United States v. Premises Known as 7725 Unity Avenue North ( 2002 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-3074
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United States of America, *
*
Plaintiff-Appellee, *
*
v. *
*
Premises Known as 7725 Unity *
Avenue North, Brooklyn Park, *
Minnesota, *
*
Defendant. *
____________________ *
*
Tonya Howell; Anthony Tyrone *
Howell; County of Hennepin; *
*
Claimants, *
*
GMAC Mortgage Corporation, *
*
Movant-Appellant. * Appeals from the United States
District Court for the District
__________ of Minnesota.
No. 01-3212
__________
United States of America, *
*
Plaintiff-Appellee, *
*
v. *
*
Premises Known as 7725 Unity *
Avenue North, Brooklyn Park, *
Minnesota, *
*
Defendant. *
____________________ *
*
Tonya Howell; Anthony Tyrone *
Howell; *
*
Claimants-Appellants, *
*
County of Hennepin; *
*
Claimant, *
*
GMAC Mortgage Corporation, *
*
Movant. *
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Submitted: June 10, 2002
Filed: July 1, 2002
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Before BOWMAN, FAGG, and BYE, Circuit Judges.
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FAGG, Circuit Judge.
After Anthony Tyrone Howell pleaded guilty to conspiracy to distribute
cocaine, cocaine base, and marijuana, the Government filed this action seeking civil
forfeiture of Howell’s house at 7725 Unity Avenue North, Brooklyn Park, Minnesota,
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under 21 U.S.C. § 881(a)(6) (2000). Howell and his wife, Tonya Howell, refinanced
an existing GMAC mortgage through GMAC Mortgage Corporation (GMAC) in
March 1999. Although it made two unsuccessful attempts to register the mortgage,
GMAC did not register its $53,043.00 mortgage interest with the registrar of titles
until December 1999. The Government filed a notice of lis pendens against the
property in August 1999, before GMAC registered its mortgage. The Government
also complied with relevant public notice provisions. The Howells and GMAC
contested the forfeiture.
The district court rejected the Howells’ claims to the property, finding the
Howells failed to show sufficient legitimate income to provide the down payment and
mortgage payments, and Tonya Howell failed to show she was an innocent spouse.
The district court also rejected GMAC’s claim, finding GMAC lacked standing to
contest the forfeiture because GMAC’s mortgage was registered after the lis pendens.
The district court granted the Government’s motion for summary judgment. The
entire value of the property was forfeited to the Government. GMAC and the
Howells appeal, claiming the mortgage funds were improperly forfeited to the
Government. Having carefully reviewed the record de novo and considered the facts
and all reasonable inferences that can be drawn from them in the light most favorable
to the claimants, we reverse the district court’s grant of summary judgment and
remand the case for further proceedings. United States v. 318 South Third Street, 988
F.2d 822, 824 (8th Cir. 1993).
We begin by addressing the threshold question of standing. The Government
concedes the Howells have standing, but claims GMAC lacks standing under Article
III. To have Article III standing, GMAC must show a sufficient ownership interest
in the property to create a case or controversy capable of federal judicial resolution.
United States v. 1998 BMW “I” Convertible, 235 F.3d 397, 399 (8th Cir. 2000).
Ownership interest can be shown by actual possession, control, title, and financial
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stake. Id. GMAC’s ownership interests are defined by state law. United States v.
Tracts 10 & 11 of Lakeview Heights, 51 F.3d 117, 121 (8th Cir. 1995).
Under Minnesota law, “[t]he act of registration shall be the operative act to
convey or affect the land.” Minn. Stat. § 508.47, subd. 1 (2000). Because only the
act of registration creates an interest in land, GMAC had no legal interest in the
property before it registered its mortgage. Mill City Heating & Air Conditioning Co.
v. Nelson, 351 N.W.2d 362, 364 (Minn. 1984). GMAC perfected its interest in the
property by registering its mortgage in December 1999. Minn. Stat. § 508.54 (2000).
The act of registration not only created an interest in the property, but also defined
the priority of that interest. Because the Government filed its notice of lis pendens
before GMAC registered the mortgage, GMAC’s interest is junior to the
Government’s interest. Minn. Stat. § 557.02 (2000) (providing for notice of lis
pendens). Standing and priority of interest are separate questions, and it is important
to distinguish between them. To have standing, a claimant need not prove the
underlying merits of the claim. United States v. $515,060.42 in United States
Currency, 152 F.3d 491, 497-98 (6th Cir. 1998). The claimant need only show a
colorable interest in the property, redressable, at least in part, by a return of the
property. Id. Because GMAC’s mortgage can be satisfied by the return of the
property subject to forfeiture, GMAC’s junior lienholder interest in the property is
sufficient to support Article III standing. Resolution Trust Corp. v. Kemp, 951 F.2d
657, 663 (5th Cir. 1992) (resolving claim of purchaser subject to superior lis pendens
claim). GMAC need not prove its interest is superior to the Government’s interest to
have a stake in the outcome of the forfeiture proceedings.
The Government cites Fingerhut Corp. v. Suburban National Bank, 460
N.W.2d 63, 66 (Minn. Ct. App. 1990), claiming under Minnesota law, a mortgage
holder whose interest is subordinate to a lis pendens lacks standing. We disagree
with the Government’s interpretation and conclude Fingerhut addresses the separate
question of priority of interest. In Fingerhut, a notice of lis pendens was filed after
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the mortgage holder last searched the property title but four days before the mortgage
was registered. The Minnesota Court of Appeals held the priority interest protected
by the lis pendens defeated the subordinate mortgage claim. Id. at 65. Under
Fingerhut, because GMAC’s interest is subordinate to the Government’s lis pendens,
GMAC cannot recoup its mortgage loan proceeds before the forfeiture proceedings
are resolved. Id. at 66. The Government is entitled to take all properly forfeited
property before junior interests are considered. Once the Government’s suit
described in the lis pendens is resolved, either because the Government succeeded in
the forfeiture proceedings, the Government was defeated, or the case was dismissed,
the lis pendens will be canceled. Minn. Stat. § 508.67 (2000). If any property or
proceeds from the sale of the property remain, junior lienholders’ claims may be
satisfied from the residual property or proceeds. See Shaw Acquisition Co. v. Bank
of Elk River, 639 N.W.2d 873, 877 (Minn. 2002). If no property or proceeds remain
after the resolution of the forfeiture proceedings, junior lienholders like GMAC will
be left empty-handed. Having concluded GMAC’s interests are junior to the
Government’s forfeiture action, we next determine what property is subject to
forfeiture.
Federal law provides that all money or things of value furnished in exchange
for illegal drugs, all proceeds traceable to an exchange for illegal drugs, and all
money used to facilitate illegal drug trafficking are subject to forfeiture. 21 U.S.C.
§ 881(a)(6); United States v. Thirty-Nine Thousand Eight Hundred Seventy-Three
and No/100's Dollars, 80 F.3d 317, 318 (8th Cir. 1996). The Government bears the
initial burden of proving probable cause to connect the property to drug trafficking.
Id. After the Government makes this showing, the burden shifts to the claimant to
show by a preponderance of the evidence that the property is not connected with drug
trafficking or that some defense to forfeiture applies. Id. The parties do not dispute
the district court’s finding of probable cause for forfeiture, or the forfeiture of the
Howells’ equity in the property. Both the Howells and GMAC contest the forfeiture
of GMAC’s mortgage loan proceeds, claiming the mortgage proceeds were untainted
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by and untraceable to illegal drug transactions. Although the Howells challenge the
forfeiture of the loan proceeds, the Howells do not claim that the loan proceeds
belong to them. The Government does not dispute the claim that the mortgage loan
was clean, untainted money or that the loan proceeds belong to GMAC. In sum, there
is no dispute that the mortgage loan proceeds are untainted by drug money, and that
the loan proceeds belong to GMAC, not the Howells. The only issue we must resolve
on appeal is whether the Government is entitled to forfeit GMAC’s undisputably
untainted mortgage loan proceeds.
“[F]orfeitures are not favored in the law and should be enforced only within
both the letter and spirit of the governing provisions.” United States v. One 1987
Mercedes Benz 300E, 820 F. Supp. 248, 251 (E.D. Va. 1993) (citing United States
v. One 1936 Model Ford V-8 De Luxe Coach, 307 U.S. 219, 226 (1939)). Under the
language of the statute, only those proceeds traceable to illegal drug money are
subject to forfeiture. 21 U.S.C. § 881(a)(6); United States v. 92 Buena Vista Avenue,
507 U.S. 111, 123 (1993). Because there is no dispute that GMAC’s loan proceeds
are not traceable to illegal drug money, the Government has no right to forfeit the
innocent loan proceeds. United States v. One 1980 Rolls Royce, 905 F.2d 89, 90 (5th
Cir. 1990); see also United States v. 1980 Lear Jet, Model 35A, 38 F.3d 398, 401 (9th
Cir. 1994) (“This notion of an ‘innocent lienholder’ constitutes an exception to the
rule that property used to facilitate a felony drug transaction will be forfeited in toto
to the federal government.”).
The Government contends GMAC’s legitimate funds are subject to forfeiture
because the loan proceeds were comingled with illegal drug proceeds. See United
States v. 15603-85th Avenue North, 933 F.2d 976, 982 (11th Cir. 1991). We reject
this contention. The Eleventh Circuit case cited by the Government provides
legitimate funds are subject to forfeiture if those funds are knowingly comingled with
forfeitable funds. Id. The only evidence in the record addressing GMAC’s
knowledge is GMAC’s affidavit denying knowledge of the Howells’ drug activities.
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(Appellant’s App. at 27). The Government has offered no evidence that GMAC had
actual knowledge of the Howells’ illegal activities or that its loan proceeds were
comingled with the Howells’ drug profits.
We conclude neither the letter nor the spirit of the forfeiture statute allows the
Government a windfall by forfeiting undisputedly innocent proceeds. Having
concluded the Government is not entitled to forfeit the innocent loan proceeds
contributed by GMAC, we remand this case for the district court to examine the
property title and to determine who is entitled, under Minnesota law, to receive the
residual proceeds not subject to forfeiture. We need not consider GMAC’s or the
Howells’ equitable arguments. We thus reverse the district court’s grant of summary
judgment and order of forfeiture. We remand this case to the district court for
proceedings consistent with this opinion.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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