United States v. Funds in the Amount of $574,840 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-3568
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
F UNDS IN THE A MOUNT OF $574,840, et al,
Defendants.
S TEPHEN U NSWORTH and R ACHEL P ILLSBURY,
Claimants-Appellants.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 11 C 7803—Milton I. Shadur, Judge.
A RGUED A PRIL 10, 2013—D ECIDED JUNE 11, 2013
Before P OSNER, W OOD , and W ILLIAMS, Circuit Judges.
P OSNER, Circuit Judge. This is a companion case to
United States v. $196,969, No. 12-3414, which like the
present one concerns procedures in federal suits gov-
erned by 18 U.S.C. §§ 981 et seq. (a part of the Civil
Asset Forfeiture Reform Act (2000)) and Supplemental
2 No. 12-3568
Rule G of the Federal Rules of Civil Procedure, relating
to civil forfeiture of contraband, such as proceeds of
crime, or other property connected to criminal activity.
The federal government filed the suit against five
stashes of cash seized in searches of properties, including
an apartment, vehicles, and storage units, possessed or
occupied by Stephen Unsworth and his girlfriend
Rachel Pillsbury. The government suspected that the
two had been engaged in drug trafficking and that the
cash was the proceeds of that activity. They were prose-
cuted not in a federal court, but in an Illinois state
court, for the alleged trafficking. The prosecution
collapsed after the court ruled that the evidence of drug
trafficking had been procured by illegal searches and
ordered the evidence suppressed.
The federal forfeiture proceeding was filed after the
state prosecution had begun. The government notified
Unsworth and Pillsbury of the proceeding, as Rule G
requires. They submitted, as they were permitted to do
by Rule G(5)(a)(i), claims, signed under penalty of
perjury, “identify[ing] the specific property claimed” and
“the claimant and stat[ing] the claimant’s interest in the
property.” Cf. United States v. $487,825.000 in U.S.
Currency, 484 F.3d 662, 664-66 (3d Cir. 2007). Each claim
identified the claimant and the property and stated
that the claimant had “an ownership and possessory in-
terest” in all the property specified in the claim. Accompa-
nying each claim was a motion to stay the forfeiture
proceeding on the ground that allowing it to proceed
would undermine the claimant’s right not to incrim-
No. 12-3568 3
inate himself or herself in the pending state criminal
proceeding. The statute provides that such a stay “shall”
be granted “if the court determines that—(A) the
claimant is the subject of a related criminal investigation
or case; (B) the claimant has standing to assert a claim
in the civil forfeiture proceeding; and (C) continuation
of the forfeiture proceeding will burden the right of
the claimant against self-incrimination in the related in-
vestigation or case.” 18 U.S.C. § 981(g)(2). That condi-
tions (A) and (C) were satisfied is not contested, and the
claims would seem to have satisfied (B), the standing
condition, as well, by identifying the claimants and
their property interests under penalty of perjury,
though this is an issue to which we’ll return.
Without explanation the district court denied the
motion for a stay and instead gave the claimants two
weeks in which to respond to nine special inter-
rogatories that the government had propounded to
them. Rule G(6)(a) authorizes the government to issue
“special interrogatories limited to the claimant’s identity
and relationship to the defendant property.” The pur-
pose of such interrogatories is to smoke out fraudulent
claims—claims by persons who have no colorable
claims. (That is another point to which we return later in
this opinion.) The claimants objected to the inter-
rogatories and flatly refused to answer several, including
one that asked them to state the sources of the cash
they claimed to own; if the cash was proceeds of sales
of illegal drugs, the claimants had no rights in it. 21
U.S.C. § 881(a); United States v. 92 Buena Vista Ave.,
507 U.S. 111, 123-29 (1993).
4 No. 12-3568
The district judge, who early in the forfeiture pro-
ceeding had expressed concern over whether the claims
were within the jurisdiction that Article III of the Con-
stitution confers on federal courts, granted the govern-
ment’s motion to strike the claims on the ground that
by failing to answer all the interrogatories the claimants
had failed to “establish” Article III jurisdiction. 889
F. Supp. 2d 1098 (N.D. Ill. 2012). With no claims
remaining after his order to strike, the judge entered
judgment for the government, ordering forfeiture of all
the property in question and precipitating this appeal.
The judge should have issued the stay pending the
outcome of the state criminal proceeding (and maybe
beyond, if the federal government is also contemplating
prosecuting the claimants). The statute directed him to
grant a stay if all three conditions were satisfied. And
they were—he was mistaken, as we’ll see, in believing
that condition (B), relating to standing, had not been
satisfied. Had he granted the stay, no special interrogato-
ries would have been issued until it expired and so no
issue regarding the claimants’ refusal to answer some
of the interrogatories would yet have arisen.
Instead of issuing the stay the judge issued a protec-
tive order forbidding the government without the
judge’s permission to disclose the answers to the inter-
rogatories to persons other than federal government
lawyers assigned to the forfeiture case. “[T]he court
may determine that a stay is unnecessary if a protective
order limiting discovery would protect the interest of
one party without unfairly limiting the ability of
No. 12-3568 5
the opposing party to pursue the civil case.” 18 U.S.C.
§ 981(g)(3). It was because the claimants failed to
answer some of the interrogatories to which they had
objected, even after the judge issued the protective
order, that the judge ordered the forfeiture.
The government had given no reason for wanting
to pursue forfeiture before the state criminal case
against the claimants was resolved, even though that
resolution was likely to cast light on who had rights to
the cash. The effect of the protective order was to allow the
government to pursue discovery (via the interrogatories),
but not the claimants to do so, because apart from the
interrogatories discovery in the forfeiture case had not
begun. Discovery ordinarily does not begin until a dis-
covery conference is held. See Fed. R. Civ. P. 26(d)(1), (f).
None was held in this case—and 18 U.S.C. § 981(g)(3)
provides that “in no case . . . shall the court impose
a protective order as an alternative to a stay if the effect
of such protective order would be to allow one party
to pursue discovery while the other party is sub-
stantially unable to do so.” That may have been the
effect of the judge’s issuing the protective order before
discovery (other than the issuance of the interrogatories)
had begun. It is true that a claimant can ask for a
discovery conference, or ask the district judge for permis-
sion to conduct discovery even if no conference has
been held. Fed. R. Civ. P. 26(e)(1). But neither
the district judge nor the government suggests that the
claimants should have pursued either course; maybe
the claimants through no fault of theirs were not yet
ready to initiate discovery.
6 No. 12-3568
The judge’s ground for striking the claims and having
done so for ordering forfeiture was in any event not
that the claimants wouldn’t be prejudiced; it was that
without answers to all the interrogatories he could not
allay his concern that the claims might not satisfy the
jurisdictional requirements imposed by Article III. That
concern was misplaced, or at least premature, even if a
claimant in a forfeiture proceeding is required to
allege (and if the allegation is contested prove) that he
has Article III standing, which we assume in this case
though question (without attempting to resolve) in
the companion case.
At the pleading stage Article III standing is something
to be alleged, not proved. All that must be alleged is
an injury, personal to the person seeking judicial relief,
that the court can redress, an injury such as the injury
inflicted by the government when it has got hold of
money that belongs to the person and refuses to return
it. This is constitutional law 101. Rule G(5) requires
more, but the more is an addition to what is required
to plead Article III standing.
Generally when a pleading alleges facts that if true
confer Article III standing, the court’s focus should move
immediately to the merits. For if the court merely deter-
mines, on the basis of an evidentiary hearing concerning
standing, that there is no standing, it cannot make a
merits determination and so its dismissal of the claim
will have no res judicata effect. In re African-American
Slave Descendants Litigation, 471 F.3d 754, 758 (7th Cir.
2006); Frederiksen v. City of Lockport, 384 F.3d 437, 438-
No. 12-3568 7
39 (7th Cir. 2004); Southern Walk at Broadlands Homeowner’s
Ass’n, Inc. v. OpenBand at Broadlands, LLC, 713 F.3d 175, 185
(4th Cir. 2013). Granted, this is in general, not in every
case. Sometimes a factual dispute over an Article III
requirement has nothing to do with the merits—for
example a dispute over whether the parties are of
diverse citizenship in a case in which diversity is the
asserted basis for federal jurisdiction. A claim may be
valid, but if it is brought in the wrong court that court
has no authority to determine its validity; the case is
therefore dismissed without prejudice and so can be
refiled in a different court. Okoro v. Bohman, 164 F.3d
1059, 1062-63 (7th Cir. 1999).
And there are at least two situations in which even
though the standing issue merges with the merits, a
ruling rejecting standing has res judicata effect. One,
discussed most recently in El v. AmeriCredit Financial
Services, Inc., 710 F.3d 748, 751, 754 (7th Cir. 2013), is
where the suit either is frivolous (and so does not engage
the jurisdiction of the court) or is intended to harass,
and in either case the court by dismissing with prejudice
can preclude burdening itself or another court with
a future suit that simply should not be brought.
The second situation, germane to the present case, is
where the ruling on standing (or on some other juris-
dictional prerequisite), because it has a preclusive effect
with respect to the facts determined by that ruling, Hill
v. Potter, 352 F.3d 1142, 1146-47 (7th Cir. 2003), prevents
a further attempt by the plaintiff to obtain relief. A deter-
mination after an evidentiary hearing that the plaintiff
8 No. 12-3568
in a conversion suit (the claims in this case are
essentially conversion claims) has no interest in the
property that he alleges was converted will bar his
filing his claim in some other form or forum. But if
for example the only factual determination is that the
plaintiff lacked a fee simple interest in the property that
he wants returned to him, he may be able to refile the
claim, alleging a possessory interest. For “a judgment
on the merits precludes relitigation of any ground
within the compass of the suit, while a jurisdictional
dismissal precludes only the relitigation of the ground
of that dismissal.” Okoro v. Bohman, supra, 164 F.3d at
1063. So even in a case such as the present one, once
facts bearing on the claim are presented the prudent
course for the district court is to proceed to the
claim’s merits.
But there is an exception. Supplemental Rule
G(8)(c)(ii)(B) authorizes the government to move to
strike a claim on the ground that the claimant
“can[not] carry the burden of establishing standing by
a preponderance of the evidence.” It is always open to
a party to contest standing by proving facts that con-
tradict his opponent’s allegations of standing. Suppose
the government wanted to show that although the
money it’s holding may belong to the claimants, they
don’t want it back because they don’t consider fiat
money to be legal tender; they want the money burned.
Then they wouldn’t have standing, because a judgment
in their favor would not provide them with any
lawful redress. (It is unlawful to burn U.S. currency.
18 U.S.C. § 333.)
No. 12-3568 9
But there is more to Rule G(8)(c) than this. A forfeiture
suit is in rem. The defendant is not a person, or a firm
or a government agency or some other type of organiza-
tion, but a thing, in this case a pile of cash. It’s all too
easy for someone who has no colorable claim to
property in government hands to file a claim in the for-
feiture proceeding. Such claims, by people trolling
the Internet for forfeiture notices, could bog down for-
feiture proceedings. See Stefan D. Cassella, Asset
Forfeiture Law in the United States § 9.3, pp. 375-76 (2013).
Rule G provides an escape hatch for the government
by allowing it to respond to the claim with a motion
to strike that “may be presented as a motion for judg-
ment on the pleadings or as a motion to determine
after a hearing or by summary judgment whether the
claimant can carry the burden of establishing standing
by a preponderance of the evidence.” Rule G(8)(c)(ii)(B).
If the claimant successfully demonstrates that he has
an interest, this is not the end of the case, because
the government can sometimes obtain forfeiture of the
property anyway—for example, forfeiture of a building
owned by the claimant but used for illegal gambling,
as in United States v. On Leong Chinese Merchants Ass’n
Building, 918 F.2d 1289, 1290 (7th Cir. 1990). The motion
to strike if successful enables a fraudulent claim to
be dismissed at the threshold.
The rule’s use of the term “standing” is unfortunate
because striking a claim is a decision on the merits. It is
not a determination that the claimant has failed to
show that the court has jurisdiction and so he should
seek relief by an alternative path; it is a determination
10 No. 12-3568
that he has no interest in the property. That determina-
tion was not made in this case. It’s not as if the
claimants were claiming property obviously not
theirs—claiming for example ownership of a painting
that had been stolen from the National Gallery in Wash-
ington (and thus was owned by the federal govern-
ment) and had been recovered from the thief and the
government was seeking forfeiture of it.
“[T]he burden of proof is on the Government to
establish, by a preponderance of the evidence, that the
property is subject to forfeiture.” 18 U.S.C. § 983(c)(1); see
United States v. Funds in Amount of Thirty Thousand Six
Hundred Seventy Dollars, 403 F.3d 448, 454 (7th Cir. 2005);
United States v. $92,203.00 in U.S. Currency, 537 F.3d 504,
508-09 (5th Cir. 2008). The government can move to
strike a claim to property on the ground that the
claimant has no interest in it, but it cannot just say to
him: prove it’s your property. Remember that the claim
that Rule G(5)(a)(i) requires of a claimant is not just a
naked statement “I want the dough.” It must be signed
under penalty of perjury and identify the claimant and
the nature of his interest. It is evidence, United States
v. $133,420.00 in U.S. Currency, 672 F.3d 629, 638-40
(9th Cir. 2012); cf. United States v. $148,840.00 in U.S.
Currency, 521 F.3d 1268, 1275 (10th Cir. 2008), and shifts
to the government at least the burden of production of
evidence that the claim is invalid—as the government
appears to have recognized. For it was the absence of
evidence countering the claims in this case when they
were filed that motivated the serving of special inter-
rogatories on the claimants; the government needed
No. 12-3568 11
discovery in order to determine whether the claimants
had valid claims.
Some cases have required the claimant to provide more
evidence than Rule G(5)(a)(i) requires. See Cassella, supra,
§ 9.3, pp. 381-86; but see United States v. $148,840.00 in
U.S. Currency, supra, 521 F.3d at 1276. The cases don’t
explain where such a requirement comes from, and
we’ve expressed skepticism in the companion case that
the requirement is proper. We needn’t try to wrestle
the issue to the ground. The government jumped the
gun. It gave no reason for opposing a stay that would
defer the litigation of its forfeiture case until the crim-
inal prosecution of the claimants was resolved. For
reasons of judicial economy the stay is preferable to
immediate discovery the fruits of which are hidden
from the criminal proceeding by a protective order. And
remember that section 981(g)(3) forbids the protective-order
substitute for a stay when the effect is to hamstring
one of the parties, as by preventing him from con-
ducting discovery while the other party is using dis-
covery to make its case against him—as may have hap-
pened here.
The judgment of forfeiture must be reversed and the
case remanded for further proceedings concerning the
claimants’ interest and, possibly depending on the res-
olution of that issue, the ultimate issue of forfeiture.
Circuit Rule 36 shall apply on remand.
R EVERSED AND R EMANDED.
6-11-13