United States v. Huntington National Bank

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0178p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellee, -
UNITED STATES OF AMERICA,
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No. 10-2071
v.
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Defendant-Appellant. -
HUNTINGTON NATIONAL BANK,
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Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 06-00290—Robert Holmes Bell, District Judge.
Argued: March 8, 2012
Decided and Filed: June 14, 2012
Before: CLAY and GIBBONS, Circuit Judges; KORMAN, District Judge.*
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COUNSEL
ARGUED: Jeffrey O. Birkhold, WARNER NORCROSS & JUDD LLP, Grand Rapids,
Michigan, for Appellant. Joel S. Fauson, ASSISTANT UNITED STATES
ATTORNEY, Grand Rapids, Michigan, for Appellee. ON BRIEF: Jeffrey O. Birkhold,
Gaëtan Gerville-Réache, WARNER NORCROSS & JUDD LLP, Grand Rapids,
Michigan, for Appellant. Joel S. Fauson, Matthew G. Borgula, ASSISTANT UNITED
STATES ATTORNEY, Grand Rapids, Michigan, for Appellee.
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OPINION
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JULIA SMITH GIBBONS, Circuit Judge. Defendant-appellant Huntington
National Bank (“Huntington”) claims that it is entitled to the proceeds of a deposit
*
The Honorable Edward R. Korman, United States District Judge for the Eastern District of New
York, sitting by designation.
1
No. 10-2071 United States v. Huntington Nat’l Bank Page 2
account, which were seized by the government as part of a criminal forfeiture
proceeding, as a secured creditor of the account. Huntington asserts that it qualifies as
a bona fide purchaser for value under 21 U.S.C. § 853(n)(6)(B) and appeals the district
court’s ruling that, as a matter of law, it did not. For the reasons that follow, we reverse
the judgment of the district court and direct the district court to amend the order of
forfeiture in accordance with this analysis.
I.
This criminal forfeiture proceeding arises out of the activities of a business,
known variously as Cybernet Engineering, Cyberco Holdings, and CyberNET
(collectively “Cyberco”), whose principals engaged in a complex scheme to defraud
dozens of lending institutions out of more than $100 million in loans and lines of credit.
In October 2002, Huntington granted Cyberco a multi-million-dollar line of credit, and
in exchange Cyberco granted Huntington “a continuing security interest and lien” in all
of Cyberco’s tangible and intangible personal property and rights, including “deposit
accounts.” In November 2004, after discovering the fraud, the government seized
approximately $4 million in Cyberco assets, including $705,168.60 from Huntington
Bank Account Number 01159630935 (“the Cyberco Account”).
A number of Cyberco principals were charged in a criminal indictment with
conspiring to commit acts which violated federal laws relating to bank fraud, mail fraud,
and money laundering. Count 10 of the superseding indictment issued forfeiture
allegations against defendants Krista L. Kotlarz Watson and Paul Nathan Wright
regarding certain Cyberco assets, including the Cyberco Account. In their respective
plea agreements, Watson and Wright agreed to forfeit to the United States any interest
they possessed in the assets or funds identified in Count 10 of the superseding
indictment. On September 24, 2007, the district court entered a preliminary order of
forfeiture with regard to these assets, including the Cyberco Account. The district court
further ordered that notice of the forfeiture be published in accordance with 21 U.S.C.
§ 853(n)(1).
No. 10-2071 United States v. Huntington Nat’l Bank Page 3
On December 10, 2007, having received notice of the criminal forfeiture action,
Huntington filed a verified petition of claim, asserting that it had a right to, and a direct
ownership interest in, a portion of the forfeited property—namely, the funds in the
Cyberco Account. Huntington claimed that, at that time it filed the petition, Cyberco
remained indebted to Huntington in the amount of $926,162.57, that Cyberco had
defaulted on its obligations to Huntington by providing Huntington with fraudulent
financial statements and by failing to make payments as required, and that Huntington
was entitled to the funds in the Cyberco Account pursuant to its security agreement with
Cyberco. After holding a hearing on the third-party interests asserted in the forfeited
property, the district court found that Huntington did not have a legal right, title, or
interest that rendered the order of forfeiture invalid in whole or in part under 21 U.S.C.
§ 853(n)(6)(A). The district court then entered a final order of forfeiture, forfeiting all
the assets listed in Count 10 of the superseding indictment—including the Cyberco
Account—to the United States as having been derived from the proceeds obtained
directly or indirectly as a result of mail fraud, and/or bank fraud, or a conspiracy to
commit such offenses.
Huntington then filed a motion to alter or amend the judgment requesting that the
district court modify its opinion and order and grant its petition for claim, arguing that
it was entitled to relief under 21 U.S.C. § 853(n)(6)(B) because it was a bona fide
purchaser for value (“BFP”) of its security interest in the funds in the Cyberco account.
The district court denied the motion, finding that Huntington had waived its bona fide
purchaser argument by failing to raise it earlier. Huntington appealed this ruling, and
this court found that Huntington had not waived the argument and remanded the issue
so that the district court could consider the merits of Huntington’s claim that it qualified
as a BFP under § 853(n)(6)(B). United States v. Huntington Nat’l Bank, 574 F.3d 329,
334 (6th Cir. 2009).
On remand, the district court reached the merits of Huntington’s § 853(n)(6)(B)
argument and again denied Huntington’s claim. It noted that the term “bona fide
purchasers” was a legal term of art and that it should not be given an unnatural meaning
No. 10-2071 United States v. Huntington Nat’l Bank Page 4
for the purpose of 21 U.S.C. § 853(n)(6)(B). The district court further noted that BFP
terminology is not found in Article 9 of the Uniform Commercial Code (“UCC”)—the
article which governs Huntington’s rights as a secured creditor. Finally, after finding
the cases that Huntington relied upon in arguing that it was a BFP distinguishable
because they involved security interests in real estate or tangible personal property, the
district court “decline[d] to broaden the narrow class of parties Congress intended to
protect in § 853(n)(6)(B) by unnaturally extending the [BFP] exception to include
intangible deposit accounts.” It held that Huntington was not a bona fide purchaser for
value of the Cyberco Account and reaffirmed the final order of forfeiture and the order
denying Huntington’s motion for reconsideration.
II.
Huntington appeals the district court’s ruling that, as a matter of law, the BFP
exception to criminal forfeiture in 21 U.S.C. § 853(n)(6)(B) does not apply to its secured
interest in the Cyberco Account. This issue is a question of law that this court reviews
de novo. United States v. Harris, 246 F.3d 566, 570 (6th Cir. 2001).
Huntington argues that because it purchased a valid security interest in all of
Cyberco’s assets by extending a line of credit and loans to Cyberco and because it was
unaware of Cyberco’s fraud until the funds in the Cyberco Account were seized,
Huntington is a BFP of this security interest in the Cyberco Account under
§ 853(n)(6)(B). Huntington asserts it is therefore entitled to the return of the forfeited
Cyberco Account proceeds.
The criminal forfeiture statute provides that all right, title, and interest in property
subject to forfeiture “vests in the United States upon the commission of the act giving
rise to forfeiture under this section.” 21 U.S.C. § 853(c). Thus, “[a]fter the commission
of the criminal acts, title to the forfeitable property, by operation of the relation-back
clause, actually belongs to the government.” Harris, 264 F.3d at 575 (quoting United
States v. Lavin, 942 F.2d 177, 186 (3d Cir. 1991)). Congress, however, carved out two
exceptions to this relation-back clause in 21 U.S.C. § 853(n) to protect the rights of
certain innocent third parties. See id. at 574. These exceptions ensure that through the
No. 10-2071 United States v. Huntington Nat’l Bank Page 5
relation-back doctrine, “the government steps into the shoes of the defendant acquiring
only the rights of the defendant at the time of the criminal acts, and nothing more.” Id.
at 575–76 (citing Lavin, 942 F.2d at 185–86).
At issue in this case is the second of these exceptions, which provides that
property cannot be forfeited if “the petitioner is a bona fide purchaser for value of the
right, title, or interest in the property and was at the time of purchase reasonably without
cause to believe that the property was subject to forfeiture under this section.” 21 U.S.C.
§ 853(n)(6)(B). This bona fide purchaser exception protects a third party who acquires
a legal interest in property for value after the acts giving rise to the forfeiture have
occurred and who had no reason to believe that the property was subject to forfeiture.
See Harris, 264 F.3d at 574–75.
Federal law controls whether a party qualifies as a BFP under 21 U.S.C.
§ 853(n)(6)(B). Id. at 571 (holding that “this issue [of whether a lienholder claimant of
prepayment premiums qualifies as a BFP under § 853(n)(6)(B)] is ultimately one of
federal law”); see also United States v. Timley, 507 F.3d 1125, 1130 (8th Cir. 2007) (“If
a court determines the claimant has an interest in the property under the law of the
jurisdiction that created the property right, then . . . it must next look to federal law, i.e.,
to 21 U.S.C. § 853(n)(6), to determine if the claimant will prevail in the ancillary
proceeding.”). Although this court has cautioned that the term “bona fide purchaser for
value” in subsection (n)(6)(B) should not be given an “unnatural meaning,” the statute
itself requires that the term be liberally construed. 21 U.S.C § 853(o) (“The provisions
of this section shall be liberally construed to effectuate its remedial purposes.”); United
States v. Campos, 859 F.2d 1233, 1237–38 (6th Cir. 1988) (holding that while the statute
should be liberally construed, it would give the phrase “bona fide purchasers” an
unnatural meaning to include unsecured creditors, since such creditors do not fit within
the traditional definition of the term). Finally, we have noted that the bona fide
purchaser exception is derived “essentially from hornbook commercial law” and reflects
the common-law rule that an “‘innocent purchaser for valuable consideration must be
protected.’” Harris, 246 F.3d at 575 (quoting Lavin, 942 F.2d at 185–86).
No. 10-2071 United States v. Huntington Nat’l Bank Page 6
Huntington argues that it is well established that one who takes a security interest
in property in exchange for antecedent debt, as Huntington did, can be a BFP of that
property interest. The bank is correct. Section 853(b) defines the term “property” to
include “rights, privileges, interests, claims, and securities.” 21 U.S.C § 853(b)(2)
(emphasis added). Because a security interest is a type of specific “interest” in property,
the purchaser of a security interest could potentially qualify as a BFP under the statute.
See United States v. Reckmeyer, 836 F.2d 200, 206 n.3 (4th Cir. 1987) (contrasting
general creditors, who “cannot point to any one specific asset and claim that they are
entitled to payment out of the value of that specific asset” with secured creditors, who
do have an interest in a specific asset).
Furthermore, while we held in Campos that unsecured creditors are not permitted
to assert claims under 21 U.S.C. § 853(n)(6)(B), we also stated that the criminal
forfeiture statute gives “a party with a secured interest an opportunity to be heard.”
Campos, 859 F.2d at 1238 (emphasis added). A number of other courts have also
recognized the principle that a secured party can be a BFP. See, e.g., United States v.
Frykholm, 362 F.3d 413, 416 (7th Cir. 2004) (finding that it was sensible for the United
States not to pursue the question of “whether the holder of a security interest [in real
estate] given in exchange for an antecedent debt can be a bona fide purchaser for
value”); Genesee Merchs. Bank & Trust Co. v. Tucker Motor Sales, 372 N.W.2d 546,
548–49 (Mich. Ct. App. 1985) (holding that under Michigan law, “[t]he term ‘purchaser’
includes not only those who take by sale but also those who, like the bank here, take by
lien” and that “the antecedent indebtedness [through a financing arrangment] of [the
defaulted automobile dealership] to the bank was ‘value’ sufficient to render the bank
a good faith purchaser for value”).
The government maintains, however, that creditors cannot be bona fide
purchasers under the BFP exception to the forfeiture statute, primarily relying upon
United States v. BCCI Holdings (Luxembourg), S.A., 961 F. Supp. 287 (D.D.C. 1997).
In BCCI Holdings, American Express attempted to protect its approximately $23 million
“right of setoff” from forfeiture by claiming to be a bona fide purchaser. 961 F. Supp.
No. 10-2071 United States v. Huntington Nat’l Bank Page 7
at 290–91. The BCCI Holdings court rejected this theory, finding that there had been
no purchase because the “assertion of a state law right of set off . . . is both functionally
and legally different from the purchase of a tangible asset.” Id. at 295. This court has
explained that “[t]he right to setoff is a widely recognized common law right which
allows entities that owe each other money to apply their mutual debts against each
other.” In re Gordon Sel-Way, Inc., 270 F.3d 280, 290 (6th Cir. 2001). The government
argues that a security interest and the right of setoff are functionally the same.
Contrary to the government’s argument, however, a right of setoff and a security
interest are distinct, since a security interest is a property interest while a right of setoff
is not. See 1-3 Julian B. McDonnell, The Scope of Article 9, in Secured Transactions
Under the Uniform Commercial Code § 3.15 (Matthew Bender 2012) (“Unlike a security
interest, the set-off does not involve an interest in the property of the debtor.”).
Moreover, as the BCCI Holdings court explained, “[t]he res at issue is not the money
that was the subject of the loan or the currency transactions, but the right for American
Express Bank to take a credit for debts owed arising from the loan default and the
incomplete currency transactions.” 961 F. Supp. at 295.
The government also argues that because the right of a secured creditor to
appropriate the secured property typically vests upon default (as was the case in
Huntington’s security agreement) and because nothing of additional value is given at that
time, the secured party is not a “purchaser” and thus cannot be a BFP. The government
is essentially asserting through this argument that a secured creditor typically should be
treated the same as an unsecured creditor under the criminal forfeiture statute. Campos,
however, undermines the government’s argument. Campos clearly distinguished secured
creditors from unsecured creditors when determining what groups are permitted to assert
claims under § 853(n)(6)(B). 859 F.2d at 1238.
The government’s position that creditors cannot be bona fide purchasers under
the BFP exception to the forfeiture statute is without merit. Because Huntington had,
through its security agreement with Cyberco, a secured interest in the forfeited property
No. 10-2071 United States v. Huntington Nat’l Bank Page 8
and not simply a common-law or statutory right of setoff, Huntington is eligible to claim
protection under the BFP exception of § 853(n)(6)(B).
Further, the distinction between interests in tangible property versus intangible
property that was drawn by the district court, and is now relied upon by the government,
is not supported by the statutory language or by precedent. The forfeiture statute
expressly defines the meaning of the term “property” to include real property as well as
“tangible and intangible personal property, including rights, privileges, interests, claims,
and securities.” 21 U.S.C. § 853(b) (emphasis added). Subsection 853(c) then precludes
forfeiture when a “transferee establishes in a hearing pursuant to subsection (n) of this
section that he is a bona fide purchaser for value of such property.” Id. at § 853(c).
Thus, under the plain meaning of the statute, Congress intended the BFP protections to
apply to interests in both tangible and intangible property.
Even if the statute did not so clearly define the meaning of “property” to include
intangible personal property, however, the district court still mistakenly found that the
inclusion of interests in intangible assets like deposit accounts would be an “unnatural”
extension of the BFP exception to the federal forfeiture statute. Again, while the
meaning of § 853(n)(6)(B) is governed by federal law, because the BFP exception is
derived essentially from hornbook commercial law, it is appropriate for this court to look
to state commercial law as persuasive guidance to help discern what Congress intended
when it used the term “bona fide purchaser for value” in the federal statute.1 Harris, 246
F.3d at 575. There is an extensive body of case law demonstrating that commercial law
has traditionally applied the BFP concept to intangible property, which refutes the
district court’s determination that it would be unnatural to do so for the purposes of
1
It was also appropriate for the district court to look to Michigan’s Uniform Commercial Code
for (non-binding) guidance on the question of whether the holder of a security interest can be a BFP under
§ 853(n)(6)(B). The district court was mistaken, however, when it found that Article 9 of the UCC, which
governs Huntington’s rights as a secured creditor, does not provide protection for good faith or bona fide
purchasers for value. Article 9 of the UCC does not use express BFP terminology, but the system of
perfection and priority found in Article 9 exemplifies the common law BFP concept. Cf. Matter of
Samuels & Co., 526 F.2d 1238, 1243 (5th Cir. 1976) (en banc decision adopting prior dissent of J. Godbold
with additional comments set out in margin) (stating that “[l]ack of knowledge of outstanding claims is
necessary to the common law BFP” and finding that this requirement is expressed in many provisions of
the UCC, including the priority provisions found in Article 9).
No. 10-2071 United States v. Huntington Nat’l Bank Page 9
§ 853(n)(6)(B). See, e.g., Enochs v. State, 91 So. 20, 23–24 (Miss. 1922) (Ethridge, J.,
dissenting) (describing a state inheritance tax that provided “said lien shall not affect any
tangible or intangible personal property after it has passed to a bona fide purchaser for
value”); In re Vardaman Shoe Co., 52 F. Supp. 562, 565 (E.D. Mo. 1943) (finding that
under Missouri law a bona fide purchaser of accounts receivable could obtain priority
over competing claims to the accounts); In re Tropicana Graphics, Inc., 24 B.R. 381,
384 (Bankr. C.D. Cal. 1982) (finding that a statutory lien under the Internal Revenue
Code may be enforceable against a bona fide purchaser of a bank account).
Finally, the government also argues that the panel should not expand the BFP
exception to include grantees of security interests in intangible deposit accounts because
it would render the relation-back doctrine under 21 U.S.C. § 853(c) meaningless. The
government’s argument fails to appreciate the fact that the whole purpose of 21 U.S.C.
§ 853(n)(6)(B) is to protect innocent purchasers who acquire property without notice of
the government’s superior interest—acquired through the operation of the relation-back
doctrine—in the forfeited property. The government claims that an expansion of the
exception would allow a holder of a security interest to always defeat the government’s
forfeiture, no matter when its right to the property under the security vested. This is
plainly incorrect. The BFP exception protects only innocent purchasers, and simply
because the grant of a security interest in a deposit account constitutes a purchase does
not mean that the purchase was innocent. The relation-back doctrine would not be
rendered meaningless. Additionally, even if this argument had any merit, it would apply
with equal force to tangible property. The government provides no rationale for this
court to distinguish between tangible and intangible property when construing the extent
of the BFP exception.
In sum, a party who takes a security interest in property, tangible or intangible,
in exchange for value, can be a BFP of that property interest under § 853(n)(6)(B).
No. 10-2071 United States v. Huntington Nat’l Bank Page 10
III.
Having established that Huntington, as holder of a security interest in the
Cyberco Account, is eligible to qualify for the BFP exception under the criminal
forfeiture statute, we now turn to the question of whether Huntington actually qualifies
as a bona fide purchaser for value under the § 853(n)(6)(B). Huntington asserts that it
purchased its security interest in the Cyberco Account for value and was ignorant of the
potential forfeiture of the Cyberco Account. Accordingly, Huntington argues that it is
a BFP of its security interest in the Cyberco Account, and because Cyberco owed
Huntington more than the value of the Cyberco Account, its interest attached to the
entire proceeds of the account.
The government advances two arguments that challenge Huntington’s right to
the proceeds from the Cyberco Account and Huntington’s status as a BFP. The
government first contends that even if Huntington purchased a security interest in the
Cyberco Account, that interest did not extend to the funds contained within the account.
This argument is without merit for a number of reasons. First, the security agreement
gave Huntington a broad security interest in “all tangible and intangible property and
rights in which a security interest or lien may be taken,” which would include the
Cyberco Account funds. Moreover, while federal law governs the question of whether
Huntington’s security interest qualifies under 21 U.S.C. § 853(n)(6)(B), the nature and
extent of Huntington’s property interest in the Cyberco Account are governed by
Michigan law. See Harris, 246 F.3d at 571. This means that the cases cited by the
government that distinguish a security interest in a deposit account from an interest in
the funds contained within that account—all applying law from jurisdictions other than
Michigan—are inapposite. Finally, in an adversary proceeding brought by the
bankruptcy trustee against Huntington, the bankruptcy court held that Huntington’s
security interest attached to the deposited funds. In re CyberCo Holdings, Inc., 382 B.R.
118, 122, 134 (Bankr. W.D. Mich. 2008). The district court adopted this holding as well.
We decline to disturb these rulings and find that Huntington’s security interest extended
to the funds contained within the Cyberco Account.
No. 10-2071 United States v. Huntington Nat’l Bank Page 11
In its second argument, the government contests Huntington’s assertion that the
government has already stipulated to Huntington’s bona fides and argues that remand
is necessary because Huntington has never established it was actually a bona fide
purchaser. Huntington maintains that the government has already stipulated that
Huntington was an innocent purchaser and that the bank had no knowledge of Cyberco’s
fraud or the potential forfeiture of the Cyberco account. The government argues that it
never made a statement that would serve as a deliberate waiver of its right to put on
evidence to contest whether Huntington was bona fide. See MacDonald v. Gen. Motors
Corp., 110 F.3d 337, 340 (6th Cir. 1997) (“In order to qualify as judicial admissions, an
attorney’s statements must be deliberate, clear and unambiguous.”) (citation omitted).
At the forfeiture hearing held on January 10, 2008, however, the government
stated that none of the claimants, including Huntington,“were complicitous in any way
in the fraud” and that the claimants had “no knowledge of the fraud.” Additionally, in
the previous appeal of this case, this court found that it made no difference that
Huntington had not addressed the issue of whether it had cause to believe that the
property was subject to forfeiture because “the government conceded in its pre-hearing
brief that ‘all of the claimants were unaware of the criminal activity.’” Huntington Nat’l
Bank, 574 F.3d at 333. We further stated that “[t]he government, indeed, conceded away
the only issue on which such testimony or evidence could have been relevant here:
whether Huntington had ‘cause to believe that the property was subject to forfeiture.’
21 U.S.C. § 853(n)(6)(B).” Id. Thus, we have clearly already found that the government
has conceded away this issue, and the government should not now be allowed to recant
its prior stipulation. See Estate of Quirk v. Comm’r of Internal Revenue, 928 F.2d 751,
759 (6th Cir. 1991) (finding that in the absence of any exceptional circumstances, parties
should not be allowed to challenge their prior stipulations, as this would strip such
stipulations of much of their purpose).
Accordingly, we find that because Huntington purchased its security interest in
the Cyberco Account for valuable consideration—in the form of loans and a line of
credit—and had no cause to believe that the Cyberco Account was subject to forfeiture,
No. 10-2071 United States v. Huntington Nat’l Bank Page 12
Huntington is entitled to the protections of 21 U.S.C. §§ 853(c) and (n)(6)(B) as a bona
fide purchaser for value.
IV.
For the reasons provided above, we reverse the ruling of the district court and
direct the district court to amend the order of forfeiture in accordance with this analysis.
Further, having held the government to its prior stipulation to Huntington’s status as an
innocent purchaser, we also dismiss Huntington’s motion to strike the government’s
Rule 28(j) letter as moot.