It occasionally happens that a trustee seeks to avoid a
debtor's prepetition transfer of property as a fraudulent transfer and that
property is also subject to a government forfeiture proceeding. In that event,
can the trustee still follow the familiar path and file an adversary proceeding
in the bankruptcy court, or must the trustee jump into unfamiliar territory and
file a petition in forfeiture proceeding in the district court?
A recent opinion coming out of the Scott Rothstein Ponzi
scheme case concludes that in these circumstances, the trustee must pursue the
fraudulent transfer claim in the forfeiture process and that the trustee's
attempt to pursue it in the bankruptcy court after the entry of a final order
of forfeiture is barred by res judicata. Stettin
v. Alu (In re Rothstein Rosenfeldt
Adler, P.A.), 2012 Bankr. LEXIS 4472 (Bankr. S.D. Fla. Aug. 29, 2012). In
that case, the trustee in the bankruptcy case of Rothstein's law firm sought to
avoid a transfer of $301,000 that the law firm had made to the bodyguard of
Rothstein's wife to enable him to purchase a home. The bodyguard and his wife,
Joseph and Jody Alu, executed a note and a mortgage to Fifth Court LLC, an
entity owned by Rothstein. The trustee
also sought to avoid that note and mortgage.
The assets of Fifth Court, however, were the subject of a
district court forfeiture order in Rothstein's criminal case, stating that
Rothstein forfeited "[a]ll right, title and interest in Fifth Court and all
assets held by or owed to it." In the meantime, the Alus interpled with the
bankruptcy court sufficient funds to pay off the mortgage. As a result, the
dispute over those funds was really between the trustee and the government -
fraudulent transfer claim v. forfeiture order.
The government, relying on the specific language of the
forfeiture order, contended that the trustee's claim was a collateral attack
upon it. The trustee argued that he was not collaterally attacking the
forfeiture order or challenging government's claim to Fifth Court and its
assets but rather was asserting that Fifth Court, and therefore the government,
had no claim to the interpled funds because the note and mortgage were invalid.
The bankruptcy court found for the government and
dismissed the trustee's fraudulent transfer claim. The court held that an
ancillary proceeding under 21 U.S.C. § 853(n) "is the exclusive means for a
third party to claim an interest in forfeited property." The court also noted
that § 853(k) prohibits a third party from commencing an action at law or
equity against the government concerning the validity of an alleged interest in
the property outside of an ancillary proceeding. Because the trustee could have
filed a petition in the ancillary proceeding asserting his fraudulent transfer
claim and the invalidity of the note and mortgage but did not, the final order
of forfeiture extinguished the trustee's claim.
Interestingly, the trustee had actually filed a petition
in the forfeiture action, but only seeking the imposition of a constructive
trust over Fifth Court for an amount equal to funds that the law firm had
transferred to the Alus. The district court, however, had dismissed that claim.
It is unclear why the trustee had not asserted his fraudulent transfer claim in
the same petition. According to the bankruptcy court, that is precisely what
the trustee should have done.
The bankruptcy court's decision on this issue is not an
anomaly. It is consistent with prior case law. See, e.g., Uecker &
Assocs., Inc. v. L.G. Hunt & Assocs., Inc. (In re American Basketball League, Inc.), 317 B.R. 121, 128 (Bankr.
N.D. Cal. 2004) (holding that upon entry of the final order of forfeiture, the
government held good title to sales proceeds as substitute res and no petition
had been filed in the ancillary proceedings under 21 U.S.C. § 853(n) so the
fraudulent transfer claim to recover the proceeds was barred outside of the
forfeiture action under § 853(k)).
The lesson for bankruptcy trustees from these cases is
clear: Any avoidance action directed at forfeited property must be made in the
forfeiture action under 21 U.S.C. § 853(n) and not in the bankruptcy court.
Even though this will obviously be more challenging for trustees and their
counsel and probably outside of their comfort zones, their failure to abide
this lesson will likely mean the loss of the fraudulent claim to the detriment
of the estate.
Read additional articles at The Ponzi Blog
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book is available for purchase at www.lexisnexis.com/ponzibook,
and more information about the book can be found at www.theponzibook.com.
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