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United States of America v. Huntington National Bank

June 14, 2012

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
HUNTINGTON NATIONAL BANK, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 06-00290--Robert Holmes Bell, District Judge.

The opinion of the court was delivered by: Julia Smith Gibbons, Circuit Judge.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

Argued: March 8, 2012

Before: CLAY and GIBBONS, Circuit Judges; KORMAN, District Judge.*fn1

OPINION

Defendant-appellant Huntington National Bank ("Huntington") claims that it is entitled to the proceeds of a deposit account, which were seized by the government as part of a criminal forfeiture proceeding, as a secured creditor of the account. Huntington asserts that it qualifies as a bona fide purchaser for value under 21 U.S.C. § 853(n)(6)(B) and appeals the district court's ruling that, as a matter of law, it did not. For the reasons that follow, we reverse the judgment of the district court and direct the district court to amend the order of forfeiture in accordance with this analysis.

I.

This criminal forfeiture proceeding arises out of the activities of a business, known variously as Cybernet Engineering, Cyberco Holdings, and CyberNET (collectively "Cyberco"), whose principals engaged in a complex scheme to defraud dozens of lending institutions out of more than $100 million in loans and lines of credit. In October 2002, Huntington granted Cyberco a multi-million-dollar line of credit, and in exchange Cyberco granted Huntington "a continuing security interest and lien" in all of Cyberco's tangible and intangible personal property and rights, including "deposit accounts." In November 2004, after discovering the fraud, the government seized approximately $4 million in Cyberco assets, including $705,168.60 from Huntington Bank Account Number 01159630935 ("the Cyberco Account").

A number of Cyberco principals were charged in a criminal indictment with conspiring to commit acts which violated federal laws relating to bank fraud, mail fraud, and money laundering. Count 10 of the superseding indictment issued forfeiture allegations against defendants Krista L. Kotlarz Watson and Paul Nathan Wright regarding certain Cyberco assets, including the Cyberco Account. In their respective plea agreements, Watson and Wright agreed to forfeit to the United States any interest they possessed in the assets or funds identified in Count 10 of the superseding indictment. On September 24, 2007, the district court entered a preliminary order of forfeiture with regard to these assets, including the Cyberco Account. The district court further ordered that notice of the forfeiture be published in accordance with 21 U.S.C. § 853(n)(1).

On December 10, 2007, having received notice of the criminal forfeiture action, Huntington filed a verified petition of claim, asserting that it had a right to, and a direct ownership interest in, a portion of the forfeited property--namely, the funds in the Cyberco Account. Huntington claimed that, at that time it filed the petition, Cyberco remained indebted to Huntington in the amount of $926,162.57, that Cyberco had defaulted on its obligations to Huntington by providing Huntington with fraudulent financial statements and by failing to make payments as required, and that Huntington was entitled to the funds in the Cyberco Account pursuant to its security agreement with Cyberco. After holding a hearing on the third-party interests asserted in the forfeited property, the district court found that Huntington did not have a legal right, title, or interest that rendered the order of forfeiture invalid in whole or in part under 21 U.S.C. § 853(n)(6)(A). The district court then entered a final order of forfeiture, forfeiting all the assets listed in Count 10 of the superseding indictment--including the Cyberco Account--to the United States as having been derived from the proceeds obtained directly or indirectly as a result of mail fraud, and/or bank fraud, or a conspiracy to commit such offenses.

Huntington then filed a motion to alter or amend the judgment requesting that the district court modify its opinion and order and grant its petition for claim, arguing that it was entitled to relief under 21 U.S.C. § 853(n)(6)(B) because it was a bona fide purchaser for value ("BFP") of its security interest in the funds in the Cyberco account. The district court denied the motion, finding that Huntington had waived its bona fide purchaser argument by failing to raise it earlier. Huntington appealed this ruling, and this court found that Huntington had not waived the argument and remanded the issue so that the district court could consider the merits of Huntington's claim that it qualified as a BFP under § 853(n)(6)(B). United States v. Huntington Nat'l Bank, 574 F.3d 329, 334 (6th Cir. 2009).

On remand, the district court reached the merits of Huntington's § 853(n)(6)(B) argument and again denied Huntington's claim. It noted that the term "bona fide purchasers" was a legal term of art and that it should not be given an unnatural meaning for the purpose of 21 U.S.C. § 853(n)(6)(B). The district court further noted that BFP terminology is not found in Article 9 of the Uniform Commercial Code ("UCC")--the article which governs Huntington's rights as a secured creditor. Finally, after finding the cases that Huntington relied upon in arguing that it was a BFP distinguishable because they involved security interests in real estate or tangible personal property, the district court "decline[d] to broaden the narrow class of parties Congress intended to protect in § 853(n)(6)(B) by unnaturally extending the [BFP] exception to include ...


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