U.S.A. v. Harris

• Decision Date: 26 January 2001
• Docket Number: 99-4492,99-4269,Nos. 99-4175,s. 99-4175
• Parties: (6th Cir. 2001) United States of America, Plaintiff-Appellee, v. William Harris, Defendant, National Realty Finance, L.C. (99-4175/4492), and LaSalle National Bank (99-4269), Claimants-Appellants. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 566

246 F.3d 566 (6th Cir. 2001)

United States of America, Plaintiff-Appellee, v. William Harris, Defendant, National Realty Finance, L.C. (99-4175/4492), and LaSalle National Bank (99-4269), Claimants-Appellants.

Nos. 99-4175, 99-4269, 99-4492.

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: January 26, 2001

Decided and Filed: April 4, 2001

Appeal from the United States District Court for the Northern District of Ohio at Toledo. No. 98-00819, David A. Katz, District Judge.

Daniel J. Flanigan, POLSINELLI, WHITE & VARDEMAN, Kansas City, Kansas, Marvin A. Robon, BARKAN & ROBON, Toledo, Ohio, Brett D. Anders, POLSINELLI, WHITE & VARDEMAN, Kansas City, Kansas, Michael S. Jones, LYDY & MOAN, Sylvania, Ohio, Gregory R. Elder, BARKAN & ROBON, Toledo, Ohio, for Appellants.

Seth Uram, ASSISTANT UNITED STATES ATTORNEY, Lawrence J. Kiroff, ASSISTANT UNITED STATES ATTORNEYS, Toledo, Ohio, Stephen R. Heifetz, DEPARTMENT OF JUSTICE, CRIMINAL DIVISION, Washington, D.C., for Appellee.

Before: JONES, BATCHELDER, and CLAY, Circuit Judges.

OPINION

CLAY, Circuit Judge.

This is a consolidated appeal involving the determination of rights of innocent third-party lenders, National Realty Finance, L.C. ("NRF") and LaSalle National Bank ("LNB"), (collectively "Claimants"), in real estate formerly owned by Defendant, William Harris, and forfeited to Plaintiff, the United States of America. Claimants all appeal from the same judgment; specifically, in Case Nos. 99-4175 and 99-4492 involving Claimant NRF, and in Case No.99-4269 involving Claimant LNB, Claimants appeal from the judgment entered by the district court on September 13, 1999, awarding Claimants "principal and interest on their loans to William Harris at the default rate, and to reasonable costs, late charges and attorney fees," while denying Claimants "prepayment premiums, or . . . late charges beyond those reasonably necessary to reimburse the lenders for transaction costs associated with processing late payments." The narrow issue on appeal, which presents itself for the first time in a federal appellate court, is whether an innocent lender is entitled to prepayment premiums as provided in the loan agreement upon the real property being forfeited to the government, and later sold by the government, as a result of a criminal forfeiture proceeding against the debtor. We answer this issue in the affirmative under the facts of this case.

Accordingly, we REVERSE the district court's judgment and REMAND the case to the district court.

BACKGROUND

Procedural History

This case involves a criminal forfeiture in which Defendant was indicted on various charges of Medicare fraud and money laundering on September 23, 1998. On January 20, 1999, the government accepted Defendant's guilty plea wherein Defendant withdrew his previous plea of not guilty, and entered a written plea agreement to charges 1 and 101 of the indictment. On this date, the government also moved for a preliminary order of forfeiture, which was granted; while Defendant waived notice of forfeiture as well as the right to appeal the order of forfeiture. The property seized by the government included real estate owned by Harris Management Service, Inc. ("HMSI"), an Ohio Corporation wholly owned by Defendant and his wife. Claimants in this matter are innocent third party lenders who held mortgages on this real estate, and each therefore petitioned the district court for a hearing to adjudicate the validity of the legal interests asserted in the property pursuant to 21 U.S.C. §853(n)(2) ("Petition for Hearing and for Validation of Mortgage of Lien Interests"). Specifically, NRF filed a petition asserting that it held valid, first priority liens on property known as the Fox Run Apartments and the RiverBend Apartments; LNB likewise filed a petition as to four large apartment complexes in the Toledo, Ohio area known as the Hunt Club, Windjammer, Devonshire, and Wellington House Apartment Complexes.

On June 7, 1999, the district court held a hearing to consider the extent of Claimants' asserted interests in the property. Following the hearing and submission of briefs by the parties, the court issued a Memorandum Opinion and Order finding that Claimants were entitled to "principal and interest at the default rate, and to reasonable costs, late charges and attorney fees," but that they were not entitled to "prepayment premiums, or to late charges beyond those reasonably necessary to reimburse the lenders for transaction costs associated with processing late payments." The district court entered a corresponding judgment and it is from this judgment that Claimants now appeal.

Facts

Defendant amassed a real estate empire consisting of several residential rental properties in Toledo, Ohio, which, according to the government, Defendant financed by defrauding the federal Medicare program. Between July of 1993, when Medicare first paid Defendant for what later were found to be fraudulent claims, and September of 1995, when the government took action against Defendant, the government claims that Defendant used over $8,000,000 of the monies which he received as a result of his fraudulent dealings with Medicare as down payments for dozens of properties worth at lest $25,000,000.

Specifically, on September 19, 1995, federal agents executed search warrants at the offices of Harris Medical Supply ("HMS"), a company that Defendant used to defraud Medicare, and at HMSI, a company that Defendant used to manage his rental properties. Within three months after the searches were executed, Defendant established a nominee corporation called Ashton Button Company, Ltd. in the Cayman Islands, and a second nominee corporation called Iguana Reef, Ltd., also in the Cayman Islands. Over the eighteen months between March of 1996, and September of 1997, Defendant wire-transferred at least $2,700,000 to the Cayman Islands and used these funds to buy real estate in the name of his two Cayman Island corporations. The government alleged that Defendant obtained the funds that he wired to the Cayman Islands from several sources, but that most of the funds came from the refinancing of Defendant's apartment buildings.

A. Claimant NRF

As to Claimant NRF, Defendant, on behalf of HMSI, obtained loans from NRF in the amount of approximately $2,000,000; one note dated August 27, 1997, was in the amount of $1,119,999, and the second note of the same date was in the amount of $1,126,000. These loans were secured by two mortgages given to NRF by HMSI; one mortgage on the Fox Run Apartment Complex, and the other mortgage on the RiverBend Apartment Complex. As part of the loan agreement, HMSI agreed that it would pay "prepayment consideration" to NRF if the loans were prepaid. NRF and the government stipulated that the prepayment consideration owed under the Fox Run note is $201,281.06, and the prepayment consideration owed under the RiverBend note is $200,029.77; however, while the government agrees that these are the amounts due as prepayment consideration, the government claims that the amounts are not recoverable by NRF as part of the forfeiture process. Under the terms of the notes, prepayment consideration becomes due and owing upon certain events including an "Event of Default" as provided in the agreement.

HMSI failed to make its August 1998, installment payment; in a letter dated August 20, 1998, NRF informed HMSI that it had not received its payment due August 1, 1998, on both the Fox Run and RiverBend loans, and that it had five days in which to make the payment in order to cure the default; otherwise, the failure to pay would be an event of default under the loan documents. HMSI did not cure its default and, according to NRF, the debt was accelerated on both loans.

Specifically, on August 26, 1998, NRF filed its amended complaint in foreclosure for declaratory judgment, and for appointment of a receiver against HMSI in the Court of Common Pleas of Lucas County, Ohio. On August 28, 1998, the Court of Common Pleas entered an order appointing Dennis Noneman as receiver of two apartment complexes that secured the debt owed to NRF.

In the criminal proceeding involving Defendant, on September 4, 1998, United States District Judge James G. Carr entered an order in aid of execution of seizure warrant as to Defendant's property. The Fox Run Apartment Complex and the RiverBend Apartment Complex were among the properties involved. Defendant was indicted on September 23, 1998.

On September 29, 1998, as a result of the government's seizure of the properties, NRF filed an amended complaint in foreclosure in its Ohio suit naming the United States of America as a party defendant. The government removed NRF's civil foreclosure action to the United States District Court for the Northern District of Ohio and, upon the government's motion, the civil foreclosure case, together with foreclosure cases filed by other innocent third party lenders including LNB, was transferred to United States District Judge David A. Katz, who had been reassigned to handle Defendant's criminal case.

B. Claimant LNB

As to Claimant LNB, Defendant, on behalf of HMSI, obtained four loans from Midland Loan Services, L.P. (for which LNB is the Assignee of all loan documents), each of which was secured by a mortgage on an apartment building and totaled approximately $15,000,000. The apartment complexes were named as the Hunt Club, the Windjammer, the Devonshire, and the Wellington House. The loans on the Hunt Club and the Windjammer complexes cross-collateralized both the Hunt Club and the Windjammer debts. The loans on the Wellington House and the Devonshire complexes were separate.

In September and October of 1998, LNB filed four foreclosure actions in Lucas County, Ohio, Common Pleas Court against HMSI after HMSI defaulted on its loan obligations, naming the United States of America as a party defendant in each action. The Common Pleas Court entered cognovit...