Eggleston v. State of Colo.

• Decision Date: 21 April 1989
• Docket Number: 86-2192,Nos. 86-2151,s. 86-2151
• Citation: 873 F.2d 242
• Parties: -1230, 89-1 USTC P 9278 Peter M. EGGLESTON, Plaintiff, v. The STATE OF COLORADO, et al., Defendants-Cross-Appellees/Cross-Appellants. UNITED STATES of America, Plaintiff-Appellant/Cross-Appellee, v. $1,508,440.00 IN UNITED STATES CURRENCY, Defendant. UNITED STATES of America, Plaintiff, v. TWELVE GOLD BARS, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 242

873 F.2d 242

63 A.F.T.R.2d 89-1230, 89-1 USTC P 9278

Peter M. EGGLESTON, Plaintiff, v.The STATE OF COLORADO, et al.,

Defendants-Cross-Appellees/Cross-Appellants.

UNITED STATES of America, Plaintiff-Appellant/Cross-Appellee, v.$1,508,440.00 IN UNITED STATES CURRENCY, Defendant.

UNITED STATES of America, Plaintiff, v.TWELVE GOLD BARS, Defendants.

Nos. 86-2151, 86-2192.

United States Court of Appeals Tenth Circuit.

April 21, 1989.

F. Joseph Mackey, III, Asst. U.S. Atty. (Robert N. Miller, U.S. Atty., D. Colo., with him on the briefs), Mountain States Drug Task Force, for plaintiff-appellant.

Larry A. Williams, First Asst. Atty. Gen. (Duane Woodard, Atty. Gen., Charles B. Howe, Deputy Atty. Gen., and Richard H. Forman, Sol.Gen., with him on the briefs), Gen. Legal Services Section, Colorado Dept. of Revenue, for defendants-appellees.

Before TACHA and SETH, Circuit Judges, and SAFFELS, District Judge.^*

TACHA, Circuit Judge.

This appeal arises from a dispute between state and federal agencies over property seized by law enforcement officials as proceeds of illegal drug trafficking.The federal Drug Enforcement Administration (DEA), the Internal Revenue Service (IRS), the Colorado Department of Revenue, and several other parties each claimed an interest in the property.The district court held that the Colorado Department of Revenue's lien for income taxes had priority over all claims and ordered the remainder of the property to be applied in partial satisfaction of a federal income tax lien, denying all other claims.We reverse and remand.

I.

This case was tried upon stipulated facts that are set out in detail in the district court's opinion, Eggleston v. Colorado, 636 F.Supp. 1312(D.Colo.1986).We therefore do not repeat them here, except for the following background facts necessary for our decision.

On November 21, 1982, Lakewood, Colorado police seized twelve one-ounce gold bars and approximately $1.5 million in cash from the home of Victoria and Albert Levy.Id. at 1316.This property was the proceeds of illegal drug transactions.Id.Soon after this seizure, several parties claimed an interest in the property and began maneuvering to establish the priority of their claims.Id. at 1316-17.The claims of all interested parties were consolidated for trial before the district court.Id. at 1314-15.Most pertinent to this appeal are the claims of the Colorado Department of Revenue, the IRS, and the DEA.¹

The Colorado Department of Revenue prepared sales, income, and Regional Transportation District(RTD) tax assessments against Albert Levy on December 22, 1982.Id. at 1317.Notices of tax lien and garnishment under distraint for collection were filed, and the Arapahoe County district court entered judgment in favor of the Department on December 23, 1982, as follows: Colorado sales tax--$115,880.12; Colorado income tax--$58,677.00; and RTD sales tax--$19,313.39. Id.

On January 5, 1982, the IRS assessed a tax liability of $1,962,563 against Albert Levy pursuant to its power under 26 U.S.C. Sec. 6851(a).Eggleston, 636 F.Supp. at 1317, 1319.Levy received notice of the assessment and demand for payment, but failed to pay the assessment.Id. at 1319.A lien therefore arose by operation of law on January 5, 1982.Id.(citing26 U.S.C. Secs. 6321,6322).

Finally, the DEA claimed the property under the civil forfeiture provisions of 21 U.S.C. Sec. 881(a)(6).Eggleston, 636 F.Supp. at 1318.Although the Government had not yet obtained a judgment of forfeiture and did not file a claim for forfeiture until after the state and federal tax liens had been filed, the DEA argued that forfeiture relates back to the moment of illegal use of the property, thereby vesting title to the property in the federal government as of that moment and preventing the attachment of all liens arising subsequent to the moment of illegal use.Id.

Applying settled principles of priority, the district court denied the claims of all parties other than the DEA, the IRS, and the Colorado Department of Revenue.The court held that because the state and federal tax liens were clearly established before the other claims had been filed, or had become choate, those other claims were inferior to the tax liens.Id. at 1319-20(citingUnited States v. New Britain, 347 U.S. 81, 84, 85, 74 S.Ct. 367, 369, 370, 98 L.Ed. 520(1954)).Furthermore, the amount of the tax liens clearly exceeded the value of the seized property, making a decision as to the validity and priority of the inferior claims unnecessary.

The critical issues before the district court therefore concerned the validity of the state tax liens and the priority among the claims of the DEA, the IRS, and the Colorado Department of Revenue.The district court upheld the validity of the state income tax lien, but denied the validity of the Colorado Department of Revenue's state sales tax and RTD sales tax claims.Id. at 1324.The district court decided that, under Colorado law, state sales and RTD taxes can be imposed only if the underlying sales can be construed as retail, rather than wholesale, transactions.Id.(citingColo.Rev.Stat. Sec. 39-26-104(1)(a)(1982)).The court, therefore, held that the sales tax liens in this case were invalid because the Department had failed to produce evidence indicating that the underlying drug sales had been retail sales.Id.

Regarding priority, the state income tax lien was held to be superior to the federal tax lien because it was filed first.Id. at 1324-25.The IRS conceded that the state income tax lien was filed first, but argued along with the DEA that forfeiture to the federal government under 21 U.S.C. Sec. 881 should prevail over all tax liens because such forfeiture related back to the time of the offense.Eggleston, 636 F.Supp. at 1318.

The district court rejected the DEA's forfeiture claim, holding that forfeiture did not relate back to the time of the offense because 21 U.S.C. Sec. 881 is a permissive, rather than a mandatory, forfeiture provision.Eggleston, 636 F.Supp. at 1323-24.Accordingly, the DEA's claim for forfeiture could vest only when the judgment of forfeiture has been entered, and the forfeiture would operate prospectively from that time.Seeid.The court did not enter a judgment of forfeiture, apparently for the same reason that other inferior claims were denied--the superior tax liens would have exhausted the property in dispute, making futile an order of forfeiture that did not relate back prior to the time such liens were entered.

The DEA appealed, claiming that the district court erred in its construction of 21 U.S.C. Sec. 881 by refusing to recognize that such forfeiture related back to the time the property was unlawfully used.The Colorado Department of Revenue filed a cross-appeal, contending that the district court erred in denying the validity of the Department's state sales tax and RTD sales tax liens.The Department further contends that even if the forfeiture relates back, sales tax proceeds held by Albert Levy are exempt from forfeiture under the so-called "innocent owner" exception of 21 U.S.C. Sec. 881(a)(6).

II.

Three questions are presented by this appeal: first, whether civil forfeiture under 21 U.S.C. Sec. 881 relates back to the moment that property was received in an illegal transaction, thereby voiding subsequent interests in the property; second, if forfeiture relates back, whether the sales tax liens, if valid, are preserved from forfeiture; and, finally, if such liens are preserved from forfeiture, whether the district court erred in placing the burden of proof upon the Department of Revenue to establish that retail, and not wholesale, sales were involved.

A.

Civil forfeiture statutes, such as 21 U.S.C. Sec. 881, "grow out of a legal heritage in which objects considered 'guilty' were held forfeit."United States v. $39,000 in Canadian Currency, 801 F.2d 1210, 1218 n. 4(10th Cir.1986)."The legal fiction underlying civil forfeitures characterizes them as proceedings in rem against 'offending inanimate objects' as defendants."Id. at 1218(quotingBramble v. Richardson, 498 F.2d 968, 971(10th Cir.), cert. denied, 419 U.S. 1069, 95 S.Ct. 656, 42 L.Ed.2d 665(1974)).The fiction that the "offense" was committed by the property subject to forfeiture underlies the common-law doctrine of relation back.At common law, after the government took legal steps to assert its rights to property subject to forfeiture, thereby vesting title to the property in the government, the doctrine of relation back applied in some cases to "carr[y] back the title to the commission of the offense."United States v. Grundy & Thornburgh, 7 U.S. (3 Cranch) 337, 350-51, 2 L.Ed. 459(1806).

When Congress has provided for forfeiture by statute, however, we need not rely on the common law of forfeiture:

Where a forfeiture is given by a statute, the rules of the common law may be dispensed with, and [whether] the thing forfeited may either vest immediately, or on the performance of some particular act, shall be the will of the legislature.This must depend upon the construction of the statute.

Id. at 351;seeUnited States v. 1960 Bags of Coffee, 12 U.S. (8 Cranch) 398, 404-05, 3 L.Ed. 602(1814).The Supreme Court has stated as "settled doctrine" the following rule of construction:

[W]henever a statute enacts that upon the commission of a certain act specific property used in or connected with that act shall be forfeited, the forfeiture takes effect immediately upon the commission of the act; the right to the property then vests in the United States, although their title is not perfected until judicial condemnation; the forfeiture constitutes a statutory transfer of the right to the United States at the time the offense is committed; and the condemnation, when obtained, relates back to that time, and avoids all intermediate sales and alienations, even to purchasers in good faith.

United States v....