892 F.3d 545 (2nd Cir. 2018), 17-898-cv, United States v. Daugerdas

Docket Nº:17-898-cv
Citation:892 F.3d 545
Opinion Judge:Gerard E. Lynch, Circuit Judge:
Party Name:UNITED STATES, Appellee, v. Paul M. DAUGERDAS, Erwin Mayer, Donna Guerin, Denis Field, Robert Greisman, Raymond Craig Brubaker, David Parse, BDO USA, LLP, Defendants, Eleanor Daugerdas, Petitioner-Appellant.
Attorney:Andrew C. Adams (Anna M. Skotko, on the brief ), Assistant United States Attorneys, for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, NY, for Appellee. James R. DeVita, Doar Rieck DeVita Kaley & Mack, New York, NY, for Petitioner-Appellant.
Judge Panel:Before: Walker, Lynch, and Chin, Circuit Judges.
Case Date:June 13, 2018
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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892 F.3d 545 (2nd Cir. 2018)

UNITED STATES, Appellee,

v.

Paul M. DAUGERDAS, Erwin Mayer, Donna Guerin, Denis Field, Robert Greisman, Raymond Craig Brubaker, David Parse, BDO USA, LLP, Defendants, Eleanor Daugerdas, Petitioner-Appellant.

No. 17-898-cv

United States Court of Appeals, Second Circuit

June 13, 2018

Argued: February 5, 2018

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[Copyrighted Material Omitted]

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Appeals from the United States District Court for the Southern District of New York

Andrew C. Adams (Anna M. Skotko, on the brief ), Assistant United States Attorneys, for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, NY, for Appellee.

James R. DeVita, Doar Rieck DeVita Kaley & Mack, New York, NY, for Petitioner-Appellant.

Before: Walker, Lynch, and Chin, Circuit Judges.

OPINION

Gerard E. Lynch, Circuit Judge:

Petitioner-appellant Eleanor Daugerdas appeals from an order of the United States District Court for the Southern District of New York (William H. Pauley III, J. ), dismissing her petition asserting a third-party interest in certain accounts (the "Accounts") preliminarily forfeited in the underlying criminal proceedings against her husband, Paul M. Daugerdas.1 The parties agree that Paul initially funded the Accounts, at least in part, with money he was paid by the law firm through which he conducted his fraudulent activities, and that he gratuitously transferred ownership of the Accounts to his wife over a period of years. Eleanor contends that the law firm irreversibly commingled the income it received from Paul’s fraudulent-tax-shelter clients with untainted money before it paid Paul, and that the funds in the Accounts therefore cannot easily be traced to her husband’s fraud. Eleanor therefore asserts that the Accounts cannot now be taken from her to satisfy her husband’s forfeiture obligations; instead, she argues, equivalent amounts must be collected from her husband’s own assets in the same manner as a judgment creditor would enforce any personal money judgment.

We conclude that Eleanor’s petition does not currently contain sufficient plausible allegations to sustain her position; however, at oral argument, she claimed to be able to plead additional facts demonstrating that the funds in the Accounts were irreversibly commingled. Because Eleanor did not have an opportunity to participate in the criminal proceedings against her husband, we conclude that if such facts exist, denying Eleanor the ability to assert the argument she raises here could potentially permit the government to deprive her of her own property without due process of law. Accordingly, we VACATE the district court’s order and REMAND the case for further proceedings consistent with this opinion.

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DISCUSSION

Eleanor’s argument turns on the complex structure of criminal forfeiture proceedings. For her position to be understood, it is necessary to clarify certain aspects of forfeiture law before discussing the facts at issue in this appeal.

I. Legal Framework of Criminal Forfeiture

The government sought forfeiture of Paul’s property pursuant to 18 U.S.C. § 981(a)(1)(C) (civil forfeiture)[2] and § 982(a)(2)(A) (criminal forfeiture). Forfeiture proceedings under those statutes are governed by 21 U.S.C. § 853 and Rule 32.2 of the Federal Rules of Criminal Procedure. See 18 U.S.C. § 982(b)(1); 28 U.S.C. § 2461(c).

Unlike civil forfeiture, which is an in rem action, "criminal forfeiture is an in personam action in which only the defendant’s interest in the property may be forfeited." Fed. R. Crim. P. 32.2(b) advisory comm. notes (2000); see also United States v. Lester, 85 F.3d 1409, 1413 (9th Cir. 1996) ("[A] criminal forfeiture is an in personam judgment against a person convicted of a crime .") (emphasis in original). Section 853 nevertheless incorporates into criminal forfeiture proceedings aspects of an in rem proceeding against property tainted by the defendant’s criminal conduct— including, as relevant here, against the proceeds of that offense— in order to effectuate Congress’s intent that forfeiture proceedings be used "to recover all of the [defendant’s] ill-gotten gains but not to seize legitimately acquired property." United States v. Porcelli, 865 F.2d 1352, 1365 (2d Cir. 1989). Under the "relation-back" doctrine of § 853(c), the government’s interest in the proceeds of a fraud vests as soon as those proceeds come into existence, and is therefore superior to that of any subsequent third-party recipient of those funds (unless the third party is a bona fide purchaser for value).3 See United States v. Kramer, No. 1:06-cr-200, 2006 WL 3545026, at *4 (E.D.N.Y. Dec. 8, 2006) (observing that § 853’s relation-back doctrine is consistent with the "long-recognized common law ‘taint theory’ "), citing Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 627, 109 S.Ct. 2646, 105 L.Ed.2d 528 (1989), and United States v. Stowell, 133 U.S. 1, 16-17, 10 S.Ct. 244, 33 L.Ed. 555 (1890). As a result, a third-party claimant must assert an interest in the proceeds of an offense that is superior to the defendant’s at the moment that offense was committed in order to assert, in a subsequent forfeiture proceeding, an interest in those proceeds that is superior to that of the government.

But where proceeds are unavailable because, as relevant here, they have become "commingled with other property which cannot be divided without difficulty," § 853(p)(1)(E), "the court shall order the

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forfeiture of any other property of the defendant ," § 853(p)(2) (emphasis added), up to the value of the missing proceeds. This so-called "substitute assets" provision thus "gives the government the ability to receive, in essence, a general judgment against the defendant." United States v. Voigt, 89 F.3d 1050, 1086 n.21 (3d Cir. 1996), quoting Arthur W. Leach & John G. Malcolm, Criminal Forfeiture: An Appropriate Solution to the Civil Forfeiture Debate, 10 Ga. St. U. L.Rev. 241, 295 n.164 (1994).

Whether property is forfeited as proceeds or as substitute assets is of particular import here because § 853(c)’s relation-back doctrine does not apply to substitute assets. The text of § 853(c) explicitly references § 853(a), which defines proceeds, but makes no mention of § 853(p), which defines substitute assets. Cf. United States v. Gotti, 155 F.3d 144, 149 (2d Cir. 1998) (holding that the materially similar RICO forfeiture provision did not permit pretrial restraint of substitute assets because the relevant provision included a specific reference to the subsection defining proceeds and not the one defining substitute assets). In the same vein, the Supreme Court recently observed in Honeycutt v. United States, that "§ 853(c) applies to tainted property only." __ U.S. __, 137 S.Ct. 1626, 1633, 198 L.Ed.2d 73 (2017). And in the absence of the relation-back doctrine, the statute is less than clear about when the government’s interest in substitute property vests.4 The result is that, if the property is forfeited as a substitute for offense proceeds, there could be a gap between the moment of the offense conduct and the vesting of the government’s interest in the property. A third party’s interest could potentially attach during that interval.

The two-step procedure for completing a forfeiture created by § 853 and Rule 32.2, however, fails to recognize that possibility. At stage one of that procedural framework, before entering a preliminary order of forfeiture, the court is directed to adjudicate the government’s interest vis-à-vis the defendant "without regard to any third party’s interest in the property." Rule 32.2(b)(2)(A); see also 21 U.S.C. § 853(k) (prohibiting third parties from intervening in the initial forfeiture proceedings of a criminal case). And at stage two, before entering a final order of forfeiture, the court resolves any third-party petitioner’s interests vis-à-vis the defendant. See 21 U.S.C. § 853(n)(6)(A) (discussing whether the petitioner’s interests are superior to any interests "of the defendant"). Frequently, the government will be seeking to forfeit offense proceeds, and, accordingly, by operation of the relation-back doctrine, the government’s interest in the contested property will be identical to that held by the defendant at the time of the offense, such that those two steps will also conclusively determine the third-party’s interests vis-à-vis both the government and the defendant. But in the case of substitute property, where the government’s interest could have vested after the time of the offense, there is no procedure for determining whether a third-party petitioner’s

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interest, which may have been inferior to the defendants (or nonexistent) at the moment of the offense conduct, could nevertheless be superior to the governments later-attaching...

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