United States v. Lee, Jack M. ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 97-4027, 98-1226, 98-1917, 98-2941, 98-2942
United States of America,
Plaintiff-Appellee,
v.
Jack M. Lee,
Defendant-Appellant,
and
Margaret B. Lee,
Claimant-Appellant.
Appeals from the United States District Court
for the Central District of Illinois.
No. 93-CR-10075--Michael M. Mihm, Judge.
Argued April 19, 2000--Decided November 7, 2000
Before Harlington Wood, Jr., Kanne, and Diane P. Wood,
Circuit Judges.
Diane P. Wood, Circuit Judge. Jack Lee defrauded
various individuals and institutions through a
variety of schemes. He eventually pleaded guilty
to committing numerous federal criminal offenses:
mail fraud, 18 U.S.C. sec. 1341, bank fraud, 18
U.S.C. sec. 1344, money laundering, 18 U.S.C.
sec. 1957(a), wire fraud, 18 U.S.C. sec. 1343,
and perjury, 18 U.S.C. sec. 1621. He reserved the
right to appeal the money laundering conviction,
which he has now done. Margaret Lee, Jack Lee’s
wife, was pulled into the fray when the
government executed a forfeiture judgment against
Jack, under 18 U.S.C. sec. 982, by taking the
home that the Lees owned as tenants by the
entirety. (For clarity, we refer to the two
appellants by their first names for the remainder
of this opinion.) The district court denied
Margaret’s petition to dismiss the forfeiture
proceedings, and that decision forms the basis
for her appeal. We find no merit in Jack’s
arguments, and so we affirm his conviction, but
we agree with Margaret that it was error to
forfeit the home, and we therefore reverse that
part of the judgment.
I
We begin with Jack’s fraudulent activity. While
there was a great deal of it, for the purposes of
this appeal we need only discuss the basis of the
money laundering charge. That charge stemmed from
his procurement of a $280,000 loan from Amcore
Bank on behalf of one of the companies he had
formed, Capital Communications, Inc. (CCI).
In February 1990, Jack approached Amcore Bank
in search of loans for CCI. CCI was a corporation
wholly owned by Jack’s two daughters, Margaret
and Debbie; Jack served as its president. To
support his application, Jack gave Amcore a
personal financial statement. Unfortunately for
everyone, including Jack by now, that statement
was false: it substantially overstated his
assets, and it omitted important details such as
liabilities of over three million dollars.
Relying on this information, on April 6, 1990,
Amcore approved a $280,000 loan. The bank issued
a note, signed by both parties, which explained
that CCI was the borrower of $280,000, and that
it was liable for the repayment of the money plus
interest. Both parties also signed a document
labeled "Closing Statement Disbursement," which
described the form in which CCI would receive its
money: $192,034.38 to First of America Bank in
Peoria as the payoff of CCI’s building mortgage;
$41,728.76 to Amcore Bank itself to pay off Note
89324 from Equity Investors representing a loan
for which Equity Investors (another of Jack’s
companies) was responsible; $686.25 to the
Chicago Title Company; $600 to Richard McCoy,
Jack’s attorney; $49 to the Peoria County
Recorder; and $44,901.61 directly to CCI.
After the bank note and the Closing Statement
had been signed, Amcore made out several bank
checks in the amounts and to the recipients
specified in the Closing Statement. Of particular
importance here, Amcore issued a $41,728.76 check
to Amcore Bank, with a note on the face of the
check that it was to be used to pay off Note
89324 from Equity Investors. Then, without going
through the formality of handing the check to
Jack so that he could tender it back, Amcore took
the check and deposited it in the Equity
Investors account.
Jack was indicted on December 1, 1993, on
various counts involving several different
fraudulent schemes, including the Amcore loan
procured under false pretenses. Count 22 of the
indictment charged that by having Amcore use
$41,728.76 of the fraudulent loan to pay off
Equity Investors’ debt, Jack had engaged in money
laundering in violation of 18 U.S.C. sec.
1957(a). Jack pleaded guilty to the list of
charges reviewed above, which included Count 22.
His plea reserved the right to appeal the
district court’s denial of his motion to dismiss
Count 22. After a sentencing hearing, on November
21, 1997, Jack was sentenced to 78 months of
imprisonment followed by five years of supervised
release and was ordered to pay restitution in the
amount of $1,587,321.50, and to forfeit $337,000
to the United States.
II
Before this court, Jack argues that the
Amcore/Equity Investors transaction did not
violate 18 U.S.C. sec. 1957(a). That statute
states that a person who "knowingly engages or
attempts to engage in a monetary transaction in
criminally derived property that is of a value
greater than $10,000 and is derived from
specified unlawful activity" is guilty of money
laundering. In Jack’s view, the charged conduct
could not properly be characterized as money
laundering because there was only one fraudulent
transaction: he defrauded Amcore of the money,
and part of that fraud was requiring the bank to
give the money to Equity Investors, rather than
directly to him. Therefore, he reasons, the money
may have been "criminally derived," but he never
"engage[d] in a monetary transaction" with it.
The government parses the transaction differently
and unsurprisingly concludes that the
requirements of section 1957(a) were met: Jack
"criminally derived" the $41,728.76 by falsely
representing his financial status in order to get
the loan, and he then "engage[d] in a monetary
transaction" with that money by using it to pay
off the Equity Investors debt.
For a section 1957(a) conviction to be proper,
"criminally derived property" must first have
existed, and then at a later time, the charged
party must have attempted to bring about or have
actually brought about a transaction with it. See
United States v. Mankarious, 151 F.3d 694, 705
(7th Cir. 1998) ("[T]he predicate offenses must
produce proceeds before anyone can launder those
proceeds."). Here, the money was not criminally
derived until Jack committed bank fraud by
defrauding Amcore, a financial institution, or by
"obtain[ing] any . . . property owned by, or
under the custody or control of [Amcore], by
means of false or fraudulent pretenses,
representations, or promises." 18 U.S.C. sec.
1344.
Jack’s bank fraud was complete, and the loan
money therefore "criminally derived," when he and
Amcore signed the bank note and transferred
control of the money to Jack. See United States
v. Gregg, 179 F.3d 1312, 1316 (11th Cir. 1999)
(finding bank fraud complete when bank made funds
available for defendant’s use). No one doubts
here that the initial monetary transaction from
Amcore to Jack was completed, and that fact
distinguishes this case from United States v.
Piervinanzi, 23 F.3d 670 (2d Cir. 1994), to which
both parties refer. In that case, an attempted
wire transfer was not completed, and therefore no
money was actually laundered. We therefore find
Piervinanzi to be of no particular assistance
here. The parties’ focus on who physically
touched the bank check used to pay off Equity
Investors’ debt and when the person did so is
similarly unhelpful. We live in an age where
money can be and often is transferred between
owners with a few strokes on a computer’s
keyboard. The physical transferring of dollar
bills may not be quite as obsolete as the
medieval English practice of feoffment with
livery of seisin, under which land was conveyed
with the symbolic handing over of a clod of dirt,
but it may be getting there.
After the signing of the bank note, Amcore
acted under Jack’s direction, as it was bound to
do under the signed Closing Statement. In effect,
therefore, it was Jack who "engage[d] in a
monetary transaction" with the bank when Amcore
deposited a check into the Equity Investors
account. Those funds belonged to Jack in his
capacity as president of CCI, and Jack was
responsible for the transfer. Amcore was not
using its own money to help Equity Investors. It
had already loaned the money to Jack, and was
simply following his instructions as to how to
disburse it. Amcore’s role in transferring Jack’s
money does not let Jack off the hook, and we
conclude that he cannot escape a money laundering
conviction by using an agent to launder the money
for him.
III
Margaret’s appeal relates to that part of
Jack’s sentence requiring forfeiture of $337,000
to the United States. The government, in an
attempt to recover that sum of money, moved to
substitute Jack and Margaret Lee’s family home in
Florida, which had not been connected to any
criminal activity, for the forfeiture amount.
That fact, among others, distinguishes this case
from Bennis v. Michigan, 516 U.S. 442 (1996), in
which the Supreme Court held that a Michigan
forfeiture statute with no innocent owner defense
was not unconstitutional. It also distinguishes
this case from the Eleventh Circuit’s decision in
United States v. Kennedy, 201 F.3d 1324 (11th
Cir. 2000), on which the government also relies,
because the jury in Kennedy found that the
property was involved in the unlawful transaction
or was traceable to property that was so
involved. Id. at 1326. Kennedy also turned on the
question whether the innocent spouse ever
purchased her husband’s interest in the property,
id. at 1329-31, which is not at issue here.
Margaret petitioned to dismiss the forfeiture
proceedings, claiming that Jack had no
forfeitable property interest in the house
because it was owned by the couple as tenants by
the entirety. On July 22, 1998 the district court
dismissed Margaret’s petition. It ruled that the
government would, in effect, be substituted for
Jack in the ownership of the home--in other
words, the government would become Margaret’s co-
tenant by the entirety. Margaret would thus
retain use of the property during her lifetime.
She would also retain her right of survivorship:
if she survived Jack she would own the property
in fee simple, but if she died before Jack the
government would attain ownership of a fee
simple.
We look to state property law to determine
whether Jack’s interest in the Lee home was a
property interest subject to forfeiture. See
United States v. Ben-Hur, 20 F.3d 313, 317 (7th
Cir. 1994). Margaret and Jack Lee held their
Florida home in a tenancy by the entirety, a form
of title under which a husband and wife may
jointly own an estate in Florida. See Sitomer v.
Orlan, 660 So.2d 1111, 1113 (Fla. Dist. Ct. App.
1995). Such a tenancy must possess five unities
in order to survive: there must be joint
ownership and control; each tenant must have an
equal interest in the property; those interests
must have originated at the same time; those
interests must have been derived from the same
instrument; and the tenants must be married. See
id. "The essential characteristic of an estate by
the entirety is that each spouse is seized of the
whole or the entirety, and not of a share,
moiety, or divisible part. Upon the death of one
spouse, the other does not ’inherit’ the interest
of the other in such estate, but merely comes
into the full beneficial enjoyment of such
estate, which is said to vest by operation of law
in the surviving spouse." Ashwood v. Patterson,
49 So.2d 848, 849 (Fla. 1951) (en banc) (internal
citations omitted).
The two tenants, then, in a valid tenancy by
the entirety, are bound to make decisions
regarding the property together. Tenancies by the
entirety in Florida operate under these rules to
protect the rights of each spouse-- against one
another, and against creditors. "Neither spouse
may sever or forfeit any part of the estate
without the assent of the other, so as to defeat
the right of the survivor." Sitomer, 660 So.2d at
1113. "Property owned as a tenancy by the
entiret[y] cannot be made available to answer for
the judgment debts of one of the tenants
individually." Neu v. Andrews, 528 So.2d 1278,
1279 (Fla. Dist. Ct. App. 1988).
Florida law clearly prohibits the forfeiture of
Jack’s interest in the family home without
Margaret’s consent. See Havoco of Am., Ltd. v.
Hill, 197 F.3d 1135, 1139 (11th Cir. 1999)
(finding that a tenant by the entirety does not
possess a forfeitable interest in property);
United States v. One Single Family Residence With
Out Buildings, 894 F.2d 1511, 1515-16 (11th Cir.
1990) (same). Margaret’s security as against her
husband’s creditors, such as the federal
government here, is exactly what the law of
tenancy by the entirety protects.
The district court came to the opposite
conclusion by relying on the Third Circuit’s
decision in United States v. Parcel of Real
Property Known as 1500 Lincoln Avenue, 949 F.2d
73 (3d Cir. 1991). It found that the federal
government has a special interest in criminal
forfeiture, and that the "innocent spouse’s"
interest in such an estate might be preserved by
giving that spouse the use and possession of the
property during her life, as well as a
survivorship right should her husband predecease
her. See id. at 77-78. But the Third Circuit was
faced with a substantially different problem from
the one now before us. In 1500 Lincoln Avenue,
the contested property once again had been used
for the illegal activities (there, the illegal
diversion of various pharmaceutical drugs). The
court concluded that it had to come to an
accommodation between two parts of the statutory
mandate of 21 U.S.C. sec. 881(a)(7): on the one
hand, the government’s right to obtain forfeiture
of property used to commit or facilitate the drug
offense, and on the other, protection of the
rights of innocent owners. See 1500 Lincoln
Avenue, 949 F.2d at 77. The federal law mandate
would have been compromised if the court had
given full force to Pennsylvania’s rules about
tenancies by the entirety. Faced with that
dilemma, the court adopted the middle ground that
the government urges here as well, namely,
forfeiture of the husband’s interest in the
tenancy by the entirety and recognition of the
wife’s right to full and exclusive use of the
property during her lifetime, protection against
any alienation without her consent, and the right
to obtain title in fee simple if the husband
predeceased her.
Our context is significantly different, because
the only claim the government has to the Lee
house arises because the house could be treated
as a substitute asset, pursuant to 18 U.S.C. sec.
982(b)(2) and 21 U.S.C. sec. 853(p). In such a
case, the need to strike a balance between the
government’s interest in seizing the means for
committing a crime and the innocent spouse’s
rights must be assessed differently. In our view,
there is no warrant for ignoring the nature of
the property right created by the state law--
here, the Florida law of tenancy by the entirety-
-in a substitute asset case. (We thus have no
need to consider whether we would agree with the
Third Circuit’s approach in a case involving
property used to commit an offense or property
that can be traced to it.)
Without the compelling need to seize unlawfully
used property (or its derivatives), the interests
of the innocent party become far more important.
And from that perspective, it is plain that the
Third Circuit’s compromise substantially
diminishes the innocent spouse’s rights. In the
hybrid arrangement that was approved in 1500
Lincoln Avenue, Margaret would, as a practical
matter, lose her right to control and manage the
estate. The government would be Margaret Lee’s
co-tenant in a form of property ownership which
requires both parties to participate in nearly
every decision concerning the property. No
mortgage would be possible without the signature
of both tenants (since otherwise creditors would
risk losing their entire investment at the death
of one of the Lees). Margaret would need the
government’s approval to sell the property or to
transfer the estate into a tenancy in common.
Though she would be fully liable for taxes and
other costs of homeownership in any tenancy by
the entirety, in a normal tenancy by the entirety
there would be a chance that her husband, also
fully liable for the property, would contribute
to those expenses. Because the government (as it
admitted at oral argument) would not be there
with its checkbook, she could do little more than
sit by and hope that the estate would not fall
into disrepair. We therefore conclude that the
attributes of tenancy by the entirety recognized
by Florida law here should not have been
overridden by the district court, and the house
should have been considered unavailable for a
substitute asset order. (We note, should it
become relevant in the future, that if the
tenancy by the entirety is ever split in
accordance with Florida law, Jack and Margaret’s
interests would then become distinct and
separable so that a later forfeiture of Jack’s
interest in the property would not affect
Margaret’s rights. See One Single Family
Residence, 894 F.2d at 1516, n.6.)
IV
We Affirm Jack Lee’s money laundering conviction
and Reverse the district court’s rejection of
Margaret Lee’s petition to dismiss the
forfeiture.