United States v. Wells Fargo Bank ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 06-2586 & 06-2587
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
JEFFREY GROSSMAN,
Defendant,
APPEALS OF:
WELLS FARGO BANK and
AURORA LOAN SERVICES, LLC,
Third Party-Petitioners.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 CR 678—Elaine E. Bucklo, Judge.
____________
ARGUED MAY 29, 2007—DECIDED SEPTEMBER 10, 2007
____________
Before BAUER, WOOD, and WILLIAMS, Circuit Judges.
BAUER, Circuit Judge. This is a criminal forfeiture
proceeding, ancillary to a federal criminal action, in which
Wells Fargo Bank and Aurora Loan Services claim a
superior interest in property seized by the government.
The district court granted the government’s motion to
dismiss. On appeal, Wells Fargo and Aurora claim that
the property is not subject to forfeiture and that they
did not have notice of the government’s interest. We affirm
2 Nos. 06-2586 & 06-2587
the dismissal of Wells Fargo’s petition for untimeliness,
but we vacate the dismissal of Aurora’s petition and
remand for further proceedings.
I. Background
Jeffrey Grossman pleaded guilty to bank fraud, wire
and mail fraud, money laundering, and obstruction of
justice, all relating to real estate developments in the
Chicago area and elsewhere. Using some of the proceeds
from this criminal activity, Jeffrey Grossman had funded
the construction of a residence in South Haven, Michigan
(“the property”). His wife, Bette Grossman, was the rec-
ord title holder of the property. The government sought
to forfeit the property as part of the criminal proceedings
and recorded a lis pendens with the Van Buren County,
Michigan Register of Deeds on May 8, 2003. The lis
pendens was recorded in the book of levies but did not
name Bette Grossman.
After the government recorded the notice of lis pendens,
Aurora and Wells Fargo acquired interests in the property
by granting mortgages to Bette Grossman. Aurora took a
mortgage assignment on the property, recorded on June
24, 2003 with the Van Buren County Register of Deeds;
Wells Fargo extended a mortgage on the property, recorded
on March 2, 2004 with the Van Buren County Register
of Deeds.
Jeffrey Grossman admitted that the property was sub-
ject to forfeiture and agreed to entry of a forfeiture judg-
ment in the amount of $4,000,000. Bette Grossman
executed a quit claim deed to the government for the
property, and the district court entered a preliminary
order of forfeiture against the property on December 14,
2004. The government served both Wells Fargo and Aurora
with notice of the forfeiture order on March 7, 2005.
Nos. 06-2586 & 06-2587 3
Wells Fargo and Aurora filed petitions seeking a declara-
tion that their mortgages from Bette Grossman were
superior to any interest the government could take in its
forfeiture action. On April 5, 2005, Aurora filed its peti-
tion, and on August 2, 2005, Wells Fargo filed its peti-
tion. The government moved to dismiss both petitions,
which the district court granted. Wells Fargo and Aurora
timely filed this appeal.
II. Discussion
Under the criminal forfeiture statute, a third party may
petition for a hearing to adjudicate its interest in a
property to be forfeited. 21 U.S.C. § 853(n)(2). Federal Rule
of Criminal Procedure 32.2 governs the procedure of this
proceeding. Under this rule, when a third party files a
petition asserting an interest in property to be forfeited,
the court must conduct an “ancillary proceeding,” Fed R.
Crim. P. 32.2(c)(1), which closely resembles a civil action.
“In the ancillary proceeding, the court may, on motion,
dismiss the petition for . . . failure to state a claim . . . .”
Fed. R. Crim. P. 32.2(c)(1)(A). This procedure is treated
like a motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b). Fed. R. Crim. P. 32.2 advisory
committee’s note. Dismissal of a claim is appropriate only
where “it is clear that no relief could be granted under
any set of facts that could be proved consistent with the
allegations.” Hishon v. King & Spalding, 467 U.S. 69, 73,
104 S. Ct. 2229, 81 L. Ed. 2d 59 (1984) (citing Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80(1957)). In ruling on a motion to dismiss, we construe
all well-pleaded allegations of the petition as true and
draw all reasonable inferences in favor of the plaintiff.
Christensen v. County of Boone, 483 F.3d 454, 466 (7th Cir.
2007). We review the grant of the motion to dismiss
de novo. Licari v. City of Chicago, 298 F.3d 664, 666 (7th
Cir. 2002).
4 Nos. 06-2586 & 06-2587
To obtain relief, each petitioner must establish by a
preponderance of the evidence either (a) that its interest
is superior to that of the defendant because it arose
before he committed the criminal acts giving rise to the
forfeiture, or (b) that it was a bona fide purchaser for value
without actual or constructive knowledge of the govern-
ment’s interest in the property. 21 U.S.C. § 853(n)(6)(A-B).
Wells Fargo and Aurora obtained their interest in the
property after the conduct giving rise to forfeiture so the
first condition does not apply. We are therefore only
concerned with whether Wells Fargo and Aurora could
show that they were bona fide purchasers for value
without notice. We look to Michigan property law to
determine what constitutes notice. See United States v.
5 S 351 Tuthill Rd., 233 F.3d 1017, 1021 (7th Cir. 2000)
(“State law defines and classifies property interests for
purposes of the forfeiture statutes, while federal law
determines the effect of the property interest on the
claimant’s standing.”).
A. Wells Fargo
The government claims that Wells Fargo was untimely
in filing its petition. We agree. Under the criminal forfei-
ture statute, a third party must file its petition within
thirty days of the earlier of its receipt of (1) actual notice
of the order of intent to dispose or (2) the final publica-
tion of the notice. 21 U.S.C. § 853(n)(2). If the third party
does not file its claim within the thirty days, “the United
States shall have clear title to property that is subject to
the order of forfeiture.” 21 U.S.C. § 853(n)(7). We construe
this provision “liberally . . . to effectuate its remedial
purposes.” 21 U.S.C. § 853(o).
Wells Fargo admits that its petition was not filed within
thirty days after its agent received notice. The government
served its notice to Wells Fargo on March 7, 2005, and
Nos. 06-2586 & 06-2587 5
Wells Fargo filed its petition five months later: on August
2, 2005. Wells Fargo claims it failed to file its petition
within thirty days because the government failed to
provide it with adequate notice. We find this argument
meritless. The notice provided by the government included
the preliminary order of forfeiture, which identified the
property by legal description, PIN number, and street
address. It also warned that “the foregoing funds and
real property are subject to forfeiture based on the defen-
dant’s conviction for the above reference violations.” We
find that the notice was adequate, and the district court
properly dismissed Wells Fargo’s petition.
B. Aurora
Aurora first challenges the district court’s ruling that
the property was subject to forfeiture. Aurora claims that
the lis pendens notice, which referred only to Jeffrey
Grossman’s interest in the property, could not affect the
interest of Bette Grossman, the record owner. Alterna-
tively, Aurora claims that because Jeffrey Grossman had
no recorded interest, he had no interest in the house that
could be forfeited. We disagree.
The interests subject to forfeiture encompass all the
fruits of a defendant’s crimes, including assets held in the
name of third parties. 21 U.S.C. § 853(c). Jeffrey Grossman
admitted that funds from his illegal activity funded the
construction of the house and agreed that it was subject
to forfeiture.
Lastly, Aurora asserts that the government’s lis pendens
was ineffective constructive notice because it was filed
under Jeffrey Grossman’s name, outside the chain of title.
Further, Aurora claims that because Van Buren County
has no tract index, the government’s lis pendens could not
be discovered by a prudent title search. The government
6 Nos. 06-2586 & 06-2587
counters that a recorded interest is sufficient constructive
notice. Because it filed its lis pendens in the book of levies
first, the government claims that it has priority to the
property regardless of how the filing was indexed. We
must determine whether the government’s lis pendens
served as constructive notice under Michigan law.
A lis pendens is a public notification that “warn[s] all
persons that certain property is the subject matter of
litigation, and that any interests acquired during the
pendency of the suit are subject to its outcome.” Black’s
Law Dictionary (8th ed.). The effect of a lis pendens is to
give notice to interested parties that the property is
subject to a lawsuit. See Continental Paper & Supply Co.
v. City of Detroit, 545 N.W.2d 657, 662 (Mich. 1996).
However, to give notice to interested parties, a lis pendens
must be recorded in accordance with Michigan law. Mich.
Comp. Laws. § 565.25 sets forth Michigan’s race-notice
statute, which establishes that recorded instruments
generally serve as constructive notice:
(1) In the entry book of deeds, the register shall enter
all deeds of conveyance absolute in their terms, and
not intended as mortgages or securities, and all copies
left as cautions. In the entry book of mortgages the
register shall enter all mortgages and other deeds
intended as securities, and all assignments of any
mortgages or securities. In the entry book of levies the
register shall enter all levies, attachments, liens,
notices of lis pendens, sheriffs’ certificates of sale,
United States marshals’ certificates of sale, other
instruments of encumbrances, and documentation
required under subsection (2), noting in the books,
the day, hour, and minute of receipt, and other partic-
ulars, in the appropriate columns in the order in
which the instruments are respectively received.
...
Nos. 06-2586 & 06-2587 7
(4) The instrument shall be considered as recorded
at the time so noted and shall be notice to all persons
except the recorded landowner subject to subsection
(2), of the liens, rights, and interests acquired by or
involved in the proceedings. All subsequent owners or
encumbrances shall take subject to the perfected liens,
rights, or interests.
Mich. Comp. Laws. § 565.28 requires each party named in
an instrument accepted for recording to also be entered
into an alphabetical grantor-grantee index:
Each register of deeds shall keep a proper general
index to each set of books in which he or she shall
enter alphabetically the name of each party to each
instrument recorded by the register of deeds, with
reference to the book and page where the instrument
is recorded . . . .
Finally, Mich. Comp. Laws. § 565.29 summarizes the effect
of these Michigan recording statutes by stating that
recordings not performed in accord with the provisions of
Chapter 565 are ineffective against subsequent pur-
chasers in good faith and for a valuable consideration:
Every conveyance of real estate within the state
hereafter made, which shall not be recorded as pro-
vided in this chapter, shall be void as against any
subsequent purchaser in good faith and for a valuable
consideration, of the same real estate or any portion
thereof, whose conveyance shall be first duly recorded.
The fact that such first recorded conveyance is in the
form or contains the terms of a deed of quit-claim and
release shall not affect the question of good faith of
such subsequent purchaser, or be of itself notice to
him of any unrecorded conveyance of the same real
estate or any part thereof.
The government argues that the chain of title is irrele-
vant, relying heavily on a negative inference created in
8 Nos. 06-2586 & 06-2587
Graves v. Am. Acceptance Mortg. Corp., 677 N.W.2d 829(Mich. 2004). In Graves, amicus and one of the parties
advanced arguments that a property interest must be
recorded in the grantor-grantee index. The court declined
to review this argument and there is no discussion of it
in its opinion. The government also relies on Cipriano v.
Tocco, 772 F. Supp. 344 (E.D. Mich. 1991), Schepke v. Dept.
of Nat. Resources, 464 N.W.2d 713 (Mich. Ct. App. 1990),
and Thomas v. Bd. of Supervisors, 182 N.W. 417 (Mich.
1921). In each of these cases, a tract index was available
as an additional method of title searching. In Van Buren
County, however, the grantor-grantee index is the only
searchable method.
We construe the Michigan statutes together to mean
that an interest must be recorded within the chain of title,
in the grantor-grantee index, to have priority over a bona
fide purchaser. The register of deeds is required to keep
a grantor-grantee index, and under M.C.L. 565.29, it is
only effective against a bona fide purchaser if it is in the
grantor-grantee index. This position is also supported by
Michigan case law. See Bristol v. Braidwood, 28 Mich. 191,
193 (Mich. 1873) (“prior mortgage might describe the
same land, yet, if executed by some one having no connec-
tion with the real title, but outside of the chain of title, it
could in no way defeat or affect the [later filed] mortgage
or impair its security”); Meacham v. Blaess, 104 N.W. 579,
580 (Mich. 1905) (“the record of deeds not in [the] chain of
title [of a party] is no notice [to that party]”); Schweiss v.
Woodruff, 41 N.W. 511, 513 (Mich. Ct. App. 1889) (“The
question . . . is whether the record contains sufficient
[information] to apprise a party that some right or title is
claimed or attempted to be conveyed in the premises, and,
if it does, the purchaser is bound to use reasonable dili-
gence to ascertain what it is that is so claimed or at-
tempted to be conveyed.”). Because the government’s
lis pendens was recorded outside the chain of title and
Nos. 06-2586 & 06-2587 9
because Van Buren County has no tract index, there was
no way for Aurora to learn of the government’s interest.
The idea that the government’s filing could be constructive
notice defies logic. We find that the district court erred
by dismissing Aurora’s case.
III. Conclusion
For the aforementioned reasons, the judgment of the
district court as to Wells Fargo is AFFIRMED, and the
judgment of the district court as to Aurora is VACATED
and REMANDED for further proceedings.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-10-07