for merchants

who are accepted into, and participate in, Global Payment

Direct’s (“Global”) credit card program affiliated with HSBC Bank

as a member of VISA USA and/or MasterCard International, Inc. 

(Opp’n at 1.) It is in this capacity that NAB interacted with

Red Rock, which was a merchant accepted into Global’s credit card

program. 

The basic credit card processing system works as follows. 

When a customer purchases a product from a merchant, such as Red

Rock, with a credit card, the merchant submits these charges to

Global for payment. (Id. at 2.) In response, Global places

funds directly into the merchant’s, in this case Red Rock’s, bank

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 2 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

 In its papers, NAB stated that it, not Global, placed the 1

money in the merchant’s account upon submission of credit card

charges. (Id. Ex. C at ¶ 5.) However, at the hearing on this

matter, NAB’s counsel clarified that Global initially paid the

money into the merchant’s account, not NAB. 

3

account. The charges are then reported on the statements of the 1

individual cardholder as monies owed for charges incurred. 

As part of its role in this system, NAB markets Global’s

credit card purchasing services to merchants, helping to prescreen and sign-up new applicants. (Id. Ex. A at 1.) Once

Global has accepted a merchant into its credit card processing

program, NAB provides various customer services to the merchant

and assists in collecting amounts owed to Global. (Id. Ex. A at

2-3.) Critical to this motion, NAB also plays an important role

in resolving “chargebacks,” which occur when a cardholder

disputes a charge. 

Specifically, when a cardholder informs Visa, MasterCard,

and/or Global of a dispute over an unauthorized or otherwise

improper charge, Global conducts an investigation of the

cardholder’s claim. (Opp’n at 2.) If the chargeback is

substantiated, Global reimburses the cardholder. (Id.) Once

Global reimburses the cardholder, it deducts the chargeback

amount from its payments to NAB and assigns NAB its right to

pursue collection of the chargeback from the merchant. (Reply at

13-14; NAB’s Verified Claim ¶ 4; Opp’n Ex. A at ¶ B.3-4.) Upon

the assignment of Global’s collection rights, NAB has the right

under the contract with the merchant to directly debit or

withdraw the chargeback amount from the merchant’s bank accounts. 

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 3 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

4

(Opp’n at 3.) Merchant authorization is not required for this

debit/deduction. (Id.) 

As a result of the government’s seizure of the funds in Red

Rock’s bank account, NAB was unable to collect from Red Rock

$35,239.89 to cover chargebacks from cardholders who had

purchased descramblers from Red Rock. In these cases, the

cardholder purchased the descrambler prior to the seizure. 

However, during the time that elapsed for the processing and

assignment of these chargebacks to NAB by Global, the government

seized the funds in Red Rock’s account, leaving NAB unable to

collect from Red Rock. (Id. Ex. E.) The reasons for the

chargebacks varied, including claims that: (1) that the charges

were unauthorized; (2) the goods were defective; (3) the

merchandise was not as described; (4) the product was returned;

or (5) the cardholder never received the product. (Id.) 

On November 18, 2004, NAB filed a verified claim to

$35,239.89 of the defendant funds. The government moves to

dismiss or, in the alternative, strike NAB’s verified claim on

two grounds: (1) NAB lacks standing to bring such a claim; and

(2) NAB does not qualify as an “innocent owner” within the

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 4 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

 Although the government brings this motion as a motion to 2

dismiss, NAB has submitted material in opposition to the motion

beyond the scope of its verified complaint. In light of these

submissions, the court treats the government’s motion as one for

summary judgment. Fed.R.Civ.P. 12(c); see Olsen v. Idaho State

Bd. of Med., 363 F.3d 916, 922 (9th Cir. 2004) (stating that

where party opposing summary judgment submits outside evidence,

the court may convert the motion to dismiss into a summary

judgment motion without providing further notice to the party). 

 NAB argues that it need not have a perfected security 3

interest in the specific assets to establish Article III

standing. (Opp’n at 10-11.) However, as stated above, this

argument is at odds with established Ninth Circuit precedent. 

5

meaning of 18 U.S.C. § 983(d). 

2

II. 

A. Article III Standing 

“In a forfeiture case, a claimant’s Article III standing

turns on whether the claimant has a sufficient ownership interest

in the property to create a case or controversy. This threshold

burden is not rigorous.” See United States v. $4,224,958.57, 392

F.3d 1002, 1005 (9th Cir. 2004) (hereinafter “Boylan”) (quoting

United States v. One Lincoln Navigator, 328 F.3d 1011, 1013 (8th

Cir. 2003)). “A claimant need not prove the merit of his

underlying claim. He must, however, be able to show at least a

facially colorable interest in the proceedings sufficient to

satisfy the case-or-controversy requirement.” United States v.

$9,041,598.68, 163 F.3d 238, 245 (5th Cir. 1998). Creditors who

lack a secured interest in the specific property subject to

forfeiture do not have sufficient ownership interest to contest

the forfeiture of the property. United States v. $20,193.39 U.S. 3

Currency, 16 F.3d 344, 346-47 (9th Cir. 1994). 

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 5 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

6

NAB asserts an interest in these funds based upon two

theories: (1) under its contract with Red Rock and Global, it

retains actual ownership of the funds deposited into Red Rock’s

account; and (2) it is the beneficiary of a constructive trust

imposed on the defendant funds. However, neither theory is

persuasive. 

1. Contractual Ownership Theory

NAB argues that, under the terms of the merchant service

agreement (“MSA”) entered into between Global, NAB, and Red Rock,

it retained ownership of the funds deposited into Red Rock’s bank

accounts until the time for customers to assert a chargeback

request expired. (Opp’n at 9-10.) Specifically, NAB argues that

the MSA grants NAB the unfettered right to directly debit or

withdraw the charged-back funds from the merchant’s account. 

(Id. at 3.) Implicit in this right to automatically debit, NAB

argues, is the corresponding obligation of the merchant to hold

the deposited funds in the account until the chargeback period

expires. (Id.) NAB claims that “[i]t is universally recognized

in the industry that funds deposited into the merchant’s account

in response to credit card charges do not belong to Red Rock

until the chargeback process cleared” and that NAB remains the

true owner of these funds until that time. (Id. Ex. C at ¶¶ 8,

10.) 

NAB’s argument finds no support in the terms of the MSA

agreement. The contractual terms make no mention of any

obligation by Red Rock to hold specific funds in its account

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 6 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

 NAB makes reference to industry policy and custom in 4

support of its contractual theory. However, evidence of usage or

custom in the trade is inadmissible to control, vary, or

contradict express terms of the contract. Fireman’s Fund Ins.

Co. v. Mercer Marine Transit Corp., 136 Ga.App. 621, 621-22, 222

S.E.2d 138 (Ga.App. 1975); Varni Bros. Corp. v. Wine World, Inc.,

35 Cal.App.4th 880, 889, 41 Cal.Rptr.2d 740 (1995). If, as NAB

7

until the chargeback period expires. Nor do they suggest that

NAB retains ownership of the funds deposited into Red Rock’s

account. Rather, the language speaks of Red Rock’s obligation to

“pay” Global/NAB the full chargeback amount and states that

chargebacks are “charged to” the merchant’s account. (Id. Ex. B

at ¶¶ 5, 14.) This suggests that when NAB places the funds in

Red Rock’s account, Red Rock becomes the owner of these funds and

NAB/Global merely retains a right to recoup from Red Rock’s

account any chargebacks incurred. 

This reading of the contract is buttressed by a comparison

with the optional reserve account provision in the agreement. 

(Id. ¶ 15.) If a reserve account is established, the MSA grants

Global/NAB a secured interest in the account, which allows

Global/NAB to withdraw funds as it deems necessary and provides

that any funds in the reserve account may be held until the

expiration of any potentially applicable chargeback period. 

(Id.) This contractual language indicates that if NAB wanted to

obligate Red Rock to hold specific funds until certain

chargebacks cleared and, thereby, acquire something akin to a

secured interest in the specific funds, a reserve account was

necessary. NAB does not claim that the defendant funds were held

in such an account.4

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 7 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

argues, there is an implied obligation under industry standards

to hold the funds, that obligation would apply to all Red Rock

accounts, not simply reserve accounts. This would make the

express provisions of the reserve account clause unnecessary. 

Moreover, NAB’s evidence in support of such a policy – one

declaration from an NAB employee – is weak. Accordingly, NAB’s

reference to industry policy and custom also fails. 

8

At most, then, the MSA gives NAB a secured interest in the

Red Rock account from which the defendant funds were seized, but

not in the actual funds. This is a critical distinction because

the defendant in this case is not the Wells Fargo account, but

the specific funds in the account. See United States v.

Bornfield, 145 F.3d 1123, 1136 n.7 (10th Cir. 1998) (noting that

bank account merely holds the property that is subject to

forfeiture). Thus, even if NAB has a secured interest in the

Wells Fargo account, it has not established an ownership interest

in the specific funds in the account. See United States v.

Approximately $178,000.00, CIV-S-03-0640 (E.D. Cal. Jan. 27,

2004) (finding that bank which held general right to

reimbursement did not establish a particular claim to the actual

funds in the customer account). 

Additionally, under the contract, any ownership right or

interest of NAB in the funds did not arise prior to the seizure. 

According to the terms of the MSA, NAB’s contractual right to

debit the account arose when it became obligated to pay certain

chargebacks and credit losses to Global. (Opp’n Ex. C. at ¶ 9.) 

However, NAB did not become obligated to pay the chargebacks in

question until after the government had seized the defendant

funds. (Id. Ex. E.) Therefore, NAB’s right to withdraw the

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 8 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

 NAB asserts that the time of the cardholder’s purchase is 5

the relevant date for determining when its interest arose. 

(Opp’n at 13.) For the reasons given above, however, this

assertion is incorrect. Neither NAB nor Global had a right to

debit Red Rock’s account until, at the earliest, the cardholder’s

chargeback requests was resolved in favor of the cardholder. 

9

funds from Red Rock’s account did not ripen until after the

seizure and, as a result, it cannot make a specific claim to the

defendant funds. See United States v. BCCI Holdings 5

(Luxembourg), S.A., 980 F.Supp. 10, 14-15 (D.D.C. 1997) (holding

that bank with unexercised, inchoate right of set-off against

defendant’s account does not have standing to contest forfeiture

of funds from that account).

For the above reasons, the MSA does not provide NAB standing

to contest the forfeiture of the defendant funds. 

2. Constructive Trust Theory

As an alternative argument, NAB claims standing based on a

constructive trust theory, relying heavily on the Ninth Circuit’s

opinion in Boylan. 392 F.3d at 1005. In Boylan, the Ninth

Circuit held that the victims of a mail fraud scheme had

sufficient Article III standing to contest the government’s

seizure of the funds because they were the beneficiaries of a

constructive trust. Id. at 1004. The court reasoned that “when

a fraudster acquires property from a victim by fraud, the

fraudster holds the property in constructive trust for his

victim.” Id. Accordingly, the Ninth Circuit concluded that

“[i]n the present case, the money fraudulently collected by [the

fraudster] was impressed with a constructive trust. The United

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 9 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

 In fact, NAB never directly deposited money into Red 6

Rock’s account as the result of any representation or

communication by Red Rock. As NAB’s counsel clarified at the

hearing, it was Global who initially credited Red Rock’s account. 

NAB simply indemnified Global and received the right to collect

the chargeback reimbursements from Red Rock’s account. 

10

States, acquiring this property by alleging [the fraudster’s]

fraud, acquired it with the same trust imposed.” Id. 

NAB asserts that, like the claimants in Boylan, it is the

beneficiary of a constructive trust because the funds were

deposited into Red Rock’s account as the result of “numerous and

discrete illegal, fraudulent, or otherwise improper charges

facilitated by Red Rock, LLC in furtherance of its scheme to

defraud the cable operators.” (Opp’n at 6; Verified Claim ¶ 6.) 

NAB was a direct victim of this fraudulent scheme, it contends,

because Red Rock’s improper submission of these illegal charges

caused money to be credited wrongfully to Red Rock’s account. 

(Opp’n at 7.) 

NAB’s reliance on Boylan and the constructive trust theory

is misplaced. Its argument is premised on its assertion that it

was the victim of Red Rock’s fraudulent or illegal cable

descrambler scheme. This characterization is not a fair

representation of the situation. Unlike the plaintiffs in

Boylan, NAB was not the target of the fraudulent scheme and did

not part with money on the basis of false representations by a

fraudster. To the contrary, NAB was simply a financial 6

intermediary that agreed to indemnify Global against potential

chargeback losses. 

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 10 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

11

Rather than a victim, NAB was actually a conduit, albeit an

unwitting one, through which the fraud was perpetuated on the

scheme’s target, the cable operators. In fact, prior to the

government’s seizure of the defendant funds, NAB actually

benefitted from its relationship with Red Rock. Although NAB may

be a victim of the forfeiture, that does not make it a direct

victim or target of Red Rock’s fraudulent or illegal scheme. The

court does not read Boylan as extending standing to all thirdparty intermediaries or indemnitors who are indirectly harmed by

criminal conduct. Accordingly, NAB lacks standing to bring its

claim. 

B. “Innocent Owner” Analysis

Even if NAB has standing, its claim fails because it cannot

satisfy the “innocent owner” requirement of 18 U.S.C. § 983(d). 

The innocent owner inquiry is a separate and distinct inquiry

from the Article III standing inquiry. United States v. Real

Property Located at 5208 Los Franciscos Way, 385 F.3d 1187, 1191

n.3. (9th Cir. 2004). Under § 983(d), the innocent owner

requirements differ depending on whether the claimant’s property

interest in the seized asset was in existence when the illegal

conduct giving rise to the forfeiture took place. 

Where the claimant’s property interest was in existence at

the time of the illegal conduct, the term “innocent owner” means

someone who: (1) did not know of the conduct giving rise to the

forfeiture; or (2) upon learning of the conduct giving rise to

the forfeiture, did all that reasonably could be expected under

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 11 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

12

the circumstances to terminate such use of the property. 18

U.S.C. § 983(d)(2)(A). In contrast, where a claimant’s property

interest arises after the conduct giving rise to the forfeiture,

a claimant must show that it: (1) is a bona fide purchaser or

seller for value; and (2) it did not know and was reasonably

without cause to believe that the property was subject to

forfeiture. 18 U.S.C. § 983(d)(3)(A). 

NAB does not contend that it was a bona fide purchaser. 

Therefore, to satisfy § 983(d), it must show that its property

interest was in existence at the time the illegal conduct giving

rise to forfeiture took place. NAB cannot make this showing. 

Whether based upon its contractual theory or its constructive

trust theory, any property interest of NAB in the seized funds

arose after the allegedly illegal sale of the cable descramblers. 

NAB reiterates its argument that, under the MSA, it retained

ownership of money deposited in Red Rock’s account until the

chargeback period expired. (Opp’n at 13-16.) It contends that

it never ceased being the owner of the defendant funds and that

its ownership interest, therefore, arose prior to the acts giving

rise to the seizure. (Id.) However, for the reasons given

above, any contractual interest in the property arose, at the

earliest, when NAB became liable for the chargebacks and Global

assigned NAB the right to collect the chargeback amount. This

necessarily occurred after the sale of the cable descramblers. 

NAB’s attempted reliance upon the constructive trust theory

is equally unhelpful. This theory is premised on the assumption

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 12 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

13

that a customer has purchased an illegal cable box descrambler,

that a charge for the purchase has been incurred, and that funds

have been placed in Red Rock’s account. NAB claims ownership of

these funds under the constructive trust theory precisely because

they are the proceeds of the scheme to defraud cable operators,

as alleged by the government. Accordingly, NAB’s interest in the

funds could not have arisen prior to the illegal acts giving rise

to the forfeiture. See United States v. Hooper, 229 F.3d 818,

821 (9th Cir. 2000) (holding that an property interest in

criminal proceeds is necessarily acquired after the offense). 

 

 Therefore, NAB also fails to show that it is an “innocent

owner” within the meaning of § 983(d). 

III. 

For the forgoing reasons, the government’s motion is

GRANTED. 

 

IT IS SO ORDERED.

Dated: 8/19/2005

DAVID F. LEVI

United States District Judge

Case 2:04-cv-00204-JAM -DAD Document 38 Filed 08/22/05 Page 13 of 13