Opinion
S2 00 Cr. 320 (JGK).
June 30, 2003.
OPINION AND ORDER
The is a motion to dismiss a petition brought by Barbara Pacheco (the "petitioner") asserting an interest in real property located at 228 Revere Avenue Bronx, New York ("the property" or "228 Revere Avenue"). The Government has moved to dismiss the petition on the ground that the property was subject to criminal forfeiture as part of the plea agreement of John Serendensky (the "defendant") and that the petitioner lacks standing under the federal criminal forfeiture statute, 21 U.S.C. § 853, to intervene and to assert an interest in the property. Additionally, the Government also argues that the criminal forfeiture statute barred the foreclosure sale as a result of which the petitioner purchased the property, which also prevents the petitioner from intervening in this action to set aside the forfeiture and requires that the petition be dismissed.
I. A.
The Government sought the forfeiture of 228 Revere Avenue, in the criminal information to which the defendant pleaded, as a result of the defendant's participation in a conspiracy to commit bank fraud and a conspiracy to launder money, and as a result, the procedures governing the forfeiture of 228 Revere Avenue are governed by the federal criminal forfeiture statute, 21 U.S.C. § 853. See 18 U.S.C. § 981(a)(1), (a)(2)A), 982(b)(1). The federal criminal forfeiture statute, 21 U.S.C. § 853, provides that a defendant convicted of certain federal crimes shall forfeit to the Government property that was involved in furtherance of those crimes or that was purchased using the proceeds resulting from illegal activity. 21 U.S.C. § 853(a).
Title 21 § 853(n) provides the exclusive means through which a third party, such as the petitioner, may assert an interest in property that has been forfeited. United States v. Phillips, 185 F.3d 183, 186 (4th Cir. 1999). Section 853(n)(2) provides, in relevant part, that "[a]ny person, other than the defendant, 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). Section 853(n)(6) sets out the standard that a third-party must satisfy in order to have the Court set aside or modify a forfeiture order. That section provides, in relevant part,
If, after a hearing, the court determines that the petitioner has established by a preponderance of the evidence that —
(A) the petitioner has a legal right, title, or interest in the property and such right, title, or interest renders the order of forfeiture invalid in whole or in part because the right, title, or interest was vested in the petitioner rather than the defendant or 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 under this section; or
(B) the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of the purchase reasonably without cause to believe that the property was subject to forfeiture under this section;
the court shall amend the order of forfeiture . . .
These are the only two ways that the petitioner can intervene in this action to prevent the forfeiture of the property, by showing by a preponderance of the evidence that either the petitioner had a "right, title, or interest" in the property at the time of the forfeiture or that the petitioner is a bona-fide purchaser for value. See United States v. Schecter, 251 F.3d 490, 494 (4th Cir. 2001).
The Government has moved to dismiss the petition without holding a hearing. In order to survive the Government's motion to dismiss, the petitioner must make a prima facie showing that the petitioner is entitled to relief under § 853(n)(6)(A) or (B). United States v. Felber, No. 94-60044, 1996 WL 795555, at *1 (Or. Oct. 30, 1996); United States v. Lagrotteria, No. 01-10205, 2003 WL 751013, at *3 (Mass. Mar. 5, 2003). "When it is clear from a third-party claimant's petition that [the petitioner] cannot, as a matter of law, prevail under Section 853(n)(6)(A) or (B), the court may dismiss the petition for lack of standing without conducting a hearing on that claim." United States v. Strube, 58 F. Supp.2d 576, 579 (M.D. Penn. 1999);see also Lagrotteria, 2003 WL 751013, at *3; United States v. East Carroll Correctional Svs., Inc., 14 F. Supp.2d 851, 853 (W.D. La. 1998).
The following facts are alleged in the petition and are undisputed by the parties.
On or about November 10, 1998, John Serendensky (the "defendant") and his wife Maria Caporale purchased 228 Revere Avenue as joint tenants. (Petition ¶ 8a.) This purchase was recorded with the Office of the City Register of the City of New York, Bronx County ("Office of the City Register") on March 4, 1999. (Id.) The defendant and Caporale financed the property through a $115,000 mortgage from Parmann Mortgage Associates, L.L.P. ("Parmann"), and this mortgage was recorded with the Office of the City Register on March 4, 1999. (Petition ¶ 8b.)
In August, 2000, the defendant and Caporale refinanced the mortgage on the property through Wilmington National Finance ("Wilmington"), and received $168,000, which was secured by a lien on the property. (Petition ¶¶ 9-10.) For reasons unknown, the Wilmington mortgage was not recorded in the Office of the City Register until November 30, 2000. (Petition ¶ 12.)
On October 5, 2000, before the Wilmington mortgage was recorded, an indictment, United States v. Joseph Foti, et al., S100 Cr. 320, was filed in the United States District Court for the Southern District of New York, and charged the defendant and other with, among other things, conspiracy to commit bank fraud, in violation of 18 U.S.C. § 371, and conspiracy to launder money, in violation of 18 U.S.C. § 1956(h). (Indictment dated Oct. 5, 2000 ("Indictment") ¶¶ 1, 7.) The indictment alleged the forfeiture of 228 Revere Avenue. (Id. ¶¶ 5b, 14b.) The conduct giving rise to the forfeiture was alleged to have taken place prior to the year 2000. (Id. ¶¶ 1, 7.)
On October 25, 2000 the Government filed a notice of pendency with the Office of the City Register against 228 Revere Avenue. (Petition ¶ 11.)
On July 19, 2001 an information, United States v. John Serendensky, S2 00 Cr. 320, was filed in the United States District Court for the Southern District of New York, and charged the defendant with, among other things, conspiracy to commit bank fraud, in violation of 18 U.S.C. § 371; bank fraud, in violation of 18 U.S.C. § 1344; conspiracy to launder money, in violation of 18 U.S.C. § 1956(h); and conspiracy to commit mail fraud, in violation of 18 U.S.C. § 371. (Information dated July 19, 2001 ("Information") at ¶¶ 1, 7, 9, 17.) The information also alleged the forfeiture of 228 Revere Avenue. (Id. ¶¶ 5b, 16b.) The alleged conduct giving rise to the forfeiture, which was the conspiracy to commit bank fraud and the conspiracy to launder money, was alleged to have occurred from in or about 1996 through in or about October 2000. (Information ¶¶ 1, 9.) The defendant pleaded guilty to all charges in the Information on July 19, 2001. (Petition ¶ 19.) As part of the defendant's plea agreement, the defendant agreed to forfeit his interest in 228 Revere Avenue. (Id.)
Despite the filing of the notice of pendency, Wilmington commenced foreclosure proceedings in New York state court, due to the failure of Serendensky and Caporale to abide by the terms of the mortgage. (Petition ¶ 15.) Despite the filing of the notice of pendency, the Government was not named as a party to the foreclosure proceeding. (Petition ¶ 47.) On May 20, 2002, Jeffrey D. Klein, as referee executed and delivery a Referee's Deed in Foreclosure for 228 Revere Avenue to Plaza Homes, LLC ("Plaza Homes"). (Petition ¶ 17.) This deed was recorded in the Office of City Register. (Id.) On the same day, Plaza Homes executed and delivered a deed for 228 Revere Avenue to the petitioner, and the petitioner's deed was recorded on June 27, 2002. (Petition ¶ 19.)
Although the Court has received a proposed Preliminary Order of forfeiture, an order of forfeiture was not signed, because of the filing of the petition.
B.
The Government first argues that the petition must be dismissed because the foreclosure sale preceding the petitioner's purchase of the 228 Revere Street property was invalid, and as a result, the petitioner does not have any valid legal interest in the forfeited property and could not, therefore, raise a claim under either § 853(n)(6)(A) or (B).
Section 853(k)(2) provides, in relevant part, that
no party. . . . [may] commence an action at law or equity against the United States concerning the validity of his alleged interest in the property subsequent to the filing of an indictment or information alleging that the property is subject to forfeiture under this section.
In this case, there was an indictment filed on October 5, 2000, and that indictment alleged the forfeiture of the property at 2288 Revere Avenue. (Indictment ¶¶ 5b, 14b.) On October 25, 2000, a notice of pendency was filed, and indicated that the Government had an interest in the property. The Information that was filed subsequently on July 19, 2001 also alleged the forfeiture of 228 Revere Avenue. (Information ¶¶ 5b, 16b.) Pursuant to § 853(k)(2) no party could commence an action after October 5, 2000 against the Government for any interest it had in 228 Revere Avenue. See Bank One, N.A. v. Everly, No. 02 Civ. 4641, 2002 WL 31056716, at *1 (N.D. Ill. Sept. 13, 2002).
Wilmington's foreclosure proceeding, which took place sometime in May, 2002, was an action commenced after October 5, 2000 and affected the Government's interest in 228 Revere Avenue, and was thus barred by § 853(k)(2). Although the Government was not a party that proceeding, it had obtained an interest in 228 Revere Avenue because the Government obtains its interest in forfeited property "upon the commission of the act giving rise to forfeiture . . ." 21 U.S.C. § 853(c). The acts giving rise to the forfeiture took place prior to the filing of the indictment and information, and as the information alleges, in or about 1996 to in or about October 2000. (Information ¶¶ 1, 9.) A foreclosure action that affects the interest of the United States but fails to name the United States as a party to that proceeding is still an action barred by § 853(k)(2). Phillips, 185 F.3d at 187-88. A foreclosure proceeding, even if valid under state law, is invalid if it is conducted in violation of § 853(k)(2). Id. at 187-88. Although Wilmington's foreclosure proceedings may have been valid under New York law, the proceedings were in violation of § 853(k)(2) and Wilmington's foreclosure of 228 Revere Avenue was invalid.
After Wilmington obtained a Judgment of Foreclosure, a referee's deed for the property was delivered to Plaza Homes, which sold the property to the petitioner. Because the petitioner obtained its interest in 228 Revere Avenue through a chain of title that was invalid due to Wilmington's failure to abide by the statutory prohibition in § 853(k)(2), the petitioner does not have any cognizable legal interest in 228 Revere Avenue. Cf. Phillips, 183 F.3d at 187 (finding party "could not have obtained a legal interest in the property at the foreclosure sale . . . because the sale itself was invalid").
Without any legal interest in 228 Revere Avenue, the petitioner cannot satisfy either § 853(n)(6)(A) or (B), and therefore lacks standing to bring a petition to prevent the forfeiture of this property.
C.
Moreover, even if the foreclosure proceeding was valid and not in violation of § 853(k)(2), the petitioner cannot make a prima facie showing under either § 853(n)(6)(A) or (B), and therefore lacks standing under § 853 to bring a third-party action.
Section 853(n)(6)(A) allows the petitioner to assert an interest in the forfeited property if the petitioner can demonstrate a legal interest in the property "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). In this case, the Information to which the defendant pleaded guilty alleged that the conduct giving rise to the forfeiture of 228 Revere Avenue took place in or about 1996 through in or about October 2000. The petitioner only gained an interest in 228 Revere Avenue in May, 2002. Consequently, the petitioner cannot state a prima facie case under § 853(n)(6)(A), because the petitioner's interest arose well after the acts giving rise to the forfeiture took place. See United States v. Hooper, 229 F.3d 818, 821-22 (9th Cir. 2000).
To the extent that the petitioner relies on the interest of Wilmington, the petitioner still fails to satisfy § 853(n)(6)(A) because the Wilmington interest vested on Nov. 30, 2000, after the acts giving rise to the forfeiture took place.See infra §§ I(C) — (D).
Section 853(n)(6)(B) provides that the petitioner can assert an interest in the forfeited property if the petitioner was a "bona fide purchaser for value" who was "reasonably without cause to believe that the property was subject to forfeiture" at the time of the purchase. 21 U.S.C. § 853(n)(6)(B). Whether the petitioner was a bona fide purchaser is a question to be determined by state law. See United States v. Harris, 246 F.3d 566, 571 (6th Cir. 2001).
Because the property is located in New York, and the parties do not dispute that, New York law governs the petitioner's status as a "bona fide purchaser." New York has a "race-notice" recording scheme. Therefore, for a party to qualify as a bona fide purchaser whose title to property is superior to that of another prior lien-holder, the party "must have no knowledge of an outstanding lien and win the race to the recording office."Jenkins v. Stephenson, 745 N.Y.S.2d 30, 32 (App.Div. 2002) (quotations omitted); see also Morrocoy Marina, Inc. v. Altengarten, 501 N.Y.S.2d 701, 702 (App.Div. 1986). In order for the petitioner to establish bona fide purchaser status, she must show that she had no knowledge of the outstanding lien, namely the notice of pendency filed by the Government, and that she recorded her interest prior to the time the Government recorded its interest in the property.
The petitioner did not "win the race" to the recording office. The Government filed its notice of pendency against 228 Revere Avenue on October 25, 2000. The chain of title that gave rise to the petitioner's interest in the property originates in the lien that Wilmington placed on the property, a mortgage that was recorded on November 30, 2000. Because the Wilmington mortgage was recorded after the Government recorded its interest, the petitioner could not be a bona fide purchaser because the petitioner's interest was not recorded prior to the interest of the Government, the prior lien holder. See Jenkins, 745 N.Y.S.2d at 31; Burkhart v. George, 644 N.Y.S.2d 773, 773 (App.Div. 1996) (holding that defendant could not be bona fide purchaser where plaintiffs filed and recorded a lis pendens on the property prior to the defendant's recording of title).
Although the Wilmington mortgage was apparently executed months before November 30, 2000, it remained unrecorded for several months. The petitioner does not argue that Wilmington's failure to record in a timely fashion should be excused and does not provide any basis or authority from which to excuse such a failure to record.
In addition, the petitioner could not be a bona-fide purchaser for value because the petitioner was on notice of the Government's prior in time interest in 228 Revere Avenue. When a notice of pendency is filed "a purchaser is charged with constructive notice of litigation if he fails to record the deed prior to the filing of the notice of the pendency." Goldstein v. Gold, 483 N.Y.S.2d 375, 378 (App.Div. 1984). The fact that the petitioner may not have had actual knowledge of the Government's filing of the notice of pendency is irrelevant, because by merely filing the notice of pendency, the petitioner is charged with the knowledge of the United States' interest and the fact that the result of the Government litigation involving the property would affect any rights that the petitioner eventually obtained. See id.; Morrocoy Marina, 501 N.Y.S.2d at 501 ("A lis pendens affords constructive notice from the time of the filing so that any person who records a conveyance or encumbrance after that time becomes bound by all of the proceedings taken in the action.") (internal citation omitted). In this case, the notice of pendency was filed on October 25, 2000, and the petitioner purchased her interest in the property nearly a year and half later in May, 2002, and thus the petitioner had constructive notice of the prior interest. Because the petitioner is charged with having constructive notice of the Government's interest in 228 Revere Avenue from the filing of the notice of pendency, the petitioner was aware of the prior lien on the property and therefore could not be a bona fide purchaser of the property. See id.
The petitioner could not, as a matter of law, be a bona fide purchaser for value, and therefore cannot satisfy the requirements of § 853(n)(6)(B). In addition, because the petitioner is charged with constructive notice of the Government's interest from the filing of the notice of pendency, the petitioner also could not be said to be "reasonably without cause to believe that the property was subject to forfeiture" and thus also cannot satisfy § 853(n)(6)(B).
Because the petitioner cannot satisfy § 853(n)(6)(A) or (B), the petitioner lacks standing to challenge the forfeiture of 228 Revere Street. Strube, 58 F. Supp.2d at 579; Phillips, 185 F.3d at 188.
D.
The petitioner has raised various arguments in opposition to the motion to dismiss, none of which have any merit, and require only the following brief discussion.
The petitioner argues in passing in the petition that the forfeiture of the property should be set aside because the Government did not provide any "valuable consideration" for the property. The petitioner did not renew this argument in the papers opposing the motion to dismiss. In any event, the federal criminal forfeiture statute does not require that the Government provide consideration for property that is forfeited. Property is forfeited as a result of the relevant criminal conduct of defendants, and upon an appropriate judicial order. See 21 U.S.C. § 853(a).
The petitioner first raises various equitable consideration to argue that the property should not be subject to forfeiture. Among other things, the petitioner argues that it is inequitable for the Government to require forfeiture of property for which the petitioner paid valuable consideration and that the petitioner stands to lose a significant amount of money should the forfeiture be finalized. Section § 853(n)(6) contains the only two avenues for a party to assert an interest in forfeited property, and the statute does not permit the Court to set aside a forfeiture, based on other considerations, including equitable ones. As one Court of Appeals explained, "[t]he criminal forfeiture statute . . . protects only two types of transferees of forfeitable property . . . In the face of that clear direction, [the Court is] not at liberty to create other categories." Hooper, 229 F.3d at 822 (finding § 853 did not permit party to raise "innocent spouse" defense to forfeiture). In any event, the petitioner's claim to an equitable exception to the statute is hollow in view of the fact that she purchased the property in face of a clear lis pendens that indicated the prior interest of the United States.
In addition, the petitioner argues that the defendant did not appropriately contest the forfeiture of 228 Revere Avenue, and that he lacked an incentive to contest the forfeiture, given his nominal investment in the property. As explained above, the petitioner lacks standing to intervene in this action. Therefore, the petitioner cannot, on behalf of the defendant, claim that the forfeiture was invalid or that the defendant should not have been forced to forfeit the property. See Strube, 58 F. Supp.2d at 586-87.
The petitioner also argues that the forfeiture is invalid, because the foreclosure sale as a result of which the petitioner purchased her interest was valid under New York State law. The argument is meritless, because state law does not determine the question of whether real property is to be forfeited for violations of the federal criminal law. "State law determines whether [the petitioner has] a property interest, but federal law determines whether or not that interest can be forfeited."Hooper, 229 F.3d at 820. The fact that New York law permitted the foreclosure sale is irrelevant, as a matter of law, as to whether the forfeiture of the 228 Revere Avenue property was valid. See Phillips, 185 F.3d at 188 (noting that where § 853(n)(6) barred party's claim to challenge forfeiture, "[i]t was simply unfortunate that [this party] . . . chose to pursue its interest through a foreclosure proceeding").
In the alternative, the petitioner has argued that to the extent that the forfeiture is valid, only one-half of the property is subject to forfeiture, because the petitioner should be considered a bona-fide purchaser for a portion, and at least one-half, of the property. This argument lacks merit. The petitioner provides no authority to suggest that where property is subject to a notice of pendency, a subsequent purchaser who has constructive notice of the possibility of the forfeiture may still validly obtain and assert an interest in a portion of that property. Also, the criminal forfeiture statute does not provide for partial forfeitures of property.
The petitioner raises the fact that the defendant had a joint tenancy with respect to 228 Revere Avenue with his wife, Maria Caporale, and that the petitioner should be deemed to have purchased the interest of Caporale which was not subject to forfeiture. Even if the petitioner purchased a partial interest in 228 Revere Avenue, such as Corporale's share of a joint tenancy, tenancy in common, or community property, the petitioner would not be able to retain that portion, because courts have consistently held that where an intervening party lacks standing under § 853(n)(6) that party is not entitled to retain a joint or partial interest in forfeited property. See, e.g., Hooper, 229 F.3d at 823 (finding that without standing spouses were not entitled to community property shares of forfeited property). In addition, to the extent that Ms. Caporale had standing to challenge the forfeiture of her husband's property because she was a bona fide purchaser, the petitioner has provided no authority suggesting that a party may rely on a prior owner's rights to challenge a forfeiture, notwithstanding the fact that the party itself lacks standing under the statute and the prior owner never asserted any objections to the forfeiture. Finally, the petitioner argues that on the basis of the doctrine of equitable subrogation, the Court should give the petitioner the status that Wilmington had at the time of the forfeiture, which the petitioner asserts is superior to that of the interest of the Government. The doctrine of equitable subrogation provides that a mortgagee who pays off a prior mortgage without knowledge of the existence of an intervening lien may have its rights subrogated to the rights of the senior mortgage and thus gain priority over the intervening lien holder. See Roth v. Porush, 722 N.Y.S.2d 566, 568 (App.Div. 2001). The doctrine does not apply, where the party seeking subrogation has notice of the intervening lien. R.C.P.S. Assoc. v. Karam Developers, 656 N.Y.S.2d 666, 667 (App.Div. 1997). In this case, the petitioner had knowledge of the intervening interest of the Government through the filing of the notice of pendency and therefore cannot obtain relief through the doctrine of equitable subrogation. In any event, even if the petitioner were given the status that Wilmington had, the petitioner would still lack standing to challenge the forfeiture because the Wilmington interest was recorded after the Government's interest was recorded, thus making Wilmington ineligible for bona fide purchaser protection under § 853(n)(6)(B), and because the Wilmington interest was created after the acts giving rise to the forfeiture, thus making Wilmington ineligible for standing under § 853(n)(6)(A).
Caporale of course could not have standing under § 853(n) (6)(A) because the 228 Revere Avenue property was purchased after the activities giving rise to the forfeiture took place.
CONCLUSION
The remaining arguments are either moot or without merit. For the reasons explained above, the Government's motion to dismiss the petition challenging the forfeiture of 228 Revere Avenue is granted. The United States is directed to submit a final order of forfeiture by July 8, 2003.