United States v. Tully, William ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-3384
United States of America,
Plaintiff-Appellee,
v.
William E. Tully, et al.,
Defendants,
Appeal of:
Travis V. Pherson, et al.,
Claimants.
Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 95 CR 116--James T. Moody, Judge.
Argued February 20, 2002--Decided April 30, 2002
Before Bauer, Ripple, and Manion, Circuit
Judges.
Manion, Circuit Judge. Donald L.
Vauters, Jr., was indicted for several
counts of mail fraud, securities
violations, and money laundering. In a
plea agreement with the government, he
acknowledged his involvement in a
conspiracy to commit mail fraud in
violation of 18 U.S.C. sec. 371, and
agreed that proceeds from the sale of
certain real estate, titled in his wife’s
name but under his direct control, would
be used to pay restitution to his
victims. When the government filed a
motion to disburse the proceeds from the
sale of the property to the restitution
victims, various individual claimants
objected. The district court overruled
the claimants’ objections, and granted
the government’s motion to disburse. The
claimants appeal the district court’s
decision. We affirm.
I.
Between September 12, 1994 and March 6,
1995, Travis Van Matre Pherson, Bedelia
Weirick, Raymond Weirick (through his
widow, Bedelia Weirick), Virginia Siscoe,
Beryl Siscoe, Donald and Marjorie
Phillips, and Illene Burton ("claimants")
collectively invested $157,000 with
Mallard Marketing, Inc. In return for
their investments, Mallard’s president,
Donald L. Vauters, Jr., executed and
delivered promissory notes to the
claimants that referenced the
construction of a private residence and
promised to pay them back the principal
amount of their loans, with interest at
the rate of 10% per annum, by certain due
dates. The promissory notes provided that
if they were not paid in full by their
respective due dates, Mallard, the maker,
would execute and record mortgage liens
in favor of the claimants, as note
holders, on property commonly known as
4418 East 50 North, Lafayette, Indiana,
and more particularly described as: "Part
of lot 32 and lot 33 in Wildcat Valley
Estates Subdivision, Phase One, Fairfield
Township, as recorded in Document No. 94-
20581, in the Tippecanoe County
Recorder’s Office, Tippecanoe County,
Indiana" ("Lot 32/33").
Unfortunately for the claimants, Mallard
never owned Lot 32/33. Baumco, Inc. or
Connie I. Vauters/1 was the title
holder of record for the real estate
during the time period the claimants
invested their money with Mallard. The
deed to Lot 32/33 was conveyed to Connie
Vauters, in her personal capacity, by
Baumco, Inc. on or about October 20,
1994, and was recorded in the Tippecanoe
County Recorder’s Office on October 24,
1994. Shortly thereafter, Mallard
constructed a two-story private residence
on Lot 32/33 with the money it received
from the claimants and additional funds
that Connie Vauters obtained by issuing a
mortgage on the property in favor of Sure
Foundation, Inc. Mallard subsequently
defaulted on each of the claimants’
promissory notes, none of which was ever
secured by a mortgage on Lot 32/33.
On December 12, 1995, a criminal
indictment was returned against Donald
Vauters, among others, charging him with
numerous counts of mail fraud, securities
violations, and money laundering. That
same day, the district court issued a
protective order prohibiting the
disposition of Lot 32/33, in which Donald
Vauters had an interest. Lot 32/33 was
thereafter sold for $251,500 pursuant to
an Order of Sale and Stipulated Motion
for Sale ("Order of Sale") approved by
the district court on July 25, 1996./2
On or about August 9, 1996, the net
proceeds from the sale of Lot 32/33,
$229,349.29, were deposited into an
interest-bearing account with the
district court pursuant to Fed. R. Civ.
P. 67./3
On April 21, 1998, Donald Vauters
pleaded guilty to conspiracy to commit
mail fraud, and in doing so acknowledged
that he was the true owner of Lot 32/33,
even though his wife was publicly listed
as the record title holder for the
property. As part of his plea agreement,
Vauters agreed that the proceeds from the
sale of Lot 32/33 would be used to pay
restitution to the numerous victims of
his criminal misconduct. On February 10,
1999, Vauters was sentenced by the
district court. His sentence provided,
among other things, that he pay
restitution to his victims in the amount
of $5,701,735.92.
On October 29, 1999, the United States
filed a motion seeking an order
authorizing the clerk of court to
disburse the proceeds from the sale of
Lot 32/33 to the named restitution
victims. In that motion, the government
noted that "there are individuals [i.e.,
the claimants] who are not restitution
victims who may claim some right,
interest or title to the proceeds of the
sale of [Lot 32/33] . . . ." A copy of
the motion was mailed to each of the
claimants that same day.
On or about February 14, 2000, the
claimants filed "Notices of Claims" in
response to the government’s motion to
disburse funds, objecting to the
disbursement of the proceeds from the
sale of Lot 32/33 to the restitution
victims. The claimants argued that
because the private residence on Lot
32/33 was primarily constructed with the
money they invested with Mallard, they
had equitable liens on the property that
now covered the sale proceeds. The
claimants further contended that their
respective interests were superior to
those of any other "claimants and parties
of interest." The basis of the claimants’
objections to the government’s motion to
disburse funds, both here and at trial,
is that Mallard’s promises to execute
mortgage liens on their behalf, in return
for the money they loaned the
corporation, created equitable liens on
Lot 32/33 that now cover the proceeds
obtained from the forced sale of the
property. The government argues that the
claimants did not have equitable liens on
Lot 32/33 at the time the property was
sold. Furthermore, the government
contends that even if such liens existed,
they would nevertheless be inferior to
the statutory lien the United States has
on the sale proceeds, pursuant to 18
U.S.C. sec. 3613(c),/4 as a result of
the district court’s restitution order.
The district court agreed with the
government’s position, and granted its
motion to disburse funds. The claimants
filed a timely appeal to the district
court’s decision.
II.
The facts of this case are undisputed.
The questions before us are whether,
under Indiana law, the claimants
possessed equitable liens on Lot 32/33 at
the time the property was sold, and, if
so, whether those liens have priority
over the government’s sec. 3613(c) lien
with respect to the proceeds from the
sale of the property. We review these
issues de novo. See, e.g., Appeal of
Swartz, 18 F.3d 413, 415-16 (7th Cir.
1994).
Because the real estate at issue is
located in Indiana, Indiana law is
controlling on the question of whether
the claimants have equitable liens on the
proceeds from the forced sale of Lot
32/33. See, e.g., United States v. Craft,
No. 00-1831, ___ U.S. ___, 2002 WL
561332, *3 (April 17, 2002) ("[a] common
idiom describes property as a ’bundle of
sticks’--a collection of individual
rights which, in certain combinations,
constitute property. State law determines
only which sticks are in a person’s
bundle. . . .") (internal citations
omitted). Under Indiana law, an equitable
lien on real property is created when a
property owner creates a written
agreement that sufficiently indicates an
intention to make his property, as
described in the agreement, a security
for a debt or other obligation. See,
e.g., Gretzinger v. Arehart, 193 N.E.
714, 716 (Ind. App. 1935). As with liens
at law, "where the existence of an
equitable lien depends on construction of
a written contract based on valuable
consideration, a lien may be declared
where the intent to secure an obligation
with the subject property is clear on the
face of the agreement." Noblesville
Redevelopment Comm’n v. Noblesville
Associates Ltd. P’ship, 674 N.E.2d 558,
562 (Ind. 1996). The intent to create a
lien "must be objectively clear [or] . .
. no lien exists at law or equity." Id.
We need not, however, engage in the
exercise of determining whether the
claimants’ promissory notes provide a
basis for placing equitable liens on Lot
32/33 because Mallard, the maker of the
promissory notes, was never the record
title holder for the property. When
Donald Vauters, as president of Mallard,
executed each of the claimants’
promissory notes, either Baumco, Inc. or
Connie Vauters was the record title
holder for Lot 32/33. Obviously, "a
grantor cannot convey that which he does
not own." Downing v. Eubanks, 557 N.E.2d
1027, 1029 (Ind. Ct. App. 1990).
Therefore, notwithstanding its "promises"
to the claimants, Mallard had no
authority to record mortgage liens on Lot
32/33 when the corporation defaulted on
their promissory notes. The claimants,
therefore, have no legal basis for
claiming entitlement to equitable liens
on the property./5
After his fraud was exposed, Vauters
pleaded guilty to being involved in a
conspiracy to commit mail fraud and
confessed that he was "the true owner of
[Lot 32/33], and that any other names
appearing as owners or joint owners
[were] only nominees." While it is true
that under Indiana law his statement
could serve as a basis for piercing the
corporate veil of Mallard, see Comm’r,
Dept. of Envtl. Mgmt. v. RLG, Inc., 755
N.E.2d 556, 563 (Ind. 2001), this belated
admission is of little assistance to the
claimants in this criminal proceeding.
The claimants’ Notices of Claims
requested that "their interests [i.e.,
alleged equitable liens] in this cause be
protected by the [district court]."
However, at the time they filed this
collective notice no such "interests" had
yet been established. Thus, while the
claimants might have, at one time,
possessed the ability to obtain equitable
liens on Lot 32/33 by filing civil
actions against Mallard and the Vauters,
they failed to do so. There is a
significant distinction between having
the right to seek an equitable lien on
real estate, and actually obtaining such
a lien. See Lakeshore Bank & Trust Co. v.
United Farm Bureau Mut. Ins. Co., Inc.,
474 N.E.2d 1024, 1027 (Ind. Ct. App.
1985) (holding that "by commencement of
the proceedings and service of the
summons the creditor acquires an
equitable lien on the credit or funds due
to the debtor."). In any event, this
criminal proceeding was not the proper
forum for the claimants to have their
claims of entitlement to equitable liens
considered. The purpose of the district
court’s hearing on the government’s
motion to disburse funds was to determine
whether the claimants’ current interests
in the proceeds from the sale of Lot
32/33 were superior to the interest the
government possessed as a result of its
statutory lien. See LTV Corp. v. Gulf
States Steel, Inc. of Ala., 969 F.2d
1050, 1063 (D.C. Cir. 1992) (holding that
the Rule 67 procedure "’provides a place
of safekeeping for disputed funds pending
the resolution of a legal dispute, but it
cannot be used as a means of altering the
contractual relationships and legal
duties [or rights] of the parties.’")
(citations omitted). The district court
correctly concluded that the claimants’
promissory notes only provided them with
unsecured interests in the property’s
sale proceeds.
While we sympathize with the claimants,
their financial losses were certainly
preventable. Rather than simply accepting
promises from Mallard that it would
execute mortgages on Lot 32/33 in the
event the corporation defaulted on their
promissory notes, the claimants should
have insisted from the outset that the
corporation secure their loans with
mortgages on the property. Had they done
so, Vauters’ scheme would have most
likely been foiled. Donald Vauters was no
doubt aware that Mallard was not the
record title holder for Lot 32/33, and
that a title search would reveal this
fact to the claimants. It is, therefore,
quite unlikely that Vauters would have
succeeded in defrauding the claimants had
they been reasonably diligent in
protecting their respective investments.
Under Indiana law, a litigant may be
precluded from equitable relief if the
harm he suffers could have been prevented
by reasonable diligence on his part. See,
e.g., Mackiewicz v. Metzger, 750 N.E.2d
812, 821 (Ind. Ct. App. 2001); Wilshire
Servicing Corp. v. Timber Ridge P’ship,
743 N.E.2d 1173, 1178-80 (Ind. Ct. App.
2001); Lakeshore Bank, 474 N.E.2d at
1026.
In fact, the very purpose of Indiana’s
recording statute is to "provide
protection to subsequent purchasers,
lessees, and mortgagees." Keybank Nat’l
Ass’n v. NBD Bank, 699 N.E.2d 322, 327
(Ind. Ct. App. 1998). Because the
identity of a property’s title holder of
record is a matter of public record,
Indiana law charges the claimants with
"constructive" notice that either Baumco,
Inc. or Connie Vauters was the title
holder of record for Lot 32/33 at the
time they invested their money with
Mallard. See id. (holding that
"[c]onstructive notice is provided when a
deed or mortgage is properly acknowledged
and placed on the record as required by
statute.").
As previously noted, there is nothing in
the record indicating that the claimants
ever took any legal action to enforce
their rights under the respective
promissory notes. The due dates on the
promissory notes range from June 25, 1995
through December 5, 1995, and the court-
ordered sale of Lot 32/33 occurred on
July 25, 1996. More importantly, while
Donald Vauters was indicted on December
12, 1995, it was not until April 21,
1998, that the district court entered the
restitution order directing that the
proceeds from the sale of Lot 32/33 be
divided among all of Vauters’ victims. As
such, the claimants had ample time,
between the dates of Mallard’s defaults
and the date of the restitution order, to
file civil actions and have their
respective interests in Lot 32/33
considered and ruled upon by a court. It
is a well- known maxim of equity that
"equity aids the vigilant, not those who
sleep on their rights." Wagner v. Estate
of Fox, 717 N.E.2d 195, 201 (Ind. Ct.
App. 1999). Indiana courts have also held
that "[a] party will be relieved against
his own mistake or carelessness where no
rights of third persons have intervened,
but not where rights have been lost, or
money parted with, on the faith of the
apparent facts, without fault of any body
except the party seeking relief." Gray v.
Robinson, 90 Ind. 527, 533 (1883)
(emphasis added). The claimants’ failure
to obtain, prior to this proceeding,
judicial determinations granting them
equitable liens on Lot 32/33 leaves them
with nothing more than unsecured
interests in the property’s sale
proceeds. The government’s statutory lien
on the sale proceeds obviously takes
priority over such unsecured interests.
See 18 U.S.C. sec. 3613.
III.
The claimants do not have equitable
liens on the proceeds from the sale of
Lot 32/33. As such, the district court
properly granted the government’s motion
to disburse funds. We, therefore, AFFIRM
the decision of the district court.
FOOTNOTES
/1 Connie Vauters was the incorporator, registered
agent, and secretary of Mallard, as well as
Donald Vauters’ wife.
/2 The Stipulated Motion for Sale provided that "[a]
contract for sale and purchase of [Lot 32/33] has
been entered into by Connie Vauters, the seller,
and a buyer . . . [and] Connie Vauters has
requested that this property be sold and is in
full agreement with the terms of the sale as
stated in this motion."
/3 Fed. R. Civ. P. 67 provides, in part, that "[i]n
an action in which any part of the relief sought
is a judgment for a sum of money or the disposi-
tion of a sum of money or the disposition of any
other thing capable of delivery, a party, upon
notice to every other party, and by leave of
court, may deposit with the court all or any part
of such sum or thing, whether or not that party
claims all or any part of the sum or thing."
/4 18 U.S.C. sec. 3613(c) provides that "[a] fine
imposed pursuant to the provisions of subchapter
C of chapter 227 of this title, or an order of
restitution made pursuant to sections 2248, 2259,
2264, 2327, 3663, 3663A, or 3664 of this title,
is a lien in favor of the United States on all
property and rights to property of the person
fined as if the liability of the person fined
were a liability for a tax assessed under the
Internal Revenue Code of 1986. The lien arises on
the entry of judgment and continues for 20 years
or until the liability is satisfied, remitted,
set aside, or is terminated under subsection
(b)."
/5 The district court came to this same conclusion,
noting "because Mallard Marketing, Inc. never
owned the property in question, Mallard’s promise
to encumber the property is without effect."