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) [an enhanced version of this opinion is available to lexis.com subscribers],
Crown Bank filed three petitions under 21 U.S.C. § 853(n) [an annotated version of this statute is available to lexis.com
subscribers] asserting interests in three assets that had been forfeited by
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. The Ponzi Book is available for purchase
and more information about the book can be found at www.theponzibook.com.
articles at The
Bazoian Phelps is the co-author of The
Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes available for
purchase at www.lexisnexis.com/ponzibook.
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