On appeal from Superior Court, Law Division, Hudson County.
Petrella, D'Annunzio and Keefe. The opinion of the court was delivered by Petrella, P.J.A.D.
This appeal by American Banking Insurance Company of Florida (American) and Louis Russo Bail Bond Agency (Russo Agency) is from a Law Division decision which forfeited to the State certain real property owned by one Pedro Gonzalez. The property was encumbered by a mortgage given as security for a bond posted by American to ensure the appearance of Pedro Gonzalez in court on various drug charges.
Although Gonzalez owned the property at 364-366 Whiton Street in Jersey City (the property), when he was arrested on May 20, 1990, he did not reside there. One Roberto Costano, arrested at the same time as Gonzalez, resided there and was considered a co-conspirator with Gonzalez in a drug distribution scheme. A police search uncovered approximately 750 grams of cocaine on a window ledge in Costano's apartment.
Prior to posting the bond and accepting the mortgage, the Russo Agency conducted a title search on the property which indicated title was free and clear of liens, encumbrances and defects in title. It also sent an agent to view the property. No notice was posted to indicate the property was subject to forfeiture. On or about May 25, 1990, American and Russo Agency posted a $100,000 bail bond for Gonzalez. The mortgage to secure the bond, recorded May 29, 1990, described Gonzalez as mortgagor and American and Russo Agency as mortgagees.
On August 10, 1990, the Hudson County Prosecutor instituted a forfeiture action in the name of the State against the property of Gonzalez. Appellants were not a party to that action, nor given notice. See N.J.S.A. 2C:64-3c. On January
28, 1991, a default judgment was entered against the property which vested title "in the Prosecutor of Hudson County" as of February 22, 1990.*fn1 Thereafter, on June 3, 1991,*fn2 the prosecutor filed a complaint to settle the validity of the mortgage held by American and Russo Agency. An order to show cause was entered requiring them to show why they should not be enjoined from foreclosing or otherwise disposing of the property. A notice of lis pendens was filed with the Hudson County Register. American and Russo counterclaimed.
When the State moved for summary judgment*fn3 the trial court adjourned the return date of the order to show cause to the return date of the summary judgment motion. On that date the Law Division Judge declared the mortgage void and entered judgment in favor of the State. The trial court rejected the mortgagees' argument that their interests were protected by N.J.S.A. 2C:64-5 (hereinafter Section 5). Section 5 provides in part that a forfeiture shall not affect the rights of "any person holding a perfected security interest in property." Relying on One 1985 Nissan, 889 F. 2d 1317, 1320 (4th Cir.1989), and applying the relation back doctrine, the trial court ruled that Section 5 does not protect perfected security interests created after the criminal act giving rise to the forfeiture.
The Russo Agency and American argue on appeal that as holders of a perfected security interest in the property their interest is excepted from forfeiture by N.J.S.A. 2C:64-5. They also contend that equity demands that they not lose their
security interest in the property.*fn4
Forfeiture of property used in criminal activity is governed by N.J.S.A. 2C:64-1 et seq., as initially enacted by L. 1978, c. 95, effective September 1, 1979, as part of New Jersey's adoption of a "Code of Criminal Justice." Chapter 64 superseded a series of other statutes.*fn5
Prior to enactment of Chapter 64 of Title 2C, New Jersey case law generally held that title to contraband vested in the prosecuting agency as of the moment of the illegal act, leaving a subsequent taker with nothing to acquire or encumber. In Spagnuolo v. Bonnet, 16 N.J. 546, 109 A.2d 623 (1954), the dispute was between Essex County and the Internal Revenue Service (IRS) over title to money (contraband gambling proceeds) seized by the sheriff in a raid on a lottery operation. The IRS obtained a tax lien several weeks after the money was seized. It argued that the State only had a contingent property right until the order of forfeiture. The Court rejected this argument, stating:
Where a forfeiture is absolute under the statute, [ N.J.S.A. 2A:152-6 to 11, now repealed] as it is here, the judgment of condemnation or forfeiture when entered relates back to the Commission of the wrongful act and takes date from the wrongful acts, not from the date of sentence or decree. United States v. 1960 Bags of Coffee, 8 Cranch 398, 3 L. Ed. 602 (1814); In re Henderson's Distilled Spirits, 14 Wall 44, 81 U.S. 44, 20 L. Ed. 815 (1872), . . .
Spagnuolo held that under then established law a transfer of any interest after the illegal use would not defeat the forfeiture,
even a sale to a bona fide purchaser with no notice of such use. Id. at 560, 109 A.2d 623.
Likewise, in Farley v. $168,400.97, 55 N.J. 31, 259 A.2d 201 (1969), Hudson County contended one Joseph Moriarty forfeited moneys because of his gambling activities. As in Spagnuolo, the IRS asserted a tax lien, this time one day before the seizure of the money. The dispute was whether the contraband gambling receipts properly belonged to Hudson County or the IRS. No other claimants were involved. Farley considered it irrelevant that the interest of the IRS was created before the seizure or the order of forfeiture. "[T]he forfeiture takes place upon the occurrence of the forbidden act or omission unless the statute provides otherwise . . . ." Id. at 40, 259 A.2d 201.
The rule of a forfeiture judgment's relation back to the time of the offense is reflected in other cases. See State v. Cavassa, 228 N.J. Super. 204, 208, 549 A.2d 458 (App.Div.1988) (Only the judgment of forfeiture, once obtained relates back; forfeiture not allowed because State failed to bring forfeiture action within statutory period.); State v. Rodriguez, 138 N.J. Super. 575, 578, 351 A.2d 784 (App.Div.1976), aff'd o.b., 73 N.J. 463, 375 A.2d 659 (1977) (Relation back rule not applied because money was not established to have been contraband proceeds of gambling.). Significantly, a forfeiture action is still required in which all holders of an interest are entitled to notice and an opportunity to contest forfeiture and claim the applicability of a statutory exception. See Dragutsky v. Tate, 262 N.J. Super. 257, 620 A.2d 1065 (App.Div.1993). See also United States ...