United States v. A. Erpenbeck, Jr.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0190p.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. 11-3530
v.
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>
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A. WILLIAM ERPENBECK, JR.,
Defendant, --
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and
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MICHAEL L. BAKER, Trustee in Bankruptcy
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for A. William Erpenbeck, Jr.,
Movant-Appellant. N
Appeal from the United States District Court
for the Southern District of Ohio at Cincinnati.
No. 1:03-cr-50-1—Sandra S. Beckwith, District Judge.
Argued: June 7, 2012
Decided and Filed: June 21, 2012
Before: SUTTON, McKEAGUE and RIPPLE*, Circuit Judges.
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COUNSEL
ARGUED: Debra S. Pleatman, ZIEGLER & SCHNEIDER, P.S.C., Covington,
Kentucky, for Appellant. Deborah D. Grimes, ASSISTANT UNITED STATES
ATTORNEY, Cincinnati, Ohio, for Appellee. ON BRIEF: Debra S. Pleatman,
ZIEGLER & SCHNEIDER, P.S.C., Covington, Kentucky, for Appellant. Deborah D.
Grimes, ASSISTANT UNITED STATES ATTORNEY, Cincinnati, Ohio, for Appellee.
*
The Honorable Kenneth F. Ripple, Circuit Judge of the United States Court of Appeals for the
Seventh Circuit, sitting by designation.
1
No. 11-3530 United States v. Erpenbeck et al. Page 2
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OPINION
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SUTTON, Circuit Judge. In a fact pattern befitting a John Grisham novel, FBI
agents found a cooler filled with more than $250,000 in cash buried at a private golf
course outside Cincinnati. The money belonged to A. William Erpenbeck, Jr., a
convicted fraudster then serving a 300-month sentence in federal prison. What came
next is a tug-of-war over who gets the money: the government, which wants a criminal
forfeiture of the cash, or the trustee of Erpenbeck’s bankruptcy estate, who wants to
distribute the cash to Erpenbeck’s creditors. The district court sided with the
government, but because the government did not provide the trustee with sufficient
notice of the forfeiture proceeding, depriving him of the chance to assert his claim, we
vacate the final order of forfeiture and remand.
I.
As president of the Erpenbeck Development Company, once one of the largest
residential developers in the Cincinnati area, Erpenbeck orchestrated a fraud that bilked
nearly $34 million from home buyers and banks between 1999 and 2002. United States
v. Erpbenbeck, 532 F.3d 423, 426–30 (6th Cir. 2008). Erpenbeck pled guilty to federal
bank-fraud charges in April 2003 and received a 300-month prison sentence. Id. at
428–30. The district court also ordered him to forfeit the proceeds of the fraud:
$33,935,878.02. See 18 U.S.C. § 982(a).
Six years later, the FBI learned that, before he went to prison, Erpenbeck gave
a friend more than $250,000 in cash and asked him to hold the money until his release.
The friend put the cash in a cooler and buried it near the green of the third hole (a 366-
yard par four) at Summit Hills Country Club in Crestview Hills, Kentucky. FBI agents
unearthed the cooler on October 1, 2009, and the government sought forfeiture of the
cash.
No. 11-3530 United States v. Erpenbeck et al. Page 3
The government posted notice of the forfeiture online (at www.forfeiture.gov)
in November and December 2009. Three months later, the trustee of Erpenbeck’s
bankruptcy estate—Erpenbeck’s creditors filed an involuntary bankruptcy petition in
July 2002, see 11 U.S.C. § 303—contacted an Assistant United States Attorney, told her
the estate had an interest in the cash and asked about the government’s plans. The
government’s attorney did not tell the trustee about the ongoing forfeiture proceedings.
Because no one filed a petition asserting an interest in the cash, the district court entered
a final order of forfeiture vesting “all right, title, and interest” to the cash in the United
States. R. 150; see 21 U.S.C. § 853(n)(7).
The trustee filed a motion to stay the final order of forfeiture in November
2010, contending that the cash belonged to the bankruptcy estate. The district court
denied the motion, holding that the trustee waived his claim because he did not file a
timely petition asserting his interest.
II.
A.
To obtain title to property through criminal forfeiture, the government must give
third parties a chance to assert competing interests in the property. See United States v.
Huntington Nat’l Bank, 574 F.3d 329, 330 (6th Cir. 2009). After a district court enters
a preliminary order of forfeiture, federal law requires the government to provide notice
of the proceedings, giving interested parties thirty days to file a petition asserting their
claims. 21 U.S.C. § 853(n)(1)–(2). If anyone files a petition, the court must hold an
ancillary hearing to determine the bona fides of his alleged interest. Id. § 853(n)(2). If
no one files a petition within the statutory time frame, “clear title” vests in the United
States, extinguishing all other parties’ interests in the property. 21 U.S.C. § 853(n)(7);
see United States v. O’Brien, Nos. 98-3114, 98-3206, 1999 WL 282687, at *2 (6th Cir.
Apr. 28, 1999); United States v. Marion, 562 F.3d 1330, 1339 (11th Cir. 2009).
Acknowledging he did not file a petition within thirty days of online publication
of the notice, the trustee maintains that the district court could not extinguish his interest
No. 11-3530 United States v. Erpenbeck et al. Page 4
in the cash because the government never gave him direct notice of the forfeiture action.
The trustee never knew the thirty-day clock was ticking—having apparently not
occupied his free time by browsing www.forfeiture.gov—and thus never had a chance
to assert his interest in a timely manner. For its part, the government acknowledges it
did not provide direct notice of the forfeiture action to the trustee.
Did the government’s notice suffice? More to the point, was notice by
publication sufficient or was direct notice to the trustee required? That depends—on the
interrelation of two subsections of the criminal forfeiture statute: 21 U.S.C. § 853.
The first of these subsections, § 853(j), incorporates the civil forfeiture statute.
It says: “Except to the extent that they are inconsistent with the provisions of this
section, the provisions of section 881(d) of this title shall apply to a criminal forfeiture
under this section.” 21 U.S.C. § 853(j). Section 881(d) in turn incorporates “[t]he
provisions of law relating to the . . . judicial forfeiture . . . of property for violation of the
customs laws.” And the statute governing customs-related forfeitures requires the
government to publish notice and to send direct “[w]ritten notice . . . to each party who
appears to have an interest in the seized article.” 19 U.S.C. § 1607(a). So far so good
from the trustee’s perspective. The direct-notice requirement applicable to civil
forfeitures governs criminal forfeitures as long as it is not “inconsistent with” other
provisions of the criminal forfeiture statute.
That leads to the other relevant subsection. One potential inconsistency with this
direct-notice requirement appears in § 853(n)(1), which says:
Following the entry of an order of forfeiture under this section, the
United States shall publish notice of the order and of its intent to dispose
of the property in such manner as the Attorney General may direct. The
Government may also, to the extent practicable, provide direct written
notice to any person known to have alleged an interest in the property
that is the subject of the order of forfeiture as a substitute for published
notice as to those persons so notified.
21 U.S.C. § 853(n)(1) (emphasis added). A first glance suggests tension between the
two provisions, as § 853(n)(1) seems to make direct notice discretionary while § 1607(a)
No. 11-3530 United States v. Erpenbeck et al. Page 5
makes it mandatory. But that is not a necessary reading of § 853(n)(1) or even the best
reading of it. Section § 853(n)(1) by its terms gives the government discretion to
provide direct notice “as a substitute for published notice as to those persons so
notified.” (emphasis added). The provision thus does not give the government a free
hand in deciding whether to provide interested third parties with direct notice; it merely
gives the government discretion to employ direct notice as a substitute for published
notice. Practically speaking, that means parties who receive direct notice may not
complain about defects in publication notice because the direct notice operates as a
substitute—a safe harbor—for any publication notice otherwise required. See United
States v. Puig, 419 F.3d 700, 703–04 (8th Cir. 2005) (claimant who received actual
notice may not complain about defect in published notice).
Buttressing this conclusion is the constitutional-avoidance canon. If a statute is
susceptible of “two plausible . . . constructions,” one of which “would raise a multitude
of constitutional problems, the other should prevail.” Clark v. Martinez, 543 U.S. 371,
380–81 (2005). Imagine if the statute did not require direct notice to parties whom the
government knows, or reasonably should know, have an interest in the forfeitable
property. That would raise serious, likely devastating, constitutional objections. Due
process requires the government to provide “notice reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of” a legal action that will
determine their rights to property, and to “afford them an opportunity to present their
objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).
When the government knows not whom the forfeiture affects, constructive notice by
publication suffices. Id. at 317. But that is not true when the government knows or
reasonably should know whom to notify. As to them, the government must attempt to
provide direct notice of the proceeding. Id. at 318–19; see also Mennonite Bd. of
Missions v. Adams, 462 U.S. 791, 797–98 (1983) (requiring government to provide
direct notice to mortgage holder who has a publicly recorded interest before selling
property to satisfy tax lien).
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A recent amendment to Rule 32.2 of the Federal Rules of Criminal Procedure
supports this reading. As of December 1, 2009, Rule 32.2, applicable to criminal
forfeitures, requires the government to “publish notice of the order [of forfeiture] and
send notice to any person who reasonably appears to be a potential claimant with
standing to contest the forfeiture.” Fed. R. Crim. P. 32.2(b)(6) (emphasis added). The
district court entered the preliminary order of forfeiture in this case on November
10, 2009, weeks before the amendment went into effect, meaning that the prior version
of the Rule governs. See United States v. McGinty, 610 F.3d 1242, 1248 n.5 (10th Cir.
2010). Yet the thrust of the amendment was not to change current requirements; it was
to codify them. The amendment “codif[ies] and restate[s] prevailing due process
requirements governing adequate notice.” United States v. Davenport, 668 F.3d 1316,
1322–23 (11th Cir. 2012).
B.
Does the trustee fall within the class of third parties to whom the government
owes direct notice? In other words, in the words of the statute, does he “appear[] to have
an interest in the seized article”? 19 U.S.C. § 1607(a).
The short answer is yes. Under the Bankruptcy Code, when Erpenbeck’s
creditors filed an involuntary bankruptcy petition against him in July 2002, all of his
property, “wherever located and by whomever held,” became part of the bankruptcy
estate. 11 U.S.C. § 541(a). That would include the $250,000 buried near the third hole
of Summit Hills Country Club.
The long answer also is yes, though it requires a few additional answers to the
government’s contrary position. As the government sees it, the cash did not belong to
Erpenbeck in July 2002 because, under the forfeiture statute’s relation-back clause,
21 U.S.C. § 853(c), title to the cash retroactively vested in the government at the time
of Erpenbeck’s fraud. Because the cash did not belong to Erpenbeck, it did not become
part of the bankruptcy estate, and the trustee never had a right to direct notice. See
United States v. Phillips, 185 F.3d 183, 186–87 (4th Cir. 1999).
No. 11-3530 United States v. Erpenbeck et al. Page 7
That might be true if the $250,000 represented the proceeds of Erpenbeck’s
fraud. Under the relation-back clause, “[a]ll right, title, and interest in the property
described in subsection (a) of this section vests in the United States upon the commission
of the act giving rise to forfeiture.” 21 U.S.C. § 853(c). “[T]he property described in
subsection (a)” covers tainted property: “any property constituting, or derived from,
any proceeds the person obtained, directly or indirectly, as the result of” his criminal
activity. Id. § 853(a). If the cash were tainted property, title would have vested in the
government at the time of Erpenbeck’s fraud, which occurred prior to the bankruptcy
filing, and the cash would not have entered the bankruptcy estate. See In re Dreier LLP,
452 B.R. 391, 410–12 (Bankr. S.D.N.Y. 2011).
But the government did not seek forfeiture of the cash as tainted property. It
argued (and the district court found) that the cash was “substitute property”—untainted
property that the government may seize to satisfy a forfeiture judgment if the tainted
property is unavailable. 21 U.S.C. § 853(p); see United States v. Hill, 167 F.3d 1055,
1073 (6th Cir. 1999). Whether the trustee has a cognizable interest in the cash thus turns
on whether the relation-back clause also applies to substitute property.
It does not. The relation-back clause extends only to tainted property—“property
described in subsection (a).” 21 U.S.C. § 853(c). In construing a related section of the
statute authorizing pretrial restraint of “property described in subsection (a),” we held
that this identical limitation “convey[s] Congress’s intent to authorize the restraint of
tainted assets prior to trial, but not the restraint of substitute assets.” United States v.
Parrett, 530 F.3d 422, 431 (6th Cir. 2008) (discussing 21 U.S.C. § 853(e)). The same
analysis holds here. The explicit reference to “property described in subsection (a)” in
the relation-back clause limits the applicability of the relation-back principle to tainted
property. As the Tenth Circuit, too, has held, “the United States does not have a ripened
interest in . . . substitute property until (1) after the defendant’s conviction and (2) the
court determines the [tainted] property is out of the government’s reach for a reason
enumerated in [the statute].” United States v. Jarvis, 499 F.3d 1196, 1204 (10th Cir.
2007); see also United States v. Jewell, 556 F. Supp. 2d 962, 967 (E.D. Ark. 2008);
No. 11-3530 United States v. Erpenbeck et al. Page 8
United States v. Jennings, No. 5:98-CR-418, 2007 WL 1834651, at *3–4 (N.D.N.Y. June
25, 2007); United States v. Kramer, No. 1:06-cr-200, 2006 WL 3545026, at
*7 (E.D.N.Y. Dec. 8, 2006).
The Fourth Circuit, we acknowledge, has gone the other way. Applying the
statutory exhortation that “[t]he provisions of this section shall be liberally construed to
effectuate its remedial purposes,” 21 U.S.C. § 853(o), the court held that “the forfeiture
of substitute property pursuant to [§] 853(p) relates back to the date of the acts giving
rise to the forfeiture,” United States v. McHan, 345 F.3d 262, 272 (4th Cir. 2003). The
court reasoned that, although the relation-back clause does not say it applies to substitute
property, neither does it “preclude the application of the relation-back principle to
substitute property.” Id. at 271. Then again, most “Stop” signs do not say “absolutely,”
and most are not accompanied by “Yield” signs. Yet (most) drivers still stop and yield.
Consistent with our decision in Parrett, the explicit reference to “property described in
subsection (a)” shows that Congress authorized the relation-back principle to apply to
tainted assets, not substitute assets. 530 F.3d at 431. The ambiguity needed to trigger
the “liberal[]” construction of this remedial provision simply does not exist. 21 U.S.C.
§ 853(o).
Even if the relation-back clause does not apply to substitute property, the
government persists, the trustee still lacks a plausible claim to the cash (and thus has no
right to direct notice) because his interest is not one the forfeiture statute allows a third
party to assert in an ancillary proceeding. The statute allows a third party to assert two
kinds of claims: (1) that he “is a bona fide purchaser for value,” or (2) that he had “a
legal right, title, or interest in the property . . . at the time of the commission of the acts
which gave rise to the forfeiture of the property under this section.” 21 U.S.C.
§ 853(n)(6). The trustee, all agree, is not a bona fide purchaser. See Zartman v. First
Nat’l Bank of Waterloo, 216 U.S. 134, 135 (1910). And the trustee, the government
claims, did not have an interest in the cash at the time of Erpenbeck’s fraud. But that
theory assumes that the “act[] which gave rise to the forfeiture of the” cash was
Erpenbeck’s fraud. 21 U.S.C. § 853(n)(6)(A). It was not. As substitute property, the
No. 11-3530 United States v. Erpenbeck et al. Page 9
cash did not become subject to forfeiture until the tainted assets exceeded the
government’s grasp. See Jarvis, 499 F.3d at 1204. The government could not fail to
find the tainted property until it tried to collect it, which did not happen until after
Erpenbeck’s conviction in April 2003 (several months after the bankruptcy filing).
Because the trustee has a plausible claim to the cash that is not defeated by the relation-
back principle and that is cognizable under § 853(n)(6), the government should have
given him direct notice of the forfeiture action and an opportunity to assert the claim.
C.
The government offers several explanations for not providing direct notice to the
trustee. It claims it had no reason to believe the bankruptcy case was still open in
2009, seven years after the filing of the bankruptcy petition. But a quick check of the
docket would have shown the case remained open, surely the kind of “reasonably
diligent effort[]” due process requires the government to undertake in identifying
potential third-party claimants. Tulsa Prof’l Collection Servs., Inc. v. Pope, 485 U.S.
478, 491 (1988). Nor was the trustee a mysterious claimant lurking in the shadows. He
had previously objected to the forfeiture of other Erpenbeck assets. On this record, the
trustee’s interest in the cash was not merely “conjectural” but one that, “in due course
of business,” should have “come to [the government’s] knowledge.” Mullane, 339 U.S.
at 317.
The government also assumed the trustee would receive notice of the preliminary
order of forfeiture through the district court’s case management and electronic case filing
(“CM/ECF”) system because the trustee had previously filed a motion in Erpenbeck’s
criminal case objecting to the forfeiture of other property. But the government, not the
trustee, bears the burden of establishing compliance with statutory notice requirements,
see United States v. Robinson, 78 F.3d 172, 173, 175 (5th Cir. 1996); cf. Grable & Sons
Metal Prods., Inc. v. Darue Eng’g & Mfg., 377 F.3d 592, 597 (6th Cir. 2004), aff’d on
other grounds, 545 U.S. 308 (2005), and the government offers no evidence that reliance
on CM/ECF in this instance to deliver notice was “reasonably calculated, under all the
circumstances, to apprise [the trustee] of the pendency of” the forfeiture proceeding.
No. 11-3530 United States v. Erpenbeck et al. Page 10
Mullane, 339 U.S. at 314. The government provided no evidence about how the
evolving CM/ECF notification system worked at this time: whether it sent notices of
docket activity to all counsel or just to counsel of record for the principal parties, not
third-party movants like the trustee; whether it stopped sending notices to counsel who
had not filed anything in the case for several years; or whether there was any other
feature of the system at that point that would have prevented notice from going to the
trustee. The trustee at all events disclaims ever receiving notice through CM/ECF.
Without more, we cannot conclude that relying on CM/ECF alone to deliver notice was
sufficient.
All of this is of no moment, the government adds, because the trustee obtained
actual notice of the forfeiture action anyway. In pushing this point, the government
invokes the district court’s statement that the trustee “apparently concedes, albeit tacitly,
that he did receive notice of the Court’s order preliminarily forfeiting the contents of the
cooler.” R. 154 at 5. The district court reached this conclusion based on a single
sentence in the trustee’s motion: “Most notably, the discussions in which the Trustee
asserted his claim to the Property were held after the United States had filed its
preliminary forfeiture motion in November of 2009 but before it filed its final order in
June of 2010.” Id. (quoting R. 151 at 4). This statement was not a concession, tacit or
otherwise, that the trustee knew about the forfeiture. It refers to a discussion that took
place in March 2010 in which the trustee told a government attorney about the estate’s
interest in the cash. The statement shows that the trustee told the government about the
estate’s interest before the district court entered the final order of forfeiture, not that the
trustee knew about the forfeiture proceeding at that time.
The government’s efforts to explain away its failure to notify the trustee overlook
a simple reality: neither the forfeiture statute nor the Due Process Clause demands that
the government undertake “heroic efforts” to provide the required notice; mailing the
trustee a certified letter will suffice. See Dusenberry v. United States, 534 U.S. 161, 170,
172–73 (2002). Even though the trustee’s interest in the cash was far from a mystery,
the government did not take this modest step.
No. 11-3530 United States v. Erpenbeck et al. Page 11
D.
That leaves the question of remedy. The most sensible approach, and the one we
adopt here, is to remand the case to the district court with instructions to accept a third-
party petition from the trustee and to hold an ancillary proceeding under 21 U.S.C.
§ 853(n) and Federal Rule of Criminal Procedure 32.2(c) to adjudicate the legitimacy of
his claim. See United States v. Estevez, 845 F.2d 1409, 1412 (7th Cir. 1988); see also
United States v. Robinson, 434 F.3d 357, 362 (5th Cir. 2005); 3 Charles Alan Wright et
al., Federal Practice & Procedure Criminal § 574 (4th ed. 2012) (“If a third-party
claimant did not receive adequate notice of the criminal forfeiture action, that party may
file a motion under Rule 60(b) . . . to reopen the ancillary proceeding.”); Fed. R. Crim.
P. 32.2, adv. cmte. notes (“In the rare event that a third party claims that he or she was
not afforded adequate notice of a criminal forfeiture action, the person may file a motion
under Rule 60(b) of the Federal Rules of Civil Procedure to reopen the ancillary
proceeding.”).
One other thing. The trustee submits there is no need to go through the ancillary
proceeding because the cash belonged to the bankruptcy estate from the get-go and
therefore is not subject to forfeiture at all. As the trustee sees it, the cash became
property of the bankruptcy estate upon the filing of the bankruptcy petition in July
2002, see 11 U.S.C. § 541(a), and thus does not meet the statutory definition of
“substitute property” because it is not “property of the defendant,” 21 U.S.C. § 853(p).
But this is nothing more than “an assertion that [the trustee] has a superior interest in [the
cash]”—exactly the kind of argument that a third-party must make in an ancillary
proceeding under § 853(n). DSI Assocs. LLC v. United States, 496 F.3d 175, 184–85 (2d
Cir. 2007). The forfeiture statute makes it clear that an ancillary proceeding is the sole
avenue for a third party to assert an interest in forfeitable property. 21 U.S.C. § 853(k);
see Libretti v. United States, 516 U.S. 29, 44 (1995) (“Once the Government has secured
a stipulation as to forfeitability, third-party claimants can establish their entitlement to
return of the assets only by means of the hearing afforded under 21 U.S.C. § 853(n).”
(emphasis added)).
No. 11-3530 United States v. Erpenbeck et al. Page 12
The trustee claims that United States v. Surgent, No. 04-CR-364, 2009 WL
2525137, at *29 (E.D.N.Y. Aug. 17, 2009), an unpublished decision, supports its motion.
Maybe so, though the opinion is so thinly reasoned it is difficult to know why the court
did what it did. At all events, the decision conflicts with the well-established notion that
the ancillary proceeding is the sole means for third parties to assert their interests in
forfeitable property. See 21 U.S.C. § 853(k); Libretti, 516 U.S. at 44.
The Bankruptcy Code’s automatic-stay provision does not mandate a different
result. Filing a bankruptcy petition usually “operates as a stay, applicable to all entities,”
of a variety of actions, including “any act to obtain possession of property of the estate.”
11 U.S.C. § 362(a)(3). But the Code exempts from this automatic stay “the
commencement or continuation of a criminal action or proceeding against the debtor.”
Id. § 362(b)(1). Because criminal forfeiture is part and parcel of a criminal case, see
Libretti, 516 U.S. at 39, it falls squarely within this exemption. See In re Rodriguez, No.
07-276, 2008 WL 8448043, at *4 (9th Cir. BAP July 10, 2008); see also United States
v. Coluccio, 19 F.3d 1115, 1117 n.2 (6th Cir. 1994).
III.
For these reasons, we vacate the final order of forfeiture and remand for further
proceedings consistent with this opinion.