Argued April 7, 2014.
[Copyrighted Material Omitted]
Defendant-appellant Rodney Watts and interested party-appellant DePetris & Bachrach, LLP appeal from a judgment of the district court dismissing their petition for an ancillary hearing to adjudicate their claims to property found subject to forfeiture under 18 U.S.C. § 982(a)(2) following the conviction of defendant Courtney Dupree. The district court found that an assignment of the contested property to DePetris & Bachrach gave appellants standing to assert an interest in the property under 21 U.S.C. § 853(n)(2), but that appellants failed to state a plausible claim for relief under 21 U.S.C. § 853(n)(6) because the assignment gave DePetris & Bachrach no interest in the funds at the time of the criminal offense, see id. § 853(n)(6)(A), and because the government's forfeiture allegations gave DePetris & Bachrach reasonable cause to believe that the funds were subject to forfeiture, see id. § 853(n)(6)(B). We agree with the district court that the assignment suffices to give appellants standing to seek an ancillary hearing and that appellants have failed to state a superior claim to the property under 21 U.S.C. § 853(n)(6)(A). However, we conclude that appellants' petition states a plausible claim that DePetris & Bachrach reasonably lacked cause to believe that the property was subject to forfeiture and consequently entitles appellants to continue pursuing relief under 21 U.S.C. § 853(n)(6)(B) .
RONALD E. DEPETRIS (Marion Bachrach, Thompson & Knight LLP, on the brief), Southampton, New York, for Defendant-Appellant Rodney Watts and Interested Party-Appellant DePetris & Bachrach, LLP.
BRIAN D. MORRIS, Assistant United States Attorney (Varuni Nelson and Michael L. Yaeger, Assistant United States Attorneys, of Counsel, on the brief), for Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, New York.
Before: KEARSE, CALABRESI, and LYNCH, Circuit Judges.
Gerard E. Lynch, Circuit Judge :
Defendant-appellant Rodney Watts and his counsel, interested party-appellant DePetris & Bachrach, LLP (" D& B" ), appeal from a judgment of the United States District Court for the Eastern District of New York (Kiyo A. Matsumoto, Judge ), granting the government's motion to dismiss their petition asserting an interest in property found subject to forfeiture under 18 U.S.C. § 982(a)(2) following the conviction of Watts's co-defendant, Courtney Dupree. Watts and D& B (jointly, " petitioners" ) claim that, as the beneficiary of an assignment transferring a portion of the forfeited property in exchange for legal services, D& B (1) possessed a superior interest in that portion of the property under 21 U.S.C. § 853(n)(6)(A), and (2) was a bona fide purchaser reasonably without cause to believe that the contested property was forfeitable under 21 U.S.C. § 853(n)(6)(B). They also claim that the contested funds cannot be reached by a forfeiture order under § 982(a)(2) because Dupree, the criminal defendant, never owned the funds in question. Finally, they claim that the government lacks standing to challenge the validity of D& B's assignment under state law. The government responds that petitioners fail to state a claim on any of their grounds for relief and, regardless, lack standing to seek an ancillary hearing because D& B's assignment was a fraudulent conveyance. The district court determined that both parties had standing to litigate the issues, but agreed with the government that petitioners failed to state any claims for relief.
We affirm in part and reverse in part. Because the government's forfeiture claim qualifies it as a creditor under New York law, the government has standing to challenge D& B's assignment as a fraudulent conveyance. Because the record fails to
establish whether the transferor of the contested funds was insolvent at the time of the transfer so as to render D& B's assignment a fraudulent conveyance, the petitioners have, at this stage in the proceedings, alleged a plausible interest in the property sufficient to create standing to seek an ancillary hearing. Because the contested funds are subject to forfeiture as " proceeds" of Dupree's criminal activity and therefore only came into existence following the commission of his criminal act, petitioners cannot claim that D& B had a superior interest in those funds at the time of the offense as required by 21 U.S.C. § 853(n)(6)(A). Because the criminal forfeiture statute limits a third party's right to challenge a post-indictment forfeiture order to the two grounds identified in 21 U.S.C. § 853(n)(6), petitioners may not challenge the inclusion of the contested funds in the forfeiture order under § 982(a)(2).
We disagree, however, with the district court's conclusion that petitioners failed to state a plausible claim to relief under § 853(n)(6)(B). Because D& B accepted the assignment of the contested funds shortly after a Monsanto hearing in which the district court determined that the government failed to establish probable cause to restrain the contested property, and because the petition alleges no additional facts suggesting that D& B had reason to know that the property was forfeitable as a matter of law, petitioners have plausibly alleged that D& B was a bona fide purchaser reasonably without cause to believe that the property was subject to forfeiture.
I. The Indictment
In July 2010, two magistrate judges in the Eastern District of New York issued a series of warrants authorizing the government to seize several bank accounts associated with GDC Acquisitions, LLC (" GDC" ) as property constituting or derived from proceeds traceable to a conspiracy to commit bank fraud, mail fraud, and wire fraud under federal law. The bank accounts seized included four accounts at JP Morgan Chase Bank in the name of Unalite Southwest, LLC (" USW" ), a wholly-owned subsidiary of GDC, containing a total of $983,790.11. On August 13, 2010, a grand jury indicted Courtney Dupree, GDC's president and chief executive officer, Rodney Watts, GDC's chief financial officer or chief investment officer, and Thomas Foley, GDC's outside counsel or chief operating officer, on charges of bank fraud in violation of 18 U.S.C. § 1344; conspiracy in violation of 18 U.S.C. § 1349 to commit bank, mail, and wire fraud in violation of 18 U.S.C. § § 1344, 1341, and 1343; and making false statements to influence a federally insured financial institution in violation of 18 U.S.C. § 1014. The indictment alleged that, between January 2007 and July 2010, Dupree, Watts, and Foley participated in a scheme to defraud Amalgamated Bank (" Amalgamated" ) by obtaining or attempting to obtain loan funds worth up to $21 million for three wholly-owned subsidiaries of GDC on the basis of false financial statements and other material misrepresentations.
The August 13, 2010 indictment, as well as all subsequent superseding indictments, included a criminal forfeiture allegation under 18 U.S.C. § 982(a)(2)(A), giving notice of the government's intent to " seek forfeiture . . . of any property constituting or derived from proceeds obtained directly or indirectly as a result of such offenses." On February 22, 2011, the government also filed a Bill of Particulars identifying nine bank accounts that it sought to have forfeited, including the four USW accounts at JP Morgan Chase.
II. Pretrial Restraint of Seized Funds
On January 10, 2011, Watts, represented by D& B, filed a motion seeking release of the seized funds for use in paying his legal fees during the criminal prosecution. After initially denying Watts a hearing, the district court directed then-Magistrate Judge Joan M. Azrack to conduct a hearing pursuant to United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991), on the limited issue of the forfeitability of USW's four accounts at JP Morgan Chase. On July 27, 2011, the district court adopted in part and modified in part Judge Azrack's Report and Recommendation. While finding that the government had demonstrated probable cause to restrain $350,290.87 of USW's funds in the JP Morgan Chase accounts as traceable to the proceeds of the charged offense, it found that the government had failed to demonstrate probable cause to restrain the remaining $633,499.24 (the " contested funds" ). The district court consequently ordered the government to " release the remaining funds to [USW] promptly." App'x at 128. After the government requested a stay of the order the following day, the district court entered a 30-day stay on August 2, 2011.
On August 11, 2011, USW, acting through Dupree's " Attorney in Fact," executed an assignment (the " Assignment" ) of all its interests in the contested funds to D& B. In relevant part, the Assignment stated:
In payment of invoices . . . for past legal services and for future legal services that Assignee has provided or will provide to Rodney Watts, Jr. . .., and in partial satisfaction of the obligation of the Assignor . . . to advance funds for Mr. Watts' defense, all deemed good and valuable consideration received, Assignor hereby unconditionally and irrevocably assigns, grants, and transfers all rights, title, interest, and obligation in, to and under . . . [a]ll funds in the Assignor's bank accounts . . . at JPMorgan Chase Bank . . . . The Assignor warrants and represents that the ...