United States v. $4,480,466.16 in Funds Seized from Bank of Am. Account Ending in 2653

• Decision Date: 05 November 2019
• Docket Number: No. 18-10801,18-10801
• Citation: 942 F.3d 655
• Parties: UNITED STATES of America, Plaintiff - Appellee v. $4,480,466.16 IN FUNDS SEIZED FROM BANK OF AMERICA ACCOUNT ENDING IN 2653 Defendant, Retail Ready Career Center Incorporated, Claimant - Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

942 F.3d 655

UNITED STATES of America, Plaintiff - Appellee

v. $4,480,466.16 IN FUNDS SEIZED FROM BANK OF AMERICA ACCOUNT ENDING IN 2653 Defendant,Retail Ready Career Center Incorporated, Claimant - Appellant

No. 18-10801

United States Court of Appeals, Fifth Circuit.

FILED November 5, 2019

Beverly Kristyne Chapman, Northern District of Texas, Dallas, United States District Court, Dallas, TX, Leigha Amy Simonton, Assistant U.S. Attorney, U.S. Attorney's Office, Northern District of Texas, Dallas, TX, for Plaintiff-Appellee.

Jack Ternan, Ternan Law Firm, P.L.L.C., Plano, TX, for Claimant-Appellant.

Before ELROD, WILLETT, and DUNCAN, Circuit Judges.

STUART KYLE DUNCAN, Circuit Judge:

The petition for panel rehearing is DENIED. We withdraw the previous opinion issued August 22, 2019, 936 F.3d 233, and substitute the following:

We address whether a claimant in a civil forfeiture proceeding may counterclaim for constitutional tort damages against the United States. The district court held a claimant may never file counterclaims of any kind. It adopted the First Circuit’s reasoning that, because a forfeiture is an in rem proceeding against property, there is no "claim" against a claimant that he may "counter." Although this reasoning has been adopted by several district courts and recently by the Sixth Circuit, we find it unpersuasive and decline to adopt it. We nonetheless affirm the district court’s judgment dismissing the counterclaims for a different reason. The counterclaims here seek damages based on alleged Fourth and Fifth Amendment violations arising from the property seizure. The United States has not waived sovereign immunity for either claim. We therefore affirm the district court’s judgment on the alternative ground that the counterclaims are barred by sovereign immunity.

I.

Appellant Retail Ready Career Center ("RRCC") was a private school in Texas offering a six-week "boot camp style" course to train students as Heating, Ventilation, and Air Conditioning ("HVAC") technicians.¹ According to RRCC, "[m]ost" students were "veterans who pa[id] for the course using their earned GI Bill benefit," but "courses were open to other participants" as well. In 2017, the United States Department of Veterans Affairs ("VA") began investigating whether RRCC had falsely claimed to be in compliance with the "85-15" rule. This rule prohibits the VA from approving a veteran’s enrollment in a course "for any period during which more than 85 percent of the students enrolled in the course are having all or part of their tuition, fees or other charges paid for them by the educational institution or by VA[.]" 38 C.F.R. § 21.4201. The rule’s purpose is to "minimize the risk that veterans’ benefits will be wasted on educational programs of little value ... and to prevent charlatans from grabbing the veterans’ education money." Cleland v. Nat’l Coll. of Bus. , 435 U.S. 213, 219, 98 S.Ct. 1024, 55 L.Ed.2d 225 (1978) (cleaned up).

In September 2017, federal warrants were issued to seize the money in RRCC’s bank accounts—amounting to over $4.6 million—as the alleged proceeds of federal law violations. See FED. R. CIV. P., SUPPLEMENTAL RULE (" SUPP. RULE ") G(3)(b) ("the court—on finding probable cause—must issue a warrant" to seize movable property not in government control).² In October 2017, the government filed a complaint in rem seeking forfeiture of the funds under various fraud and conspiracy statutes.³ After receiving notice of the forfeiture action, RRCC filed a verified claim to the seized property. See 18 U.S.C. § 983(a)(4)(A) (providing that "[a]ny person claiming an interest in the seized property may file a claim asserting such person’s interest in the property"); SUPP. RULE G(5)(a) (setting out claim requirements). In its verified claim, RRCC alleged that the seizure occurred without prior notice or hearing; caused "an immediate and devastating effect on RRCC’s business"; and forced RRCC to "close the school," dismiss employees without pay, and fly students home lest they be "stranded in Texas." RRCC also included two "constitutional counterclaims," which alleged the seizure violated the Fourth and Fifth Amendments and sought "damages to compensate [RRCC] for the destruction of its business."

The government moved to dismiss RRCC’s counterclaims under Federal Rule of Civil Procedure 12(b)(6). Relying principally on the First Circuit’s decision in United States v. One Lot of U.S. Currency ($68,000) , 927 F.2d 30 (1st Cir. 1991) (" $68,000 "), the government argued that "claimants in civil-forfeiture cases may not file counterclaims against the United States, as they are merely claimants, not the party against which the suit is directed." The district court noted the parties had not cited "any binding Fifth Circuit authority" on this question, but found "persuasive" the First Circuit’s reasoning in $68,000 , which had been followed by several district courts from other circuits.⁴ The district court therefore granted the government’s motion to dismiss RRCC’s counterclaims, "hold[ing] that, as a claimant in an in rem civil forfeiture action, RRCC cannot bring a counterclaim."

Meanwhile, the government struggled to state an adequate claim against RRCC’s funds under the forfeiture rules. The district court dismissed the government’s first amended complaint, finding its allegations insufficiently specific. The second amended complaint met the same fate. See, e.g. , United States v. $4,480,466.16 in Funds Seized , 2018 WL 4096340, at *3 (N.D. Tex. Aug. 28, 2018) (ruling allegations in second amended complaint were "insufficient to comply with Supp[lemental] R[ule] G(2)’s requirement that the complaint must ‘state sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial’ "); SUPP. RULE G(2)(f). The parties continue to litigate that issue below.⁵

The issues before us on appeal concern only the fate of RRCC’s counterclaims. On June 12, 2018, the district court entered a final judgment dismissing RRCC’s counterclaims under Federal Rule of Civil Procedure 54(b), which RRCC timely appealed. We have jurisdiction to review that Rule 54(b) judgment. See New Amsterdam Cas. Co. v. United States , 272 F.2d 754, 756 (5th Cir. 1959) (dismissal of counterclaim, when plaintiff’s claim is still pending, is non-appealable "absent a certificate under Rule 54(b)").

II.

We review the district court’s judgment dismissing RRCC’s counterclaims de novo , " ‘accepting all well-pleaded facts [in RRCC’s counterclaims] as true and viewing those facts in the light most favorable to [RRCC].’ " SGK Props., LLC v. U.S. Bank Nat’l Ass’n , 881 F.3d 933, 943 (5th Cir. 2018) (quoting Stokes v. Gann , 498 F.3d 483, 484 (5th Cir. 2007) ). We may affirm the district court’s judgment "on any basis supported by the record." Total Gas & Power North Am., Inc. v. FERC , 859 F.3d 325, 332 (5th Cir. 2017) (citing Taylor v. City of Shreveport , 798 F.3d 276, 279 (5th Cir. 2015) ; EEOC v. Simbaki, Ltd. , 767 F.3d 475, 481 (5th Cir. 2014) ); see also Lee v. Kemna , 534 U.S. 362, 391, 122 S.Ct. 877, 151 L.Ed.2d 820 (2002) ("[I]t is well settled that an appellate tribunal may affirm a trial court’s judgment on any ground supported by the record.").

III.

We decline to endorse the district court’s ruling that claimants in in rem civil forfeiture proceedings are barred, always and everywhere, from filing counterclaims. As we explain below, that broad holding relies on dubious reasoning in a First Circuit opinion that overlooks the procedural rights of claimants in in rem forfeiture actions and that conflicts with longstanding practice in in rem admiralty cases. Nonetheless, we affirm the district court’s judgment on the narrower ground that RRCC’s constitutional damages claims are barred by sovereign immunity.

A.

The district court relied heavily on the First Circuit’s decision in $68,000 , which concerned an in rem forfeiture action against a cocaine-tainted Lincoln Town Car. 927 F.2d at 31–32. The claimant, Castiello, sought to retrieve a "portable telephone" from the car by "fil[ing] what he termed a ‘counterclaim’ for [its] return." Id. at 34. The First Circuit identified multiple flaws in Castiello’s position. For instance, the court pointed out that, because the forfeiture warrant did not even encompass the telephone, Castiello’s "personal property claim had no place in th[e] action." Id. at 35.⁶ But the court also laid down this broader reason for rejecting Castiello’s "counterclaim":

By definition, a counterclaim is a turn-the-tables response directed by one party ("A") at another party ("B") in circumstances where "B" has earlier lodged a claim in the same proceeding against "A." A forfeiture action is in rem , not in personam . The property is the defendant. Since no civil claim was filed by the government against Castiello—indeed, rather than being dragooned into the case as a defendant , he intervened as a claimant —there was no "claim" to "counter." Thus, Castiello’s self-styled counterclaim was a nullity, and the court below appropriately ignored it.

$68,000 , 927 F.2d at 34. This citationless half-paragraph furnished the sole rationale for the district court’s holding below that "a claimant in an in rem civil forfeiture action ... cannot bring a counterclaim."

We readily grasp why the district court disposed of RRCC’s counterclaims on this basis. As the court pointed out, the First Circuit’s musing in $68,000 has metastasized to several district courts, and also recently to the Sixth Circuit. See Zappone v. United States , 870 F.3d 551, 561 (6th Cir. 2017) (stating that owner in civil forfeiture action may "intervene" but "may not assert counterclaims against the United States") (citing $68,000 ). And the district court had no binding authority from our court, because we have never squarely addressed the issue. We do so now. Examining the issue as one of first impression, we respectfully reject the First...