Daily Development for
Tuesday, September 3, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

FORFEITURE; LOAN FRAUD; "INNOCENT OWNER:" Filing false loan application is basis for federal government forfeiture of property acquired with the loan.

United States v. Real Property 874 Gartel Drive, Walnut, California, 79 F.3d 918 (9th Cir. 1996)

Owners, assisted by their real estate broker, filed a loan application with a federally insured lender claiming that they owned and operated a catering business earning $8400 per month. In fact, the business in question had an income of around $600 per month. Owners claimed that they signed the form presented to them by their broker without reading it.

Owners borrowed about 2/3 of the purchase price of their home pursuant to this application, paying the balance of the price, around $100,000 in cash. (This probably explains why the bank did not bother to carefully examine the credit here - in California the bank would have had no deficiency rights in any event, and its real security was the "equity cushion" in the home.)

There is no indication that the owners defaulted in the loan. The government nevertheless moved to forfeit their interests in the property because of the false loan application, a violation of 18 U.S.C. § 1014. According to the concurring opinion, the government was of the opinion that one of the owners was a drug dealer, and may have been aggressively pursing a forfeiture action here because of that belief. In any event, the government charged the owners with willfully filing a false loan statement.

Held: Summary judgment for government affirmed. Forfeiture upheld (this round) "innocent owner" defense denied. Owners "obviously knew about, or were willfully blind to" the falsity in the loan application. Apparently the court wasn't even interesting in taking testimony. (The claims concerning the ignorance of the contents of the application appeared on verified responses to interrogatories.)

Note that the government forfeited not only the equity in the property, but also attempted to "forfeit" an additional sum equal to the loan proceeds themselves - $267,000, since these proceeds were the product of an unlawful misrepresentation on the credit report.

Note also that the case is remanded for rulings on whether the Excessive Fines Clause applies on these facts. In particular, note that the concurring judge suggests that it would be relevant if the government were in fact attempting to punish these owners because of their drug dealing, and not because of their false loan application.

Comment: The editor has railed about forfeiture issues before, attempting to stir the blood of DIRT readers to initiate activity in some professional organizations to get some control over this beast. Here we see some new claws. There was no drug offense involved at all in the legal issues here. There were no gangs, no violence. We had parties against whom the government had a grievance, and the government used forfeiture to go after them.

The sole claim is a false loan application. Ever had a client guilty of this? Ever seen a loan broker or real estate broker "assist" an applicant in filling out a form that turned out to be fraudulent? Are you comfortable with forfeiture of a $100,000 asset without even a criminal prosecution on these facts?

Note that the procedural rules in a civil forfeiture of this type are quite a bit more favorable to the government than in a criminal prosecution. As the court points out here, the government need not demonstrate that the owner has actually committed the underlying offense. It need only establish probable cause that the defendant property was involved in the alleged underlying offense, following which the burden shifts to the claimant to establish by a preponderance of the evidence that the defendant property is not subject to forfeiture.

The government may not be knocking at your door yet with forfeiture warrants, but they are one step closer.

FORFEITURE; "INNOCENT OWNER DEFENSE:" To establish that one is an "innocent owner" within the meaning of 18 U.S.C.  981(a)(2), and owner must be unware of the actual criminal acts constituting the forfeitable offence, and mere ignorance of their criminality is not sufficient.

United States v. Real Property 874 Gartel Drive, Walnut, California, 79 F.3d 918 (9th Cir. 1996) (a separate aspect of this case is discussed under the heading: "Forfeiture; Loan Fraud; `Innocent Owner:'")

Owner's $100,000 equity in his home was forfeited on the grounds, inter alia, the property was acquired through a violation of the bank reporting laws in that the down payment consisted of numerous cashier's checks in relatively small amounts, acquired with cash, in order to avoid the requirement that banks report receipt of currency in excess of $10,000.

The owner, accompanied by his real estate broker, bought for cash ten cashier's checks from five different banks (including three branches of one bank), all of them for under $10,000, and used them together to make the $95,000 down payment on the house that was the subject of the forfeiture.

The owner, at the time a resident of Tijuana, Mexico, claimed that he did not know that what he was doing was unlawful and was guided in his conduct by the real estate broker.

Held: Summary judgment of forfeiture affirmed. "An innocent owner . . . must lack knowledge of the transactions; it is not enough to demonstrate ignorance of the transactions.

Comment 1: See comments for separate posting of this case for other issues.

Comment 2: Let us assume that the bank financing this transaction conducted its own closings - a common practice in many parts of the country. The buyer shows up at the closing with ten cashier's checks, each in an amount of $10,000 or less. Although the escrow officer - a bank employee, may not know that there is any illegality here, surely the officer is aware that there has been some scheme employed dealing with cashier's checks of under $10,000. Is this enough to render the bank's loan forfeitable? Does it make a difference if the government suspects the bank of criminal activity on some other front?

What if the bank is owned by a financier who supports a political party hostile to that of the local federal prosecutor? What if the alleged "other criminal activity" is something that might have embarrassing political repercussions for the prosecutor's political enemies? Or what if the prosecutor is attempting to induce the bank to cooperate in an investigation that will cause embarrassment to the prosecutor's political enemies, and is using the threatened forfeiture as leverage? Can't happen?

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.