Opinion ID: 2798222
Heading Depth: 2
Heading Rank: 1

Heading: Legal Standards Governing Forfeiture

Text: Section 982 of Title 18 of the United States Code prescribes different forfeiture penalties for different categories of federal crimes. See 18 U.S.C. § 982(a). In seeking forfeiture of USW’s accounts in this case, the government relies on 18 U.S.C. § 982(a)(2), which provides: The court, in imposing sentence on a person convicted of a violation of, or a conspiracy to violate . . . section . . . 1341, 1343, or 1344 of this title, affecting a financial institution, . . . shall order that the person forfeit to the United States any property constituting, or derived from, 15 proceeds the person obtained directly or indirectly, as the result of such violation. 18 U.S.C. § 982(a)(2). The procedures surrounding forfeiture under § 982(a)(2), “including any seizure and disposition of the property and any related judicial or administrative proceeding,” are governed by the provisions of 21 U.S.C. § 853. Id. § 982(b)(1). Among other things, § 853 establishes the procedures by which a third party may claim an interest in funds ordered forfeited to the United States. As a general matter, the section clarifies that “[a]ll right, title, and interest in property . . . [subject to criminal forfeiture] vests in the United States upon the commission of the act giving rise to forfeiture.” 21 U.S.C. § 853(c); see also Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 627 (1989) (“[Section] 853(c) reflects the . . . long‐recognized and lawful practice of vesting title to any forfeitable assets, in the United States, at the time of the criminal act . . . .”). Should an innocent third party claim a legal interest in the forfeitable property, however, § 853(n) allows him to recover his interest through an ancillary proceeding following the preliminary forfeiture order. See id. § 853(n); Willis Mgmt. (Vt.), Ltd. v. United States, 652 F.3d 236, 246 (2d Cir. 2011). Under 16 § 853(n), any third party “asserting a legal interest in property which has been ordered forfeited to the United States pursuant to this section 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). The petition, which is sworn and signed by the petitioner, “shall set forth the nature and extent of the petitioner’s right, title, or interest in the property, the time and circumstances of the petitioner’s acquisition of the right, title, or interest in the property, any additional facts supporting the petitionerʹs claim, and the relief sought.” Id. § 853(n)(3). At the hearing, the petitioner must first establish his standing to challenge the forfeiture order by demonstrating a “legal interest” in the forfeited property under § 853(n)(2). United States v. Ribadeneira, 105 F.3d 833, 835 (2d Cir. 1997); see also United States v. Timley, 507 F.3d 1125, 1129 (8th Cir. 2007). The petitioner must then prove his entitlement to relief on the merits by establishing, through a preponderance of the evidence, one of two superior claims to the property under § 853(n)(6). See 21 U.S.C. § 853(n)(6); Pacheco v. Serendensky, 393 F.3d 348, 351 (2d Cir. 2004). Under § 853(n)(6)(A), the petitioner must demonstrate that he “has a legal right, title, or interest in the property, . . . [that] was vested in the petitioner rather than the defendant or was superior to any 17 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.” 21 U.S.C. § 853(n)(6)(A). Under § 853(n)(6)(B), the petitioner must demonstrate that he “is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture.” Id. § 853(n)(6)(B). At the hearing, the petitioner “may testify and present evidence and witnesses on his own behalf.” Id. § 853(n)(5). In response, the “United States may present evidence and witnesses in rebuttal [of the petitioner’s claims] and in defense of its claim to the property,” including “cross‐examin[ing] witnesses who appear at the hearing.” Id. If the court determines by a preponderance of the evidence that the petitioner has a superior interest in the property, the court “shall amend the order of forfeiture in accordance with its determination.” Id. § 853(n)(6). Following an advance disposition of any third‐party petitions, however, or in the absence of any such petitions, “the United States shall have clear title to property that is the subject of the order of forfeiture and may warrant good title to any subsequent purchaser or transferee.” Id. § 853(n)(7). 18 The procedures governing ancillary proceedings under § 853(n) are further elaborated in Rule 32.2(c) of the Federal Rules of Criminal Procedure. Willis, 652 F.3d at 241. Rule 32.2(c)(1) provides that, where “a third party files a petition asserting an interest in the property to be forfeited, the court must conduct an ancillary proceeding.” Fed. R. Crim. P. 32.2(c)(1). Without proceeding to a formal hearing, however, the “court may, on motion, dismiss the petition for lack of standing, for failure to state a claim, or for any other lawful reason.” Id. 32.2(c)(1)(A). A motion to dismiss a third‐party petition “should be treated like a motion to dismiss a civil complaint under Federal Rule of Civil Procedure 12(b).” Willis, 652 F.3d at 241 (internal quotation marks omitted). To survive a motion to dismiss, the petition need only “state[ ] enough facts to state a claim to relief that is plausible on its face.” Id. at 241‐42 (internal quotation marks omitted). We review a district court’s grant of a motion to dismiss de novo, and may affirm “on any ground which finds support in the record, regardless of the ground upon which the trial court relied.” McCall v. Pataki, 232 F.3d 321, 323 (2d Cir. 2000) (internal quotation marks omitted). We must assume all facts alleged in the petition to be true, affirming the dismissal only where the plaintiff fails to plead any “factual content that allows the court to draw the reasonable inference 19 that” he is entitled to relief. Starr v. Sony BMG Music Entm’t, 592 F.3d 314, 321 (2d Cir. 2010) (internal quotation marks omitted). II. Petitioners’ Standing to Assert a Claim under § 853(n)(2) To establish standing to challenge an order of forfeiture under § 853(n), a petitioner must demonstrate that he has a “legal interest in [the forfeited] property.” Ribadeneira, 105 F.3d at 835; see also 21 U.S.C. § 853(n)(2). The extent of a petitioner’s interest in the forfeited property is determined in accordance with state law. Willis, 652 F.3d at 242. Where the petitioner has no valid interest in the property under state law, “the inquiry ends, and the claim fails for lack of standing.” Timley, 507 F.3d at 1130. The parties do not dispute that USW had a valid legal interest in its four accounts at JP Morgan Chase. Because USW assigned its entire interest in those funds to D&B, petitioners may thus assert a claim to those funds under § 853(n) so long as they can show that D&B’s Assignment from USW was valid under New York law. See United States v. Three Hundred Sixty Four Thousand Nine Hundred Sixty Dollars ($364,960.00) in U.S. Currency, 661 F.2d 319, 326 (5th Cir. 1981) (“Where, as here, the party challenging forfeiture is not the person in possession of the property at the time it was seized but instead purports to be an 20 assignee of that person, the . . . claimant must show that the assignment was valid . . . .”), superseded on other grounds by The Civil Asset Forfeiture Reform Act of 2000, Pub. L. No. 106‐185, 114 Stat. 202. If, by contrast, the August 11, 2011 Assignment is void as a fraudulent conveyance under New York law, D&B has no cognizable interest in the funds and petitioners have no standing to seek an ancillary hearing. See United States v. Real Prop. Located at 5208 Los Franciscos Way, Los Angeles, Cal., 385 F.3d 1187, 1192‐93 (9th Cir. 2004) (holding that undisputed evidence that claimants’ interest in property was based on fraudulent conveyance left district court with “no alternative other than to find that [claimants] lacked . . . standing to contest the forfeiture”). Under the New York Debtor and Creditor Law, “[e]very conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors . . . if the conveyance is made or the obligation is incurred without a fair consideration.” N.Y. Debt. & Cred. Law § 273.2 As the statutory language implies, a fraudulent conveyance under § 273 2 In its motion to dismiss, the government does not specify which provision of the New York Debtor and Creditor Law it invokes to challenge the Assignment, citing only a Bankruptcy Court case that itself cites N.Y. Debt. & Cred. Law §§ 273, 274, and 275. We construe its motion as relying on N.Y. Debt. & Cred. Law § 273, which best fits both the government’s arguments for dismissal and the facts of the case. 21 “is not void per se” in all its applications. Eberhard v. Marcu, 530 F.3d 122, 129 (2d Cir. 2008).3 Rather, as a transaction fraudulent only “as to creditors of the transferor,” it is merely “voidable by creditors of the transferor.” Id. In order to contest the validity of a transfer under § 273, it is thus “well settled” under New York law that the challenger “must be a creditor.” Id.; see also Drenis v. Haligiannis, 452 F. Supp. 2d 418, 428 (S.D.N.Y. 2006) (“In order to bring a cause of action for fraudulent conveyance, the plaintiff must be a creditor of the transferor of the alleged fraudulent conveyance.”). The government insists that petitioners have no standing to assert a claim to the contested funds under § 853(n)(2) because USW’s assignment of the funds to D&B, the sole source of petitioners’ interest in the property, was a fraudulent conveyance. Petitioners counter that the governments lacks standing to challenge the validity of the Assignment because it is not a “creditor” of USW under New York law. We find that the government qualifies as a “creditor” for 3 While Eberhard involves N.Y. Debt. & Cred. Law § 276, governing conveyances made “with intent to defraud,” see id., the relevant language invoking a transferor’s “creditors” is substantially the same in both provisions. Compare N.Y. Debt. & Cred. Law § 276, with id. § 273. 22 the purposes of § 273,4 but conclude that, on the facts of the Petition, we must accept the Assignment as a valid conveyance at this stage.
The New York Debtor and Creditor Law defines a “creditor” as “a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent,” against the transferor. N.Y. Debt. & Cred. Law § 270. This definition has been characterized as a “broad” one. Shelly v. Doe, 671 N.Y.S.2d 803, 805 (3d Dep’t 1998); Drenis, 452 F. Supp. 2d at 428. It includes, 4 In dismissing petitioners’ challenge to the government’s standing, the district court relied primarily on § 853(n)(5), which authorizes the “United States . . . [to] present evidence and witnesses in rebuttal” of a petitioner’s claims. See 21 U.S.C. § 853(n)(5). The court reasoned that this provision clearly anticipates that the government will have standing to contest the validity of a petitioner’s legal interest in the property, including through allegations of a fraudulent transfer. While we do not disagree with the district court’s conclusion, its reasoning confuses the issue of the government’s standing to challenge the petitioner’s claims under § 853(n) with the government’s standing to invalidate fraudulent transfers under N.Y. Debt. & Cred. Law § 273. Petitioners do not question that the government has standing to dispute petitioners’ third‐party claims at the ancillary hearing, including by challenging the validity of the Assignment as a fraudulent conveyance. What they dispute is whether, under New York law, the government is one of the limited parties against whom a fraudulent conveyance is considered “invalid” to begin with, such that the government’s allegations of fraudulence can undermine petitioners’ claims to a legal interest in the property under § 853(n)(2). 23 among other things, “one who has a right to maintain a tort action but has not recovered judgment at the time of the transfer.” Drenis, 452 F. Supp. 2d at 428; see also Shelly, 671 N.Y.S.2d at 805. New York courts have clarified that, in such cases, “the relationship of debtor and creditor arises the moment the cause of action accrues.” Shelly, 671 N.Y.S.2d at 805. The government’s forfeiture claim constitutes a “claim” within the meaning of § 270. We see no reason why the government’s claim to property subject to forfeiture under 18 U.S.C. § 982(a)(2) is any different in this regard from that of a plaintiff in a pending tort action. Just as a plaintiff’s right to recover from a tortfeasor “arises the moment the cause of action accrues,” id., the government’s claim to property subject to criminal forfeiture “vests in the United States upon the commission of the act giving rise to forfeiture,” 21 U.S.C. § 853(c). Whether the United States has received a special verdict entitling it to forfeiture of that property at the time of the transfer, much like whether the plaintiff in a tort case has yet “recovered judgment” on his cause of action, Drenis, 452 F. Supp. 2d at 428, does not change the fact that it has a claim against the account holder. In both cases, the “relationship of debtor and creditor arises the moment” 24 the creditor’s legal right to recover property from the defendant accrues. Shelly, 671 N.Y.S.2d at 805. Petitioners essentially concede this point. Where the government challenges a fraudulent conveyance of forfeitable property owned by a defendant, they admit, “the government is by definition a creditor of the transferor” “by virtue of its forfeiture claim against the criminal defendant.” The difference in this case, they argue, is that the contested funds did not belong to the criminal defendant – that is, to Dupree himself – but only to USW, an innocent third party against whom the government has no forfeiture claim. Petitioners’ argument effectively seeks to relitigate whether USW’s bank accounts at JP Morgan Chase are subject to forfeiture as part of Dupree’s sentence under § 982(a)(2) – a question discussed in greater detail below. For the purposes of petitioners’ standing argument, it suffices to observe that the jury at Dupree’s trial determined that USW’s accounts were forfeitable under § 982(a)(2) as property derived from proceeds traceable to Dupree’s offenses. While those assets may have rested in the hands of USW rather than those of Dupree, the fact remains that, as property subject to a forfeiture under § 982(a)(2), the assets “vest[ed] in the United States upon the commission” of Dupree’s crimes. See 21 25 U.S.C. § 853(c). To the extent that an order of criminal forfeiture renders the government a “creditor” as to any property properly subject to that order, the government’s forfeiture claim against USW’s accounts under § 982(a)(2) rendered the government a “creditor” of USW at the time of the Assignment, regardless of whether USW was charged with any crimes or was a party to the criminal trial.6 Contrary to petitioners’ claims, our holding in Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008), does not compel a different outcome. In Eberhard, we held that a federal securities receiver appointed to conserve a defendant’s estate pending a securities fraud trial “st[ood] only in the shoes” of the defendant and consequently could not invalidate any fraudulent transfers made by that defendant under New York law. Id. at 133. Drawing a weak analogy to the facts of that case, petitioners claim that the government’s order of forfeiture against Dupree placed the government only “in the shoes” of Dupree himself, who cannot qualify as a creditor of USW so as to challenge USW’s assignment to D&B. As discussed above, however, the government’s right to forfeiture under § 982(a)(2) does not place the government “in the shoes” of the criminal 6 Petitioners do not contend, in connection with their standing argument, that the government’s forfeiture order cannot validly encompass USW’s property as a matter of law. 26 defendant. Instead, it gives the government an independent legal claim to any assets traceable to the defendant’s crime, vesting such property in the government from the moment of the crime’s commission. See 21 U.S.C. § 853(c). Under the terms of § 853(c), that is, the government’s right to the forfeited property does not arise because the government “inherits” the defendant’s interests through the forfeiture order; it arises because the government has an independent interest in that property that is superior to the defendant’s own claims. In this case, the government’s right to forfeiture of any property derived from Dupree’s criminal proceeds, including the funds in USW’s accounts at JP Morgan Chase, gave the government an independent legal claim to those funds. That legal claim renders the government a “creditor” of USW with standing to challenge the Assignment as a fraudulent conveyance under New York law. B. Validity of Petitioners’ Assignment under § 273 Section 273 of the New York Debtor and Creditor Law provides that “[e]very conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors . . . if the conveyance is made or the obligation is incurred without a fair consideration.” 27 N.Y. Debt. & Cred. Law § 273. A debtor’s conveyance is thus “deemed constructively fraudulent” under § 273 only if two separate elements are satisfied: first, “it is made without ‘fair consideration,’” and second, “the transferor is insolvent or will be rendered insolvent by the transfer in question.” In re Sharp Int’l Corp., 403 F.3d 43, 53 (2d Cir. 2005). A debtor is considered insolvent when the “present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.” N.Y. Debt. & Cred. Law § 271. Whether the debtor received “fair consideration” entails three elements: first, “the recipient of the debtor’s property must either . . . convey property in exchange or . . . discharge an antecedent debt in exchange”; second, “such exchange must be a fair equivalent of the property received”; and third, “such exchange must be in good faith.” Sharp, 403 F.3d at 53 (internal quotation marks omitted). While transfers “made to benefit third parties” are generally “not made for a fair consideration,” Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, 991 (2d Cir. 1981) (internal quotation marks omitted), fair consideration may be deemed to exist “where the debtor’s discharge of a third person’s debt also discharges his own debt to that third person,” id. at 992; see 28 also HBE Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir. 1995) (applying Rubin to the New York debtor laws). Even a transfer satisfying an antecedent debt to a third party, however, is not made for fair consideration where that third party is “an officer, director, or major shareholder of the transferor.” Sharp, 403 F.3d at 54 (internal quotation marks omitted). The government argues that USW’s assignment to D&B was a fraudulent conveyance under § 273 because USW was insolvent at the time of transfer and failed to receive fair consideration. First, the government claims that certain statements made by the district court in the fall of 2011 demonstrate that USW was effectively defunct at the time of the Assignment. Second, it claims that petitioners failed to establish that USW had any pre‐existing obligation to pay Watts’s legal fees, and that repayment of USW’s alleged antecedent debt to Watts, a corporate officer, cannot constitute fair consideration under New York law. Without reaching the merits of whether USW’s payment of Watts’s legal fees may constitute “fair consideration,” we conclude that, at this stage of the proceedings, the record is simply too bare to support the government’s claims that USW was insolvent so as to render its Assignment fraudulent under § 273. 29 The government’s allegation that USW was insolvent at the time of the Assignment relies entirely on two statements made by the district court during its September 13, 2011 hearing regarding release of USW’s contested funds, in which the court interpreted the parties’ prior representations to suggest that USW was “defunct” and “not operational.” Assuming that the transcript of this hearing is a record of which we may take judicial notice, see Hong Mai Sa v. Doe, 406 F.3d 155, 158 (2d Cir. 2005) (noting that we “can take judicial notice of this Court’s files as well as those of the district court”), the district court’s cursory impressions of USW’s operational status – not a matter litigated by the parties at the hearing – hardly provides compelling evidence, let alone a factual finding, that USW was insolvent at the time of the Assignment. Indeed, the district court’s characterization was immediately disputed by Watts’s attorney, who insisted that USW “hasn’t been shut down” and “could function.” It is true that, in interpreting § 273, New York courts have stated that “the element of insolvency is presumed when a conveyance is made without fair consideration, and the burden of overcoming such presumption is on the transferee.” United States v. Alfano, 34 F. Supp. 2d 827, 845 (E.D.N.Y. 1999); see, e.g., In re Estate of Steele, 925 N.Y.S.2d 250, 253‐54 (3d Dep’t 2011). But see Am. 30 Inv. Bank, N.A. v. Marine Midland Bank, N.A., 595 N.Y.S.2d 537, 538 (2d Dep’t 1993) (“The burden of proving both insolvency and the lack of fair consideration is upon the party challenging the conveyance . . . .”); Murin v. Estate of Schwalen, 819 N.Y.S.2d 341, 343 (3d Dep’t 2006). Even assuming that generally to be the case, we decline to give that presumption dispositive weight at this stage in the proceedings, in evaluating a motion to dismiss. Because, quite understandably, the Petition contains no allegations defending the solvency of USW in anticipation of the government’s challenge, petitioners have received no opportunity to rebut any adverse presumptions that may arise even assuming, arguendo, that USW’s assignment lacked fair consideration. See 21 U.S.C. § 853(n)(3) (third party’s petition need only set forth “the nature and extent of the petitioner’s right, title, or interest in the property, the time and circumstances of the petitioner’s acquisition of the right, title, or interest in the property, . . . and the relief sought”). In reviewing a motion to dismiss, we must accept all facts alleged by the petitioners as true, and may dismiss the petition only if those allegations fail to state a “plausible” claim for relief. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Because the facts alleged in the Petition, prior to petitioners’ receiving 31 the benefit of discovery or even notice of the government’s legal challenge, do not suggest that it is implausible that USW was in fact solvent at the time of the Assignment, we must assume that the Agreement was, as alleged in the Petition, a valid conveyance. Having determined that petitioners have plausibly alleged a legal interest in the contested funds so as to establish standing under § 853(n)(2), we thus proceed to examine whether petitioners have stated a plausible claim to relief under § 853(n)(6).