United States v. Huntington Nat'l Bank

• Decision Date: 14 June 2012
• Docket Number: No. 10–2071.,10–2071.
• Citation: 682 F.3d 429
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. HUNTINGTON NATIONAL BANK, Defendant–Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

682 F.3d 429

UNITED STATES of America, Plaintiff–Appellee,

v.HUNTINGTON NATIONAL BANK, Defendant–Appellant.

No. 10–2071.

United States Court of Appeals,Sixth Circuit.

Argued: March 8, 2012.

Decided and Filed: June 14, 2012.

ARGUED:Jeffrey O. Birkhold, Warner Norcross & Judd LLP, Grand Rapids, Michigan, for Appellant. Joel S. Fauson, Assistant United States Attorney, Grand Rapids, Michigan, for Appellee. ON BRIEF:Jeffrey O. Birkhold, Gaëtan Gerville–Réache, Warner Norcross & Judd LLP, Grand Rapids, Michigan, for Appellant. Joel S. Fauson, Matthew G. Borgula, Assistant United States Attorney, Grand Rapids, Michigan, for Appellee.

Before: CLAY and GIBBONS, Circuit Judges; KORMAN, District Judge. ^*

OPINION

JULIA SMITH GIBBONS, Circuit Judge.

Defendant-appellant Huntington National Bank (“Huntington”) claims that it is entitled to the proceeds of a deposit account, which were seized by the government as part of a criminal forfeiture proceeding, as a secured creditor of the account. Huntington asserts that it qualifies as a bona fide purchaser for value under 21 U.S.C. § 853(n)(6)(B) and appeals the district court's ruling that, as a matter of law, it did not. For the reasons that follow, we reverse the judgment of the district court and direct the district court to amend the order of forfeiture in accordance with this analysis.

I.

This criminal forfeiture proceeding arises out of the activities of a business, known variously as Cybernet Engineering, Cyberco Holdings, and CyberNET (collectively “Cyberco”), whose principals engaged in a complex scheme to defraud dozens of lending institutions out of more than $100 million in loans and lines of credit. In October 2002, Huntington granted Cyberco a multi-million-dollar line of credit, and in exchange Cyberco granted Huntington “a continuing security interest and lien” in all of Cyberco's tangible and intangible personal property and rights, including “deposit accounts.” In November 2004, after discovering the fraud, the government seized approximately $4 million in Cyberco assets, including $705,168.60 from Huntington Bank Account Number 01159630935 (“the Cyberco Account”).

A number of Cyberco principals were charged in a criminal indictment with conspiring to commit acts which violated federal laws relating to bank fraud, mail fraud, and money laundering. Count 10 of the superseding indictment issued forfeiture allegations against defendants Krista L. Kotlarz Watson and Paul Nathan Wright regarding certain Cyberco assets, including the Cyberco Account. In their respective plea agreements, Watson and Wright agreed to forfeit to the United States any interest they possessed in the assets or funds identified in Count 10 of the superseding indictment. On September 24, 2007, the district court entered a preliminary order of forfeiture with regard to these assets, including the Cyberco Account. The district court further ordered that notice of the forfeiture be published in accordance with 21 U.S.C. § 853(n)(1).

On December 10, 2007, having received notice of the criminal forfeiture action, Huntington filed a verified petition of claim, asserting that it had a right to, and a direct ownership interest in, a portion of the forfeited property—namely, the funds in the Cyberco Account. Huntington claimed that, at that time it filed the petition, Cyberco remained indebted to Huntington in the amount of $926,162.57, that Cyberco had defaulted on its obligations to Huntington by providing Huntington with fraudulent financial statements and by failing to make payments as required, and that Huntington was entitled to the funds in the Cyberco Account pursuant to its security agreement with Cyberco. After holding a hearing on the third-party interests asserted in the forfeited property, the district court found that Huntington did not have a legal right, title, or interest that rendered the order of forfeiture invalid in whole or in part under 21 U.S.C. § 853(n)(6)(A). The district court then entered a final order of forfeiture, forfeiting all the assets listed in Count 10 of the superseding indictment—including the Cyberco Account—to the United States as having been derived from the proceeds obtained directly or indirectly as a result of mail fraud, and/or bank fraud, or a conspiracy to commit such offenses.

Huntington then filed a motion to alter or amend the judgment requesting that the district court modify its opinion and order and grant its petition for claim, arguing that it was entitled to relief under 21 U.S.C. § 853(n)(6)(B) because it was a bona fide purchaser for value (“BFP”) of its security interest in the funds in the Cyberco account. The district court denied the motion, finding that Huntington had waived its bona fide purchaser argument by failing to raise it earlier. Huntington appealed this ruling, and this court found that Huntington had not waived the argument and remanded the issue so that the district court could consider the merits of Huntington's claim that it qualified as a BFP under § 853(n)(6)(B). United States v. Huntington Nat'l Bank, 574 F.3d 329, 334 (6th Cir.2009).

On remand, the district court reached the merits of Huntington's § 853(n)(6)(B) argument and again denied Huntington's claim. It noted that the term “ bona fide purchasers” was a legal term of art and that it should not be given an unnatural meaning for the purpose of 21 U.S.C. § 853(n)(6)(B). The district court further noted that BFP terminology is not found in Article 9 of the Uniform Commercial Code (“UCC”)—the article which governs Huntington's rights as a secured creditor. Finally, after finding the cases that Huntington relied upon in arguing that it was a BFP distinguishable because they involved security interests in real estate or tangible personal property, the district court “decline[d] to broaden the narrow class of parties Congress intended to protect in § 853(n)(6)(B) by unnaturally extending the [BFP] exception to include intangible deposit accounts.” It held that Huntington was not a bona fide purchaser for value of the Cyberco Account and reaffirmed the final order of forfeiture and the order denying Huntington's motion for reconsideration.

II.

Huntington appeals the district court's ruling that, as a matter of law, the BFP exception to criminal forfeiture in 21 U.S.C. § 853(n)(6)(B) does not apply to its secured interest in the Cyberco Account. This issue is a question of law that this court reviews de novo. United States v. Harris, 246 F.3d 566, 570 (6th Cir.2001).

Huntington argues that because it purchased a valid security interest in all of Cyberco's assets by extending a line of credit and loans to Cyberco and because it was unaware of Cyberco's fraud until the funds in the Cyberco Account were seized, Huntington is a BFP of this security interest in the Cyberco Account under § 853(n)(6)(B). Huntington asserts it is therefore entitled to the return of the forfeited Cyberco Account proceeds.

The criminal forfeiture statute provides that all right, title, and interest in property subject to forfeiture “vests in the United States upon the commission of the act giving rise to forfeiture under this section.” 21 U.S.C. § 853(c). Thus, “[a]fter the commission of the criminal acts, title to the forfeitable property, by operation of the relation-back clause, actually belongs to the government.” Harris, 246 F.3d at 575 (quoting United States v. Lavin, 942 F.2d 177, 186 (3d Cir.1991)). Congress, however, carved out two exceptions to this relation-back clause in 21 U.S.C. § 853(n) to protect the rights of certain innocent third parties. See id. at 574. These exceptions ensure that through the relation-back doctrine, “the government steps into the shoes of the defendant acquiring only the rights of the defendant at the time of the criminal acts, and nothing more.” Id. at 575–76 (citing Lavin, 942 F.2d at 185–86).

At issue in this case is the second of these exceptions, which provides that property cannot be forfeited if “the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section.” 21 U.S.C. § 853(n)(6)(B). This bona fide purchaser exception protects a third party who acquires a legal interest in property for value after the acts giving rise to the forfeiture have occurred and who had no reason to believe that the property was subject to forfeiture. See Harris, 246 F.3d at 574–75.

Federal law controls whether a party qualifies as a BFP under 21 U.S.C. § 853(n)(6)(B). Id. at 571 (holding that “this issue [of whether a lienholder claimant of prepayment premiums qualifies as a BFP under § 853(n)(6)(B) ] is ultimately one of federal law”); see also United States v. Timley, 507 F.3d 1125, 1130 (8th Cir.2007) (“If a court determines the claimant has an interest in the property under the law of the jurisdiction that created the property right, then ... it must next look to federal law, i.e., to 21 U.S.C. § 853(n)(6), to determine if the claimant will prevail in the ancillary proceeding.”). Although this court has cautioned that the term “bona fide purchaser for value” in subsection (n)(6)(B) should not be given an “unnatural meaning,” the statute itself requires that the term be liberally construed. 21 U.S.C. § 853( o ) (“The provisions of this section shall be liberally construed to effectuate its remedial purposes.”); United States v. Campos, 859 F.2d 1233, 1237–38 (6th Cir.1988) (holding that while the statute should be liberally construed, it would give the phrase “bona fide purchasers” an unnatural meaning to include unsecured creditors, since such creditors do not fit within the traditional definition of the term). Finally, we have noted that the bona fide purchaser exception is derived “essentially from hornbook commercial law” and reflects the common-law rule that an “ ‘innocent purchaser for...