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U.S. v. Lavin

filed: August 6, 1991; As Corrected August 6, 1991. Second Correction.

UNITED STATES OF AMERICA
v.
LAWRENCE W. LAVIN WMOT ENTERPRISES, INC., APPELLANT



On Appeal From the United States District Court for the Eastern District of Pennsylvania; D.C. Criminal No. 84-00388-01.

Becker, Nygaard and Higginbotham, Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge

This appeal derives from the criminal prosecution of Dr. Lawrence Lavin for federal drug and tax offenses. As part of Lavin's criminal sentence, the district court entered a forfeiture order encompassing all of his property derived from drug activity. Appellant WMOT Enterprises, Inc. ("WMOT") thereafter petitioned the court under 21 U.S.C. § 853(n)(6) to amend its forfeiture order. WMOT asserted that Lavin, together with one Mark Stewart, embezzled a large sum of money from the company, thus giving the company an interest in Lavin's forfeited property. However, because Lavin's drug trafficking began a full three years before the embezzlement, WMOT conceded that its interest in Lavin's forfeited property is superior to that of the government only if it is a "bona fide purchaser for value" under section 853(n)(6)(B). The district court held that "bona fide purchaser" status under subsection (B) arises only through advertent business transactions. Since WMOT acquired its interest in Lavin's estate through an inadvertent transaction (viz. embezzlement), the court dismissed WMOT's petition, and this appeal followed.

WMOT's appeal presents two issues, one jurisdictional and the other statutory. At the outset, we must determine whether a proceeding under section 853(n)(6) is criminal in nature, in which case Fed. R. App. P. 4(b) allows only ten days to appeal, or whether it is civil in nature, in which case Fed. R. App. P. 4(a)(1) allows sixty days to appeal if the United States is a party. The government argues that, because the district court's forfeiture order was part of Lavin's criminal sentence, a proceeding to amend that order is criminal, and WMOT's notice of appeal, which was filed fifty-four days after the district court dismissed its petition, was untimely filed under Rule 4(b). We disagree, and hold that a proceeding under section 853(n)(6) is civil in nature, and hence that WMOT's appeal was timely filed under Rule 4(a)(1).

On the merits, we agree with the district court that a victim of embezzlement lacks standing to petition the court under section 853(n)(6)(B). In light of the relevant statutory language, legislative history, and decided cases, we hold that, in order to qualify as a "bona fide purchaser" under subsection (B), the petitioner must acquire its interest in the forfeited assets through an advertent, contractual transaction, as opposed to an inadvertent, tortious transaction like embezzlement. We therefore will affirm the district court's dismissal of WMOT's petition under section 853(n)(6)(B).

I. FACTS AND PROCEDURAL HISTORY

WMOT, incorporated in Pennsylvania in 1971, originally was engaged in the business of producing musical recordings and leasing the rights to those recordings in exchange for royalties. In late 1980, WMOT began to experience a severe cash flow crunch. Unable to obtain sufficient credit, WMOT entered into an agreement with TEC Records, Inc. ("TEC Records"), a Pennsylvania corporation controlled by Mark Stewart. Under the agreement, TEC Records acquired 60% of WMOT's stock in consideration for its assumption of all of WMOT's outstanding liabilities. In addition, Stewart, who was able to secure a line of credit for WMOT from Bank Leumi Le-Israel B.M. ("Bank Leumi"), assumed effective control of the company, becoming both an officer and the chairman of its board of directors.

Stewart's arrival at WMOT precipitated the company's downfall. Between January and September of 1981, Stewart deposited approximately $3,354,000, including $1,440,000 of WMOT funds, into an account at Bank Leumi denominated the Mark Stewart Real Estate Escrow Account ("Escrow Account"). Stewart's deposits of WMOT funds were made without the knowledge or approval of WMOT's other officers and directors. During this very same time period, Stewart transferred approximately $440,000 from the Escrow Account to Dr. Lawrence Lavin. Lavin used this money to purchase such items as luxury dwellings, an automobile, a swimming pool, and a seat on the Philadelphia Stock Exchange.

Because of Stewart's predations, WMOT was forced to file a Chapter 11 bankruptcy petition in 1982. Alan Cohen, Michael Goldberg, and Jeffrey and Mark Salverian, WMOT's present owners, purchased the company in November of 1984 pursuant to a plan of reorganization. At the time of the purchase, WMOT's recording business was virtually defunct. The primary asset of the company therefore was a potential cause of action against Bank Leumi and Stewart to recover the funds that had been diverted from WMOT in 1981. WMOT filed this lawsuit on November 2, 1984, and a few days later, amended its complaint to include Lavin. WMOT eventually settled with Bank Leumi for approximately $1.3 million.

Meanwhile, Lavin was indicted on federal drug charges on September 10, 1984, and on October 1, 1984, was indicted on federal tax charges. He was released on bail and, shortly afterward, became a fugitive. In February of 1985, WMOT brought a separate action in bankruptcy court against Lavin and his wife, Marcia, seeking a declaration that Lavin was a fugitive and was indebted to WMOT. This lawsuit resulted in a default judgment being entered against the Lavins in the amount of $355,385.71. The bankruptcy court also ordered that the Lavins be deemed constructive trustees for the benefit of WMOT of all real property titled in their names.

Over a year later, Lavin was apprehended. Following the return of a superseding indictment, he pled guilty to violating federal drug and tax laws, 21 U.S.C. §§ 848, 846, 843(b) and 841(a)(1), and was sentenced to twenty-two years in prison. As part of his plea agreement, Lavin agreed to forfeit all of his property associated with or derived from his drug activity. He specifically agreed to forfeit certain assets, such as real estate holdings and numerous bank accounts, that he previously had identified to the FBI as proceeds from his drug trafficking and that were listed in an addendum to his plea agreement. At sentencing, the district court entered an order of forfeiture under 21 U.S.C. § 853 encompassing these enumerated assets.

Seven months later, WMOT petitioned under 21 U.S.C. § 853(n) for a hearing to adjudicate the validity of its interest in Lavin's forfeited property. The petition requested that the forfeiture order be amended so that $355,385 of the assets seized by the government as proceeds from drug trafficking would be turned over to WMOT in satisfaction of its default judgment against the Lavins. The government responded by moving to dismiss WMOT's petition for lack of standing under 21 U.S.C. § 853(n)(6).

II. THE DISTRICT COURT'S OPINION

Title 21 U.S.C. § 853(n)(6) recognizes certain third-party interests in assets that are subject to forfeiture. More specifically, section 853(n)(6) instructs the district court to amend its order of forfeiture if a petitioner demonstrates 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 sole issue confronting the district court was whether WMOT had established a prima facie case under subsection (B), for WMOT disavowed any claim under subsection (A).*fn1 To make out a prima facie case under section 853(n)(6)(B), the petitioner must demonstrate that: (1) it had a legal "right, title, or interest in the [forfeited] property;" (2) it was a "bona fide purchaser for value of the right, title, or interest in the [forfeited] property;" and (3) it was "at the time of the purchase reasonably without cause to believe that the property was subject to forfeiture." 21 U.S.C. § 853(n)(6)(B).

With respect to the first requirement, the district court held that WMOT had, at this juncture, adduced sufficient proof to establish a prima facie case that WMOT had a legal "right, title, or interest" in Lavin's forfeited property.*fn2 The court next examined whether the transaction whereby WMOT acquired its legal interest in Lavin's forfeited property constituted a "bona fide purchase [] for value." As a preliminary matter, the court had to identify the relevant "purchase." WMOT argued that the "purchase" occurred in September of 1984, when the present owners of WMOT purchased the company pursuant to the plan of reorganization. The district court, however, rejected this theory, emphasizing that the claim against Lavin's property belonged to WMOT, not its present shareholders:

If WMOT has a cognizable claim against Lavin, it is a claim assertible by way of [a] claim against the forfeited property, without regard to whether WMOT was sold in the course of the reorganization proceedings to persons other than persons previously connected with WMOT.

Id. at 1071.*fn3 The district court instead concluded that the operative "purchase" occurred in 1981 when Stewart allegedly transferred to Lavin the funds that he had embezzled from WMOT. Neither party appeals these two aspects of the district court's ruling.

Turning to the events of 1981, the district court rejected WMOT's contention that Stewart's siphoning of funds from WMOT accounts and subsequent transfers to Lavin constituted a bona fide purchase within the meaning of the statute. The court stated: "To [so] characterize the 1981 events seems to me to put pressure on the language of the statute beyond what it would reasonably bear." Id. at 1072. Noting that Congress has offered very little guidance as to the meaning of the phrase "bona fide purchaser for value," the district court turned to the three decided cases that have construed this language, see United States v. Campos, 859 F.2d 1233 (6th Cir. 1988); United States v. Reckmeyer, 836 F.2d 200 (4th Cir. 1987); and United States v. Mageean, 649 F. Supp. 820 (D. Nev. 1986), aff'd, 822 F.2d 62 (9th Cir. 1987).

Although these cases primarily address a slightly different question -- i.e., whether a general, unsecured creditor can have a "legal right, title, or interest" in forfeited property -- the district court found a common thread running through all of them. 745 F. Supp. at 1072. They all involved what it described as advertent (as opposed to inadvertent) transactions. The court stated:

The decided cases do not offer instances in which a claim which arises inadvertently is found to be cognizable under ...


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