United States v. Chowaiki

• Decision Date: 29 March 2019
• Docket Number: 18-cr-323 (JSR)
• Citation: 369 F.Supp.3d 565
• Parties: UNITED STATES of America v. Ezra CHOWAIKI, Defendant.
• Court: U.S. District Court — Southern District of New York

369 F.Supp.3d 565

UNITED STATES of America

v.Ezra CHOWAIKI, Defendant.

18-cr-323 (JSR)

United States District Court, S.D. New York.

Signed March 29, 2019

Daniel Marc Tracer, DOJ, United States Attorney's Office, SDNY, New York, NY, for United States of America.

OPINION AND ORDER

JED S. RAKOFF, U.S.D.J.

Ezra Chowaiki, the former operator of an art gallery, pleaded guilty before this Court to a fraudulent scheme relating to works of art held by his gallery on consignment. During the plea proceedings, the Court entered a preliminary order forfeiting Chowaiki's interest in various works of art that he acquired as the result of, or that were used to perpetrate, his fraud. A number of third-party petitioners filed claims asserting interests in the works of art. The disposition of most of the contested works has been resolved by settlement.

Before the Court is the Government's motion to dismiss several petitions insofar as they assert any interest in one specific painting, Picasso's Le Clown. For the reasons that follow, the Government's motion to dismiss is granted insofar as it seeks to dismiss the petitions of the Bankruptcy Trustee and KS Enterprise LLC. The motion is denied insofar as it seeks to dismiss the petition of Piedmont Capital LLC.

I. Factual Background

A. The Conviction and Forfeiture Allegations

For several years, Ezra Chowaiki operated Chowaiki & Co. Fine Art Ltd. ("the Gallery"). In 2015, Chowaiki began to use the Gallery to defraud investors and consignors. Specifically, Chowaiki would invite investors to send money to the Gallery that would purportedly be used to purchase artwork for resale. In fact, however, Chowaiki used that money to pay off the Gallery's mounting debts. Similarly, Chowaiki would use artwork held by the Gallery on consignment as collateral to secure new loans, or in satisfaction of existing, defaulted loans. In November of 2017, the Gallery filed for bankruptcy. The next month, a criminal complaint was filed, accusing Chowaiki of the above-described fraudulent conduct. See ECF No. 1. He ultimately pleaded guilty to one count of wire fraud on May 3, 2018, and was sentenced on September 27, 2018 to eighteen months' imprisonment and three years of supervised release. See Judgment, ECF No. 76.

At the time of the guilty plea, and on consent of the parties, the Court entered a preliminary order of forfeiture. See Consent Preliminary Order of Forfeiture, ECF No. 16. That Order provided for the forfeiture of various works of art and also provided that a money judgment in the amount of $ 16,635,370 would be entered against the defendant, less the value of any of the forfeited works that were actually recovered. Id. at 1-5. The Government published notice of the proposed forfeiture as required by Fed. R. Crim. P. 32.2(b) (6), see Service by Publication, ECF No. 80, and several third-party claimants filed petitions asserting interests in one or more of the paintings. The Government represents that it seeks to determine the rightful owner of the various works, not to keep the paintings for itself. The Court's understanding is that the painting at issue in this motion is the only remaining work that is the subject of contested proceedings. Claims as to the other works have either been settled or are in the process of settling, and the preliminary forfeiture order has been amended several times to vacate references to those works.

The instant motion concerns one painting, Le Clown by Picasso ("the Work"). Four parties filed petitions asserting interests in the Work: Andrew and Kirsten Neuman ("the Neumans"), ECF No. 31 ; KS Enterprise LLC ("KS Enterprise" or "KS"), ECF No. 47 ; Piedmont Capital LLC ("Piedmont Capital" or "Piedmont"), ECF No. 57 ; and Albert Togut, the Bankruptcy Trustee for the Gallery's estate ("the Trustee"), ECF No. 59.

B. The Third-Party Petitions

1. The Neumans

According to their petition, the Neumans entered into a consignment agreement with the Gallery on March 31, 2017. Neuman Pet. ¶ 8. The agreement provided that the Neumans would put up the money to purchase Le Clown, while the Gallery would act as their agent in buying and then reselling the Work. Neuman Pet. Exh. A ¶¶ 3, 6, ECF No. 31-1 ("Agreement"). The Agreement further provided that while the Gallery would have physical custody, the Work would be the property of the Neumans, who would also retain "sole discretion" to approve any sale or sale price. Id. ¶¶ 8, 10. The Gallery would be entitled to 15% of any sale price. Id. ¶ 12(a). On April 3, 2017, the Neumans wired the money necessary to purchase the Work to the Gallery. Neuman Pet. ¶ 12. The Neumans subsequently demanded, and regained, custody of the Work in November of 2017. Id. ¶ 14. The Neumans argue in their petition that they held an interest superior to Chowaiki's at all times following the purchase of the Work in April 2017. Id. ¶¶ 22-23, 26.

2. KS Enterprise

KS Enterprise claims in its petition that it agreed to buy Le Clown (and another work, Jellyfish Eyes, not at issue here) from the Gallery on September 8, 2017. KS Enterprise Pet. ¶ 6. KS wired the purchase price to the Gallery on September 11 and took possession of the Work on September 16. Id. ¶¶ 8, 12. On September 25, the Gallery offered KS Enterprise $ 350,000 to buy back Le Clown and Jellyfish Eyes. Id. ¶ 13. KS agreed, and the Gallery took possession the same day on the representation that payment would be forthcoming. Id. ¶ 15. The invoice from KS provided that "title to the Artwork shall not pass to the purchaser until full payment has been acknowledged to have been received by KS Enterprise LLC." Id. ¶ 16; KS Enterprise Pet. Exh. C, ECF No. 47-3. The Gallery never paid. KS Enterprise Pet. ¶ 20. KS Enterprise claims that it acquired title to the Work on September 11, 2017, which it retained through the subsequent repossession because the Gallery never transmitted payment. Id. ¶¶ 11, 22.

3. Piedmont Capital

According to its petition, on September 19, 2017, Piedmont Capital lent $ 300,000 to the Gallery. Piedmont Pet. ¶ 15; Piedmont Pet. Exh. A, ECF No. 57-1. Certain works of art were pledged as collateral, including Le Clown, which the Gallery claimed to own. Piedmont Pet. ¶ 16(b); Piedmont Pet. Exh. B, ECF No. 57-2. The Gallery defaulted on the loan, and on October 19, 2017, the parties executed a release agreement whereby Piedmont would discharge the debt in exchange for ownership of the collateral. Piedmont Pet. ¶ 20-21; Piedmont Pet. Exh. G ¶¶ 1, 3, ECF No. 57-7. Piedmont claimed to have superior title to the Work as a bona fide purchaser for value. Piedmont Pet. ¶ 28.

4. The Bankruptcy Trustee

According to the petition by the Trustee, the Gallery filed for bankruptcy on November 13, 2017. Trustee Pet. ¶¶ 1, 2. In its petition, the Trustee claims an interest in Le Clown that is superior to all other claimants on the ground that the various transfers of the work constituted avoidable preferences under the Bankruptcy Code. Id. ¶ 28(v). Alternatively, the petition claims that the Gallery retains a 15% interest in the Work pursuant to the consignment agreement. Id.

C. The Motion to Dismiss

On January 3, 2019, the Government filed the instant motion to dismiss the petitions of KS, Piedmont, and the Trustee. Gov't Mem. Supp. Mot. Dismiss ("Gov't Mem."), ECF Nos. 86, 87. The Government argues that all these petitions should be dismissed for lack of standing and failure to state a claim. Gov't Mem. 7-8. In the alternative, the Government asks that summary judgment be granted in its favor. Id. at 8. The Neumans joined the Government's motion, ECF No. 99, and Piedmont and KS opposed, Piedmont Mem. Opp. Mot. Dismiss ("Piedmont Opp."), ECF No. 98 ; KS Mem. Opp. Mot. Dismiss ("KS Opp."), ECF No. 101. The Trustee does not oppose the Government's motion, with certain caveats. Trustee Resp. Mot. Dismiss ("Trustee Resp."), ECF No. 96.

II. Discussion

A. Legal Standards

1. Forfeiture

Any property "which constitutes or is derived from proceeds traceable to" wire fraud is forfeitable to the Government. See 18 U.S.C. § 981(a)(1)(C) (incorporating the definition of "specified unlawful activity" in 18 U.S.C. § 1956(c)(7), which incorporates offenses listed in 18 U.S.C. § 1961(1), which lists wire fraud); see also 28 U.S.C. § 2461(c) (providing for forfeiture of property subject to civil forfeiture upon criminal conviction, using the procedures specified in 21 U.S.C. § 853 ). Title to such property vests in the United States "upon commission of the act giving rise to forfeiture." 18 U.S.C. § 981(f). Accordingly, "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)." United States v. Daugerdas, 892 F.3d 545, 548 (2d Cir. 2018).¹

Third parties claiming an interest in forfeited property may file petitions requesting a hearing. 21 U.S.C. § 853(n)(2). Such third-party petitions cannot challenge the predicate finding that the Government's interest in the property is superior to the defendant's; they are limited to arguing that the third party's interest trumps the Government's. See DSI Assocs. LLC v. United States, 496 F.3d 175, 185 (2d Cir. 2007).

To carry its burden, a petitioner "must first establish his standing to challenge the forfeiture order by demonstrating a ‘legal interest’ in the forfeited property." United States v. Watts, 786 F.3d 152, 160 (2d Cir. 2015). "Where the petitioner has no valid interest in the property under state law, the inquiry ends, and the claim fails for lack of standing." Id. at 161 (quoting United States v. Timley, 507 F.3d 1125, 1130 (8th Cir. 2007). "The petitioner must then prove his entitlement to relief on the merits by establishing, through a preponderance of the evidence, one of two superior claims to the property under § 853(n)(6)." Id. at 160. The petitioner can prevail by showing...