Daily Development for Wednesday, January 5, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

FEDERAL FORFEITURE; COTENANCIES: Where a criminal defendant owns only a partial interest in real estate, such as a cotenancy, Federal criminal forfeiture against that defendant’s property will affect only that partial interest, and the balance of the cotenancy interest remains unaffected and can pass to third parties through grant or foreclosure.

Pacheco v. Serendensky, 2004 WL 29998622 (2nd Cir. 12/29/04)

A defendant was convicted of conspiracy to commit bank fraud and money laundering.  The government sought to forfeit his interest in certain real estate pursuant to federal criminal forfeiture law. The government alleged that the property had been acquired with the proceeds of the criminal activity.  Appropriate notice was recorded.

The property had been acquired in joint tenancy by the defendant and his wife.  They acquired the property a year after the commencement of the alleged criminal activity.  The wife had no involvement in the criminal activity.  They had taken out a first mortgage loan for $118,000.  Later, they refinanced the first mortgage, in August of 2000, again during the period of the alleged criminal activity.  The court stated that it “assumed” that the first mortgage was discharged at that time, although there appears to be nothing in the record about that.

The refinancing lender did not record its mortgage until November of 2000.  During this approximate 90 day “gap,” the government notice declaring the property potentially subject to forfeiture, was issued and recorded.  A superceding indictment was filed a year later.

The defendant negotiated a guilty plea, including a consent to the forfeitures, and filed the plea on the same day the indictment came down, in 2001.  During the period of plea negotiation, the couple had defaulted on their mortgage.  Ultimately, the refinancing lender had initiated a foreclosure sale, which did not occur until 2002., while the government’s forfeiture action was still pending.  Pacheco purchased from the successful foreclosure bidder the day after the foreclosure sale.  Pacheco and the foreclosure purchaser were on notice of the government’s claim of forfeiture.  Pacheco, at least, also had actual notice.

Pacheco initiated a quiet title action, and a trial court found for the government on all counts.  It held: (1)  that the foreclosure sale was invalid in that federal law prohibit foreclosure sales after a notice of pending forfeiture is filed action and (2) that, even if the foreclosure sale was valid,  Pacheco  was not a BFO and had no claim of an interest antecedent to the government’s forfeiture claim.  Therefore, Pacheco had no interest in the property and lacked standing to quiet title.

On appeal: Held: Reversed in part.  Although the criminal defendant’s interest was validly forfeit, the joint tenancy interest of the wife was not forfeitable, and therefore the bank’s mortgage and, through it, Pacheco’s interest in the wife’s estate was free of the forfeiture and Pacheco could quiet title in it.

To reach this conclusion the court had first to construe the meaning of the word “property” in the federal forfeiture law.  It noted that, although the definition does include “real property,” it also includes “interests and claims.”  The court concluded that the reference to “interests and claims,” even though included in a section of the statute describing personal property, indicates an intention on the part of the drafters to permit forfeiture of a partial interest in real property.  Indeed, if this were not possible, the court commented, there would be doubt as to the Constitutionality of the forfeiture statute entirely, as the wife was not implicated in the criminal conduct and her interest in the property therefore should not have been within the reach of the government.

The court further stated that the law already is clear that civil forfeiture statutes do permit forfeiture of partial interests in real estate, and the Second Circuit panel here joined the Ninth Circuit and the Sixth Circuit in affirming that the civil and criminal forfeiture statutes should be read as creating the same substantive rights and protections.  Thus, the government’s forfeiture action gave it the right only to seize the defendant’s joint tenancy interest.  The court commented:

“No other result seems reasonable. Although partial forfeitures may occasionally make for strange bedfellows--such as making the government co-owners of real property with the spouse of a criminal defendant--the alternative could give the government an undeserved windfall and deny an innocent third party her valid property interest. The purposes of the forfeiture penalty are to punish, deter and disempower criminals, . . .  aims which are not furthered by taking an innocent owner's share. Indeed, we fail to see either how any legitimate interest could be furthered by reading the statute to forbid partial forfeitures or how Congress could have intended to forbid them.” (Citation omitted)

Comment 1: Of course, there is no joint tenancy any more. Pacheco doesn’t have to take the risk that she will survive the government in order to enjoy full ownership.  Upon the forfeiture or the foreclosure (whichever came first), a severance occurred by operation of law and Pacheco’s interest is a tenancy in common.

Comment 2: What if the interest of the spouses is an “impenetrable” tenancy by the entireties?  One assumes that ultimately the court will interpret the federal statute similar to the federal tax lien statute and permit, as a matter of federal supremacy, a severance of the tenancy in common notwithstanding state law.  Note, however, that in the tax lien case, clear federal statutory language supported the result.  It is questionable whether such language exists here.  Nevertheless, the result seems to be the next logical shoe to drop.

Comment 3: Would the bank have escaped the forfeiture entirely if it had timely recorded its refinancing lien?  Would it have been subrogated to the first mortgagee’s lien?  Why isn’t it subrogated anyway?  Is the federal government entitled to bona fide purchaser status under the federal statute, even though it isn’t buying anything? Based upon the results of this case, it would appear so. But perhaps the issue wasn’t argued.

Comment 4:  Incidentally, the government also sought to forfeit $65,000 in men’s jewelry (yes, men’s jewelry) and $2,000,000 in cash.  Certainly quite a trove for a guy living in a $225,000 house in the Bronx..

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