United States v. Watts, 786 F.3d 152

Background

In 2010–2011 the government seized bank accounts belonging to Unalite Southwest, LLC (USW), identified as traceable to proceeds of Courtney Dupree’s bank-fraud conspiracy; a forfeiture allegation was included in the indictments under 18 U.S.C. § 982(a)(2).
After a Monsanto hearing the district court found probable cause to restrain $350,290.87 but not $633,499.24 (the “contested funds”) and ordered release of the contested funds to USW; the government stayed that order.
On August 11, 2011 USW (through Dupree’s attorney-in-fact) assigned all interest in the contested funds to De‑Petris & Bachrach, LLP (D & B) as partial payment/advance for Rodney Watts’s legal fees; D & B and Watts later petitioned as third-party claimants under 21 U.S.C. § 853(n).
Following Dupree’s conviction and a jury special verdict finding the seized accounts forfeitable, the district court entered a preliminary criminal forfeiture order and the government moved to dismiss petitioners’ ancillary petition.
The district court dismissed the petition: it held petitioners lacked a superior interest under § 853(n)(6)(A) (funds were proceeds that vested in the U.S. at the time of the offense) and could not plausibly show D & B was reasonably without cause to believe the funds were forfeitable under § 853(n)(6)(B).
On appeal this Court (a) held the government is a “creditor” under New York law and thus may challenge the assignment as a fraudulent conveyance, (b) found petitioners have pleaded a plausible legal interest sufficient for standing because insolvency/fraudulent-conveyance were not established on the face of the petition, (c) affirmed dismissal under § 853(n)(6)(A), but (d) reversed dismissal under § 853(n)(6)(B) and remanded for further proceedings.

Issues

Issue	Plaintiff's Argument (Watts/D & B)	Defendant's Argument (U.S.)	Held
Standing to contest forfeiture (fraudulent conveyance challenge)	Assignment to D & B was valid under NY law; government lacks status as a creditor to attack it	Government is a creditor by virtue of its forfeiture claim and may void fraudulent transfers	Court: Government qualifies as a creditor; but on petition facts the assignment cannot be dismissed as fraudulent at this stage (insolvency not established)
Superior interest under § 853(n)(6)(A)	D & B (via assignment) held a superior interest in the funds	Funds are proceeds that vested in the U.S. when the criminal act occurred, so no superior interest could have existed earlier	Court: Dismissed § 853(n)(6)(A) claim — proceeds arose after the crime and vested in the government; Willis exception (constructive trust) doesn’t apply here
Bona fide purchaser defense under § 853(n)(6)(B)	D & B acquired the funds after a Monsanto hearing that found no probable cause for restraint of the contested funds and thus reasonably lacked cause to believe they were forfeitable	D & B knew of the forfeiture allegation and Bill of Particulars identifying the accounts; attorney of record cannot reasonably be without cause	Court: Monsanto outcome can, in some circumstances, make an attorney reasonably without cause; petitioners plausibly alleged such facts so § 853(n)(6)(B) claim survives pleading stage
Whether USW funds could be forfeited under § 982(a)(2) when never in Dupree’s hands	Funds were deposited to USW (third party), not held by Dupree, so criminal forfeiture should not reach them	§ 982(a)(2) reaches property “constituting, or derived from, proceeds” obtained by the defendant even if held by third parties	Court: Rejected plaintiffs’ argument; De Almeida principle controls — § 982(a)(2) can reach proceeds held by third parties and petitioners cannot re‑litigate that under § 853(n)

Key Cases Cited

Monsanto v. United States, 924 F.2d 1186 (2d Cir. 1991) (establishes post‑indictment adversarial hearing standard for probable‑cause restraint of assets)
Caplin & Drysdale v. United States, 491 U.S. 617 (U.S. 1989) (attorneys’ claims to client funds and effect of indictment/notice of forfeiture)
Willis Mgmt. (Vt.), Ltd. v. United States, 652 F.3d 236 (2d Cir. 2011) (narrowly recognizes constructive‑trust exception for § 853(n)(6)(A))
Timley v. United States, 507 F.3d 1125 (8th Cir. 2007) (relation‑back doctrine: proceeds vest in the government when the criminal act occurs)
De Almeida v. United States, 459 F.3d 377 (2d Cir. 2006) (criminal forfeiture reaches property “involved in” or derived from proceeds of the offense even if held by third parties)
Contorinis v. United States, 692 F.3d 136 (2d Cir. 2012) (interpreting limits of forfeiture statutes in a civil‑forfeiture context; distinguished here)
Ribadeneira v. United States, 105 F.3d 833 (2d Cir. 1997) (standing under § 853(n) requires a legal interest)