UNITED STATES OF AMERICA v. 101 HOUSECO, LLC; JAMES HOUSE; DAVID LONICH
Nos. 18-10305, 18-10370, 19-10043
United States Court of Appeals for the Ninth Circuit
January 10, 2022
Before: Andrew D. Hurwitz and Daniel A. Bress, Circuit Judges, and Clifton L. Corker, District Judge. Opinion by Judge Bress.
D.C. Nos. 3:14-cr-00329-SI-1, 3:14-cr-00139-SI-2
FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Appeal from the United States District Court for the Northern District of California Susan Illston,
Argued and Submitted February 10, 2021 San Francisco, California
Filed January 10, 2022
Before: Andrew D. Hurwitz and Daniel A. Bress, Circuit Judges, and Clifton L. Corker,* District Judge.
Opinion by Judge Bress
SUMMARY**
Criminal/Forfeiture
The panel affirmed the district court‘s dismissal of Intervener 101 Houseco, LLC‘s ancillary petitions challenging the district court‘s forfeiture order in two criminal cases, asserting that the criminal defendants lacked a forfeitable interest in the property.
The panel considered whether a third party may raise such a challenge or whether it is limited to arguing under
COUNSEL
John D. Cline (argued), Law Office of John D. Cline, San Francisco, California, for Intervenor-Appellant.
Francesco Valentini (argued), Trial Attorney; Matthew S. Miner, Deputy Assistant Attorney General; Brian A. Benczkowski, Assistant Attorney General; Criminal Division, Appellate Section, United States Department of Justice, Washington, D.C.; Adam A. Reeves, Robert David Rees, and David B. Countryman, Assistant United States Attorneys; David L. Anderson, United States Attorney; United States Attorney‘s Office, San Francisco, California; for Plaintiff-Appellee.
OPINION
BRESS, Circuit Judge:
101 Houseco, LLC intervened in two criminal cases to challenge the district court‘s forfeiture order, asserting that the criminal defendants lacked a forfeitable interest in the property. The princiрal question we consider is whether a third party may raise such a challenge or whether it is limited to arguing under
We hold—agreeing with every circuit to have considered this question—that a third party in a criminal forfeiture proceeding may not relitigate the antecedent forfeitability question, but is instead restricted to the two avenues for relief that
I
David Lonich, James House, and others were involved in a complex fraud scheme designed to secure title to Park Lane Villas East (PLV East), a real-estate development in Sonoma County, California.1 Bijan Madjlessi, a now-deceased real-estate developer, originally owned the property, which was secured through a construction loan of more than $30 million from IndyMac, a financial institution.
After Madjlessi defaulted on the IndyMac loan, he and Lonich (Madjlessi‘s lawyer) came up with a plan to regain control of PLV East. IndyMac was in FDIC conservatorship and the FDIC was auctioning off the loan. But FDIC rules prohibited Madjlеssi from bidding on his own defaulted note. To get around this, Lonich and Madjlessi had a straw buyer bid on the loan and then covertly return PLV East back to Madjlessi‘s control.
Madjlessi owed James House over $200,000 for contracting work performed at PLV and other projects. Madjlessi and
To carry out the scheme, Lonich created 101 Houseco as an LLC with twо members: House owned 80.1% and 101 Park Lane, LLC—an LLC held by House but controlled by Lonich—owned the remaining 19.9%. Madjlessi and Lonich then conspired with Sean Cutting and David Melland, officers at Sonoma Valley Bank (SVB), to assist House in securing a fraudulent loan for 101 Houseco.
Lonich arranged for House to submit false documentation in the FDIC auction process certifying that Madjlessi was not involved in the bid. 101 Houseco then used the SVB loan to bid at the auction. After 101 Houseco prevailed at the auction, it foreclosed on the Madjlessi note and acquired clear title to PLV East.
Despite House being 101 Houseco‘s owner on paper, the 101 Houseco operating agreement gave Lonich actual control over that entity. Lonich exclusively controlled 101 Houseco‘s bank accounts and any funds that PLV East generated. Lonich also could appoint, fire, and replace 101 Houseco‘s members and managers. Lonich used that power to appoint himself 101 Houseco‘s sole manager. And even after he was convicted on federal criminal charges, Lonich continued to receive monthly payments from revenue generated by PLV East.
After House pleaded guilty and a jury separately convicted Lonich, Cutting, and Melland of various federal crimes, the district court entered a preliminary order forfeiting PLV East. See
The district court rejected 101 Houseco‘s petitions. Noting that “there was considerable evidence that Lonich and Madjlessi created 101 Houseco, LLC in order to carry out the fraud and the money laundering,” the district court found thаt House and Lonich had forfeitable interests in PLV East because 101 Houseco was a sham entity, and its corporate form should therefore be disregarded. The court determined that House had a forfeitable interest through his legal ownership of PLV East during the relevant time frame, and that Lonich had a forfeitable interest because he exercised control over the property.
After rejecting 101 Houseco‘s ancillary petitions, the district court entered final forfeiture orders in both cases. 101 Houseco now appeals. The district court stayed the sale of PLV East pending the resolution of these consolidated appeals.
II
In considering ancillary criminal forfeiture proceedings, we review “the district court‘s findings of fact for clear error and its legal conclusions de novo.” United States v. Nava, 404 F.3d 1119, 1127 n.3 (9th Cir. 2005). The district court dismissed 101 Houseco‘s petitions on the merits because it found that House and Lonich had forfeitable interests in PLV East. It did not addrеss the government‘s threshold argument that 101 Houseco could not challenge forfeitability in a third party proceeding.
A
“Criminal forfeiture statutes empower the Government to confiscate property derived from or used to facilitate criminal activity.” Honeycutt v. United States, 137 S. Ct. 1626, 1631 (2017). For House‘s and Lonich‘s crimes of conviction, the government may seek forfeiture of criminally obtained proceeds. See
The Federal Rules of Criminal Procedure and
A third party may not challenge the forfeiture order in the preliminary forfeiture proceedings or through a separate lawsuit. Under
A third party wishing to challenge a district court‘s criminal forfeiture order must do so in an ancillary proceeding under
If, after [a] hearing, the court determines that the petitioner has established by a preponderance of the evidence that—
(A) the petitioner has a legal right, title, or interest in the property, and such right, title, or interest renders the order of forfeiture invalid in whole or in part because the right, title, or interest was vested in the petitioner rather than the defendant or was superior to any right, title, or interest of the defendant at the time of the commission of the acts which gave rise to the forfeiture of the property under this section; or (B) 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;
the court shall amend the order of forfeiture in accordance with its determination.
B
101 Houseco argues, as it did below, that House and Lonich never sufficiently owned PLV East, so the district court could not order the property forfeited as obtained through the proceeds of their offenses. Effectively, 101 Houseco seeks to invalidate the district court‘s original forfeiture order, with thе result that ownership of PLV East would presumably remain with 101 Houseco. The problem, however, is that this “argument is not [101 Houseco‘s] to make.” United States v. Fabian, 764 F.3d 636, 637 (6th Cir. 2014).
101 Houseco must have statutory standing to bring its claim. The question is thus whether 101 Houseco has a right of action—a legally recognized remedial right—to obtain the relief it seeks. See Lexmark Int‘l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125, 127–28 & n.4 (2014). A statute or some other source of law must give a petitioner the right to sue to redress his claimed injury. See Id. at 128–29. Here, the only possible basis for 101 Houseco‘s claim is statutory. To answer whether 101 Houseco has statutory standing, we therefore employ “traditional principles of statutory interpretation” to determine whether Congress provided 101 Houseco a right of action to challenge the underlying forfeiture order. Id. at 128. It did not.
We read statutes (and the Federal Rules) in their most natural sense and as parts of a broader whole. See, e.g., Sturgeon v. Frost, 136 S. Ct. 1061, 1070 (2016) (“It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” (quoting Roberts v. Sea-Land Servs., Inc., 566 U.S. 93, 101 (2012))); United States v. Petri, 731 F.3d 833, 839 (9th Cir. 2013) (“Because the Federal Rules of Criminal Procedure, once effective, have the force and effect of law . . . we apply ‘traditional tools of statutory construction’ to interpret them.” (citing Beech Aircraft Corp. v. Rainey, 488 U.S. 153, 163 (1988))).
Here, the statutory scheme is clear, providing that a third party may not challenge a forfeiture order “[e]xcept as provided in subsection (n).”
That is consistent with the Federal Rules of Criminal Procedure. Those Rules similarly require thе district court to enter a preliminary forfeiture order “without regard to any third party‘s interest in the property.”
In harmony with the statutory provisions, the Federal Rules thus direct that a third party is limited to those challenges that Congress has allowed. And Congress has allowed only two such challenges, which do not include a claim that the property was not forfeitable in the first place. An 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.”
Although we have not previously addressed this precise question, our precedents strongly forecast the conclusion. In United States v. Hooper, 229 F.3d 818 (9th Cir. 2000), we stated that “[t]he criminal forfeiture statute . . . protects only two types of trаnsferees of forfeitable property: bona fide purchasers and those whose interest in the property antedated the crime.” Id. at 822 (emphasis added). Several years later, in United States v. Nava, 404 F.3d 1119 (9th Cir. 2005), we similarly explained that “[t]he petitioner [in an ancillary proceeding] may prevail only upon showing, by a preponderance of the evidence, that he possessed a vested or superior legal right, title, or interest in the property at the time the criminal acts took place, or that he was a bona fide purchaser for value.” Id. at 1125 (emphasis added). Then, in United States v. Liquidators of European Federal Credit Bank, 630 F.3d 1139 (9th Cir. 2011), we observed that “[m]any legal sources . . . support the government‘s view” that ”
Our holding is also in line with the other circuits to have addressed the question, all of which agree that
Turning now to the two grounds for relief that
Nor was 101 Houseco a bona fide purchaser. A bona fide purchaser, at the time of the purchase, must not have reasonable сause “to believe that the property was subject to forfeiture.”
III
101 Houseco protests that interpreting
The Supreme Court has already rejected a similar argument. In Libretti v. United States, 516 U.S. 29 (1995), the defendant argued that, before accepting a guilty plea, the district court must make a factual inquiry into the basis for the forfeiture order. Id. at 37–38. Such an inquiry, he argued, was “essential to preserving third-party claimants’ rights” because a “defendant who has no interest in particular assets . . . will have little if any incentive to resist forfeiture of those assets, even if there is no statutory basis for their forfeiture.” Id. at 44. The defendant further asserted that
Two of our sister circuits have since held that Libretti resolves the due process challenge that 101 Houseco raises here. See United States v. Dong Dang Huynh, 595 F. App‘x 336, 340-41 (5th Cir. 2014) (“The Supreme Court‘s rejection of a due-process argument concerning
Other precedents confirm this. To show a procedural due process violation, 101 Houseco must prove “two distinct elements: (1) a deprivation of a сonstitutionally protected liberty or property interest, and (2) a denial of adequate procedural protections.” Brewster v. Bd. of Educ. of Lynwood Unified Sch. Dist., 149 F.3d 971, 982 (9th Cir. 1998).
Even if 101 Houseco had a legitimate property interest in PLV East (it did not),
Moreover, third parties may also petition the Attorney General for discretionary relief to mitigate, remit, or restore a forfeited property or take “any other action to protect the rights of innocent persons which is in the interest of justicе.”
101 Houseco nonetheless points to two cases to argue that
Reckmeyer dealt with the scope of “bona fide purchaser for value” under
Daugerdas likewise does not suggest that third parties may challenge the antecedent question of whether the property was forfeitable. It dealt with a third party‘s due process challenge for a defendant forfeiting “substitute property,” 892 F.3d at 553–58, which involves a distinct set of statutory provisions. See
AFFIRMED.