United States v. Real Property in Waterboro

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
No. 93-2278
UNITED STATES OF AMERICA,
Plaintiff, Appellee,
v.
REAL PROPERTY IN WATERBORO, ET AL.,
Defendants, Appellees,
v.
PATRICK CUNAN,
Claimant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, U.S. District Judge]
No. 94-1599
UNITED STATES OF AMERICA,
Appellant,
v.
RICHARD J. DECATO, JR., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
No. 94-2036
UNITED STATES OF AMERICA,
Appellee,
v.
RICHARD J. DECATO, JR., ET AL.
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Boudin, Circuit Judge,
Aldrich, Senior Circuit Judge,
and Bownes, Senior Circuit Judge.
Bruce E. Kenna, with whom Kenna, Johnston & Sharkey was on brief
for appellants.
David S. Mackey, Assistant United States Attorney, with whom
Donald K. Stern, United States Attorney, was on brief for appellee.
September 8, 1995
BOWNES, Senior Circuit Judge. These consolidated
BOWNES, Senior Circuit Judge.
appeals involve third-party claims to real properties in
Bangor and Portland, Maine ("the Maine properties"), that the
United States is trying to forfeit as part of a criminal
prosecution in Massachusetts. The District Court for the
District of Massachusetts granted the third-party claimants'
motion to dismiss the Maine properties from the indictment.
Because we find that the third-party claims were premature
under the applicable criminal forfeiture statute, we vacate
the order of dismissal and remand for further proceedings.
I.
The government alleges that Richard DeCato, Jr.,
the principal of a drug-dealing and money-laundering
operation in New England, purchased the Maine properties with
the proceeds of drug trafficking and installed his brother-
in-law, Patrick Cunan, as the straw owner. In 1990, the
government filed two civil forfeiture actions against the
Maine properties in the District of Maine. Not surprisingly,
Cunan was the only party to assert a claim in those actions.
The civil forfeiture actions were sidetracked by
pretrial proceedings, including an appeal to this court, see
United States v. TWP 17 R 4, 970 F.2d 984 (1st Cir. 1992),
and by the government's pending criminal investigation in
Massachusetts. In 1993, while both cases were pending, a
federal grand jury in Massachusetts charged DeCato and the
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Cunans (Patrick and Patricia) with various offenses,
including conspiracy to violate federal drug laws and money
laundering. Count 37 of the indictment -- which named DeCato
alone -- sought criminal forfeiture of the Maine properties
under 21 U.S.C. 853.
Four days after the indictment was returned, the
government moved to dismiss the two civil forfeiture actions
with prejudice, in deference to the criminal forfeiture count
in Massachusetts. Judge Carter so dismissed the actions.
The United States Marshal for the District of Maine continued
to hold the assets at issue (including escrowed monies from
the sale of some of the Portland properties) pursuant to
instructions from the United States Attorney for the District
of Massachusetts.
Several months after the dismissal of the civil
actions, Cunan moved in the District of Maine for an order
directing the Maine Marshal to disencumber or release the
Portland assets. He argued that the dismissal with prejudice
of the civil actions barred, as a matter of res judicata, the
criminal forfeiture of those assets in the District of
Massachusetts. Judge Carter denied the motion, and Cunan
appealed the denial in Appeal No. 93-2278.
In the District of Massachusetts, the government
moved to restrain all of the properties in the criminal
forfeiture count. The Cunans moved, on res judicata grounds,
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to strike or dismiss the Maine properties from the
indictment. Judge Young entered a temporary restraining
order, took the Cunans' motion under advisement, and
ultimately held that claim preclusion barred the criminal
forfeiture of the Maine properties.
The government moved for reconsideration, arguing
for the first time that the Cunans, who are third parties to
Count 37, must wait until an order of forfeiture has actually
been entered before they may assert their claim. See 21
U.S.C. 853(k) (barring third-party intervention in criminal
forfeiture action except as provided in 853(n)). Judge
Young denied reconsideration but noted that "the restraining
order already entered remains in full force and effect." The
government appealed the dismissal of the Maine properties in
Appeal No. 94-1599.
In July, 1994, DeCato entered a written plea
agreement that forfeited "his legal and beneficial interests
in all assets described in Count 37, including a cash
forfeiture in the amount of $3,000,000." He acknowledged
that all such assets were subject to forfeiture as "the
proceeds of unlawful drug activity . . . and/or as substitute
assets." DeCato also agreed to testify against the Cunans at
their upcoming trial.
The government then filed a supplemental motion to
restrain the Maine properties, although the previous
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restraining order does not appear to have been lifted. It
argued that notwithstanding any preclusive effect from the
dismissal of the civil actions, the government was free to
forfeit DeCato's interest in the Maine properties as
"substitute assets" in place of the $3 million cash
forfeiture. See 21 U.S.C. 853(p). Judge Young entered the
restraining order as requested, which the Cunans appealed in
Appeal No. 94-2036.
II.
We begin with the government's appeal from the
dismissal of the Maine properties. In its motion for
reconsideration, the government argued that the Cunans are
barred by 21 U.S.C. 853(k) from asserting their third-party
claim to the Maine properties until the properties have
actually been ordered forfeited to the United States. We
consider this argument on the merits, despite the
government's possible waiver below, for two reasons. First,
the district court did not expressly rely upon waiver in
denying the motion for reconsideration. Second, the Cunans
have not asserted waiver on appeal.1
1. We recognize that the government's belated argument is
possibly a jurisdictional one, to the extent that Congress
may have barred the Cunans from raising, and the district
court from considering, their claim of ownership of the Maine
properties. See Halleran v. Hoffman, 966 F.2d 45, 47 (1st
Cir. 1992) ("A challenge to federal subject matter
jurisdiction may be raised at any time, including for the
first time on appeal."). We express no opinion on this and
do not rely on it.
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The bar on third-party intervention in 21 U.S.C.
853(k) provides:
(k) Except as provided in subsection (n)
of this section, no party claiming an
interest in property subject to
forfeiture under this section may --
(1) intervene in a trial or appeal of a
criminal case involving the forfeiture of
such property under this subchapter; or
(2) commence an action at law or equity
against the United States concerning the
validity of his alleged interest in the
property subsequent to the filing of an
indictment or information alleging that
the property is subject to forfeiture
under this section.
Section 853(n), the subsection cited in 853(k), is a wait-
and-see provision: "[f]ollowing the entry of an order of
forfeiture," the United States is required to publish notice
of the order to interested third parties. 853(n)(1)
(emphasis added). "Any person . . . asserting a legal
interest in property which has been ordered forfeited to the
United States" may then "petition the court for a hearing to
adjudicate the validity of his alleged interest in the
property." 853(n)(2).
The government argues that 853(k) bars third
parties such as the Cunans from participating in pre-
forfeiture proceedings under any circumstances. We disagree.
A statutory exception to the bar is found in 853(e)
("Protective orders"): where the government seeks a pre-
indictment protective order against the property alleged to
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be subject to forfeiture, "persons appearing to have an
interest in the property" must be afforded notice and an
opportunity for a hearing. 853(e)(1)(B). There is no
suggestion that third parties are excluded from this process,
even though restraining orders necessarily precede forfeiture
orders. In fact, the legislative history of the bar on
third-party intervention cautions that "[t]his provision is
not intended to preclude a third party with an interest in
property that is or may be subject to a restraining order
from participating in a hearing regarding the order . . . ."
S. Rep. No. 225, 98th Cong., 2d Sess. 206 n.42 (1983)
(explaining parallel provision of RICO statute), reprinted in
1984 U.S.C.C.A.N. 3182, 3389 n.42. The legislative history,
moreover, makes no distinction between pre-indictment and
post-indictment restraining orders; evidently, third parties
may "participat[e]" in both types of restraining order
proceedings. Cf. id. at 3386 (noting that although "the
post-indictment restraining order provision [ 853(e)(1)(A)]
does not require prior notice and opportunity for a hearing,"
the provision "does not exclude . . . the authority to hold a
hearing subsequent to the initial entry of the order . . .
.").
This exception to the bar on intervention may
reflect due process concerns. Section 853(e) presents a
special problem for third parties, who face not only the
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potential forfeiture of property in which they claim an
interest, but also immediate restraints upon property that
may be in their control. A restraining order directed at
third parties is "strong medicine," United States v. Regan,
858 F.2d 115, 121 (2d Cir. 1988), whether it is entered
before or after the indictment.
We conclude that under 853(e), third parties
claiming an interest in restrained or potentially
restrainable property may "participat[e]" in the associated
restraining order proceedings. We now ask whether the Cunans
participated in those proceedings in the manner contemplated
by Congress. After examining the structure and legislative
history of 853(e), we hold that the Cunans' res judicata
argument was prematurely made.
Broadly speaking, the government can seek
protective orders in two contexts: before an indictment has
been filed, or after. To obtain a pre-indictment protective
order, the government must show, among other things, that
"there is a substantial probability that the United States
will prevail on the issue of forfeiture . . . ."
853(e)(1)(B). By contrast, under 853(e)(1)(A), the
indictment itself establishes the merits of the government's
case, and courts may enter a protective order "upon the
filing of an indictment . . . alleging that the property with
respect to which the order is sought would, in the event of
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conviction, be subject to forfeiture . . . ." The text of
853(e)(1)(A) nowhere suggests that participants in a post-
indictment protective order proceeding can challenge the
underlying forfeitability of the property. That would turn
an ancillary proceeding into the main event -- a result at
odds with Congress' desire to "assure a more orderly
disposition of both the criminal case and third party
claims." 1984 U.S.C.C.A.N. at 3390.
The legislative history of 853(e)(1)(A) confirms
this reading, for it expressly limits the scope of arguments
that can be raised by participants in a post-indictment
853(e) proceeding. "For the purposes of issuing a
restraining order, the probable cause established in the
indictment . . . is to be determinative of any issue
regarding the merits of the government's case on which the
forfeiture is to be based." 1984 U.S.C.C.A.N. at 3386. If
the court elects to "hold a hearing subsequent to the initial
entry of the order . . . the court may at that time modify
the order or vacate an order that was clearly improper (e.g.,
where information presented at the hearing shows that the
property restrained was not among the property named in the
indictment). However, it is stressed that at such a hearing
the court is not to entertain challenges to the validity of
the indictment." Id. (emphasis added). We think these
provisos were meant to apply to both criminal defendants and
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third-party claimants. The purpose of a restraining order
proceeding, after all, is to preserve at-risk property for
trial, not to determine whether the property should have been
included in the indictment. Under 853(e)(1)(A), parties
claiming an interest in restrained or potentially
restrainable property may not use the restraining order
proceeding to attack the indictment itself.
That is what the Cunans tried to do. Their res
judicata claim states, in essence, that the indictment is
invalid because criminal forfeiture as a cause of action has
vanished. This direct challenge to the validity of the
indictment cannot be heard in a restraining order proceeding.
To challenge the forfeitability of the Maine properties, the
Cunans must await the entry of an order of forfeiture and
petition for a hearing under 853(n)(2), at which time they
may press their claim that they have a superior interest in
the properties as a matter of res judicata. See
853(n)(6)(A) (forfeiture order shall be amended if the
claimant's right, title, or interest in the property was
vested or superior to that of the defendant at the time of
the acts giving rise to the forfeiture). See also United
States v. Reckmeyer, 836 F.2d 200, 206 (4th Cir. 1987)
(noting that the petitioners' post-forfeiture claim under
853(n) "is a fundamental one that . . . attacks the validity
of the forfeiture order itself").
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We acknowledge that it may be difficult in some
cases to establish the proper limits of third-party
participation in restraining order proceedings. On the one
hand, premature attacks upon the validity of the indictment -
- the type of argument made by the Cunans -- are clearly
barred. On the other, prudential arguments concerning the
burdens of restraint are clearly permitted by the statute,
which recognizes the due process concerns that are triggered
by judicial orders aimed at third parties. Cf. Regan, 858
F.2d at 121-22 (delineating circumstances under which such
orders should not be entered). Some arguments may not fall
neatly on either side of the line. In Regan itself, for
example, the third-party claimant, a partnership whose
partners included the criminal defendants, was permitted to
challenge the potential forfeitability of partnership assets
under RICO's forfeiture provision, albeit without disputing
the factual allegations of the indictment. See also United
States v. Wu, 814 F. Supp. 491, 494 (E.D. Va. 1993)
(speculating that the third-party spouse of the defendant
might be entitled to intervene in restraining order
proceeding in order to contest the breadth of the order). At
any rate, the Cunans' res judicata argument falls well on the
forbidden side of the line.
Our holding is limited to the arguments made by the
Cunans. Specifically, the Cunans do not argue, and we do not
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consider, whether the Due Process Clause may sometimes
require that interested parties be given an opportunity to
challenge a restraining order, on the merits of the
indictment if necessary, before the entry of an order of
forfeiture. Cf. United States v. Harvey, 814 F.2d 905, 929
(4th Cir. 1987) ( 853(e)(1)(A) violates due process to the
extent that it authorizes ex parte, post-indictment
restraining orders without opportunity for a post-restraint
hearing other than the criminal trial itself); United States
v. Crozier, 777 F.2d 1376, 1382-84 (9th Cir. 1985) (
853(e)(1)(A) violates due process by not guaranteeing third
parties or criminal defendants an opportunity to challenge a
post-indictment restraining order until after forfeiture has
been ordered). Here, the district court permitted the Cunans
to participate in the restraining order proceedings; in fact,
it granted the Cunans more process than was provided by the
statute.
III.
Our holding moots the Cunans' appeals in No. 94-
2036 (from Judge Young's entry of a restraining order) and
No. 93-2278 (from Judge Carter's denial of the motion to
disencumber or release the Portland assets). It does not
matter whether Judge Carter should have granted the motion to
disencumber, because Judge Young subsequently entered a
restraining order in the Massachusetts prosecution, and that
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order cannot be challenged on the sole ground -- res judicata
-- raised by the Cunans on appeal. That leaves us with no
basis for granting the only relief that the Cunans seek in
Appeal No. 93-2278, i.e., the return of the Maine properties.
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IV.
For the foregoing reasons, we vacate the March 18,
1994 order of the Massachusetts District Court dismissing the
Maine properties from Count 37 of the indictment, and remand
the case to that court for proceedings consistent with this
opinion.
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