DSI ASSOCIATES LLC v. U.S.

SACK, Circuit Judge.

To resolve this appeal, we must determine whether a general creditor may intervene in a criminal forfeiture proceeding to assert its alleged rights to property subject to a criminal order of forfeiture or challenge the underlying validity of the forfeiture order, and if so, how.

BACKGROUND

On December 19, 2003, the defendant, Daniel L. Gordon, pled guilty in the United States District Court for the Southern District of New York (Gerard E. Lynch, Judge) to three counts of an information (the "Information") charging him with undertaking an elaborate scheme to defraud his employer, Merrill Lynch Capital Services, Inc., and Merrill Lynch & Co. (collectively "Merrill Lynch") of many millions of dollars. Count One charged him with wire fraud in violation of 18 U.S.C. § 1343. Count Two charged him with laundering the proceeds of the wire fraud in violation of 18 U.S.C. § 1956(a)(1)(B)(I). And Count Three charged him with conspiring to falsify Merrill Lynch's books and records in connection with the sale of its energy trading unit, Global Energy Markets ("GEM"), in violation of 18 U.S.C. § 371.1 The Information also included "forfeiture allegations" relating to the fraudulently obtained money.

According to the Information, in or before 2000, Merrill Lynch entered into a $500 million long-term energy call agreement with the Williams Energy Marketing and Trading Company. Merrill Lynch sought insurance to hedge against that obligation. In response, Gordon used an entity he had created and operated, Falcon Energy Holdings, S.A. ("Falcon"), to negotiate a fraudulent energy insurance contract with Merrill Lynch. On or about August 25, 2000, Merrill Lynch entered into the purported 11-year energy insurance agreement with Falcon, transferring approximately $43 million, its only payment pursuant to that agreement, to Falcon's bank account, which Gordon had opened for it in Switzerland.2

At about the same time, Gordon incorporated Ostrich Capital Partners, Inc. ("Ostrich"), in the Marshall Islands. On or about September 21, 2000, Gordon transferred approximately $33 million from the Falcon account in Switzerland to an Ostrich account at the same bank. Gordon subsequently made several additional transfers from the Falcon account to accounts in the United States, including a total of $30 million to a bank account in New York in the name of Kings Holdings, LLC ("Kings Holdings"), a Delaware corporation, all the outstanding shares of which Gordon owned. These transfers underlie the money laundering charge against Gordon.

On or about November 14, 2000, Gordon used funds from Kings Holdings' New York bank account to purchase from the appellant DSI Associates LLC ("DSI") seventy percent of the outstanding shares of Daticon, Inc. ("Daticon"), a private document-management services company located in Connecticut. Kings Holdings acquired 7,923 of the 11,318 outstanding shares of Daticon from DSI for nearly $23 million in cash and an unsecured promissory note of $4 million. Gordon became chairman of Daticon's board of directors and received a salary and other income from the company from sometime in 2000 to sometime in 2002. DSI continued to hold thirty percent of Daticon's outstanding shares.

The Criminal Investigation and the Promissory Note

After learning of Gordon's scheme, representatives of the United States Attorney's office in Manhattan negotiated with representatives of DSI with a view toward finding a neutral third party to purchase all the shares of Daticon—those held by Kings Holdings and those held by DSI. The government intended to seize Kings Holdings' portion of the proceeds in a forfeiture proceeding as part of its planned criminal prosecution of Gordon.

On July 18, 2003, while negotiations with the government were proceeding, DSI filed suit against Kings Holdings and Gordon in Connecticut state court. DSI alleged that the two had defaulted on the unsecured promissory note that was a part of the consideration they paid to DSI for the Daticon stock. At the same time, DSI sought and received an ex parte prejudgment attachment on $5 million worth of Kings Holdings' assets.

On August 6, 2003, DSI and Kings Holdings settled their dispute and terminated the Connecticut proceedings. Under the settlement, the prejudgment attachment was vacated and in its place Kings Holdings executed a non-negotiable, unsecured demand promissory note for $2.5 million (the "Settlement Note" or the "Note"). The settlement agreement provided that the Settlement Note could be enforced by a claim against the proceeds of a sale of Daticon, except in the event that the government placed any such proceeds in an escrow account or initiated a forfeiture proceeding against Kings Holdings. The parties had received notice from the government, however, that it intended to initiate forfeiture proceedings that would include any Daticon sale proceeds. They therefore agreed that if DSI attempted to collect on the Settlement Note from the proceeds of the sale of Daticon after such a proceeding had been initiated, it would do so within the "context of" the criminal forfeiture proceeding unless the United States Attorney for the Southern District of New York "consented to any other means of collection." Letter Agreement dated Aug. 6, 2003, at 1.

In September 2003, pursuant to an arrangement with the government, Kings Holdings and DSI sold their shares of Daticon to a neutral third party3 with the active monitoring and approval of the government. Approximately $22.9 million of the sale proceeds were immediately placed in a government account pending forfeiture proceedings. Approximately $6.5 million of the proceeds were deposited in an escrow account (the "Escrow Account"), to be held there until the end of the following year, to provide for post-acquisition contingencies specified in the purchase agreement, which primarily related to the anonymous third-party purchaser. The remaining $6 million was transferred into a separate escrow account (the "Separate Escrow Account") until December 26, 2003, to be available in the event that post-acquisition challenges arose relating to Gordon's ownership and control of Kings Holdings. If no challenges were made by that date, the money would be transferred from the Separate Escrow Account to a government account awaiting forfeiture.

On October 15, 2003, after making a demand for payment in full of the Settlement Note, DSI filed another complaint in Connecticut state court based on the Note. DSI applied to the court for a second ex parte prejudgment attachment order against the sale proceeds that had been put into escrow funds in the amount of $2.5 million, plus interest. That day, the Connecticut court entered a prejudgment attachment for $2.5 million against the Separate Escrow Account.4 On December 26, 2003, when no claims other than those embodied in the court's attachment order on the $6 million Separate Escrow Account funds had been made, that amount less the $2.5 million that remained the subject of the prejudgment attachment was paid into the government account. The $2.5 million apparently remains in the Separate Escrow Account.

Gordon's Guilty Plea, Forfeiture, and Ancillary Proceedings

Meanwhile, on December 19, 2003, Gordon pled guilty to all three charges contained in the Information. Pursuant to a written plea agreement, he agreed to forfeit the $43 million he initially received pursuant to the fraudulent scheme, as well as any interest in property derived from proceeds traceable to the wire fraud offense or involved in the money laundering offense. On February 20, 2004, as part of Gordon's sentence, the district court entered a Preliminary Order of Forfeiture requiring the defendant to forfeit $43 million and any right, title, and interest in specific property described in the Preliminary Order.

Title 21 U.S.C. §§ 853(n)(1) and (2) set forth the procedure for asserting, in an ancillary proceeding, a third-party claim with respect to property subject to a criminal order of forfeiture:

21 U.S.C. § 853(n)(1), (2).

Pursuant to section 853(n)(1), the government sent notice to counsel for Merrill Lynch, Allegheny Energy Supply Company LLP ("Allegheny"), and DSI, as "person[s] known to have alleged an interest in the property that is the order of forfeiture." 21 U.S.C. § 853(n)(1). Under the statute, the recipients of the notice had thirty days in which to "petition the court for a hearing to adjudicate the validity of his alleged interest in the property." Id. § 853(n)(2).

The substantive portion of section 853(n) provides:

Id. § 853(n)(6), (7).

Merrill Lynch and Allegheny filed timely petitions in response to the section 853(n) notice, asserting a prior superior interest in some of the forfeited property. See id. § 853(n)(6)(A). On June 10, 2005, the district court endorsed a Stipulation and Order of Settlement that provided for Merrill Lynch and Allegheny to split the final amount forfeited—except for $10 million to be kept by the government5 —in return for the withdrawal of their petitions. The stipulation also provided that Merrill Lynch and Allegheny would divide equally the $2.5 million that remained in escrow pending resolution of the Connecticut state court proceeding if and when those funds were transferred from the Separate Escrow Account into the government account.

On October 24, 2005, the district court sentenced Gordon to 42 months' incarceration and entered a Final Order of Forfeiture.

DSI's Motion to Intervene

On September 29, 2004, more than five months after the thirty days in which to petition for relief under section 853(n) had elapsed, DSI moved to intervene in Gordon's criminal forfeiture proceeding pursuant to Rule 24 of the Federal Rules of Civil Procedure. DSI proffered two principal arguments in support of its motion: (1) the original $4 million promissory note used by Kings Holdings as consideration for the Daticon shares (subsequently reduced to the Settlement Note) was not tainted by the fraudulent scheme and therefore could not be forfeited because the district court did not have jurisdiction over the proceeds derived from, or traceable to, the equivalent proportion of Daticon stock;6 and (2) the district court did not have authority to enter an order forfeiting to the United States property that was the subject of the Connecticut court attachment. DSI conceded, however, that it was statutorily barred from intervening in the criminal proceeding under the terms of 21 U.S.C. § 853(k), which provides that, except as set forth in section 853(n), no party claiming an interest in property subject to forfeiture under section 853 may intervene in a trial or appeal of a criminal case involving such forfeiture, or bring an action against the government concerning the validity of the party's alleged interest in the property, after an indictment or information alleging that the property is subject to such forfeiture has been filed.7 DSI further conceded that, as a general unsecured creditor, it did not have standing to petition the court through the ancillary proceeding provided for in section 853(n).

The district court addressed the merits of the motion and denied it. First, it observed that despite the fact that Kings Holdings paid for the Daticon shares with approximately $23 million in cash that was traceable to the defendant's criminal conduct and a $4 million promissory note, DSI received all of the Daticon shares due to it and therefore retained "no legally[ ] cognizable interest in any portion of the [Daticon] shares," or the proceeds thereof, because it was, as it readily admitted, a general creditor with no specific claim on any of the forfeited property. United States v. Gordon, 2005 WL 2759845, at *2-*3, 2005 U.S. Dist. LEXIS 24897, at *7 (S.D.N.Y. Oct.13, 2005). As a general creditor, and as DSI and the government agreed, DSI did not have standing to initiate a section 853(n) proceeding to protect their interests.

Second, the district court pointed out that although the Fifth Amendment's Due Process Clause requires that any person who claims a legal interest in property subject to forfeiture receive notice and an opportunity to be heard, due process does not require "that persons claiming merely that they would be advantaged in some way if the defendant were allowed to keep more of his assets should be allowed to intervene to object to the forfeitability of assets admittedly belonging to the defendant." Id. 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *8. Assuming without deciding that Federal Rule of Civil Procedure 24 was applicable to Gordon's criminal proceeding, the district court therefore concluded that DSI "ha[d] no right to intervene under Rule 24(a) [of the Federal Rules of Civil Procedure], section 853(n), or any other provision of law." Id. 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *8-*9.

Third, the district court also denied DSI permissive intervention under Rule 24(b), concluding that such intervention would constitute an unwarranted interference in the "expeditious . . . adjustment of rights as between the defendant and the Government," which lies at the core of the criminal forfeiture provisions. Id. 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *8-*9.

Finally, the district court observed that DSI's motion to intervene was not its only recourse in pursuing satisfaction of the Settlement Note. Section 853(i) confers broad discretion on the Attorney General to take any action "to protect the rights of innocent persons which is in the interest of justice." Id. 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *10 (quoting 21 U.S.C. § 853(i)(1)) (emphasis and internal quotation marks deleted). The district court further noted that the government had specifically invited DSI to pursue such discretionary relief. Id. 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *10.

DSI appeals.

DISCUSSION

On appeal DSI argues that it has standing to intervene under Rule 24 of the Federal Rules of Civil Procedure. It contends that the district court exceeded its statutory forfeiture authority by including the untainted portion of the proceeds of the Daticon stock sale in the forfeited property. It further argues that to the extent that section 853(n) ancillary proceedings provide the exclusive means of pursuing its interest in the proceeds of the Daticon stock sale, the statute violates the Due Process Clause of the Fifth Amendment of the Constitution.8

I. Standard of Review

We review the denial of a motion to intervene under Rule 24 of the Federal Rules of Civil Procedure, whether as of right under Rule 24(a) or by permission under Rule 24(b), for abuse of discretion. See In re Holocaust Victim Assets Litig., 225 F.3d 191, 197 (2d Cir.2000). "Errors of law or fact may constitute such abuse." SG Cowen Sec. Corp. v. Messih, 224 F.3d 79, 81 (2d Cir.2000). We review de novo whether a party has standing to petition the district court for a hearing under 21 U.S.C. § 853(n), and, of course, all questions of statutory interpretation.9 United States v. Ribadeneira, 105 F.3d 833, 834 (2d Cir.1997) (per curiam).

II. DSI's Motion to Intervene under Rule 24

A. Title 21 U.S.C. § 853

1. Section 853 is the Exclusive Means for Third Parties to Intervene in Forfeiture Proceedings.

It is well established that third parties may not intervene during criminal forfeiture proceedings to assert their interests in the property being forfeited. See 21 U.S.C. § 853(k);10 United States v. McHan, 345 F.3d 262, 269 (4th Cir.2003) (observing that section 853 "provides that, until this sentence of forfeiture is entered, no party claiming an interest in the forfeited property may intervene in the criminal case"); see also United States v. Gilbert, 244 F.3d 888, 910 (11th Cir.2001) ("By specifically barring third-parties from intervening in the criminal trial [through the analogous Racketeer Influenced and Corrupt Organizations Law (`RICO') provision], 18 U.S.C. § 1963(k), it is clear that Congress intended section 1963(l) proceedings to provide the exclusive means for third-parties to assert their claims to forfeited property.").11 Rule 32.2 of the Federal Rules of Criminal Procedure, which pertains to procedures related to criminal forfeiture, also prohibits a third party from "object[ing] to [a] final [forfeiture] order on the ground that the third party had an interest in the property." Fed.R.Crim.P. 32.2(c)(2).

It is similarly well settled that section 853(n) provides the exclusive means by which a third party may lay claim to forfeited assets — after the preliminary forfeiture order has been entered. We have recognized that

De Almeida v. United States, 459 F.3d 377, 381 (2d Cir.2006) (quoting 21 U.S.C. § 853(k)) (alterations and emphasis in original); see also Libretti v. United States, 516 U.S. 29, 44, 116 S.Ct. 356, 133 L.Ed.2d 271 (1995) ("Once the government has secured a stipulation as to forfeitability, third-party claimants can establish their entitlement to a return of the assets only by means of the hearing afforded under 21 U.S.C. § 853(n).").12

2. DSI Lacks Standing Under 21 U.S.C. § 853(n).

As the district court pointed out, "[w]hile DSI's claim derives from the purchase of the shares [of Daticon], as a matter of law, having failed to retain a security interest in the shares, DSI is simply a general creditor of Kings [Holdings], and its claim to any specific property Kings [Holdings] may possess is no greater than that of any other such creditor." Gordon, 2005 WL 2759845, at *3, 2005 U.S. Dist. LEXIS 24897, at *7. DSI does not assert otherwise. As a general creditor of Kings Holdings and Gordon, DSI does not possess a "legal right, title, or interest in the property" that was forfeited as required for standing under section 853(n)(6)(A), nor can it show that it was a bona fide purchaser for value of any such right, title or interest, as required for standing under section 853(b)(6)(B). See Ribadeneira, 105 F.3d at 836. Without possessing such an interest "in" a "particular, specific asset" that is, or is part of, the forfeited property, DSI does not meet the statutory requirements for initiating an ancillary proceeding under section 853(n). Id. at 835-37; see also United States v. Schwimmer, 968 F.2d 1570, 1580-81 (2d Cir.1992) (holding that general creditors lack standing under 18 U.S.C. § 1963(l)(6)).

3. Rule 24 Does Not Provide an Alternative Means to Intervene.

DSI asserts, however, that it is not attempting to employ a section 853(n) petition here. It is not looking to "recover an alleged interest in forfeited property," Ribadeneira, 105 F.3d at 834, i.e., its alleged interest in the funds traceable to untainted shares of Daticon, for which section 853(n) would provide the proper mechanism. Instead, DSI contends, its motion to intervene seeks to challenge the validity of the forfeiture order as it was applied to those funds.

DSI cannot prevail, however, by reframing its argument as one challenging the underlying validity of the forfeiture order rather than the district court's denial of its efforts to assert its property interest in the funds traceable to untainted shares of Daticon. In either case, DSI is contending that the remaining funds owing under the Settlement Note belong to it, not Gordon. And the argument that the district court does not have the authority to order those funds forfeited because they belong to DSI is effectively the same argument as an assertion that DSI has a superior interest in those funds. Both are forbidden by section 853(k) unless they fall within the exception carved out by section 853(n).13 See also Fed.R.Crim.P. 32.2 Advisory Committee Note ("Th[e ancillary] proceeding does not involve relitigation of the forfeitability of the property; its only purpose is to determine whether any third party has a legal interest in the forfeited property.") DSI's attempt to participate in the forfeiture proceeding is thus foreclosed by its acknowledged inability to meet the requirements of section 853(n). It may not bypass this procedure by employing the Federal Rules of Civil Procedure, or, indeed, any other mechanism.14

B. Due Process

DSI contends that if, as we have here and elsewhere concluded, section 853(n) provides the exclusive means by which a third party can challenge a forfeiture order in court, yet DSI does not have standing to intervene under that section, DSI has been deprived of a property interest without a meaningful opportunity to be heard in violation of the Fifth Amendment's Due Process Clause; in other words, that the failure of section 853 to provide general creditors with such an opportunity to be heard renders the statutory scheme unconstitutional.15 This argument depends on three premises: first, that DSI has a property interest at stake that is subject to the requirements of due process; second, that the forfeiture order deprives it of that property interest; and third, that the deprivation has been imposed without due process of law. As for the first, we assume without deciding that DSI, through its attachment under Connecticut law of the Settlement Note or otherwise, has a property interest sufficient for it to invoke the Due Process Clause.16 As for the second, we conclude that, whether or not it does, DSI has not been deprived of any such property interest — at least not yet. We therefore do not reach the third question: whether, should the deprivation occur, it will violate the due process guaranty.17

Section 853(n) may be DSI's exclusive path to challenge the forfeiture order before the judicial entity which entered the order, but it is not DSI's only course of action available under the statute within which it may assert its interest in the forfeited property. Under section 853(i), the Attorney General maintains discretion to "take any . . . action to protect the rights of innocent persons which is in the interest of justice and which is not inconsistent with the provisions of this section." 21 U.S.C. § 853(i)(1). This non-judicial remedy confers upon the Attorney General the authority to rectify precisely the situation presented here: A third party that possesses an interest in forfeited property yet does not meet the standing requirements of section 853(n) may petition the Attorney General for redress in the "interest of justice." As the Third Circuit explained:

United States v. Lavin, 942 F.2d 177, 185 (3rd Cir.1991) (citing 21 U.S.C. § 853(i)) (emphasis in original); see also United States v. BCCI Holdings (Luxembourg), S.A., 46 F.3d 1185, 1192 (D.C.Cir.), cert. denied sub nom. Chawla v. United States, 515 U.S. 1160, 115 S.Ct. 2613, 132 L.Ed.2d 856 (1995) (concluding that the statutory scheme for RICO forfeiture proceedings "directs parties without an interest in specific property to seek relief from the Attorney General, not the court adjudging the forfeiture"). Indeed, the District of Columbia Circuit has similarly noted that while section 853 was intended to provide certain third parties with additional due process protections, "general creditors seem precisely the type of innocent persons Congress had in mind" when it included the non-judicial mechanism set forth by section 853(i) "to protect the rights of innocent persons." Id. at 1192 (quoting 18 U.S.C. § 1963(g)(1) (internal quotation marks omitted)).

As the district court rightly noted, DSI has not demonstrated that any such a request would be futile. Indeed, the government, which received $10 million from the forfeiture, specifically invited DSI to pursue this avenue of relief.

Perhaps at some future time DSI will be able to establish that it has exhausted all possible avenues for relief. If so, it might be able to argue persuasively that the availability of a remedy through the executive branch under section 853(i), and whatever other avenues it might pursue,18 are insufficient to satisfy the Due Process clause. But inasmuch as it has yet to demonstrate that it has finally been deprived of property, we need not determine whether any such deprivation would be constitutionally permissible.

CONCLUSION

We conclude that the district court acted within its discretion in denying DSI's motion to intervene, and that the denial did not violate the Fifth Amendment's Due Process Clause. The order of the district court is therefore affirmed.