but do not possess a lien against corporate assets. 14 N.Y. Jur. 2d § 573 (1981); Cass v. Realty Secur. Co., 148 A.D. 96, 100-101, 132 N.Y.S. 1074, 1078 (1st Dep't 1911), aff'd, 206 N.Y. 649, 99 N.E. 1105 (1912). Therefore, since shareholders are not legal owners or lienholders of the corporation's assets, they lack standing to intervene to claim the sales proceeds of the in rem defendants.
The shareholder claimants contend that they have standing because the right to intervene in a forfeiture proceeding "extends to any person or party having a legally recognized interest in the [seized item], whether he is owner or lienholder, and whether that interest is legal or equitable in nature." United States v. One 1961 Cadillac Hardtop Automobile, 207 F. Supp. 693, 698 (E.D. Tenn. 1962) (emphasis supplied), cited as parenthetical in United States v. $ 364,960.00 in U.S. Currency, 661 F.2d 319, 326 (5th Cir. 1981).
While One 1961 Cadillac addressed a lienholder's challenge to a forfeiture under 49 U.S.C. § 782 of an automobile used to transport narcotics, id. at 694, 698, the legislative history of 21 U.S.C. § 881(a)(6) evidences similar congressional intent. "The term owner should be broadly interpreted to include any person with a recognizable legal or equitable interest in the property seized." Joint Explanatory Statement of Titles II and III, 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 9518, 9522 (explaining § 881(a)(6)) (emphasis supplied). Similarly, section 881(a)(7) "would also include an 'innocent owner' exception like that now included in those provisions permitting the civil forfeiture of certain vehicles and moneys or securities." S. Rep. No. 225, 98th Cong., 2d Sess. 215 (1984), reprinted in 1984 U.S.C.C.A.N. 3182, 3398.
An equitable owner is
"one who is recognized in equity as the owner of property, because the real and beneficial use and title belong to him, although the bare legal title is vested in another, e.g., a trustee for his benefit. One who has a present title in land which will ripen into legal ownership upon the performance of conditions subsequent. There may therefore be two "owners" in respect of the same property, one the nominal or legal owner, the other the beneficial or equitable owner.
Black's Law Dictionary 1105 (6th ed. 1990). Since the legal owner and the equitable owner may represent differing interests, both may file a notice of claim to the seized property.
In contrast, while shareholders hold equitable title to corporate assets, Wallach, 935 F.2d at 462 ("the stockholders . . . are the ultimate or equitable owners of the assets") (citing 5303 Realty Corp. v. O & Y Equity Corp., 64 N.Y.2d 313, 323, 486 N.Y.S.2d 877, 884, 476 N.E.2d 276, 283 (1984)), they may not file a notice of claim. A shareholder may only recover decreases in stock value attributable to mismanagement or the loss of corporate assets if the corporation brings a direct action against the wrongdoer or if the shareholder brings a derivative action on behalf of the corporation. Vincel v. White Motor Corp., 521 F.2d 1113, 1118 (2d Cir. 1975) (citing Niles v. New York Cent. & H. R. R.R., 176 N.Y. 119, 68 N.E. 142 (1903)).
Where the corporation brings a direct action, then the shareholder is precluded from bringing a derivative action. Gaff v. Federal Deposit Ins. Corp., 814 F.2d 311, 315 (6th Cir. 1987) (shareholder derivative suit only available where "the corporation fails to act"). In this case, New Silver Palace filed a notice of claim to the in rem defendants; therefore, the shareholders cannot maintain a derivative claim on behalf of the corporation, and their notices of claim must be dismissed.
Furthermore, there is a more fundamental reason why shareholders, as equitable owners, may not challenge the forfeiture of the corporation's assets. In the forfeiture context, it is settled law that "possession of bare legal title by one who does not exercise dominion and control over the property is insufficient to establish standing to challenge a forfeiture." United States v. Real Property & Improvements Located at 5000 Palmetto Drive, 928 F.2d 373, 375 (11th Cir. 1991) (citing United States v. A Single Family Residence and Real Property Located at 900 Rio Vista Blvd., 803 F.2d 625, 630 (11th Cir. 1986)); United States v. One 1945 Douglas (DC-4) Aircraft, Serial Number 22186, 604 F.2d 27, 28-29 (8th Cir. 1979), appeal after remand, 647 F.2d 864 (8th Cir. 1981), cert. denied sub nom. Stumpff v. United States, 454 U.S. 1143, 71 L. Ed. 2d 294, 102 S. Ct. 1002 (1982).
This rule precludes subterfuge by those dealing in drugs from creating a "strawman" to hold legal title, who could then assert an innocent owner defense, which would defeat the statutory purposes of forfeiture of property used in the commission of drug offenses or derived from drug proceeds. A Single Family Residence, 803 F.2d at 630 (citing United States v. One 1977 36 Foot Cigarette Ocean Racer, 624 F. Supp. 290, 294-95 (S.D. Fla. 1985)). Likewise, drug dealers could set up a corporation and sell stock to innocent shareholders or to those acting in concert, who could then assert an innocent owner defense in any pending forfeiture proceeding. Thus, if the nominal holder of legal title does not have standing to challenge a forfeiture of assets, a shareholder possessing only equitable ownership of the corporation's assets, but who cannot exercise "dominion and control" over the daily affairs of the corporation, also lacks standing to intervene in a forfeiture proceeding.
In addition, the shareholder claimants argue that the government is barred by laches from moving to dismiss the shareholders' notices of claim after its initial challenge to their notices of claim under the Supplemental Rules was corrected and they have answered the complaint and filed counterclaims. However, laches is not available against the United States. United States v. RePass, 688 F.2d 154, 158 (2d Cir. 1982) (citing United States v. Summerlin, 310 U.S. 414, 416, 84 L. Ed. 1283, 60 S. Ct. 1019 (1940)). Furthermore, a party asserting the defense of laches must show (1) lack of diligence by the other party and (2) prejudice. Southside Fair Hous. Comm., 928 F.2d 1336, 1354 (2d Cir. 1991) (citing Costello v. United States, 365 U.S. 265, 282, 5 L. Ed. 2d 551, 81 S. Ct. 534 (1961)). Here, it cannot be gainsaid that the government was diligent in moving for dismissal of the shareholders' notices of claim. Whether shareholders lack standing to file a notice of claim in a forfeiture proceeding involving corporate assets is a novel issue that has yet to be addressed by any court.
The government, cognizant of Fed. R. Civ. P. 11, properly moved to dismiss the shareholders' notices of claim three-and-one-half months after the amended notices of claim were filed.
Finally, the shareholder claimants argue that they should be allowed to intervene because the corporation is bankrupt, all of its assets were sold, and the proceeds were deposited in an account. See Supplemental Memo. of Law in Opp'n to Pl's Mot. to Dismiss Shareholders' Notice of Claim at 4-5. However, there is no indication that New Silver Palace "is so dead that it can be disregarded in the consideration of property rights which naturally and logically belong to it . . . and that it must be held that perforce of dissolution and loss of corporate existence and capacity[,] its property and rights have passed to its stockholders as ultimate owners." Brock v. Poor, 216 N.Y. 387, 400, 111 N.E. 229, 234 (1915). The shareholder claimants do not state that New Silver Palace has filed for bankruptcy, nor do they state that they have surrendered their stock. See id. at 399-400, 111 N.E. at 233-34. The shareholder claimants simply contend that New Silver Palace has ceased to do business. But that is a far cry from preventing the corporation from claiming the proceeds of the interlocutory sale, as indeed the corporation has done in this case.
For the reasons stated above, the government's motion for judgment on the pleadings is granted on the ground that this Court does not have subject matter jurisdiction to entertain the shareholders' notices of claim. Accordingly, the shareholders' notices of claim are dismissed.
Dated: Brooklyn, New York
November 25, 1992
I. Leo Glasser, U.S.D.J.