United States District Court, Eastern District of New York
June 26, 1991
UNITED STATES OF AMERICA, PLAINTIFF,
CERTAIN FUNDS ON DEPOSIT IN ACCOUNT NO. 01-0-71417, LOCATED AT THE BANK OF NEW YORK; ACCOUNT NO. 01-0-71425, LOCATED AT THE BANK OF NEW YORK; ACCOUNT NO. 092-00011-6, LOCATED AT THE EUROPEAN AMERICAN BANK (EAB); ACCOUNT NO. 81736021878-65, LOCATED AT MANUFACTURERS' HANOVER TRUST CO.; ACCOUNT NO. 81730625199-65, LOCATED AT MANUFACTURERS' HANOVER TRUST CO., DEFENDANTS.
The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM DECISION AND ORDER
Claimants Baer & Baer, Efficient Management Service, Inc. and
137-41 South Fifth Avenue, Inc. ("the Baer Claimants"), move by
order to show cause pursuant to Rule 12 of the Rules for
Admiralty and Maritime Claims of the Eastern District of New
York for the summary release of three of the defendant bank
accounts from arrest and attachment. The Government opposes
this application, which opposition is supported by the
claimants Andrew Paulucci and Andrew Paulucci, Inc.
In addition, claimants Andrew Paulucci, Andrew Paulucci,
Inc., Aurelio Paulucci, David Minor, Julia Paulucci, Michael
Jacobs and Rosemary Jacobs ("the Paulucci Claimants"), move for
leave to file late notices of claim.
For the reasons that follow, the motion of the Baer Claimants
for summary release of the seized funds is denied, and the
motion of the Paulucci Claimants for leave to file late notices
of claim is granted.
I. FACTUAL BACKGROUND
United Independent Federal Credit Union ("United"), is a
federal credit union located in the State of New York. The
National Credit Union Administration ("NCUA"), has supervisory
authority over all of the nation's approximately 11,000
federally insured credit unions. The NCUA charters, insures,
examines the financial status of, and conserves or liquidates
such institutions when required. A "federal credit union" is a
"cooperative association" of seven or more natural persons,
organized "for the purpose of promoting thrift among its
members and creating a source of credit for provident or
productive purposes" (12 U.S.C. § 1752, 1753).
United became chartered as a federal credit union in 1936,
including in its "field of membership" persons who are members
of the United Independent Young Men's Benevolent Society, Inc.
of New York, New York, a Jewish fraternal organization, as well
as immediate family members. United presently has 433 members
and, as of June 30, 1990, its asset size was $1,244,000. United
is controlled by claimants Aaron Baer and Maurice Baer.
United shared office space with various business entities
controlled by Aaron Baer and Maurice Baer, including their
accounting firm Baer & Baer, Efficient Management Service,
Inc., 137-41 South Fifth Avenue, Inc. and 147 Franklin Realty
Corp. Together, the Baer brothers own more than 40% of the
shares on deposit at United and are on the Credit Committee.
The Government contends that from between June 1, 1989 and
June 30, 1990, Aaron Baer received $504,757 and Maurice Baer
received $195,500 in loans from United.
On October 18, 1990, counsel for claimant Andrew Paulucci
contacted the NCUA, advising them that Andrew Paulucci was a
member of United under the alias "Andrew Paul", as was Aurelio
Paulucci under the alias "Aurelio Paul". At a subsequent
meeting with the NCUA, Andrew Paulucci allegedly revealed the
details of several allegedly improper loans made by United in
Paulucci alleges that he was requested by Baer & Baer to
apply for membership in United by using the alias surname
"Paul", so as to create the appearance that he is within the
"field of membership". The Baers also suggested creating the
corporation Andrew Paulucci Inc. ("AP Inc."). The Baers
retained a 50% voting interest in the corporation and received
40% of the shares of stock in exchange for obtaining financing
for the Paulucci's. The Baers arranged for AP Inc. to acquire
$288,000 by virtue of a series of $36,000 loans from United.
With the knowledge of Baer & Baer, Paulucci allegedly executed
fraudulent loan applications to United on behalf of
himself, as Andrew Paul, and five other borrowers, namely,
Aurelio Paul, David Minor, Julia Paulucci, Rosemary Jacobs and
Michael Jacobs. The named payees of the loans did not receive
the proceeds of the loans, but rather through fraudulent
endorsements, the Baers allegedly obtained the amounts of the
loans on behalf of AP Inc. from United.
The total amount of funds received by AP Inc. was
approximately $288,000, which was allegedly subsequently
deposited in a bank account maintained by AP Inc. Immediately
thereafter, the Baers withdrew the money from the AP Inc.
account, and diverted it to various corporations in which they
had an interest, such as Baer & Baer, Efficient Management
Service, Inc., 137-41 South Fifth Avenue, Inc. and Skan
Teknologies Inc., according to the Government.
In sum, it is alleged that the Baers misused the United
credit union, in violation of the credit union by-laws, various
statutes and the applicable regulations. It is the position of
the Paulucci Claimants that the Baers used the AP Inc.
corporation as a front to divert monies to themselves.
Based upon these allegations, the NCUA issued an order of
conservatorship for United in November 1990 in an effort to
conserve United's assets and to protect the interests of the
credit union members and the National Credit Union Share
Insurance Fund. On November 29, 1990, United was placed into
conservatorship. The conservatorship is the subject of a
separate action pending before this Court entitled, In re
Conservatorship of United Independent Federal Credit Union,
768 F. Supp. 42 (E.D.N.Y.).*fn1
On December 5, 1990, Andrew Paulucci filed a petition in the
Supreme Court of the State of New York, County of Westchester,
for the dissolution of AP Inc. and also sought an order to show
cause to appoint a receiver. On that same date, Justice W.
Denis Donovan signed an order to show cause and granted the
appointment of a receiver, which order is apparently still in
On January 25, 1991, the Government commenced this in rem
civil forfeiture proceeding, alleging that the scheme of the
Baers and Paulucci to fraudulently and illegally obtain credit
union funds violated 18 U.S.C. § 657, 1006, 1014 and 1344. The
amended complaint seeks the forfeiture of the defendant funds
on deposit at the named bank accounts as being traceable
proceeds of alleged illegal activity under
18 U.S.C. § 981(a)(1)(C), and as being property involved in a money
laundering transaction in violation of 18 U.S.C. § 1956, under
18 U.S.C. § 981(a)(1)(A).
The three bank accounts that are the subject of the Baer
Claimants' instant motion are:
Account Name Bank Account Number
Baer & Baer Manufacturers' 81736021878-65
Efficient Manufacturers' 81730625199-65
Management Hanover Trust
137-41 South Bank of New 01-0-71425
By order to show cause signed by this Court on February 1,
1991, the Baer Claimants moved for an order directing the
summary release of the funds from arrest and forfeiture
pursuant to Rule 12 of the Rules for Admiralty and Maritime
Claims of the Eastern District of New York.
The Government opposes this application, as does the Paulucci
Claimants. In addition, the Paulucci Claimants moved for leave
to file late notices of claim.
a. Motion of the Paulucci Claimants to File Late Notices
Proposed claimants Andrew Paulucci, AP Inc., Aurelio
Paulucci, David Minor, Julia Paulucci, Michael Jacobs and
Rosemary Jacobs concededly filed late notices of claim,
asserting various interests in the defendant funds seized by
the Government. They now seek leave to permit them to file late
notices of claim. The Government does not oppose this
In light of the Government's prior knowledge of the nature of
the potential interests of these claimants in the seized funds
which led to the commencement of this action as well as the
related conservatorship action, and in view of the lack of
opposition by the Government, the motion of these claimants to
file late notices of claim is granted (see United States v.
1982 Yukon Delta Houseboat, 774 F.2d 1432, 1436 [9th Cir.
b. Motion of the Baer Claimants for Release of the
The Baer Claimants seek the release of the three bank
accounts from seizure on two grounds: first, that the procedure
used to seize the defendant bank accounts set forth in Rule
C(3) of the Supplemental Rules for Certain Admiralty and
Maritime Claims ("Supplemental Rules") is constitutionally
defective on its face and as applied as violative of the
claimants' due process rights; and, second, that the Government
may not seize and forfeit the entire contents of the defendant
accounts, but such seizure should be limited only to the
traceable proceeds of the alleged illegal activity. Each of
these grounds is considered separately below.
i. Constitutionality of Supplemental Rule C(3).
Any property that may be forfeitable to the United States
pursuant to 18 U.S.C. § 981(a)(1)(A), "shall be seized . . .
upon process issued pursuant to the Supplemental Rules . . ."
(18 U.S.C. § 981[b]). According to the Supplemental Rules,
"[i]n actions by the United States for forfeitures for federal
statutory violations", like this one, the Government is
permitted to proceed directly to the Clerk of the Court for the
issuance of a warrant for the arrest of the res without first
obtaining review of the verified complaint by a judicial
officer (Supplemental Rule C). As the advisory committee
"The . . . requirements for prior court review or
proof of exigent circumstances do not apply to
actions by the United States for forfeitures for
federal statutory violations. In such actions a
prompt hearing is not constitutionally required .
. ., and could prejudice the government in its
prosecution of the claimants as defendants in
parallel criminal proceedings since the forfeiture
hearing could be misused by the defendants to
obtain by way of civil discovery information to
which they would not otherwise be entitled and
subject the government and the courts to the
unnecessary burden and expense of two hearings
rather than one."
A similar constitutional challenge to Supplemental Rule C
raised by the Baer Claimants was rejected by Judge Goettel in
United States v. Banco Cafetero International, 608 F. Supp. 1394,
1406-07 (S.D.N.Y. 1985) (collecting cases), aff'd sub
nom. United States v. Banco Cafetero Panama, 797 F.2d 1154
Cir. 1986). This is consistent with the Supreme Court's
decision in Calero-Toledo v. Pearson Yacht Leasing Co.,
416 U.S. 663
, 94 S.Ct. 2080, 40 L.Ed.2d 452 (1974), which
reaffirmed the Fuentes v. Shevin, 407 U.S. 67
, 92 S.Ct. 1983,
32 L.Ed.2d 556 (1972) holding that pre-seizure notice and an
opportunity for a hearing are not constitutionally mandated
when the following circumstances are met:
"`[first,] the seizure has been directly necessary
to secure an important governmental or public
interest. Second, there has been a special need
for very prompt action. Third, the State has kept
strict control over its monopoly of legitimate
force: the person initiating the seizure has been
a government official responsible for determining,
under the standards of a narrowly drawn statute,
that it was necessary and justified in the
particular instance'" (Calero-Toledo v. Pearson
Yacht Leasing Co., supra, 416 U.S. at p. 678, 94
S.Ct. at 2089, quoting Fuentes v. Shevin, supra,
407 U.S. at p. 91, 92 S.Ct. at p. 2000).
As to whether the seizure of the funds in this case was
unconstitutional, the arrest of the property by the Government
without a pre-seizure notice and an opportunity for a hearing
was clearly done in compliance with the procedures set forth in
Rule C(3). This seizure was not instituted by private
individuals, but rather by the Government and, as Supplemental
Rule C(3) provides, the Government need not seek pre-seizure
review by a judicial officer.
The seizure here also serves the important Governmental
interests insofar as preventing an alleged ongoing fraudulent
activity in connection with federally insured financial
institutions. Prompt action is especially necessary under such
circumstances as presented here, in light of the ease with
which such funds could be moved, transferred, commingled or
In addition, the Baer Claimants have failed to demonstrate
"any improper practice or manifest want of equity on the part
of the" Government under the Local Admiralty Rule 12 which
would warrant summary release from arrest.
Accordingly, to the extent that the Baer Claimants attack the
constitutionality of the procedures outlined in Supplemental
Rule C(3), this Court rejects such a challenge based upon the
authority of United States v. Banco Cafetero International,
supra, and Calero-Toledo v. Pearson Yacht Leasing Co., supra.
ii. Amount of the Funds to be Seized.
The Baer Claimants contend that even if the seizure of the
funds is proper and found not to be unconstitutional, the
Government is not entitled as a matter of law to arrest the
entire amounts on deposit in the accounts, but rather only
those amounts traceable to proceeds of the alleged illegal
Section 981(a)(1)(A) of Title 18 U.S.C. provides that "[a]ny
property . . . involved in a transaction in violation or
attempted violation of . . . section 1956 . . . of this title,
or any property traceable to such property", is subject to
forfeiture. This section has been construed by the district
courts as authorizing the forfeiture of an entire bank account
or business which was used to "facilitate" the laundering of
money in violation of 18 U.S.C. § 1956 (see, e.g., United
States v. All Monies ($477,048.62) in Account No. 90-3617-3,
754 F. Supp. 1467, 1473 [D.Haw. 1991]; United States v. 4643 W.
Kennedy Boulevard, No. 90-46-Civ-T-13, slip op., 1990 WL 305391
[M.D.Fla. Feb. 12, 1990]). In All Monies, supra, the court
"This Court finds that 18 U.S.C. § 981(a)(1)(A)
applies to all property that facilitates violations
of §§ 1956 and 1957. Even though § 981 does not
expressly include the words `facilitates' or
`facilitating,' the statute covers property
`involved in' illegal money laundering
transactions. See 18 U.S.C. § 981(a)(1)(A). The
legislative history makes it clear that `property
involved in' includes property used to facilitate
money laundering offenses" (754 F. Supp. at p.
Even if a portion of the property sought to be forfeited is
used to "facilitate" the alleged offense, then all of the
property is forfeitable (see United States v. Santoro,
866 F.2d 1538
, 1542 [4th Cir. 1989]). "Facilitating" property occurs
when the property as used makes the underlying criminal
activity less difficult or "more or less free from hindrance"
(United States v. Schifferli, 895 F.2d 987
, 990 [4th Cir.
1990]; United States v. Premises Known as 3639-2nd St.,
869 F.2d 1093
, 1096 [8th Cir. 1989]).
In light of the persuasive authority of the district courts
outside this Circuit, in this Court's view, section
981(a)(1)(A) applies to property used to facilitate the alleged
In this case, the Baer brothers are alleged to have arranged
to fraudulently disburse $288,000 of funds from a federally
insured credit union to themselves; and then clearing these
amounts through the bank accounts of the various corporations
of the Baer Claimants. As the Government contends, limiting the
forfeiture of funds under these circumstances to the proceeds
of the initial fraudulent activity would effectively undermine
the purpose of the forfeiture statute. Criminal activity such
as money laundering largely depends upon the use of legitimate
monies to advance
or facilitate the scheme. It is precisely the commingling of
tainted funds with legitimate money that facilitates the
laundering and enables it to continue.
Accordingly, to the extent that the Baer Claimants seek
summary release of the funds under Local Admiralty Rule 12 on
this ground, the motion is denied.
For the foregoing reasons, the motion of the Paulucci
Claimants to file late notices of claim is granted. The motion
of the Baer Claimants for summary release of the three bank
accounts from arrest and seizure pursuant to Local Admiralty
Rule 12, is denied in all respects.