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Lender lacks priority over forfeited funds.

Byline: Tom Egan

A creditor who made an $8,500 loan to a defendant borrower could not enforce the loan against assets the borrower forfeited for committing illegal activity, the 1st U.S. Circuit Court of Appeals has ruled.

The government argued that its claim to the forfeited assets had priority over the lender's. A three-judge 1st Circuit panel agreed.

"(T]he government's interest in the forfeited cash vested as soon as the defendant began selling drugs and before any proceeds started to reach him," Judge Bruce M. Selya wrote for the unanimous panel.

"To the extent that the appellant had any interest in the defendant's ill-gotten gains, that interest could not possibly have predated the defendant's acquisition of the funds and, thus, could not have predated the government's interest," Selya added.

The 10-page decision is United States v. Catala, Lawyers Weekly No. 01-236-17. The full text of the ruling can be found here.

Middletown attorney Barbara A. Barrow represented the lender, David Vogel. Acting U.S. Attorney Stephen G. Dambruch represented the government.

Drug dealing

In April 2007, claimant-appellant David Vogel loaned an acquaintance, defendant Juan G. Catala, $8,500 during a trip to Las Vegas. When Catala did not repay the loan, the appellant sued him in Rhode Island state court.

In April 2012, a state judge entered a judgment for $8,500, plus statutory interest and costs, in favor of the appellant. The Rhode Island Supreme Court affirmed that judgment in 2013.

For several years, the appellant's efforts to collect the judgment proved fruitless.

"A ray of hope appeared when, in mid-2016, federal authorities charged the defendant with distributing oxycodone and marijuana in violation of federal law," Selya noted.

As part of the investigation leading to those charges, federal agents had searched the defendant's home and seized $14,792 in cash.

The defendant pleaded guilty to criminal charges in U.S. District Court. Based on a judicial determination that the $14,792 in cash represented the proceeds of the defendant's illegal drug dealings, a preliminary order of forfeiture was entered.

Within a matter of days, the appellant filed a third-party petition, in which he asserted a claim to the seized cash under 21 U.S.C. s.853(n) and Rule 32.2(c) of the Federal Rules of Criminal Procedure.

Issue of first impression

"This case requires us to answer a question of first impression in this circuit - a question involving the relative priority, as between the government and a general creditor, with respect to claims relating to assets forfeited as the proceeds of criminal activity," Selya wrote.

To prevail on the merits under 21 U.S.C. s.853(n)(6)(A), the judge explained, a third party must prove that, at the time the acts giving rise to the forfeiture were committed, the right to the property to be forfeited was either vested in him rather than the defendant or that his interest in it was superior to the defendant's interest.

The provision must be read in tandem with s.853(c), Selya said.

"The latter provision, which embodies the relation-back doctrine, specifies that the right to all property used in committing, and any proceeds derived from, a criminal offense 'vests in the United States upon the commission of the act giving rise to (the] forfeiture,'" he noted.

Selya said it followed "inexorably" that a third party asserting an interest in forfeited property must establish that his interest in that property existed before the commission of the crime that led to the forfeiture.

Thus, the appellant lender had to show that his interest in the forfeited cash existed before the defendant engaged in the drug distribution that sparked his arrest, the 1st Circuit found.

"The relation-back doctrine stands in his way," Selya said, adding that a third party cannot have an interest in proceeds that do not yet exist.

"There is no suggestion that the forfeited cash came from any source other than the defendant's drug-trafficking activities," he said.

"Moreover, since the appellant's $8,500 loan to the defendant did not constitute a discrete 'instrumentality' used in his drug-trafficking activities, the appellant cannot claim that he had a prior, superior interest under section 853(n)(6)(A) and section 853(a)(2)," Selya said.


CASE: United States v. Catala, Lawyers Weekly No. 01-236-17

COURT: 1st U.S. Circuit Court of Appeals

ISSUE: Did a lender's claim to the borrower's forfeited cash have priority over the government's claim?


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Title Annotation:United States v. Catala
Author:Egan, Tom
Publication:Rhode Island Lawyers Weekly
Date:Sep 7, 2017
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