Posted by Kathy Bazoian Phelps
When a Ponzi scheme breaks, the government rushes to forfeit the assets that constitute or are derived from proceeds traceable to the crime. At the same time, creditors, thinking that they had properly secured their claims, try to grab those very same assets for themselves.
A recent decision out of the Petters Ponzi scheme case highlights this battle, which has been raging in most of the pending Ponzi cases such as Bernard Madoff, Scott Rothstein, Marc Dreier and others. In United States v. Petters, 2012 U.S. LEXIS 57645 (Apr. 24, 2012), Crown Bank filed three petitions under 21 U.S.C. § 853(n) asserting interests in three assets that had been forfeited by the government.
As to the first asset, which was the Wisconsin Lodge, Crown had loaned money to Petters in 2008, and had taken back a security interest to secure the loan. Crown alleged that Petters executed and delivered a Security Agreement that provided “a 100% Membership Interest in Tam O’Shanter Lodge, LLC,” which LLC is “the sole owner of the [Wisconsin] Lodge.” From Crown’s perspective, it sounded good – a 100% interest in the company that owned 100% of the asset. From the government’s perspective, it wasn’t good enough. As a threshold matter, to have standing to even make a claim, section 853(n) requires that the claimant have a “legal interest” in the forfeited property. The government argued, and the court agreed, that Crown had an interest in the LLC, and not in the forfeited property itself. “The Verified Petition alleges only that Crown held an interest in the LLC, which is simply one level too far removed from the forfeited property to have an assertable legal interest here.” Id. at *7.
1 for the Government, 0 for Crown.
As to the other two assets, the Keystone and Plymouth properties, things were looking up for Crown part way through the court’s opinion. Crown clearly had a “legal interest” in these two assets, but the court noted that that “is only half the battle.” Crown also needed to demonstrate either “priority of ownership at the time of the offense . . . or that [it] subsequently acquired the property . . . as a bona fide purchaser for value.” 21 U.S.C. § 853(n)(6)(A)-(B). Crown made no attempt to demonstrate priority of ownership (since a third party cannot successfully assert priority if the property is proceeds of a criminal offense). Rather, Crown asserted that it was a bona fide purchaser for value, which, under Minnesota law, is "one who gives consideration in good faith without actual, implied, or constructive notice of inconsistent outstanding rights of others." The court observed that “under Minnesota law, acquiring an interest in property as security for an antecedent debt is a bona fide purchase for value.” This was Crown’s situation, so one would have expected a ruling in favor of Crown on these last two assets.
Instead, however, the court focused on a footnote in the Government’s brief, which stated that Crown "knew, or should have known, that the Keystone and Plymouth [P]roperties were subject to forfeiture." Id. at *14-15. This was enough for the court to put on the brakes and set the matter for further briefing on what Crown knew about the Petters’ fraud. We will have to wait to see the ultimate outcome of this battle.
The Government’s forfeiture rights are powerful and are being exercised with increasing frequency. An entire chapter of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes by Kathy Bazoian Phelps and Hon. Steven Rhodes is dedicated to discussion of the Government’s forfeiture powers. The discussion includes criminal and civil forfeiture proceedings, third party rights to assert claims in those same assets, the struggles between the Government and trustee and receivers seeking to administer the same assets, and efforts at cooperation and coordination in these types of proceedings.
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