U.S. v. Approximately $44,888.35 in U.S. Currency

• Decision Date: 19 August 2005
• Docket Number: No. CIV-S-04-0204 DFLDAD.,CIV-S-04-0204 DFLDAD.
• Citation: 385 F.Supp.2d 1057
• Court: U.S. District Court — Eastern District of California
• Parties: UNITED STATES of America, Plaintiff, v. APPROXIMATELY $44,888.35 IN U.S. CURRENCY, et al., Defendants.

385 F.Supp.2d 1057

UNITED STATES of America, Plaintiff, v. APPROXIMATELY $44,888.35 IN U.S. CURRENCY, et al., Defendants.

No. CIV-S-04-0204 DFLDAD.

United States District Court, E.D. California.

August 19, 2005.

Courtney Jack Linn, Assistant U.S. Attorney, Sacramento, CA, for Plaintiff.

Anthony Joseph Siciliano, Esq., Springfield, MA, Christopher H. Wing, Sacramento, CA, for Defendants.

MEMORANDUM OF OPINION AND ORDER

LEVI, District Judge.

This civil forfeiture action arises out of the criminal investigation and prosecution of Scott Poll and his company, Red Rock, LLC ("Red Rock"), for a scheme to defraud cable operators by selling illegal cable descramblers. The United States seeks forfeiture of approximately $44,888.35 in funds seized on December 3, 2003 ("defendant funds") from one of Red Rock's bank accounts. North American Bancard ("NAB") filed a verified claim to a portion of the defendant funds, which the government now moves to dismiss. For the following reasons, the court GRANTS the government's motion to dismiss.

I.

The defendant funds were seized on December 3, 2003 pursuant to a federal seizure warrant. (Mot. at 3.) The government alleges that the defendant funds represent the proceeds of specified unlawful activity and are, therefore, subject to civil forfeiture under 18 U.S.C. § 981(a)(1)(C). (Id.) Specifically, the government contends that the defendant funds are the proceeds of the sale of cable descramblers, often purchased over the internet by individuals using a credit card. (Id. at 2-3.) The government also alleges that the funds were involved in, or traceable to, violations of 18 U.S.C. § 1956(a)(1)(A)(I) (money laundering) and are, therefore, subject to civil forfeiture under 18 U.S.C. § 981(a)(1)(A).

NAB has filed a verified claim to $35,239.89 of the defendant funds. NAB is a third-party intermediary for merchants who are accepted into, and participate in Global Payment Direct's ("Global") credit card program affiliated with HSBC Bank as a member of VISA USA and/or MasterCard International, Inc. (Opp'n at 1.) It is in this capacity that NAB interacted with Red Rock, which was a merchant accepted into Global's credit card program.

The basic credit card processing system works as follows. When a customer purchases a product from a merchant, such as Red Rock, with a credit card, the merchant submits these charges to Global for payment. (Id. at 2.) In response, Global places funds directly into the merchant's, in this case Red Rock's, bank account.¹ The charges are then reported on the statements of the individual cardholder as monies owed for charges incurred.

As part of its role in this system, NAB markets Global's credit card purchasing services to merchants, helping to pre-screen and sign-up new applicants. (Id. Ex. A at 1.) Once Global has accepted a merchant into its credit card processing program, NAB provides various customer services to the merchant and assists in collecting amounts owed to Global. (Id. Ex. A at 2-3.) Critical to this motion, NAB also plays an important role in resolving "chargebacks," which occur when a cardholder disputes a charge.

Specifically, when a cardholder informs Visa, MasterCard, and/or Global of a dispute over an unauthorized or otherwise improper charge, Global conducts an investigation of the cardholder's claim. (Opp'n at 2.) If the chargeback is substantiated, Global reimburses the cardholder. (Id.) Once Global reimburses the cardholder, it deducts the chargeback amount from its payments to NAB and assigns NAB its right to pursue collection of the chargeback from the merchant. (Reply at 13-14; NAB's Verified Claim ¶ 4; Opp'n Ex. A at ¶ B.3-4.) Upon the assignment of Global's collection rights, NAB has the right under the contract with the merchant to directly debit or withdraw the chargeback amount from the merchant's bank accounts. (Opp'n at 3.) Merchant authorization is not required for this debit/deduction. (Id.)

As a result of the government's seizure of the funds in Red Rock's bank account, NAB was unable to collect from Red Rock $35,239.89 to cover chargebacks from cardholders who had purchased descramblers from Red Rock. In these cases, the cardholder purchased the descrambler prior to the seizure. However, during the time that elapsed for the processing and assignment of these chargebacks to NAB by Global, the government seized the funds in Red Rock's account, leaving NAB unable to collect from Red Rock. (Id. Ex. E.) The reasons for the chargebacks varied, including claims that: (1) that the charges were unauthorized; (2) the goods were defective; (3) the merchandise was not as described; (4) the product was returned; or (5) the cardholder never received the product. (Id.)

On November 18, 2004, NAB filed a verified claim to $35,239.89 of the defendant funds. The government moves to dismiss or, in the alternative, strike NAB's verified claim on two grounds: (1) NAB lacks standing to bring such a claim; and (2) NAB does not qualify as an "innocent owner" within the meaning of 18 U.S.C. § 983(d).²

II.

A. Article III Standing

"In a forfeiture case, a claimant's Article III standing turns on whether the claimant has a sufficient ownership interest in the property to create a case or controversy. This threshold burden is not rigorous." See United States v. $4,224,958.57, 392 F.3d 1002, 1005 (9th Cir.2004) (hereinafter "Boylan") (quoting United States v. One Lincoln Navigator, 328 F.3d 1011, 1013 (8th Cir.2003)). "A claimant need not prove the merit of his underlying claim. He must, however, be able to show at least a facially colorable interest in the proceedings sufficient to satisfy the case-or-controversy requirement." United States v. $9,041,598.68, 163 F.3d 238, 245 (5th Cir.1998). Creditors who lack a secured interest in the specific property subject to forfeiture do not have sufficient ownership interest to contest the forfeiture of the property.³ United States v. $20,193.39 U.S. Currency, 16 F.3d 344, 346-47 (9th Cir.1994).

NAB asserts an interest in these funds based upon two theories: (1) under its contract with Red Rock and Global, it retains actual ownership of the funds deposited into Red Rock's account; and (2) it is the beneficiary of a constructive trust imposed on the defendant funds. However, neither theory is persuasive.

1. Contractual Ownership Theory

NAB argues that, under the terms of the merchant service agreement ("MSA") entered into between Global, NAB, and Red Rock, it retained ownership of the funds deposited into Red Rock's bank accounts until the time for customers to assert a chargeback request expired. (Opp'n at 9-10.) Specifically, NAB argues that the MSA grants NAB the unfettered right to directly debit or withdraw the charged-back funds from the merchant's account. (Id. at 3.) Implicit in this right to automatically debit, NAB argues, is the corresponding obligation of the merchant to hold the deposited funds in the account until the chargeback period expires. (Id.) NAB claims that "[i]t is universally recognized in the industry that funds deposited into the merchant's account in response to credit card charges do not belong to Red Rock until the chargeback process cleared" and that NAB remains the true owner of these funds until that time. (Id. Ex. C at ¶¶ 8, 10.)

NAB's argument finds no support in the terms of the MSA agreement. The contractual terms make no mention of any obligation by Red Rock to hold specific funds in its account until the chargeback period expires. Nor do they suggest that NAB retains ownership of the funds deposited into Red Rock's account. Rather, the language speaks of Red Rock's obligation to "pay" Global/NAB the full chargeback amount and states that chargebacks are "charged to" the merchant's account. (Id. Ex. B at ¶¶ 5, 14.) This suggests that when NAB places the funds in Red Rock's account, Red Rock becomes the owner of these funds and NAB/Global merely retains a right to recoup from Red Rock's account any chargebacks incurred.

This reading of the contract is buttressed by a comparison with the optional reserve account provision in the agreement. (Id. ¶ 15.) If a reserve account is established, the MSA grants Global/NAB a secured interest in the account, which allows Global/NAB to withdraw funds as it deems necessary and provides that any funds in the reserve account may be held until the expiration of any potentially applicable chargeback period. (Id.) This contractual language indicates that if NAB wanted to obligate Red Rock to hold specific funds until certain chargebacks cleared and, thereby, acquire something akin to a secured interest in the specific funds, a reserve account was necessary. NAB does not claim that the defendant funds were held in such an account.⁴

At most, then, the MSA gives NAB a secured interest in the Red Rock account from which the defendant funds were seized, but not in the actual funds. This is a critical distinction because the defendant in this case is not the Wells Fargo account, but the specific funds in the account. See United States v. Bornfield, 145 F.3d 1123, 1136 n. 7 (10th Cir.1998) (noting that bank account merely holds the property that is subject to forfeiture). Thus, even if NAB has a secured interest in the Wells Fargo account, it has not established an ownership interest in the specific funds in the account. See United States v. Approximately $178,000.00, CIV-S-03-0640 (E.D.Cal. Jan. 27, 2004) (finding that bank which held general right to reimbursement did not establish a particular claim to the actual funds in the customer account).

Additionally, under the contract, any ownership right or interest of NAB in the funds did not arise prior to the seizure. According to the terms of the MSA, NAB's contractual right to debit the account arose when it became obligated to pay certain chargebacks and credit losses to Global. (Opp'n Ex. C. at ¶ 9.) However, NAB did not become obligated to pay the chargebacks in...