MEDIA

June 13, 2014

Interaction of Federal and State Forfeiture Actions

Published in: New York Law Journal | volume 252

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Nicholas G. Garaufis suppressed body armor permanently seized from defendant at the police precinct following his arrest for littering where there was no probable cause to keep the armor as evidence of a crime. Judge Arthur D. Spatt declined to dismiss a federal in rem civil forfeiture action despite a prior pending civil forfeiture action brought in state court under Article 13-A, CPLR. Judge Allyne R. Ross, on reconsideration, granted summary judgment to a plaintiff insurance company in light of newly discovered deposition testimony in a state case. And Judge Joseph F. Bianco denied defendant's untimely motion to withdraw a bankruptcy reference.

Seizure of Body Armor

In United States v. Herron, Judge Garaufis, granting defendant's motion to suppress, held that the post-arrest warrantless seizure of body armor on defendant's person was unlawful.

A superseding indictment charged defendant with 23 counts related to leading a racketeering enterprise over 12 years, involving murder, robbery, extortion, assault and narcotics trafficking. He moved to suppress body armor seized from him after his arrest.

The evidence at the suppression hearing showed that in October 2008 Officer Anchundia and a colleague, then members of a unit handling "quality of life" offenses, were patrolling the 76th Precinct in a police van. They received a 911 radio transmission referring to a possible crime and describing a "male with a firearm, . . . black, six feet tall, black leather coat, wearing sunglasses." They drove to the area in question, the Gowanus Houses, where they saw a man fitting the description walking to their police van. Officer Anchundia noticed that the suspect's jacket looked abnormally puffy, suggesting a bullet-proof vest.

The officer saw defendant throw a clear wrapper to the ground, a "quality of life" offense. He left the van and asked defendant to put his hands on a gate. Defendant was cooperative. Patting him down, the officer felt the vest.

After defendant was handcuffed, Officer Fioravante, a supervisor, arrived. He recognized defendant and knew him to be violent. In May 2008, Detective Fazzingo, from a narcotics squad, had told Fioravante that defendant was under scrutiny in federal investigations.

Both Anchundia and Fioravante testified that, given all the circumstances, they never picked up the wrapper to preserve the evidence.

On arrival at the police station, defendant was arrested "for wearing the bullet-proof vest and littering." While at the precinct, the officers learned that it is not illegal to wear a bullet-proof vest unless it is worn in the commission of a crime. Fioravante, however, spoke with Detective Fazzingo again and "figured" that the vest "would help the [federal] case." Fazzingo asked Fioravante to voucher the vest while he obtained a federal subpoena.

Defendant remained at the precinct for over an hour. Absent evidence that the vest had been stolen, Anchundia issued only a summons for littering. Detective Fazzingo later retrieved the vest pursuant to the federal subpoena. The littering charge in state court was ultimately resolved by Adjournment in Contemplation of Dismissal.

As Garaufis found, the initial arrest was justified by probable cause that defendant was littering in the officers' presence. "[T]he absence of the wrapper weakens the Government's case," the court stated, "but it is not fatal." Slip op. 11. Overall, the evidence supported the officers' testimony about defendant's littering. Among other things, "Anchundia was specifically patrolling for quality of life violations at the time of the incident." Slip op. 10.

The officers properly searched defendant at the time of his arrest and later at the police station. The custodial arrest also justified the seizure of the vest along with defendant's other personal items for the duration of that arrest. Pending processing on the littering charge, the police lawfully tried to determine if the vest was stolen.

But once defendant left the precinct with a summons, the search incident to arrest could not validate the permanent seizure of the body armor for use as evidence in a federal proceeding. Rather, the validity of the seizure required probable cause that the armor was contraband or stolen property or evidence of a crime.

Contrary to the government's argument, there was no probable cause to view the vest as evidence of illegal gun possession. "[T]he possession of body armor—without any other incriminating paraphernalia—suggests a concern for one's safety and does not necessarily imply one possessed a weapon. . . . " Slip op. 17.

There was also no probable cause to believe that the body armor was "evidence of stolen property." Slip op. 17-18.

Nor, when the vest was seized, was there probable cause to believe that it was evidence of defendant's "criminal conduct charged in the superseding indictment." The superseding indictment was not returned until February 2012—three-and-a-half years after the arrest in question—"presumably after extensive further investigation…" Slip op. 19. "By the Government's logic, at the time of the seizure of the body armor, the officers would have had to know that although not illegal to wear, it was evidence of criminal conduct charged in one of the twenty-three counts three and a half years later." Id. The officers' testimony revealed only vague knowledge about the subject of the federal charges. These fatal flaws could not be cured by the "collective knowledge doctrine," especially where none of the officers had more than a "suspicion of some generalized misconduct" that could be imputed to his partners. Slip op. 18-22.

Federal and State Forfeiture

In United States v. Real Property and Premises Located at 249-20 Cambria Avenue, Little Neck, New York 11362 and All Proceeds Traceable Thereto, 13 CV 6730 (EDNY, May 27, 2014), an in rem forfeiture action, Judge Spatt held that a prior civil forfeiture proceeding pending in state court under Article 13-A of the CPLR did not bar the federal suit for lack of subject matter jurisdiction.

A common-law rule "prohibits a state or federal court from assuming in rem jurisdiction over a res that is already under the in rem jurisdiction of another court." Slip op. 6. Conversely, where one action is in personam and the other in rem, both cases may proceed at the same time. This case presented a question of first impression: "whether a New York State civil action commenced pursuant to Article 13-A of the CPLR amounts to a jurisdictional bar to a later-commenced civil in rem action in federal court." Slip op. 8.

The federal in rem forfeiture proceeding involved four properties in New York, two in Florida, and U.S. currency, all subject to forfeiture as property used to commit crimes or proceeds of the crimes. The New York properties were at issue in claimants' motion to dismiss.

In March 2013 the state criminal defendants were indicted in New York state court and charged with participating in a scheme to import and sell counterfeit designer handbags, boots, jackets, and other merchandise from China and distribute the counterfeit goods to "street sellers" in New York and other states. In May 2013, New York State commenced a civil forfeiture proceeding seeking a judgment in the amount of $6.7 million. The state then obtained ex parte orders of attachment, recorded in the county clerk's office, restraining all properties owned by defendants, including the New York properties. Suffolk County Supreme Court confirmed the attachments in February 2014.

The United States commenced the civil in rem action in December 2013. Claimants moved to dismiss the complaint for lack of subject matter jurisdiction, claiming that the commencement of the state forfeiture action barred the federal in rem civil forfeiture proceeding against the same property or, alternatively, that by the attachment orders the New York state court secured in rem jurisdiction over the New York properties.

Article 13-A of the CPLR provides that actions under the statute are "civil, remedial, and in personam in nature." Spatt found this language to be clear and unambiguous. In addition, the attachment orders issued by the court in Suffolk County were mere provisional remedies to protect the state's interests in the properties. Spatt also dismissed concerns of comity, observing that the state could execute any judgment against the United States, which would take the properties subject to any mortgages, liens or encumbrances.

Because there had been no exercise of New York State jurisdiction over the properties in Florida, they too were subject to federal forfeiture. Slip op. 12.

Insurance Policy

In U.S. Underwriters v. 14-33/35 Astoria Boulevard, 10 CV 1595 (EDNY, April 23, 2014), Judge Ross entered summary judgment on plaintiff's motion to rescind an insurance policy after granting reconsideration upon newly discovered evidence.

In December 2011, Ross had denied plaintiff's motion for summary judgment, finding a fact issue as to whether defendant 14-33/35 Astoria Boulevard (Astoria Boulevard) had made a material misrepresentation in connection with its application for the subject policy. The application called for Astoria Boulevard to identify the general contractor it had retained, and it identified Parma Tile Mosaic & Marble Co. Astoria Boulevard's principal, James Vissas, submitted an affidavit in opposition to plaintiff's motion stating that, at the time he had filled out the application, he was "seriously considering" hiring Parma Tile as general contractor.

Ross had held that this created a triable issue as to whether Vissas' statement was false "as to past or present fact" so as to justify rescission (in that Vissas may have intended Parma Tile as general contractor at the time he submitted the application). Slip Op. 3-4 (emphasis in opinion, quoting N.Y. Insurance Law §3105(a)).

In 2013, Vissas was deposed in a parallel state case he had brought alleging insurance broker malpractice. There, Vissas testified that he could not remember whether he had "seriously considered" retaining Parma Tile, did not know what was in his federal court affidavit when he had signed it and, to the best of his recollection, he had signed both the insurance application and the contract with Parma Tile that accompanied it in blank (such that someone else must have filled them in afterward).

Defendant did not dispute that the 2013 deposition testimony constituted newly discovered evidence, but argued it did not justify summary judgment. Ross disagreed:

First, the 2011 affidavit Vissas had submitted to avoid summary judgment should be disregarded as in conflict with his deposition testimony, and there was no reason that the rule against an affidavit contradicting prior deposition testimony should not apply equally where the affidavit precedes the testimony. That affidavit therefore no longer operated to create an issue of fact as to whether Vissas had made a misstatement in the insurance application.

Second, the 2013 deposition testimony confirmed that there was no such issue. Slip Op. 8-12.

Third, the misstatement's materiality was established by the affidavit of plaintiff's claims examiner, and by its written Underwriting Guidelines, each of which confirmed that a signed contract with an insured general contractor was a precondition to issuance of such policies. Slip Op. 13-18.

Bankruptcy Court

In Pryor v. Tromba, 13 MC 676 (EDNY, April 7, 2013), Judge Bianco denied without prejudice defendant Ellen Tromba's untimely motion to withdraw the reference to the U.S. Bankruptcy Court for the Eastern District of an adversary proceeding brought against her by the trustee in her husband's bankruptcy case. The Eastern District by Order dated Aug. 28, 1986, as amended Dec. 5, 2012, refers all bankruptcy cases to the bankruptcy judges pursuant to 28 U.S.C. §157(a) for submission of findings of fact and conclusions of law. A party may move in the district court for removal of the reference to the bankruptcy court pursuant to §157(d).

In the adversary proceeding filed in October 2011, the trustee alleged that the debtor had fraudulently transferred real property and cash to his wife, defendant here. The trustee sought return of the property and cash to the husband's bankruptcy estate for distribution to the creditors.

In April 2012, after the trustee moved in bankruptcy court for default judgment against defendant, she filed a late answer, in which she asserted affirmative defenses, and requested both withdrawal of the adversary proceeding reference and a jury trial. After the trustee filed a motion for summary judgment against defendant and debtor, to delay the proceedings defendant filed two bankruptcy cases, each of which was dismissed. Defendant filed the instant motion to withdraw the reference in August 2013 two years after the trustee commenced the adversary proceeding.

Defendant argued that the reference should be withdrawn because "(1) the Bankruptcy Court does not have subject matter jurisdiction over the non-bankruptcy-related claims against a non-debtor defendant, and (2) the requirements for permissive withdrawal are satisfied." Even though under Stern v. Marshall, 131 S. Ct. 2594 (2011), the bankruptcy court lacks authority to enter final judgment on fraudulent transfer and preference claims, Bianco held withdrawal was not warranted here. Defendant met several of the criteria for permissive withdrawal set forth in In re Orion Pictures, Corp., 4 F.3d 1095 (2d Cir. 1993). First, the trustee's claims did not fall under the public rights exception to Stern, because a fraudulent conveyance claim against a person who has not submitted a proof of claim is a matter of private right. Second, defendant did not file a proof of claim against the debtor's bankruptcy estate. Third, defendant had not consented to the jurisdiction of the bankruptcy court to enter a final judgment. As a result, the bankruptcy court lacked final authority to adjudicate the claims.

However, defendant did not move to withdraw the reference in a timely manner. The bankruptcy court administered the adversary proceeding for over two years, acquiring familiarity with the facts and legal issues. Defendant delayed further by failing to file a timely answer and filing bankruptcy petitions only days before hearings on motions for summary judgment. Finally, defendant's demand for a jury trial did not mandate withdrawal because that demand was also untimely. Under the Eastern District 2012 Standing Order, any order or judgment of the bankruptcy court would be treated as proposed findings of fact and conclusions of law.

Harvey M.  Stone and Richard H.  Dolan are partners at Schlam Stone & Dolan.  Bennette D.  Kramer, a partner of the firm, assisted in the preparation of the article.

[This article is reprinted with permission from the June 13, 2014, issue of the New York Law Journal.  Copyright © 2014 ALM Properties, Inc.  All rights reserved.  Further duplication without permission is prohibited.]